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Probate & Property

Jul/Aug 2023

Using Development Agreements to Further Environmental Ends A Case Study

Frederic W Knaak and Jordan Espinoza


  • Development agreements have many different forms and can differ greatly in their function, in each case depending on the specific concerns being addressed.
  • Smaller cities are able to use tools to accomplish important environmental and economic—goals with the full cooperation of developers.
  • Detailed agreements related to the protection of the wetlands for example gave both sides what they needed to allow the commercial development to occur.
Using Development Agreements to Further Environmental Ends A Case Study
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Development agreements are powerful legal tools commonly used by local governments, landowners, builders, and real estate developers for all manner and size of developments. These agreements have many different forms and can differ greatly in their function, in each case depending on the specific concerns being addressed. This article will focus on their use as a means of environmental protection of lands in a city that wants to encourage development, but in a way that addresses issues of public health and safety. On the “other side” of the equation, the agreement must confer benefits upon a developer or landowner sufficient to make the development viable and worthwhile. More specifically, we will consider the use of development agreements in a few specific cases in Minnesota, primarily for residential real estate development.

Although the use of development agreements could be called commonplace, and their interpretation invariably is one of contract law, the underlying authority for them varies among states. Hawaii and California, for example, have statutes dealing expressly with development agreements and their form and use. California, in particular, has a rich history of litigation of development agreement issues. Minnesota is among many states in which the grant of authority is broad under state statutory or case authority. Over the years, issues related to whether language in development agreements would violate the takings clauses of the federal or state constitutions, or as an unlawful delegation of the state’s reserved powers, have been tested in the courts. Generally, the courts have allowed their use in a manner that favors use of properly crafted development agreements. It is beyond the scope of this article to delve into the details of the analysis on a state-by-state basis, but readers should see the excellent, short summary of the law in the field and a good general overview provided in David Callies, Cecily Barclay & Julie Tappendorf, Development by Agreement: A Tool for Land Developers and Local Governments (ABA Books, 2012).

Commercial Development Agreements for Environmental Concerns

With the narrower focus of this article, we are ignoring many of the historical uses of development agreements in larger commercial and industrial developments, including in Minnesota. It is a coincidence that the cities we’re looking at are all located on the Mississippi River or its close tributaries.

In Newport, Minnesota, a development agreement was key to dealing with a former sewer disposal plant location with attendant environmental concerns. A development agreement was entered into by the developer and the city that guaranteed a certain valuation of the property being redeveloped, including otherwise non-taxable but very valuable industrial equipment to be installed, and also made use of tax increment financing possible. A state-of-the-art refuse-derived-fuel (RDF) plant was constructed that created combustible fuel from garbage for electrical generation, thereby eliminating much of the need for landfill space. It also created a tax increment sufficient to allow wholesale, and very successful, industrial redevelopment to occur in the surrounding area on the river, resulting in a massive boost to the city’s tax base.

Similarly, only a bit further upstream, Fridley, Minnesota, was able to use an elaborate development agreement to establish an increment sufficiently large to raze a blighted area in the city and allow for the construction of the central headquarters campus of Medtronic. Nearby, a large defense contractor was struggling to expand on its own site but was hampered by brownfield conditions that were the result of its operations over many years. With the pollution on its property, the contractor was finding it impossible to obtain financing for a necessary expansion of its industrial plant. It was effectively being forced to move elsewhere to meet its space needs, notwithstanding the very large size of its lot in the city. In that case, the development agreement allowed a subdivision of the property to occur that created five lots, four of which were unpolluted and one that was. By obtaining financing on the unpolluted portions, the owner-developer was able to construct a large expansion to its industrial facilities and, through the sale of its now neighboring parcels, to provide designated funding to resolve the environmental cleanup the site required by law and the development agreement.

In all these cases, we see the proverbial “win/win” by both the cities’ seeking to solve significant environmental issues and the developers’ being able to build on otherwise “difficult” properties.

