real estate Archives - The National Law Forum

The New Paradigm in Mexico for Damage Claims in Industrial Property.

The Federal Law for the Protection of Industrial Property, in force since the 5th of November of 2020, is distinguished from its predecessor, among other things, by the particularities in the claims of a compensation for damages caused by the infringement of industrial property rights.

Currently, individuals may claim a compensation for damages through the administrative venue, before the Mexican Institute of Industrial Property (IMPI), or through the civil venue before the corresponding Courts in the matter. This implies that the holder of infringed exclusive rights may opt for two procedures and authorities of different nature, which has its benefits and disadvantages.

Before the IMPI, the compensation action is exercised in an ancillary proceeding, provided that such authority has previously issued a declaration of administrative infringement that is enforceable. Alternatively, it is still possible for the action to be brought directly before the Civil Courts, once the resolution from IMPI is final.

Although the exercise of the action for compensation before the administrative authority implies that a specialized authority in the matter is to hear the case, it has the disadvantages that its ancillary proceeding requires the prior prosecution of an administrative infringement claim before the same administrative authority (IMPI) and the lack of experience to quantify damages and losses. Additionally, the time required for the enforcement of the resolution issued by the IMPI before the Federal Courts in Civil Matters must be added to the time required for the substantiation of the action.

Thanks to the entry into force of the new Law, individuals may also resort directly to the civil Courts to claim infringement of their industrial property rights and compensation for damages, without the need for a prior declaration of infringement by the IMPI. This implies that a Judge, an expert in civil law, will have to delve into complex, specialized and technical issues, specific to industrial property.

Additionally, it is provided that the proceeding of the civil action will be suspended if an invalidity claim is filed before the IMPI against the right basis the civil claim, as long as the administrative authority does not issue a final resolution to such nullity action. This counteracts the advantage of a civil proceeding whose resolution may be quicker than before IMPI.

The new landscape for the claim for damages requires a careful study of the particularities of each specific case to determine the suitability of each route, since this is influenced, among other factors, by the complexity, the sophistication of the counterparty, the causes and technical considerations of the violation caused, among others.

This Michigan Supreme Court Case Has the Potential to Guide Drone and Air Rights Law for the Nation

While at first glance the Michigan Supreme Court case of Long Lake Township v. Maxon, appears to be a simple zoning dispute with a Fourth Amendment twist, the real impact of the case may ultimately fall on drones and air rights law, particularly the rights of landowners to exclude drones from flying in the airspace immediately above their land, and relatedly the ability of state and municipal governments to regulate such flights.

The history of the case is straightforward. When the Michigan municipality of Long Lake Township sought to enforce a zoning ordinance against Todd Maxon, Mr. Maxon asked the trial court to exclude all evidence obtained by flying a drone over Mr. Maxon’s land. After the trial court refused to exclude the evidence on the grounds that the photographs did not violate the Fourth Amendment, an appellate court ruled that the Fourth Amendment issue was irrelevant because a legal proceeding to enforce a local zoning ordinance is not required to exclude evidence obtained in violation of the Fourth Amendment (the requirement to exclude such evidence is known as the “exclusionary rule”).

Now, we await the Michigan Supreme Court’s decision as to whether the exclusionary rule applies, and if so, whether the use of the drone to inspect Mr. Maxon’s land for zoning compliance violated the Fourth Amendment’s prohibition of unreasonable searches.

A decision on that second question will center on landowners’ right to exclude drones from the airspace immediately above their land, because a warrantless search violates the Fourth Amendment if there is a reasonable expectation of privacy in the searched area that society recognizes as reasonable. It follows then, that, if a landowner has no legal right to exclude drones from flying over his or her land, then it would be inherently unreasonable to expect privacy in portions of their property that can be observed from such public drone flight paths above their land, as courts routinely rule that there cannot be a reasonable expectation of privacy in land that can be observed from adjacent, publicly-accessible space.

As drone technology developed from a curious, niche hobby into a potential billion-dollar business with the ability to change the way packages are delivered to our homes and offices, legal debates quickly followed about whether all airspace above the blades of the grass constitutes “publicly navigable airspace” that is beyond the control of the landowners below, or if those landowners maintain some residual control over some airspace above their land. A decision from the Michigan Supreme Court on this issue would be one of the highest level state or federal courts to confront this question.

