For decades, California has been the nation’s premier thought-leader and legislative pioneer with respect to land use planning and environmental issues. While California’s goals have been lofty and its regulatory regime has attracted considerable positive attention, was its regulatory environment prepared for a global credit crisis? Can California’s land use model adapt to the changed economic environment?
Historically, while real estate development has been cyclical, a reliable countervailing factor in California was that as the regulatory complexity grew, so did the value of obtaining entitlements. Entitled land was often worth up to hundreds of times its pre-entitlement value, and many developers could justify the cost of California’s rigorous and lengthy entitlement process because of the potential financial upside once the property was entitled. In past down cycles, while the endeavor was more risky, the financial upside still sufficiently motivated owners and developers to pursue entitlements. Today, California developers are asking themselves whether entitling and developing property is worth it.
These peculiar times have also seen a rapid change in the mix of players. Joining the ranks of “traditional” developers are a host of lenders, investors, and distressed asset funds, some relatively new to California’s complex rules. While time will ultimately tell whether California’s regulatory environment can adapt to and survive the changed economic environment, in the interim, savvy owners and developers are finding ways to maximize value and prosper. Land use in California is different today than it was two years ago, but it is alive and well.
In This Issue:
Preserving Entitlements, Re-Negotiating Fees, and Re-Positioning Projects
In general, entitled land in California remains more valuable than unentitled land. Due to the time, expense, and uncertainty in obtaining entitlements, developers, and land owners - and increasingly investors and foreclosing lenders – should be highly motivated to preserve entitlements and seek to re-negotiate them wherever possible....
Environmental Impact Review & Green Building Issues
Just as extending the life of or modifying existing entitlements has become critical, reducing the length of time required for developer-funded environmental review of unentitled or modified projects can substantially reduce costs and add value to a project. California’s mandatory environmental review statute – the California Environmental Quality Act (Pub. Resources Code, § 21000 et seq.), commonly referred to as CEQA – provides multiple tools and processes for streamlining environmental review. In addition, numerous CEQA exemptions are available to specific classes of development projects. For example, as a result of the enactment of Senate Bill 375 in 2008, which seeks to statutorily link land use and transportation planning in an effort to reduce greenhouse gas emissions, certain “transit priority projects” are exempt from CEQA. “Transit priority projects” are projects with at least 50 percent residential use and a minimum net density of 20 dwelling units per acre, located within one-half mile of a major transit stop or high quality transit corridor included in a regional transportation plan. (Pub. Resources Code, § 21155(b).) By utilizing these types of exemptions and other streamlining techniques, an otherwise lengthy entitlement process can potentially be simplified, with developers achieving significant cost-savings and adding value to otherwise unentitled property....
Creating Working Capital through Fee Refunds and Reimbursements
When real estate values were escalating, developers often pre-paid impact fees to avoid proposed increases. In many instances, lots for which fees were paid have not yet been built out and remain dormant. In addition, developers were often required to build over-sized infrastructure to serve neighboring projects, with the expectation of future reimbursements from other developers and agencies. As projects falter and developers lay off the employees who managed them, considerable fee payments and reimbursement rights may be forgotten, leaving substantial sums in others’ hands....
Challenges Remain
The global credit crisis has caused a domino effect. California is experiencing an unprecedented budget crisis, the likes of which have not been seen since World War II. In its search for funding sources, the state is seeking to take or borrow local government revenues, and in particular redevelopment funds. In addition, as cities and counties become increasingly impacted, developers will face planning and redevelopment staff reductions, which will likely increase the time and, as a result, the cost of obtaining approvals....
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