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Land Use Update

By Megan Kinneyn | Nov. 2, 2006

Law Office Management

Nov. 2, 2006

Land Use Update

A roundtable with Allen Matkins Leck Gamble Mallory & Natsis; Nossaman Guthner & Elliot; and Wendel Rosen Black & Dean.

Executive Summary
      This month our panel of experts discuss how the residential market slowdown is affecting land use and entitlement services; the challenges developers face when municipalities are struggling to finance infrastructure, such as fire services and road maintenance; and what developers and investors may want to consider if they are going to purchase or invest in under-entitled land in California.
      Our panelists are William Devine and Sonia Ransom of Allen Matkins Leck Gamble Mallory & Natsis; John Condas and Greg Sanders of Nossaman Guthner Knox & Elliot; and David Preiss of Wendel, Rosen, Black & Dean. The roundtable took place in September and was moderated by California Real Estate Journal Editor Michael Gottlieb and reported for Barkley Court Reporters by Laurie Schmidt.
      MODERATOR: Given the residential market slowdown in many markets throughout California, what effect is this having on land use demand and the need for entitlement services?
      CONDAS: Over the last few years we have been doing a lot of due diligence, representing home builders and developers in the purchase of land, coordinating consultants' efforts during that due diligence phase; working with biologists, civil engineers, planners, et cetera. We probably were doing four to five such projects per month. With the national builders' recent slowdown, we have been doing much less of this work. However, there seems to be a lot of pressure on the national builders to get units to market for projects that are further along. Clients are trying to get their entitlements perfected so they can get houses built and sold quickly. Our work has actually increased this year compared to the last couple of years, even though we are doing different kinds of work today.
      DEVINE: Most of the work that I do is with developers. Similar to what John [Condas] said, our work has actually increased. We do some due diligence work for homebuilders, but it's fairly minimal. Most of the work is really entitlement work for major projects—master-planned communities, base reuse, or urban infill. None of those areas have slowed down. The base reuse projects and big master-planned communities are long-term projects.
      Developers of master-planned communities have been trying to expedite their entitlement processing because they're concerned about a slowdown. Unfortunately, because so many things have to be done in the entitlement process before they get to the stage where they are actually selling to homebuilders, expediting has not really happened. Developers still have been willing to keep putting money in and get those entitlements done so they will be prepared when the pace picks up again.
      Typically, sometime during the entitlement process for a big master-planned project, the developer will enter into purchase and sale agreements with the future homebuilders. Many of those deals have started and stopped, and started and stopped. The homebuilders are letting the developer go further along in the entitlement process before executing a contract.
      MODERATOR: How does that compare and contrast with the experience we are seeing in terms of a large-scale master-planned residential development with the other major residential push—the infill, mixed-use, more complex, smaller projects?
      PREISS: The large national builders are responding to somewhat different market forces than the ones that are just unique to California. Clearly the infill push in the transit-oriented developments is still moving along in certain urban areas. Oakland is certainly one of them; although there's a political regime change, so we will see how that all comes out.
      A lot of the development trend in California is very geographically oriented. There's always some lag time in different parts of California reacting to national trends. The Central Valley is still going strong on large-scale master-planned communities, and yet I believe those are going to slow down for the larger nationally based companies. What we've learned from the '90s is, if you stop the entitlement process, then when the economics start picking up, you could be behind the eight ball if you haven't kept the process going. The infill projects will continue. It will still be interesting whether the groups that have traditionally fought the larger developments will continue to fight infill developments, which are still going on despite the economic slowdown.
      RANSOM: You also have to keep in mind that it has been a seller's market in terms of the land. We've seen a lot of these incredibly short due diligence periods. Developers who are used to being able to string out options over a long period of time haven't been getting away with it. So once people have actually closed on the land and spent the money for the dirt at pretty premium prices, it makes a lot of sense to go ahead and obtain the entitlements because that enhances its value in any market.