Hopefully, the exclusionary rule will not prevent a thorough analysis of the issue, as its resolution will ultimately be necessary to confirm the permissibility of local government regulation of the time, place, and manner of drone flights, and landowners’ airspace control rights, and only when those questions are resolved will drone technology be able to fully flourish in the United States as part of a legal regime that acknowledges and respects the traditional property rights of landowners.

This is a bellwether. This decision will affect the course of not just Michigan, but all of America about how it treats drone surveillance.

Office Tenants: Do Due Diligence on Your Landlord

Office markets from coast-to-coast are struggling mightily, especially in major urban downtowns. Chicago’s downtown business district (i.e. the Loop) is no exception. Right now, Chicago’s Loop office vacancy rates are the highest since such rates have been recorded.

In April of this year, Crain’s Chicago Business reported that downtown office vacancy broke 25% for the first time on record, landing at 25.1%. This number reflects seven consecutive quarters of increasing vacancy.

What does this mean for tenants? Well…a lot.

It means opportunity as landlords feel pressure to fill vacant office space. Lease concessions that never would have been considered three years ago, might be available now. These days, on most office deals, tenants enjoy considerable leverage. While this market brings tenant’s many benefits, it also brings significant risks. Here are a few risks for tenants to consider before signing a lease:

1. Is your landlord in financial distress? Landlords will always vet an incoming tenant’s financial condition. The same often does not happen in reverse. Many office landlords face financial pressure now. If the landlord is at risk of foreclosure, or otherwise in financial peril, the tenant should have a number of concerns ranging from how well the building will be maintained to whether or not they will be staying in a bank-owned building soon. Tenants should fully inquire into landlord’s financial condition, especially if meaningful tenant allowances have been agreed to.

2. Subordination and Non-Disturbance Agreements are more important now than ever. “SNDAs” can go a long way towards protecting tenant’s lease rights in the event of a foreclosure.

3. Will “creative” uses come to the building? Never underestimate the ingenuity of the commercial real estate industry. All kinds of ideas have sprouted up as to what could be done to fill empty downtown office space. Indoor dog parks, pickle ball courts and the often tossed about notion of converting vacant office space into residential apartments are good examples. Tenants should find out before signing if the landlord has any designs on filling vacant space with uses that the tenant might find objectionable.

4. Co-tenancy provisions and the careful review of how operating costs will be allocated are critical. Who bears the risk of vacancy as to operating expenses? Tenants needs to know if fewer tenants means they will have a higher share of operating costs. Tenants also need to know if they have any way out of the lease if the building really struggles. No one wants to be alone in an empty tower.

Recently Effective & Pending State Housing Laws: 2024 Land Use, Environmental & Natural Resources Update

Various state housing bills are currently making their way through the State Legislature that are expected to benefit mixed-income multifamily housing developers. The following summaries reflect the status of the legislation as of May 15, 2024. The legislative process is ongoing and future amendments are expected.

The recently effective state housing laws are also summarized below.

PART I: RECENTLY EFFECTIVE STATE HOUSING LAWS

Governor Newsom approved multiple state housing bills passed by the State Assembly and Senate during the last legislative session. The following is an abbreviated summary of a few of the key bills that are expected to benefit mixed-income multifamily housing developers, with a more detailed summary available in our prior legal alert.

SENATE BILL 423 — EXPANSION AND EXTENSION OF SENATE BILL 35

SB 423 (Wiener) extends the sunset provision for and makes other substantive changes to SB 35. As explained in our prior legal alert, SB 35 provides for a streamlined ministerial (i.e., no CEQA) approval process for qualifying housing development projects in local jurisdictions that have not made sufficient progress towards their state-mandated Regional Housing Needs Allocation (RHNA), as determined by the California Department of Housing and Community Development (HCD).

SB 423 made the following key amendments to SB 35:

Extended SB 35 to January 1, 2036
Expanded SB 35 to apply when a local jurisdiction fails to adopt a housing element in substantial compliance with state housing element law (regardless of RHNA progress), as specified and as determined by HCD
Revised the coastal zone development prohibition to allow for projects in specified urban coastal locations (e.g., property not vulnerable to five feet of sea level rise or within close proximity to a wetland) where the property is zoned for multifamily housing and is subject to a certified local coastal program or a certified land use plan
Removed skilled and trained workforce requirements for projects below 85 feet in height and imposes modified skilled and trained workforce requirements, as specified, for projects at least 85 feet in height. In exchange, projects with 50 or more dwelling units and using construction craft employees to meet apprenticeship program requirements and provide health care expenditures for each employee, as specified

Please see our prior legal alert for information about other SB 35 amendments made by SB 423, including San Francisco-specific amendments.