Development Agreements for “Smaller” Residential Developments

Development agreements for the kinds of large commercial properties just discussed are elaborate documents, carefully drafted and worked out by large law firms after extensive negotiations. They are, although not rare, not routine. Yet the concept has expanded well beyond the megaproject level to a more broadly accepted use for environmental issues. The past several years have seen the almost pervasive use of development agreements to address environmental issues involved in smaller residential developments or smaller commercial projects. Their successful proliferation is a testament to both their convenience and practicality.

The following examples show how even smaller cities are able to use these tools to accomplish important environmental—and economic—goals with the full cooperation of developers.

Newport: High Environmentally Sensitive Heights Needing Water and Sewer

Newport, which we just discussed, is a small city of 3,500 residents wedged between industrial St. Paul to the north, a refinery immediately to the south, and two large and expanding full-size, affluent suburbs to the east. It is among the oldest cities in Minnesota and was suffering from a lack of space to add areas for upscale residential development. Its reputation was that of a gritty, former meatpacking town just across the Mississippi River from what used to be the largest stockyards in the country outside of Chicago. Nearly 40 percent of its residents live in “affordable” multifamily housing.

Yet, Newport was sitting on a gem, if only it could be fully utilized. A very high river bluff line bisected the city. Below it, sewer and water could be provided by the city. Above it, the costs were prohibitive. Above the bluff, houses were being built on 10-acre lots to accommodate onsite sewage treatment. These rural-level densities eliminated any possibility of building and accessing water or sewer services. Moreover, the tops of the bluffs were either sand moraines left over from the glaciers or the underlying porous sandstone that acted like a sponge feeding any contaminants directly to the aquifers below. Whatever development that did occur could not allow for any contaminate seepage into the soils, which were also highly erodible.

The undeveloped area was surrounded by many acres of parkland and adjoined a small, pristine lake. The other side of the lake was a large park owned by an adjoining city. Views from the edge of the bluff had direct lines of sight with both the Minneapolis and St. Paul downtown skylines. To the south was a vista overlooking the Mississippi River valley for over 20 miles. The city owned 20 acres of the area that had originally been purchased for a water tower site. These were joined with neighboring, privately-owned parcels for the purpose of marketing the entire acreage for a development that would be of sufficient density to allow for the provision of sewer and water to the site. Any development would have to provide full assurance that no soil pollution or erosion would occur, particularly with regard to the nearby lake.

After very active marketing, the city found an experienced, creative developer who was willing to undertake the development of the area, all strings attached. The city’s zoning code allowed for what is known as a “planned unit development,” which is a zoning classification that allows a city to negotiate greater densities and lower setbacks. After significant negotiation back and forth on the number of housing units and their location on the site, the parties entered into a very carefully drafted development agreement. Over 30 units would be built in an area that, under other circumstances, might have allowed three or four homes. Very careful restrictions on water runoff and retention ponds, as well as erosion control, were inserted into the agreement with penalties for noncompliance. More importantly, financial provisions were put into place that allowed the city to construct the necessary sewer connections and an elevated municipal water tank and water lines to service the development without need for bonding. The water system was sized to service not only the new construction but surrounding areas that previously would not have been allowed to develop at the densities needed to provide municipal service.

The success of the project was immediate. Designed to be built in three phases, the project construction was continuous and completed well before the initially planned time frame. The developer won awards for the environmentally positive development and earned substantial profits from the rapid sale of well-above-market-value homes. For its part, the city, for the first time in the memory of many, gained tens of millions of dollars’ worth of new, private residential development and dealt with potential erosion and pollution problems in a unique and stunningly beautiful part of the city. Not coincidentally, the city was able to construct an impressive new, combined city hall, police station, and primary fire station without bonding. None of these benefits could have occurred without the assurances and guarantees the parties provided one another in the development agreement.

Afton: How Green Is Our Valley

Afton, Minnesota, is just a few scant miles east of Newport on the Wisconsin border, but it could not be in a more different development environment. Affluent and idyllic, it is located in the St. Croix River valley that separates Minnesota from Wisconsin. The city, also little more than three thousand people, is spread out over an area of nearly 36 square miles. With the exception of a charming, old downtown located directly on the St. Croix River, the city is largely rural, with many still-active farms. “Preservation of the rural character of the city” is a fairly constant battle cry and a fundamental tenet of the city’s comprehensive plan.

