How developers can avoid pitfalls in today’s regulatory and market environment

Michele Staples, Shareholder, Jackson DeMarco Tidus Peckenpaugh

Gregory Powers, Shareholder, Jackson DeMarco Tidus Peckenpaugh

Times are tough for many industries, and the development industry is no exception. As a result of the uncertain marketplace, projects in California have been replanned, restructured, redesigned, down-sized, foreclosed upon, have gone into bankruptcy and have come out of bankruptcy.

Through it all, developers have found ways to continue to make deals happen. But in today’s environment, where the market is so unpredictable, laws continuously change, and projects are often transferred and transformed numerous times before the first inch of dirt is moved, the better bargain goes to the dealmaker who foresees and accounts for the potential development pitfalls.

Smart Business learned more about current development challenges from Michele Staples and Gregory Powers, shareholders at Jackson DeMarco Tidus Peckenpaugh.

Are development approvals extended along with the tentative map?

Since 2008, state legislation has been enacted to automatically extend the life of certain tentative maps. The legislation also extends some related development approvals. The most recent legislation (AB 208) extends state agency approvals such as Coastal Commission and Fish and Game permits issued in connection with certain tentative maps. However, AB 208 does not mandate extension of local development approvals.

Developers should be aware that, for tentative maps taking advantage of the legislative extension, AB 208 also reduces protections against the imposition of new conditions of approval and allows the levy of development fees upon building permit issuance.

What are ‘impact fees’ and how can they affect my project?

Development impact fees are payment obligations imposed on a project as a condition of development, and are typically meant to cover the costs of constructing improvements necessitated by the project that will not be built by the developer. Some examples include drainage facility fees, utilities infrastructure fees and traffic mitigation fees.

Impact fee amounts can be shocking. Fee obligations can come from a variety of sources, including local codes and regulations, state laws and written contracts. If a project has been changed in some way since the fees were initially imposed (for example, a modified land plan, changes in density and/or product, etc.), it can open the door to new fee obligations. Nothing can affect the profitability of a project more drastically than impact fees. Early discussions with local agency staff to assess the payment status of a project’s impact fees, along with checking local codes and pre-existing agreements for impact fee obligations, is a critical part of due diligence.

Are continuing security obligations something I need to consider early?

Where ‘broken’ projects are concerned, required improvements are often secured by performance bonds for which premiums may or may not be current. Cities have begun calling such bonds in order to fund needed infrastructure. Unless the obligation has been assigned with the local agency’s consent as part of a change in project ownership, ultimate financial liability may rest on the original developer, the new owner, or both. As part of the transfer, it also may be possible to negotiate a reduction of bonds with the local agency where improvements were partially completed before the project stalled.

What about California’s tangled web of environmental laws?

Whether a project is residential, commercial, industrial, or mixed use, developers can expect some level of environmental review.

The foundation of environmental review is the California Environmental Quality Act (CEQA). The level and complexity of CEQA review required is not necessarily driven by a project’s size, but, rather, its potential environmental impacts. It is a fact-sensitive inquiry that must be handled on a case-by-case basis. Although a project may have ‘survived’ CEQA review already, new or supplemental review may be necessary because of project changes since the initial review was performed. This process can be time-consuming, expensive and risky from the developer’s perspective, so project modifications should be assessed closely when acquiring a partially completed project.

In addition to CEQA, there are a host of other environmental regulations to consider. Remediation, indemnification and insurance requirements in connection with hazardous materials and/or contamination at the project site may need to be considered, along with a multitude of federal, state, regional and local environmental protection requirements. Two things are certain when it comes to environmental review and compliance in California: (1) it is highly complex, and (2) it can make or break a project’s bottom line.

Why is storm water a concern when I have not designed my project yet?

Development projects must minimize storm water runoff through site design so that post-development runoff conditions mimic the undeveloped conditions. The regulations are imposed by cities and counties to comply with permits issued to them by the Regional Water Quality Control Boards. Some jurisdictions have more flexible rules than others, allowing alternative compliance approaches or waivers for projects where strict compliance is not feasible. In most cases, the new regulations apply even if the project already has an approved tentative map. Where tentative maps were approved with insufficient consideration of storm water compliance, the project as originally conceived may not be able to comply with the regulations. The problem is most acute in infill projects where the undeveloped area is too small to accommodate storm water infiltration. Project changes may be required to comply with the new regulations, such as adjusting lot lines or reducing the number of developable lots. At some point, the necessary changes may be so extensive as to require an amended tentative map.

The key to a profitable development in today’s challenging market is accounting for the myriad regulatory obligations in the project’s pro forma before closing the deal.

Michele Staples and Gregory Powers are attorneys in the Land Use and Environmental Department of Jackson DeMarco Tidus Peckenpaugh. Reach them at [email protected] and [email protected], respectively.