Can a city council member who serves on a redevelopment successor agency board exercise a right of first refusal from a pre-office lease to buy property in the former redevelopment area?

Plain-English summary

Assemblymember Jose Medina asked the AG about a real conflict-of-interest puzzle. A city council member took office in June 2009. As part of his council duties, he also served on the city's redevelopment agency board (which, after AB 1X 26 in 2011, became a successor agency board in February 2012). Three years before he took office, in 2006, he had signed a lease for commercial property inside a redevelopment area. The lease included a right of first refusal: if the owner wanted to sell, the council member could match any third-party offer. The lease was set to expire in 2017. By 2016, the owner was talking about selling, and the council member wanted to exercise the right of first refusal. Could he?

AG Kamala Harris (through Deputy AG Lawrence Daniels) concluded no. The controlling statute is Health and Safety Code § 33130(a), which prohibits a redevelopment "agency or community officer or employee who in the course of his or her duties is required to participate in the formulation of, or to approve plans or policies for, the redevelopment of a project area" from "acquir[ing] any interest in any property included within a project area within the community." A 2014 AG opinion (97 Ops.Cal.Atty.Gen. 75) had already concluded that § 33130 continues to apply to successor agency board members after AB 1X 26 dissolved the original redevelopment agencies.

The key statutory question: does exercising a pre-office right of first refusal count as "acquiring" a new property interest? The AG said yes. A right of first refusal is "a contractual right to purchase property in the event the owner decides to sell" (Campbell v. Alger). It is not itself ownership. When the owner gets a third-party offer, the right of first refusal ripens into an option to purchase. When the holder exercises that option, he acquires ownership, a property interest "new and distinct from his preexisting leasehold interest, right of first refusal, or option to purchase" (Auerbach v. Assessment Appeals Bd.). That new ownership interest is what § 33130(a) prohibits acquiring.

The opinion noted three narrow statutory exceptions to § 33130's bar, and ruled out each. The first (Health & Safety Code § 33130(b)) allows acquisition if the official "has owned a substantially equal interest as that being acquired for the three years immediately preceding the selection of the project area." A leasehold and right of first refusal are not substantially equal to fee ownership. The second (§ 33130(c)) authorizes leasing under conditions, but the question wasn't about the existing lease but about a future purchase. The third (§ 33130.5) covers residential use, but the property was commercial. None of the exceptions opened a door.

The AG drew an analogy to City of Imperial Beach v. Bailey (1980), which held that a city council member's exercise of a renewal option in a pre-office lease was a "making" of a contract prohibited as a conflict of interest under Government Code § 1090. The court there sympathized with the dilemma but applied the rule strictly. Same result here under § 33130.

A footnote in the opinion is worth flagging: if the council member had purchased the property before assuming office, he could have kept it during his tenure, provided he made a written disclosure entered into the board's minutes. The trigger is the act of acquisition while in office, not the existence of property interests acquired earlier.

Currency note

This opinion was issued in 2016. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: Could the council member resign in time to exercise the right of first refusal?
A: The opinion did not directly address timing. The bar applies to acquisitions "during the period of his service." Resigning before exercising the option would, in principle, remove the bar, but careful timing and substantive disclosure issues would remain (cf. Imperial Beach v. Bailey).

Q: What is a 'redevelopment successor agency'?
A: In 2011, the California Legislature dissolved redevelopment agencies through AB 1X 26 in response to a fiscal crisis. The successor agencies (usually the same cities or counties that created the original agencies) wound down the agencies' affairs and inherited their assets and obligations. The conflict-of-interest rules carried over to the successor agencies.

Q: Does this opinion still apply if the city has no current successor-agency activity in the area?
A: The § 33130 prohibition runs through the duration of the board member's service in the successor-agency role. As long as the property is "within a project area" of the former redevelopment agency, the bar applies.

Q: Could the council member exercise the option through a family member or LLC?
A: The opinion did not specifically address that. Conflict-of-interest statutes are read broadly (61 Ops.Cal.Atty.Gen. 247), and a transparent attempt to circumvent the rule via a corporate vehicle would likely face similar treatment. Consult counsel before trying it.