      SANDERS: Sometimes it's a mistake to use the national homebuilders as a barometer because the publicly traded companies by and large, are very sensitive to the stock price. And so sometimes the slightest economic downturn can cause a stampede that results in inventory being sold off in order to generate revenue to keep the stock price up.
      RANSOM: What's been unspoken here is the complexity of the entitlement process. The cities have real financial workload issues, and those become ours. But the most significant factor in speeding up the process is political will from the elected officials and city staff, especially if they're in sync. Then you can get a lot done amazingly quickly. For example, an IKEA was entitled in three-and-a-half months because the political will was there, including the desire and need for the sales tax generation. Small projects can be just as complicated as big projects; but the small projects can't really bear the cost as well as the big projects can.
      CONDAS: There also is an interesting dichotomy. On the one hand, you've got a lot of NIMBYism, with sophisticated citizens and a sophisticated city regulatory framework in place. On the other hand, you can try to avoid NIMBYism by going further out to jurisdictions that have not experienced dramatic growth. I'm working on a couple of projects in such cities and it's almost more difficult developing there because these cities aren't used to processing developments. They have a skeletal staff—a planning director and maybe one other planner. These "easy" projects often go slower than "tough" projects in tough jurisdictions because the outlying jurisdictions have less experience in processing.
      DEVINE: One of the projects that I'm involved with is in Central California. It's not in a big community, but for a city of that size, this master-planned community is a large project. They've never done a development agreement. They've never done a Community Facilities District. This city has already hired and fired a couple sets of outside consultants because they don't have a staff that can handle a project of this magnitude. Here we are four years later, and it is still without an approved specific plan.
      With regard to the more urban areas, one of the biggest issues in reuse and urban infill projects of a larger scale is backbone infrastructure. How do you pay for that? The homebuilder doesn't want to have too high of a burden on the property tax. They are really unable to compete in the market with neighboring jurisdictions. Existing infrastructure often doesn't meet the needs of higher density development. The capacity isn't there. And oftentimes that hasn't been taken into account when the land was purchased.
      MODERATOR: How much of the financing burden for fire services, police services, green space, is being put on developers—for example, municipalities requiring Mello-Roos assessments?
      PREISS: In Northern California, some areas are trying to fund a lot of the regional infrastructure through state and local transportation taxes. The jury is still out whether they've been really successful in terms of what they're actually building and constructing. There is an immediate knee-jerk reaction to run to the new development to play catch-up on the aging or outdated infrastructure, which has huge ramifications for housing costs, particularly when you are trying to include a significant affordable housing component in the projects. I have yet to determine precisely how you balance things like Mello-Roos with your affordable-housing component.
      A bill that just passed, SB 1432, which the governor has not yet signed, now specifically adds incentives and funding for affordable housing through Mello-Roos districts. At some point, you can't put it all on the backs of the development projects because they won't pencil out.
      SANDERS: I'd like to see an updated study on the issue of whether residential projects do or don't pay for themselves in terms of municipal services-whether they are infill, exurban, or suburban. With a significant run-up in residential real estate prices, the property tax generated by residential projects is coming pretty close to carrying itself in terms of services. But cities will typically impose a requirement that the developer form a Mello-Roos district to generate the revenues to pay for those services. In some cases, it's patently unlawful for the city to be doing that because there's a specific section in the Mello-Roos Act that says cities can't impose Mello-Roos taxes for services that the city already provides. That's an issue that's ripe for adjudication.
      DEVINE: In some of the projects that I've been involved with, cities are taking the opportunity to throw into a Community Facilities District everything they can think of that they might like to have in the city, rather than what is actually needed as a result of the project. This inflates the size of the CFD. Since developers don't want to see the property tax go over a certain amount, a CFD has limited capacity.
      PREISS: In good years, cities developed quite significant general funds, but there has never been a mindset of budgeting and reserving money for streets over time, which is what homeowners associations have to do. I do think there is money available in a lot of jurisdictions, but you don't seem to find them spending it on roadways and other infrastructure.
