Can the State Land Use Commission Downzone Property that a Developer does not Develop in a Timely Manner?

The short answer is yes--but it depends.

In DW Aina Le‘a Development, LLC v. Bridge Aina Le‘a, LLC, the Hawaii Supreme Court considered whether the State Land Use Commission properly downzoned 1,060 acres of land slated for a residential project. 

Background.  In 1989, 1,060 acres of land on the Island of Hawaii was reclassified from agricultural to urban to allow for the development of a residential community.  The reclassification was made subject to numerous conditions, including a condition that at least 60 percent of the residential units be affordable.  The Commission granted requests to amend the affordable housing condition for the Aina Le'a project.  (Note: During this period of the Commission's history, it was not uncommon for the Commission to require a 60 percent affordable set-aside for residential developments.  Anecdotally, the Commission reduced the affordable housing requirements for these projects to a more economically feasible set-aside, upon request.)

By 2005, the condition required the landowner, Bridge Aina Le‘a, LLC (Bridge), to set aside 20 percent of the units as affordable.  Because of Bridge's perceived failure to comply with certain conditions, in December 2008, the Commission issued an order to show cause (OSC) why the land should not revert to its former agricultural land use classification.  Soon thereafter, Bridge informed the Commission that it intended to assign its interest in the land to DW Aina Le‘a Development, LLC (DW) through an installment sale. DW subsequently invested more than $20 million in developing the site.  Nevertheless, after proceedings over the course of several years, the Commission issued an order reverting the land to the agricultural use district.

Conceptual Plan
Source: http://www.ainaleaasia.com/our-current-project.html

Boundary Amendment Process and Enforcement.  Under HRS § 205-2, there are four major land use districts in which all lands in the state are placed: urban, rural, agricultural, and conservation.  The counties may further zone lands in the state urban district.  Counties have limited authority to zone in the other districts, except for conservation, where the state regulates exclusively.

Since 95 percent of lands in the state are in the conservation or agricultural district, landowners frequently desire a land use district boundary amendment to allow residential, commercial, and other uses.  HRS § 205-4 generally sets forth the procedures the Commission must follow in amending a district boundary.   The Commission is required to find by a clear preponderance of the evidence that the reclassification is reasonable, not violative of HRS § 205-2 (district classification standards), and consistent with the policies of HRS § 205-16 (compliance with the Hawaii state plan) and HRS § 205-17 (decision-making criteria).

HRS § 205-4(g) gives the Commission broad authority to impose conditions on boundary amendment petitions.  While the Commission can determine whether a condition it imposes is being violated, in general, enforcement of these conditions are left to the counties under HRS § 205-12.  However, a 1990 legislative amendment to HRS § 205-4(g) empowered the Commission "to void a boundary amendment, after giving the landowner the opportunity for a hearing, if the landowner failed to substantially commence use of the land in accordance with its representations."  In other words, under certain circumstances, the Commission may revert or downzone a property to its former state land use boundary classification (e.g., as in this case, from urban back to agricultural).

Holding.  The Court set-forth the following principles for the Commission when it considers reverting a boundary designation to its former classification:

• First, the Commission must issue an Order to Show Cause, which is set-forth in the Commission's rules at HAR § 15-15-93.
• Second, the Commission must determine "whether the petitioner has substantially commenced use of the land in accordance with its representations." 
• Finally, if the answer to the above question is yes, the Commission is required to follow the procedures set forth in HRS § 205-4.  If no, the Commission may revert the land without following the procedures set forth in HRS § 205-4.

Applying the aforementioned principles to the facts of this case, the Court held that the circuit court correctly concluded that the Commission erred in reverting the property to agricultural use without complying with the requirements of HRS § 205-4, because by the time the Commission reverted the property, DW and Bridge had substantially commenced use of the land in accordance with their representations.

The Court reasoned that although there is no definition for "substantially commenced" in the statutes, the intent of the legislature was to "deter speculators who obtained favorable land-use rulings and then sat on the land for speculative purposes."  The Court relied on the circuit court's analysis of this finding, noting that the petitioner had, among other things, continued to actively proceed with preparation of plans and studies, including building plans and studies for the environmental impact statement.  In addition, sixteen townhouses were completed on the property.

Other Holdings.  Although the Court did agree with the circuit court on the substantive portion of the case, it disagreed on three other items worth noting.

First, specific documents that were not before the Commission should have been struck from the record on appeal.  HRS § 91-14 specifically confines an agency appeal to the administrative record.

Second, the Commission did not violate DW and Bridge's constitutional rights to due process and equal protection.  Both Bridge and DW had notice and a meaningful opportunity to be heard before the Commission reverted the property. And, given the circumstances, the Commission's conduct was not “arbitrary and unreasonable.”

Third, Bridge’s and DW’s equal protection rights were not violated because the record does not establish that the LUC lacked a rational basis for its decisions.