Appeals Court tackles Chapel Hill inclusionary zoning challenge

Judge John Tyson, center, asks a question during oral arguments at the North Carolina Court of Appeals. (Image from North Carolina Court of Appeals YouTube channel)

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  • The North Carolina Court of Appeals heard oral arguments Wednesday in a case challenging fees Chapel Hill charged a developer in connection with town inclusionary zoning rules.
  • Chapel Hill argues that plaintiff Epcon Homestead waited too long to challenge the fees as unconstitutional.
  • The 4th US Circuit Court of Appeals ruled in favor of the town in a similar dispute in March 2023.

North Carolina’s second-highest court will decide in the months ahead whether a developer can continue to seek a refund of more than $800,000 in fees paid to Chapel Hill in connection with the town’s inclusionary zoning rules. The developer challenges the fee as unconstitutional.

A three-judge NC Court of Appeals panel heard more than an hour of oral arguments on the issue Wednesday.

The town argues that plaintiff Epcon Homestead waited too long to file suit challenging the fees. The developer agreed to pay the fees instead of complying with Chapel Hill’s affordable housing requirement. Town rules called for setting aside 15% of a new development’s homes to be sold at below-market rates.

The 4th US Circuit Court of Appeals ruled in March 2023 against Epcon and in favor of Chapel Hill. But the developer’s lawyer argued Wednesday that the state court claim is different.

“We’re here only to get our money back,” argued Jeffrey Roether, Epcon’s lawyer. “We are here for a claim to recover unlawful fees.”

Jeffrey Roether at the North Carolina Court of Appeals
Attorney Jeffrey Roether offers an oral argument at the North Carolina Court of Appeals. (Image from North Carolina Court of Appeals YouTube channel)

Roether argued that Epcon faced a three-year statute of limitations that started when the developer made each fee payment.

Chapel Hill countered that Epcon instead faced a one-year statute of limitations because it was challenging a zoning or development ordinance. Epcon’s suit did not meet that time limitation.

“This case presents the question of whether a developer can request to pay a fee in lieu to comply with a development condition, go ahead and go through the approval process, build the development, and then wait to file suit to challenge the condition of development based on the underlying ordinance being ultra vires or unconstitutional for more than five years after the development approval and at least four years after the plaintiff acquired standing by beginning the purchase of the land subject to the approval,” argued Katherine Barber-Jones for the town.

Katherine Barber-Jones at the North Carolina Court of Appeals
Attorney Katherine Barber-Jones offers an oral argument at the North Carolina Court of Appeals. (Image from North Carolina Court of Appeals YouTube channel)

Judge Jeff Carpenter characterized Epcon’s request as more than just a request for a refund.

“It’s an ancillary attack on the ordinance, isn’t it?” Carpenter asked. “You’re not saying, ‘You need to set the ordinance aside. It’s unconstitutional.’ You’re saying, ‘It’s unconstitutional. We want our money back.’ … So it’s a collateral attack on the statute.”

Judge John Tyson asked whether the disputed fee amounted to a penalty. “Are we penalizing people for not building affordable housing?” he asked Barber-Jones.

Tyson also raised questions about the definition of affordable housing. “Development is not an objective, absolute ‘This is what it’s going to cost,’” he said. “You don’t know what it’s going to cost until you’re in the middle of it. So if you’re basing based on costs, you’re trying to impose a fixed condition on variable conditions. That’s the problem you’ve got.”

Judge John Arrowood asked why Epcon waited until after paying the fees to challenge their constitutionality. “You could have brought a cause of action that said, ‘I don’t have to pay them,’ couldn’t you?” Arrowood asked. “Then there would have been no payments. Isn’t that correct?”

Roether explained to appellate judges that Chapel Hill’s ordinance did not require developers to build smaller, less expensive homes to meet its affordable housing requirement.

“The town’s ordinance required 15% of the number of units be what’s called set aside for affordable housing,” he explained. “The town continues to refer to this as building affordable housing. That’s not what the ordinance requires.”

“The homes that you build for affordable housing purposes have to have the same exterior appearance,” Roether continued. “They have to have the same number of bedrooms. You’re essentially required to build the same houses you’re building everywhere else.”

“It’s not a requirement to build affordable units,” he said. “The requirement is that they be sold to certain groups of people at a price that’s dictated by the amount of their income — 80% of median income.”

“What we’re really talking about is a requirement that they give away their property — a compelled transfer to certain groups of people — at below-market prices,” Roether concluded.

Wednesday’s oral arguments took place more than a year after the 4th Circuit upheld a federal trial judge’s ruling favoring Chapel Hill in the fee dispute. Appellate judges agreed the plaintiff waited too long to file suit.

The complaint stemmed from the $803,250 fee charged to developers of Courtyards of Homestead, a 63-unit single-family housing development.

The project secured a special-use permit in 2014, four years after the town adopted an ordinance “to create and preserve affordable housing opportunities for its residents” and “to provide a structure for cooperative participation by the public and private sectors in the production of affordable housing,” according to the 4th Circuit court opinion.

Developers must include affordable housing in any project in Chapel Hill with at least five single-family homes. The town also can agree to let the developer pay a fee instead.

Epcon, owner of the Courtyards of Homestead property, chose to pay the fee in installments. The last payment reached Chapel Hill in May 2019. The company filed suit to recover the fee in October 2019.

In addition to state constitutional claims, Epcon argued that Chapel Hill’s affordable housing fee amounted to an “unconstitutional taking” under the U.S. Constitution’s Fifth Amendment and a “due process violation” under the 14th Amendment.

A federal trial judge dismissed the case, ruling that Epcon had failed to file suit within a three-year statute of limitations.

“There is no dispute that the applicable statute of limitations for Epcon’s federal claim is three years,” wrote Appeals Court Chief Judge Roger Gregory. “[T]he parties disagree about when the clock on Epcon’s … claim began to tick.”

“Here, Epcon alleges that it suffered an injury … stemming from the application of an unlawful special use permit condition,” Gregory wrote. “As the district court concluded, Epcon first had reason to know of this injury no later than 2015, when it began purchasing the land subject to the special use permit. Thus, its claim that the permit condition violated its rights to just compensation and due process accrued at that point and extinguished three years later. By the time Epcon filed suit in October 2019, the sun had set on its federal claims.”

Judges rejected the company’s argument that each fee payment amounted to a new constitutional violation. A new violation would have extended the statute of limitations.

“Epcon’s federal claims allege the Town imposed an unconstitutional condition on its permit — a single act. Epcon’s payments pursuant to that permit were not repeated constitutional violations but rather continual ill effects of the original violation alleged,” wrote Judge Allison Jones Rushing in a concurring opinion.

Judge Stephanie Thacker joined Gregory’s opinion.