      SANDERS: One of the problems is that there's just no political sizzle in paving streets. A lot of the money is being spent on things that don't relate to infrastructure. Developers are looking at the bottom line more carefully. There's a danger that a city can kill the goose that lays the golden eggs by over-reaching. I just don't see any new revenue sources coming out of the state and local governments to pay for all of this in the post-Proposition 13 environment we have in California. It gets down to having to manage municipal budgets more carefully.
      RANSOM: When both the jurisdiction and the developer are reasonable about the infrastructure issue, there can be a meeting of the minds. Most developers don't mind constructing some offsites while they're constructing their own project because that infrastructure will benefit both their community and the city.
      We've all had experiences with great people in the community who love a project, or people with concerns that are legitimate. The problem is that we also all run into the people without legitimate concerns. They just want their agenda or they want to stop any kind of growth.
      I had one client who did the pioneering project up at Fort Ord, generating 32 percent affordable housing. The residents of the community overwhelmingly supported the project, but a few thought that because it was Ford Ord, half should be affordable. Well, where's the reasonableness standard? Instead of getting that 32 percent of the houses to market, we have litigation by a small group using CEQA [California Environmental Quality Act] as a device to try to get more affordable housing into the project.
      PREISS: The most creative approaches I have seen are public/private partnerships where the jurisdiction becomes part of a joint venture with the property owner and developer. You get a more entrepreneurial bent that sees the cities getting in on the ground floor and actually looking to get a certain profit margin out of the development, which generates significant funds for infrastructure and other city services.
      Despite Prop 13, we've seen cities that are very creative at making new assessments on new development, but it's obviously a huge political issue to go to your constituency and say, "we've got to share the burden as well."
      CONDAS: In some jurisdictions we try to inform the jurisdictions that the market has changed, and now many of the public facilities sought cannot be provided. There is less money for the infrastructure that the cities are trying to get our clients to pay for.
      The jurisdictions perceive that the developers are trying to avoid obligations by building without providing infrastructure. But our clients are not doing that. They know that their communities need adequate public facilities and amenities to be successful.
      RANSOM: Municipalities have had a lot more success in using the carrot than the stick. Personally, I am huge fan of SB 1818, the state density bonus law. With SB 1818, which some municipalities resented, the state was coming in and basically saying it doesn't matter what your zoning code says, if a developer includes this amount of affordable housing on-site, the project is entitled to a density bonus as well as concessions and waivers.
      MODERATOR: What tips do you have for developers and investors who are buying or considering investing in under-entitled land in California?
      PREISS: For those players who can buy realistically priced dirt that is not over-inflated, it could now be the beginning of a great time to own property, if you don't have a huge carry cost. And even given the two- to three-year lead time for development, if you get in at a reasonable price now, it might be an opportunity for some smart, leaner players to get unentitled land and be in a great position next cycle.
      CONDAS: Probably six months or a year might be a little better, due to the present disconnect in market perception between developers and homebuilders on the one hand, and sellers of land and jurisdictions on the other. Once that disconnect disappears, you're absolutely correct, it will be a great opportunity for sophisticated and deep-pocketed developers to tie up land and entitle it, to get ready for the next boom.
      DEVINE: During this last cycle, there was such an aggressive effort to buy land wherever you could find it and the idea was that you would take care of any problems later. The turnaround times for due diligence review were short so the level of due diligence was pretty unrealistic and minimal. It was a seller's market. Now it's starting to become more of a buyer's market. If you're going to buy under-entitled or unentitled land, it is critical to do a very thorough and detailed due diligence analysis, and get a more realistic idea of the time and costs involved for what you want to do with the land.
      SANDERS: California has the sixth largest economy in the world. The Los Angeles metropolitan area is an enormous economic engine. There's more wealth here than one could ever imagine. Land here, relative to other urban areas in the world, is still cheap. Over the long term, that bodes well for the real estate business. It's certainly possible to lose money in the real estate business, so you have to be very careful with your entry. As most sophisticated real estate developers will tell you, you make your money going in, not coming out. I subscribe wholeheartedly to the concept that due diligence at the front end can pay big dividends.