Background and statutory framework

Redevelopment agencies were created by the California Legislature in 1945 to address blighted areas. AB 1X 26 dissolved them in 2011 as a fiscal measure. Health and Safety Code §§ 34161-34191 set up the dissolution and successor agency framework. Section 34173(b) explicitly preserved the conflict-of-interest rules.

Section 33130(a) is the conflict-of-interest statute. Subsections (b) and (c) and § 33130.5 supply the three narrow exceptions: prior-substantially-equal-interest, leasing, and residential. The Legislature was deliberate about exempting only specific situations; courts and the AG have refused to add unstated ones (97 Ops.Cal.Atty.Gen. at 83).

The opinion also referenced other conflict-of-interest regimes (Gov. Code § 1090 contractual, § 87100 financial, plus common-law conflicts under Clark v. City of Hermosa Beach), but did not need to apply them because § 33130 controlled.

Citations

• Cal. Health & Safety Code § 33130(a) (general prohibition)
• Cal. Health & Safety Code § 33130(b), (c) (exceptions)
• Cal. Health & Safety Code § 33130.5 (residential-use exception)
• Cal. Health & Safety Code § 34173(b) (successor agency duties carry over)
• City of Imperial Beach v. Bailey, 103 Cal.App.3d 191 (1980) (Gov. Code § 1090 analog)
• 97 Ops.Cal.Atty.Gen. 75 (2014) (§ 33130 applies post-AB 1X 26)

Source

• Landing page: https://oag.ca.gov/opinions/yearly-index
• Original PDF: https://oag.ca.gov/system/files/opinions/pdfs/15-1103_0.pdf

Original opinion text

TO BE PUBLISHED IN THE OFFICIAL REPORTS
OFFICE OF THE ATTORNEY GENERAL
State of California
KAMALA D. HARRIS
Attorney General

OPINION of KAMALA D. HARRIS, Attorney General
LAWRENCE M. DANIELS, Deputy Attorney General

No. 15-1103
September 2, 2016

THE HONORABLE JOSE MEDINA, MEMBER OF THE STATE ASSEMBLY, has requested an opinion on the following question:

May a member of a city's redevelopment successor-agency board purchase commercial property located within a former redevelopment area pursuant to a right of first refusal contained in a lease that the member entered into before taking office?

CONCLUSION

A member of a city's redevelopment successor-agency board may not purchase commercial property located within a former redevelopment area pursuant to a right of first refusal contained in a lease that the member entered into before taking office.

ANALYSIS

In 1945, the Legislature created redevelopment agencies to revitalize blighted areas of communities. For decades, the redevelopment agency was the "principal instrument of economic development" in California cities and counties. In the vast majority of cases, the members of the legislative body of the city or county would also act as the board of the redevelopment agency. The redevelopment agency board had the power to acquire real property, dispose of it without public bidding, construct infrastructure to enable building on project sites, and improve other facilities.

In 2011, confronted with a statewide fiscal crisis, the Legislature enacted Assembly Bill 1X 26 (AB 1X 26) in order to recapture property tax increment revenue that had been diverted from schools to community redevelopment agencies. This legislation prohibited redevelopment agencies from engaging in new business, directed that the agencies be dissolved, and provided for "successor agencies" to wind down their affairs. As of February 1, 2012, the redevelopment agencies were dissolved, and the successor agencies, usually the cities or counties that created them, assumed both their assets and obligations.

We are told about one city council member who took office on June 23, 2009, and, as part of his council duties, also served on the city's redevelopment agency board until the board was dissolved on February 1, 2012. At that point, he and the rest of the city council became members of the city's newly-created successor agency board. In 2006, before assuming any of these offices, the council member entered into a lease of commercial property in a redevelopment area. The lease, which is set to expire in 2017, includes a right of first refusal, under which the council member has the right to match a third party's offer to purchase the property during the duration of the lease. We are asked whether it would now be a conflict of interest for the council member to exercise this right of first refusal, and purchase the property. We believe that it would.

