Hailey Mayor Fritz Haemmerle announced on Monday that the city will abandon an appeal of a 2012 federal court ruling that has prohibited the city from collecting $2.5 million in annexation fees from the developer of the Old Cutters housing subdivision.
The announcement puts an end to a two-year court battle, and could mark the beginning of a new era in how the city negotiates with developers during annexations.
“There have been a lot of lessons learned out of this case,” said Haemmerle in an interview following the announcement at City Hall. “We have learned to not rush forward with an annexation, and to get expert opinion on what the annexation fees are, and what they are for.”
The Old Cutters property was annexed into the city in 2006 after three years of negotiations. Court records state that Old Cutters LLC bought the land for Old Cutters subdivision in 2003 and 2005 for a total purchase price of $6.2 million, using $4.4 million in bank loans. To finance Old Cutters’ development of the property, Old Cutters obtained $13,133,000 by 2008 in credit from Mountain West Bank.
Old Cutters paid $1.3 million in annexation fees to the city. Plans called for 149 single- and multi-family units, including 24 affordable-housing units. The developer was required to build one affordable unit for every five market-rate units. Only a handful of lots were developed before the onset of the recession.
In 2009, after the beginning of the real estate and housing crisis that swept the nation, the Hailey City Council accepted an 1883 water right in lieu of the first annual installment of annexation fees totaling $3.87 million. It also renegotiated the terms of deed restrictions on community housing in the development.
In 2010, primary developer John Campbell offered to give the city eight lots within the development in lieu of an $880,000 annexation fee payment, but the deal fell apart due to public pressure and some last-minute changes in the proposed agreement.
Old Cutters filed a petition for Chapter 11 bankruptcy proceedings in July 2011. Secured claims against the company totaled about $12.5 million, with Mountain West Bank claiming $9.5 million, the Blaine County tax collector claiming about $330,000, and the city of Hailey claiming $2.45 million. Old Cutters Inc. assets were listed as totaling about $3 million, almost all of which were land in the development.
On Dec. 31, 2012, federal Judge Jim D. Pappas stated that based on several Idaho court decisions, Hailey’s annexation fee of $3.8 million, contained in a 2006 annexation agreement, was “unquestionably in excess of” that required to compensate the city for actual costs resulting from the annexation. He also released Old Cutters from the obligation to build affordable-housing units at the subdivision.
Pappas cited e-mails between City Attorney Ned Williamson and then-City Clerk Heather Dawson that he said indicated “Hailey’s abandonment of any attempt to allocate only direct costs to Old Cutters resulting from an annexation in favor of an approach designed to generate revenue for the city.”
Hailey mounted two unsuccessful appeals of Pappas’ decision, most recently challenging a 2014 ruling by U.S. District Court Judge Edward Lodge that reaffirmed Pappas’ decision.
Old Cutters, meanwhile, sued the city to reclaim $815,000 in fees it said it had overpaid the city.
The settlement announced Monday, which is yet to be finalized, states that Old Cutters agrees to release claims for the return of $815,000 in development impact fees and city service hook-up fees. The city, in turn, agrees to pay $116,000 in legal fees incurred by Old Cutters, and give $105,000 in credits for future development impacts in the subdivision.
Williamson said he had “no idea” how much the city has spent on its appeals against Old Cutters.
Haemmerle said the $2.5 million that the city will not collect would have gone into the city’s capital fund. He said it could have been used to pay for several city services, including snow plow purchases and street repairs.
“It is safe to say this matter is now concluded,” Haemmerle said. “Old Cutters is a great asset for the city of Hailey.”