Legal Knowledge for Today's Real Estate Marketplace

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As we continue to plod through the current downturn in commercial real estate, developers, investors and lenders alike confront difficult challenges, including a virtual clamp down on lending activity, a free fall of real estate values and a drop in demand for just about every asset class -- residential, office, industrial and retail.  All with a stake in a distressed asset want the time and flexibility to sort through these challenges.  Time, however, is not on their side when it comes to maintaining a property's entitlements.  Most development rights expire if not used in a timely manner.  If that happens, much of a property's value will be lost.  My law partner and colleague, Fernando Villa, weighs in on this problem from a California perspective, and offers practical ways to help protect a property's value by preserving the rights to develop it.

Almost all entitlements, such as a subdivision map or conditional use permit, require a developer to develop property for approved uses within a prescribed period, and to meet conditions of approval.  These conditions can include such matters as payment of development impact fees or construction of off-site improvements, and often must be satisfied long before development rights expire.  If the property is not developed within the time allowed, or conditions of approval are not met, an entitlement will lapse or can be terminated by the city or other agency which approved the project. 

If entitlements are lost, the property will lose much of its value, and the developer will need to start the time-consuming and costly entitlement process all over again to regain development rights.  A successful outcome in this process will by no means be assured since a  city has wide discretion to approve or deny the requested development rights.  Indeed, a city may be reluctant to grant rights a second time to a developer which allowed the first entitlements to lapse or go unmet.

Fortunately, those faced with an imminent loss of development rights may seek to renew or modify these rights, often in less time and with less risk than would occur in pursuing new entitlements after the original ones expire.

If the objective is to retain existing rights and buy more time, the developer should apply for an extension of all entitlements.  Many cities provide a simpler, more streamlined process for approving extensions than for seeking new entitlements, reducing both the time and risk needed to retain development rights.  Often, a city official, such as a director of planning, has the authority to approve an extension, and can do so without a public hearing which new entitlements might require before a city council or planning commission.  The applicant should keep in mind that cities will frequently want proof that the applicant has either proceeded diligently to complete the project or has a good reason for not having done so.

If the development team wants a new or different project (e.g., from condominiums to rental apartments), the team would need to modify or change the entitlements before they lapse.  While that could involve considerable time, risk and expense, in today's economic climate cities are increasingly willing to work with developers who are willing and able to complete the revised project.  Many municipalities, faced with falling tax revenues and budget shortfalls, are themselves stakeholders in a project's success and would rather see a new development vision realized than no project at all.  Having a city's strong support for a changed development plan could go a long way to control the time, risks and costs associated with seeking modified or new entitlements.
   
Alternatively, the developer may want to "vest" entitlements, which would allow the completion of the project for a period of time in which a city could not change its regulations or the entitlements to prevent or modify the development.  Vesting could be accomplished either by entering into a development agreement or a vesting tentative map.  In negotiating these rights with the city, the developer should seek as much flexibility as it may need in terms of time (California law imposes no time limits on these agreements), scope of development and other terms.

Fernando Villa contributed to this column.

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