Compass Newsletter - Articles


by Eric Yandell and Donald H. Upjohn
July 2005

Ballot Measure 37("M37"), which the voters adopted by a 60% - 40% margin in 2004, theoretically relaxes state and local land use restrictions so that some land owners who acquired an interest in property before particular restrictions took effect could "roll back the clock" and develop or improve their property as if the regulations in effect on the date of acquisition did not apply. This process is commonly referred to as a "waiver"of restrictions by the state, county, city or other governing body ("government"). "Development" can mean anything from a second home on farm property to a subdivision.

Alternatively, the government may choose to pay compensation for the difference in value, measured in today's dollars, between the property with the restrictions as of the date of acquisition but without the restrictions arising thereafter.

M37 left open a number of questions, which will need to be resolved through the legal process or by the legislature. As a consequence, anyone hoping to take advantage of M37 should proceed cautiously, or risk losing rights. Key unanswered questions include:

  1. Who is the relevant "owner" of property?

    Both M37 benefits (compensation and waiver) run from the date an "owner" acquires an interest in property. If the government chooses to compensate, an "owner" includes the present owner and any family member (defined by M37) from whom the present owner acquired property by gift, inheritance or purchase. Because most governments do not have money to pay compensation - and because compensation must come from funds set aside to pay M37 claims - the government will usually choose to waive.

    If the present owner is an original owner, waiver will permit the desired development. However, if the present owner only recently acquired the property, the government will almost certainly waive, because most restrictions date back to the 1970's and 1980's, and the waiver dates back only to the date the present owner acquired the property.

    To illustrate, if you and your spouse acquired property in 1952, both benefits (compensation and waiver) go back to that date. If your spouse dies, you still acquired an interest in 1952 and the result should be the same. If both of you die, and your child inherits the property, the result is less clear; the child should be able to claim compensation back to 1952, but waiver may only date back to the date of inheritance. If you sold the property in 1970, but took it back through foreclosure in 1980, are your rights restored? M37 does not address the issue.

  2. What kinds of transfers should you be cautious of?

    All kinds. Until M37 is clarified, if you have held property in the family for a long time and hope to take advantage of M37, you should consider the implications every time you transfer an interest in property. For example, if you transfer property to an LLC or a corporation, that entity now owns the property and you will likely lose any M37 rights, even if you are the sole owner of the entity. The same result will likely obtain if you transfer property into an irrevocable trust, at least unless you remain as a trustee or beneficiary. While the result seems absurd, if you and your spouse transfer property into a revocable living trust (a common estate planning tool), that step may also constitute a "change in ownership," so that you lose M37 benefits to the date you transferred into the trust.

    Some property - especially farm property - may have been held in a general partnership for years. (Partnership property can be held in the name of only one of the partners.) Even if that partner dies, and title passes to heirs, the property may retain its character as "partnership property" and thus qualify for an M37 rollback to the date the first owner acquired it. Current advisors often recommend transfers to a different type of entity for estate planning, limited liability, or management purposes. M37 rights should be considered before any such transfer.

    What if an original owner sells an undivided half interest in property or transfers the property to himself and his spouse as tenants by the entirety, does the interest he retains preserve any M37 claim he might have? Logically, the transfer should not affect that interest; however, the new owner would have rights only from the date she received the interest.

    What if the original owner wants compensation? Does he only get half the amount? M37 provides that, if the government awards compensation, but doesn't pay for two years, the failure to pay amounts to a waiver of the restrictions. Can only one of the owners take advantage? The Act does not address these issues.

  3. What rights does a buyer of property developed under an M37 waiver acquire?

    If an owner applies for and receives a waiver of restrictions, can the owner then sell the property free of those restrictions? The Measure is silent. However, the Attorney General in February concluded that M37 rights are "personal to the owner" - that is, the rights may not be sold with the land and evaporate upon sale. This means, especially in the case of a subdivision, that the owner must develop the property herself or enter into a complicated arrangement with the developer so she retains an interest until a lot is transferred to the ultimate buyer.

    The rights of a buyer of an M37-developed lot are equally unclear. Some commentators, including lawyers for several governing bodies, have suggested that the lot is a non-conforming use, like "grandfathered" property under zoning laws. Under this characterization, the government may restrict additions, new uses, and even rebuilding if a structure is damaged by the elements. Some speculate that such potential restrictions could affect the ability to finance construction on, or acquisition of, property.

  4. How will these questions be answered?

    These questions, and many others, may be answered by the legislature or, more likely, by several years of litigation in the courts. Senate Bill 1037, originally rejected by interest groups on both sides of Measure 37 and left for dead in committee, has apparently come back to life (at least as of June 27). It specifies a uniform application process and addresses some of the other issues mentioned above. The current draft would, for example, permit one transfer of property after an M37 waiver is approved. It also specifies a uniform application procedure; presently, each governing body is free to design its own.

  5. What should I do in the meantime?

    Measure 37 does not come close to dealing with all of the issues it raises. Unless and until the Legislature clarifies these and other issues, or the appellate courts rule on them, the ultimate impact of M37 will remain unclear. Certain interest groups have filed suit in Marion County to declare the entire measure unconstitutional. Other suits, involving discreet properties, are pending.

To fully fill in the gaps left by Measure 37 will take legislation or judicial interpretation. In the latter case, the process may take years. In the meantime, if you hope to take advantage of Measure 37 and plan to transfer real property, you should consult legal counsel and other advisors before signing formal documents.