The St. Croix River valley is a federally protected scenic waterway along which any development within view of the river is discouraged and highly regulated at the federal, state, and local levels. Unlike Newport, which was seeking to pack density in a planned unit development in a way that would actually enhance environment safeguards, fleeting attempts to allow clustered developments near Afton’s borders as a trade-off to open space and wetland protection were nearly universally unpopular within the city. Yet concerns were also increasingly being raised about environmental degradation in some sensitive areas of the community. Afton created a “Preservation and Land Conservation District” that could be used to offer incentives to landowners and developers to protect environmentally sensitive features and areas.

One such area was the very upper reaches of one of the trout streams located in the city that flowed down to the St. Croix River. Much of the land in that drainage area had been planted in corn for many years, with no small deleterious effect on the water quality. The land was an undulating mix of deciduous woods and open terrain with farm fields.

The owner approached the city seeking a multi-lot development where he might otherwise have only been able to build one or, perhaps, two homes under the usual restrictions in the code on agricultural development. Careful negotiations with enough “carrots” to provide an incentive to protect the sensitive area resulted in a development whose overall plan included 16 multi-acre parcels clustered to one side of the land, far from the creek. The drainage into the creek was contained on a single outlot, planted in approved native grasses, that was owned in common by the individual landowners, subject to a conservation easement held by the city. A key “in case we missed it” catchall provision of the carefully crafted development agreement stated:

The Developer expressly recognizes that this subdivision is located on land of exceptional environment sensitivity, particularly with respect to the existence on this site of a natural trout stream. All technically feasible and necessary precautions will be taken during construction on this site to assure that no pollution or other damage to this resource will occur as the result of the construction process.

Although a considerable amount of give-and-take occurred during the construction of the development among the developer, the city planning staff, and no small number of city residents, the development was built out in an extraordinarily short period of time. Valuations of the homes built on the development were upward to $6 million. The protection of the highly sensitive trout stream reaches were secured by easements and covenants provided for in the development agreement. Needless to say, the close proximity to a natural and protected trout stream was one of many selling points used by the developer. And the city benefitted with a high-valuation increase in property taxes.

Ramsey: A Small Family-Owned Parcel Needed for a Hotel

Ramsey is several miles upstream from Newport, on the other corner of the Twin Cities metropolitan area. On the cusp of development pressures, it is just under 30 square miles in size, with nearly 30 thousand residents. Only half of it is within the Metropolitan Urban Service District (called MUSA, in MinnesotaSpeak), meaning that accessible sewers are available only in that part of the city and the balance can be developed only at rural densities. Bordered by the Mississippi and Rum rivers, it sits upon a geological feature known as the “Anoka Sand Plain,” a 50- to 100-foot layer of porous, washed sand caused by a massive glacial outflow thousands of years ago. The water table is high to the surface in many areas, and the city has large amounts of surface water and sensitive wetlands requiring protection. Until recently, a large percentage of the land in the city was owned by farm families, one of which was now seeking to sell the property to a developer interested in commercial and industrial development.

Two key problems came with the site: (1) A large percentage of the property contained wetlands and (2) the overall parcel was owned by a multiple-family trust, the terms of which prohibited its subdivision or reconveyance to the third party. The city was very interested in seeing a high-end hotel from a national chain come into the city near its growing commercial area but was very concerned about the impact that kind of density would have on the sensitive property nearby. Joint ownership of parcels developed in the city was a practice strongly discouraged for reasons of accountability. In this instance, a carefully crafted development agreement guaranteed sufficient resources in the event of default by the developer, as well as detailed agreements related to the protection of the wetlands on the site that gave both sides what they needed to allow the commercial development to occur.


These examples show how the creative use of development agreements have served as powerful tools for “smaller” developments to accomplish environmental goals in a way in which both the developer and the city could leave the table satisfied with the end result. Each community presented unique problems and solutions, all in the context of reaching an agreement via development agreement. By offering positive incentives to cooperation and allowing developers to earn more than zoning would otherwise have permitted, these cities avoided issues of takings or undue exactions in exchange for genuine environmental protections and community benefit.