      RANSOM: People should talk to the jurisdictions and then listen to what jurisdictions have to say, and not just hear what they want to hear. If people went in and actually listened, they would be very thankful for the important information freely given by city staff. People should draw the distinction between the courtesy of elected officials and staff, and political support.
      SANDERS: Sometimes the real estate industry grossly overreaches. The San Joaquin Valley Air Pollution Control District has developed an indirect source of rule, which results in imposition fees on new development. The real estate industry has been fighting this. And the perception is that the real estate industry just wants to run rampant through the Central Valley without any regard to air quality. The real estate industry needs to come to the table and bargain in good faith and come up with a program that makes sense.
      PREISS: Many of the developers I work with have a PR person as part of their team from the get-go. I don't know if the real estate industry is reluctant to do that. It's often a matter of money and often a matter of one more consultant to deal with. But the best projects often have a big component of community outreach. It is very difficult to go to city councils these days and not be able to answer the question, "How many community outreach meetings did you have?" Make sure you keep a record of who attended and the items reviewed and discussed.
      CONDAS: Our industry also needs to focus on the macro-regulatory level. There is so much regulatory activity going on at the federal, state, and local levels, which will affect the cost, the timing, and the ability to develop property. We need to make a bigger financial and time commitment, to be involved in these regulatory processes, to facilitate more balanced and constructive solutions.
      William R. Devine is a partner in the Orange County office of Allen Matkins Leck Gamble Mallory & Natsis where he focuses on the land use, environmental, and natural resources aspects of real estate development. His practice includes land acquisition due diligence, CEQA/NEPA compliance, endangered species, wetlands, coastal law, planning and zoning, water quality, water supply/rights, vested development rights, annexation, initiatives and referenda, subdivision mapping, redevelopment, affordable housing, energy and Indian law. He regularly represents clients before local, state, and federal administrative bodies.
      Sonia Ransom is a partner specializing in land use and redevelopment at Allen Matkins Leck Gamble Mallory & Natsis in Los Angeles. She has entitled complex commercial, industrial, and residential projects in numerous California jurisdictions, including Marina Heights, the first major project entitled on former Ford Ord, and the LA Air Force Base. Her current work includes projects in Mammoth, Pasadena, and Ontario. She has co-chaired Allen Matkins' renowned land use, environmental, natural resources group, and served as marketing partner and on the compensation committee.
      John Condas is a partner in the Irvine office of Nossaman Guthner Knox & Elliott LLP and is leader of the firm's Land Use Practice Group. He specializes in the processing of all types of land use entitlements and related litigation matters. He is on the board of directors of the Lusk Center at the University of Southern California and the board of advisors of the Hobbs Institute for Real Estate, Law, and Environmental Studies at Chapman University.
      Gregory W. Sanders is a partner at Nossaman Guthner Knox & Elliott LLP. He specializes in land use entitlement and real estate transactional matters. Mr. Sanders represents development and telecommunications companies, investors, and government agencies throughout California on permitting of complex real estate projects, development agreements, siting of telecommunications facilities, and on real estate purchases, sales, and lease matters. He graduated from Pepperdine University School of Law, and is admitted to practice in California and Washington, D.C.
      David L. Preiss, a partner at Wendel, Rosen, Black & Dean LLP with 25 years of experience, represents owners and developers in all phases of the acquisition, development, and disposition of residential, commercial, and industrial properties. His practice emphasizes all aspects of development processing and entitlements, including subdivisions, use permits, rezonings, and development agreements, as well as related environmental, construction, and litigation matters. Mr. Preiss is a frequent lecturer and author of books and articles on land use and real estate matters.
      Barkley Court Reporters is affiliated with over 100 Realtime Certified Shorthand Reporters and has eight locations throughout California, offering worldwide scheduling 24 hours a day/7days a week. The company takes pride in being the first deposition agency to use and offer state-of-the-art technology and in setting the standards of professionalism, quality, and outstanding service for the industry. Large multistate case management is its specialty.

Megan Kinneyn

Daily Journal Staff Writer

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