In considering this matter, we are guided by our earlier opinion involving conflicts of interest for successor agency board members. In 97 Ops.Cal.Atty.Gen. 75 (2014), we determined that, after the passage of AB 1X 26, the conflict-of-interest statutes that governed redevelopment agencies continue to apply to their successor agencies. Our reasoning was twofold. First, AB 1X 26 vested in the successor agencies all the duties and obligations of the redevelopment agencies that AB 1X 26 did not specifically repeal, restrict, or revise. Second, AB 1X 26 did not alter the conflict-of-interest statutes for redevelopment agencies. We went on to conclude that these anti-conflict statutes generally prohibit a successor agency board member from acquiring real property in the former redevelopment area. In reaching this conclusion, we invoked Health and Safety Code section 33130, subdivision (a), which provides that an "agency or community officer" may not "acquire any interest in any property included within a project area within the community."

We now evaluate whether this same prohibition would prevent a successor agency board member, such as the council member at issue here, from purchasing commercial property in a former redevelopment area pursuant to a right of first refusal in a lease that the board member entered into before joining the redevelopment/successor agency board. In this evaluation, the phrase "acquire any interest in any property" in Health and Safety Code section 33130, subdivision (a) is crucial. If a successor agency board member purchases real property located in a former redevelopment zone through a preexisting right of first refusal, does he or she "acquire any interest in any property" in that zone?

To answer this question, we use well-established principles of statutory interpretation. The "first task in construing a statute is to ascertain the intent of the Legislature so as to effectuate the purpose of the law. In determining such intent, [we] must look first to the words of the statute themselves, giving to the language its usual, ordinary import and according significance, if possible, to every word, phrase and sentence in pursuance of the legislative purpose." If the statutory language is clear, we "follow its plain meaning unless a literal interpretation would result in absurd consequences the Legislature did not intend." But where the plain meaning alone does not conclusively resolve the question, we may examine extrinsic aids, including the statute's legislative history.

In construing the statutory language at issue here, it is important to understand what a "right of first refusal" is. Sometimes called a "preemptive right," a right of first refusal is "a contractual right to purchase property in the event the owner decides to sell." It "does not become an option to purchase until the owner of the property voluntarily decides to sell the property and receives a bona fide offer to purchase it from a third party," at which point the holder of the right of first refusal "has a limited period … to either match the offer or reject it."

With this understanding, we conclude that the council member here would "acquire" an interest in real property by exercising his right of first refusal. First, the council member's lease gives him a leasehold interest in the property. From the provision in the lease granting him a right of first refusal, he also possesses a contractual right to buy the property before the owner may sell it to a third party. In the event the owner and a third party reach an agreement for a sale of the property, the council member's right of first refusal then becomes an option to purchase. If he then exercises the option to purchase, he would acquire an ownership interest, a property interest that is new and distinct from his preexisting leasehold interest, right of first refusal, or option to purchase, within the meaning of Health and Safety Code section 33130, subdivision (a). The council member is therefore barred from purchasing this property in the former redevelopment area during his period of his service, even though his contractual right of first refusal existed prior to this period.

Our interpretation of Health and Safety Code section 33130, subdivision (a) conforms to the Legislature's purpose in enacting the statute and retaining it after AB 1X 26: "to prevent conflicts of interest in a member of a [successor] agency with respect to property within the [former] redevelopment area under the jurisdiction of that agency…." This interpretation also aligns with judicial authority mandating that conflict-of-interest statutes be interpreted broadly to eliminate even the possibility of divided loyalty by public officials.

There are three statutory exceptions to the rule prohibiting a redevelopment/successor agency board member from acquiring property within the former redevelopment area, but none of them would allow the contemplated purchase. The first exception permits a board member to acquire an interest in a property in order to participate as an owner, or to re-enter into a business, if he or she "has owned a substantially equal interest as that being acquired for the three years immediately preceding the selection of the project area." This exception does not apply here because the council member did not have an interest substantially the same as the contemplated ownership interest in the commercial property for the three years before the project area was selected. The second exception authorizes a board member, if certain requisites are satisfied, to lease property. This exception does not apply because we are concerned here with the lawfulness of the council member's potential purchase of the property, not the lawfulness of his current lease. The third exception relates to acquiring property for personal residential use. This exception does not apply because the board member would continue to use the property only for commercial purposes after purchasing it. Because no statutory exception applies, we conclude that Health and Safety Code section 33130, subdivision (a), prohibits the council member from exercising his right of first refusal to purchase the property.

We conclude that a member of a city's redevelopment successor-agency board may not purchase commercial property located within a former redevelopment area pursuant to a right of first refusal contained in a lease that the member entered into before taking office.