The city of Berkeley has to fork up $4 million in connection with its mishandling of an application to build 260 housing units on the old Spenger’s parking lot.
Alameda County Superior Court Judge Frank Roesch fined Berkeley $2.6 million this week for violating the terms of the Housing Accountability Act when it denied a developer’s application to use a state law — SB35 — to fast-track through ministerial review the project for 1900 Fourth St. The developer, Ruegg & Ellsworth, had been seeking a $39 million fine. The money will go into the city’s Housing Trust Fund to be used to build affordable housing.
On Thursday, Berkeley also paid $1.4 million to reimburse the developer for its attorney’s fees.
Berkeley may be on the hook for an even larger amount. Even though multiple courts, including the Court of Appeal and state Supreme Court, have ruled that it must put up a $15 million bond as collateral for any damage Ruegg & Ellsworth may have suffered for having its project delayed, the city has not done so.
Roesch set two dates in April to hear testimony on the matter. He also ruled that another party to the lawsuit against the project, the Confederated Villages of Lisjan, which represents descendants of the Ohlone people who once lived in the area, was not liable for putting up funds for the bond payment.
The legal battle between Berkeley and Ruegg & Ellsworth is in its sixth year
Thursday’s hearing was the latest in a legal battle that has taken six years so far, generated multiple trips to the Superior Court, Court of Appeal, and state Supreme Court, produced thousands of pages of legal documents and probably cost Berkeley residents hundreds of thousands of dollars in legal fees.
It has brought out representatives of the Ohlone people to perform dances and ceremonies to protest construction on the last remaining undeveloped part of the West Berkeley Shellmound, a three-block area Berkeley designated as a landmark in 2000. Ohlone leaders consider the midden sacred, belonging to an area with numerous historic artifacts, burial grounds and an archaeologically significant Ohlone village. Archeological digs paid for by the developer, however, contend the land under Spenger’s parking lot was probably marshland, and not actively used by natives. Still, Ohlone leaders see the parcel as part of a larger area of settlement and argue that it should be protected.
The fight also has raised the ire of those who believe Berkeley’s handling of the project has contributed to the city’s housing crisis.
The legal battle has gone on so long that Roesch commented in court that it has turned one attorney’s hair gray.
“The last time you were here you didn’t have gray hair at all,” Roesch said to Tom Lippe, the attorney representing the Confederated Villages of Lisjan. (In addition to representing the Confederated Villages, Lippe is representing the groups that have been fighting UC Berkeley’s plan to build housing in People’s Park as well as other neighborhood groups pushing back against Cal’s growth.)
While the Ohlone people lived in West Berkeley for more than 6,000 years, this portion of the story begins around 2016 when a developer, West Berkeley Investments, applied to build a five-story building with bottom-floor retail space, a parking garage and 135 units of market-rate housing at 1900 Fourth St.
The developer completed a draft environmental review and went through Berkeley’s development process, but the project had not been approved by 2018, in part because the city was assessing its impact on the historical shellmound.
In a surprise move, in March 2018 West Berkeley Investments enlarged the project to 260 units, with half designated moderate-income, and submitted it through SB 35. That new California law stated that any municipality not meeting its regional housing requirements must allow over-the-counter approval for a project that meets zoning requirements and has 50% of its units affordable.
Berkeley turned down the SB 35 application, stating that the project would destroy a historic structure (the shellmound) and did not comply with the city’s affordable housing mitigation rules.
At that point, West Berkeley Investments dropped out, reneging on the $18.6 million it had offered to acquire the land, owned at that time by Ruegg & Ellsworth and the Frank Spenger Company, according to court documents. (Ruegg & Ellsworth bought out the Spenger interest in February 2022, according to county documents. The purchase included two lots, which collectively are assessed at $9.7 million).
Ruegg & Ellsworth vowed to continue the project, however, and sued Berkeley over its refusal to issue a permit through SB 35. Roesch ruled in 2019 that the city had the right to deny the permit, but the Court of Appeal overturned that decision and the state Supreme Court upheld that ruling in July 2021. Berkeley then issued a permit for the project.
The court originally sidestepped the question of whether Berkeley had violated the Housing Accountability Act, but Ruegg & Ellsworth raised the question again in new court filings and also named the intervener Confederated Villages of Lisjan.
In February 2022, Judge Roesch ruled that Berkeley had violated the HAA. The city appealed in March 2022 and the case went to the Court of Appeal and the state Supreme Court, which all ruled Berkeley had violated the HAA in denying the permit for 1900 Fourth St. This week, Berkeley did not contest the $2.6 million fine Judge Roesch imposed.
After Dana Ellsworth, a principal at Ruegg and Ellsworth, submitted a statement in May 2022 that the ongoing litigation meant the project would not be able to get financing, Roesch ordered that Berkeley and the Confederated Villages put up a $15 million bond within 45 days as collateral for possible damages. Berkeley appealed the decision.
The Court of Appeal ruled that the bond requirement was not appealable, a decision the state Supreme Court agreed with. But Berkeley still has not paid the bond. Its attorney, Tony Francois, has argued that appealing the bond decision automatically stayed the payment of the bond, even though the courts have not accepted that argument.
Has the developer suffered financial damage because Berkeley denied its permit to build housing?
Roesch has set two hearing dates in April to consider whether Ruegg & Ellsworth has suffered financially because of Berkeley’s appeal of the decision that its action violated the Housing Accountability Act.
In an affidavit, Dana Ellsworth stated that her company lost out on $18.6 million when West Berkeley Investments pulled out in 2018 because Berkeley turned down its SB 35 designation. The continuing cloud of litigation has made the project unfundable, experts for her side have argued. No bank or lender wants to commit funds to a project that is mired in litigation. Ellsworth wants Berkeley to make her whole for the loss of opportunity.
Berkeley has argued that the legal issues should not affect the project’s financing since Berkeley issued a permit in 2021 and renewed it for another three years in September 2022. The real reason Ruegg & Ellsworth has not gotten financing is because the project does not pencil out, Berkeley has argued in court documents. One expert hired by the city called the project “an irrational frolic.” Moreover, Ruegg & Ellsworth, whose company does not directly build projects, has not obtained a new developer to build on Fourth Street, Berkeley has pointed out. In the meantime, commercial interest rates have spiked from nearly 0% to more than 6%, making the project more expensive.
Ruegg & Ellsworth presented no evidence that the appeal of the HAA impeded the search for money, said Francois, the city’s attorney. “There’s no evidence they tried to finance it or tried to develop the project,” he said.
Judge Roesch seemed to disagree that the litigation had not had an impact. “Any litigation is detrimental to getting financing,” he said.
If the project is so economically infeasible, argued Ruegg & Ellsworth’s attorneys, why did Berkeley include the 1900 Fourth St. project when it adopted its Housing Element plan in February 2023? That plan, which Berkeley submitted to the state, marks the 260-unit project as “likely,” according to the attorneys.
Berkeley is contradicting itself, they claim.
Both parties have objected to the affidavits submitted by the other side’s expert witnesses. A hearing will allow for cross-examination of those experts, which Roesch mentioned as one reason to hold a court proceeding. A preliminary hearing is scheduled for April 5 with a full hearing on April 15.
Mayor Jesse Arreguín will announce at the next City Council meeting that the city agreed in a settlement to pay Ruegg & Ellsworth $1.4 million in legal fees, said City Attorney Farimah Brown.
Correction: The original story referred to low-income housing in relation to a 2018 proposal by West Berkeley Investments for the Spenger’s project when it it was in fact for moderate-income housing.
