In an effort to minimize the adverse effects on the supply of housing for low-income, elderly, and disabled persons caused by the conversion or demolition of hotel rooms, San Francisco passed the Residential Hotel Unit Conversion and Demolition Ordinance, which made it unlawful to eliminate a residential hotel without first obtaining a conversion permit.

To obtain a permit, applicants were required to (1) construct new residential units comparable to the converted ones; (2) construct or rehabilitate housing for low-income, disabled, or elderly persons; or (3) pay an “in lieu fee” equal to the replacement site acquisition and construction costs.

Owners of the San Remo Hotel sought to convert the hotel from mixed residential-tourist use to all tourist use. They paid an in lieu fee of $567,000 in return for the permit, and then sued to recover the fee. They argued that the ordinance violated the California Constitution, which provides: “Private property may be taken or damaged for public use only when just compensation, ascertained by a jury unless waived, has first been paid to, or into court for, the owner.” Was the conversion fee a compensable taking? [San Remo Hotel LP v. San Francisco, 41 P.3d 87 (Cal. 2002).]