Appellate Division First Department Declares Fee Mandate of Soho/Noho Rezoning Unconstitutional

This past December, the Appellate Division, First Department struck down a key provision of New York City’s recently amended Zoning Resolution. In Coalition for Fairness in SoHo and NoHo, et al., v. City of New York et al., Slip Op. 6118 (1^st Dep’t., Dec. 5, 2004) (“the Coalition case”), the court took the unusual step of invalidating a provision of the City’s zoning law — an action not taken in nearly 60 years. And it did so upon a determination that the challenged zoning provision amounted to an unconstitutional “taking” under the Fifth Amendment — also a rare occurrence in the New York state courts.
The case arose out of the City’s 2021 overhaul of existing zoning laws governing the SoHo and NoHo neighborhoods (and parts of Chinatown) in lower Manhattan. Petitioners included a grassroots neighborhood association and a number of individual homeowner residents. A key feature of the zoning legislation is a prohibition after December 2021 in the rezoned area on Joint Living-Work Quarters for Artists (JLWQA), and replacing that longstanding land use with an opportunity to convert remaining JLWQA units to unrestricted residential use. ZR §143-13. The legislation inevitably requires resident owners to undergo the conversion of their existing JLWQA units to residential use as a requirement for an ultimate sale or transfer of their homes. The City’s purported goal in the legislation is to create more residential housing in the rezoned district.
Critically, however, the precondition for receiving a permit for the residential conversion is a fee of $100 per square foot of floor area — amounting to hundreds of thousands of dollars per home — to be funneled into a new “Arts Fund” to be established by the City and supervised by its Department of Cultural Affairs.
Petitioners challenged this unprecedented Arts Fund fee as a violation of the “Takings Clause” of the U.S. and NY Constitutions. They argued that their position is supported by an established line of U.S. Supreme Court cases that evaluates the constitutionality of land use exactions under a special application of the “unconstitutional conditions doctrine” — specifically the two-prong “Nollan/Dolan” test of “essential nexus” and “rough proportionality.” See, Nollan v. California Coastal Comm’n, 483 U.S. 825 (1987); Dolan v. City of Tigard, 512 U.S. 374 (1994). The state Supreme Court declined to apply Nollan/Dolan, ruling that it is inapplicable here because the Arts Fund fee is a standalone, strictly monetary condition that is not “in lieu” of a condition requiring dedication of real property to public use (such as an easement).
On appeal to the First Department, Petitioners maintained that the lower court was wrong, as the controlling Supreme Court precedents — in particular, Koontz v. St. Johns Water Mgmt. Dist., 570 U.S. 595 (2012) — firmly support the conclusion that a monetary exaction tied to permit conditions, such as the Arts Fund fee, qualifies as a taking, regardless of a physical property dedication; and that such an exaction is thus subject to the two-prong Nollan/Dolan test. Petitioners argued that application of that test to the Arts Fund fee reveals that the fee fails both the essential nexus and the rough proportionality prongs. In response, the City argued that Nollan/Dolan is inapplicable because the Arts Fund fee is simply a “monetary assessment,” not sufficiently connected to an accompanying demand for real property. Alternatively, the City argued that if the two-prong test does apply, the fee here meets that test because: 1) an “essential nexus” exists between the societal costs resulting from issuance of residential use permits and the general purpose of the fee in promoting arts and culture in lower Manhattan; and 2) the magnitude of the fee meets the “rough proportionality” prong because of the City’s projection that a higher market value of an unrestricted residential unit compared to JLWQA units in the affected neighborhoods will make it more expensive for artists who wish to acquire a residential unit.
On appeal, the First Department rejected the City’s arguments and unanimously reversed the lower court. Citing the recent U.S. Supreme Court decision in Sheetz v. County of El Dorado, 601 U.S. 267, 270-271, 274-276 (2024), handed down during the appellate briefing period in the Coalition case, the First Department held, without further discussion, that the Arts Fund fee is a taking to which the Nollan/Dolan two-prong test applies. Applying the test, the court first found that the City had failed to identify an “essential nexus” to its land use interest. As the court explained, during the development of the rezoning legislation the City’s Department of City Planning described the JLWQA use restrictions as “outdated,” and articulated the goals of allowing in the newly rezoned district a broad range of residential, community facility, commercial and light manufacturing uses as of right. The legislation’s prohibition of new JLWQA units and the goal of expanding uses and allowing for residential conversions from JLWQA use underscored the City’s goal of phasing out JLWQA units. Thus, the court found that the City’s asserted goal on appeal of supporting art and local artists is unrelated to any land use interest. Furthermore, payment of fees to the Arts Fund would not promote the City’s asserted goal of preserving JLWQA housing for artists. Rather, as the court emphasized, the legislation is clear that the money would not be used for artist housing but for arts programming, projects, organizations, and facilities that promote the public presence of the arts in lower Manhattan.
Applying the Nollan/Dolan test’s second prong, the court found that the City had failed to demonstrate “rough proportionality” as there was no proof that the rezoning would have a negative impact on artists. This was because, due to the longstanding dearth of artists able to purchase JLWQA units in these neighborhoods, conversion of units to residential use would not lead to increased costs to the artist community.
The First Department’s decision in the Coalition case thus makes clear that the City’s efforts to extract money from existing JLWQA owners for a purpose unrelated to the goals of the rezoning fail to meet the requirements of the Fifth Amendment’s “takings” jurisprudence. In the wake of the court’s striking down of the Arts Fund fee, however, one question that remains unclear is whether conversions of JLWQA units to residential use will still be required.