United States: Contract Zoning: Let’s Make a Deal

When the owners of an energy company wanted to build a 700-megawatt, natural-gas-fired electric generating facility in Bellingham, Massachusetts, on land not zoned for such use under local zoning by-laws, it made a deal with the town. The town would rezone the land and issue all necessary permits, and the company would give the town $8 million to defray the town’s anticipated share of the cost of a new high school.

It sounded like a deal made in heaven. While the town meeting, the local legislative body, had previously rejected the rezoning, a town-appointed task force recommended industrial development on the property as a way to increase the town’s tax base. The task force specifically recommended rezoning the parcel from suburban and agricultural use to industrial use and noted that the subject land was a viable setting for an industrial operation since it was adjacent to other industrial land and was separated from residential areas by wetlands and, the town needed a new high school. The existing high school was said to be in "deplorable" condition. The deal promised to be a good one for the town and for the power plant owner.

The annual town meeting agreed. It voted by the required two-thirds vote to rezone the land in response to the power plant’s owner’s offer of "a gift of $8 million" to pay for a new high school. Once the rezoning occurred, the power plant owner spent a purported $7 million to develop plans for the plant. Not all were happy with the deal, however, and following the granting of a special permit to the developer by the local zoning board, a number of citizens sued to overturn the town meeting rezoning. After a trial in the Land Court of the Commonwealth of Massachusetts, the Court overturned the town meeting action primarily on the basis of illegal contract zoning. While the matter is now pending before the Massachusetts Supreme Judicial Court, there is a lesson here for developers who attempt to "buy" land- use approvals believing they are engaging in a winning strategy for themselves and for the municipality in which they wish to build a project.

The Land Court judge found that "but for the gift" the town meeting had the power and authority to rezone the land and that were the $8-million gift not in the picture, there would "be little doubt that the . . . rezoning was valid." Where then did the developer go wrong?

Contract zoning is not defined in Massachusetts law. It is legal in some states and disfavored in others. Contract zoning, according to the Court, quoting from a land-use treatise is, "the process by which local government enters into an agreement with a developer whereby the government extracts a performance or promise from the developer in exchange for the agreement to rezone the property . . ." Anyone familiar with how most development projects are approved, the notion of developers making promises of funds or site improvements as part of the development and permitting process is hardly unique. From Boston to Los Angeles, developers are required to improve roads, install traffic lights, and make contributions to scholarship funds and aid other community programs. Few projects in the City of Boston survive permitting without a memorandum of understanding with the community listing the benefits package that the developer is expected to provide in exchange for support by the community for the project. Absent such support, the project may have little chance of official approval. In Boston and surrounding communities, "linkage" payments are common and include such things as affordable housing set asides. These linkage requirements are frequently published as part of the zoning regulations. Against this background in Massachusetts and elsewhere, why did the Court draw the line against contract zoning in the Town of Bellingham, and how could the power plant developer have avoided the loss of $7 million in development costs in a belief that it had made a deal that both sides were eager to and did, in fact, keep?

The Court said the fatal mistake made by the town and the developer was that the $8-million gift was "extraneous consideration" for a zoning vote. The money was not intended to mitigate any land use impacts of the project. Unlike linkage payments, which as the name implies, bear some connection between the project and its impact on the community, the Bellingham case was devoid of such connection. In fact, a significant fact cited by the judge in the Bellingham case was that the power plant would have virtually no impact on school enrollment. Further, during the town meeting vote on the rezoning, the Court found there was "little discussion about the rezoning article." In the end, the Court appeared to believe that the town meeting had not done its job in considering the land-use issues raised by the rezoning article or in the alternative, that the town had sold its soul for money. Either way, the Court said that by so doing, the town’s actions were "offensive to public policy."

What could the developer have done to avoid the Court’s determination that without a link to the project, the payment and hence the rezoning were illegal? The town may not have rezoned the land absent the promised contribution to its number one priority, a new school. Thus, finding a "linked" contribution sufficient to excite the town meeting would have been very difficult.

The better course for the developer of the power plant may have been to address the need for a new high school through a tax mechanism, the developer agreeing not to a gift, but to a interim assessed value of the plant and its equipment once constructed that would yield, over a finite period, the revenue which the town required and could earmark for school construction. Perhaps other mechanisms could be found to create linkage to offset other costs likely to be incurred by the town which prevented the town from funding a new high school. Payments for the transfer development rights and other similar devices come to mind.

However, the most enduring lesson for the developer exemplified by the Bellingham case is that in jurisdictions where "contract zoning" is not the rule, the promise of money may speak too loudly, drowning out more critical concerns about the use of land. Perhaps those in the business of real estate development, unlike the power plant operator, realize that there is no short cut to zoning approvals, at least not in New England. Putting a thumb on the scale while a municipality weighs the benefits of rezoning is a cautionary tale and one that can be costly for developers who are too eager to make a deal.