ASSEMBLY BILL 1287 — ADDITIONAL DENSITY BONUS UNDER STATE DENSITY BONUS LAW

AB 1287 (Alvarez) amended the State Density Bonus Law (Government Code § 65915) by incentivizing the construction of housing units for both the “missing middle” and very-low-income households by providing for an additional density bonus, and incentive/ concession for projects providing moderate-income units or very-low-income units.

The project must provide the requisite percentage of on-site affordable units to obtain the maximum density bonus (50%) under prior law: 15% very-low-income units, or 24% low-income units, or 44% moderate-income (ownership only) units (the Base Bonus). To qualify for an additional density bonus (up to 100%) and an additional incentive/concession under AB 1287, the project must provide additional on-site affordable units, as specified (the Added Bonus). The Added Bonus may be obtained by adding moderate-income units to either a rental or ownership project, but that is capped at a total maximum of 50% moderate-income units.

ASSEMBLY BILL 1633 — EXPANSION OF HOUSING ACCOUNTABILITY ACT PROTECTIONS: CEQA

AB 1633 (Ting) closed a loophole in the Housing Accountability Act (HAA) (Government Code section 65589.5 et seq.) by establishing when a local agency’s failure to exercise its discretion under CEQA, or abuse of its discretion under CEQA, constitutes a violation of the HAA.

To qualify under AB 1633, the project must be a “housing development project” under the HAA and meet other specified requirements, as summarized in our prior legal alert. Under AB 1633, the following circumstances constitute “disapproval” of the project, in which case the local agency could be subject to enforcement under the HAA:

CEQA Exemptions. If (i) the project qualifies for a CEQA exemption based on substantial evidence in the record (and is not subject to an exception to that exemption) and (ii) the local agency does not make a lawful determination, as defined, on the exemption within 90 days (with a possible extension, as specified) of timely written notice from the applicant, as specified.
Other CEQA Determinations. If (i) the project qualifies for a negative declaration, addendum, EIR, or comparable environmental review document under CEQA; (ii) the local agency commits an abuse of discretion, as defined, by failing to approve the applicable CEQA document in bad faith or without substantial evidence in the record to support the legal need for further environmental study; (iii) the local agency requires further environmental study; and (iv) the local agency does not make a lawful determination, as defined, on the applicable CEQA document within 90 days of timely written notice from the applicant, as specified.

AB 1633 includes a limited exception to enforcement where a court finds that the local agency acted in good faith and had reasonable cause to disapprove the project due to the existence of a controlling question of law about the application of CEQA or the CEQA Guidelines as to which there was a substantial ground for difference of opinion at the time of the disapproval.

ASSEMBLY BILL 1485 — STATE ENFORCEMENT OF HOUSING LAWS

AB 1485 (Haney) granted the California Attorney General the “unconditional right to intervene” in lawsuits enforcing state housing laws, whether intervening in an independent capacity or pursuant to a notice of referral from HCD. Under prior law, the Attorney General and HCD were required to petition the court to be granted intervenor status and join a lawsuit, which can be a “lengthy and onerous process.”

PART II: PENDING STATE HOUSING LAWS

Various state housing bills are currently making their way through the State Legislature that are expected to benefit mixed-income multifamily housing developers. AB 2243 (Wicks) would amend AB 2011 (the Affordable Housing and High Road Jobs Act of 2022). AB 1893 (Wicks) and AB 1886 (Wicks and Alvarez) would amend Builder’s Remedy provisions under the HAA. AB 2560 (Alvarez) and SB 951 (Wiener) would help facilitate housing development in the coastal zone. AB 3068 (Haney) would provide for the streamlined ministerial (i.e., no CEQA) approval of qualifying adaptive reuse projects involving the conversion of an existing building to residential or mixed-uses. SB 1227 (Wiener) would help facilitate middle-income housing and other projects in the San Francisco Downtown Revitalization Zone.

The following summaries reflect the status of the legislation as of May 15, 2024. The legislative process is ongoing and future amendments are expected.

ASSEMBLY BILL 2243 — AB 2011 AMENDMENTS

AB 2243 (Wicks) would amend AB 2011 (operative as of July 1, 2023). As explained in our prior legal alert, AB 2011 provides for “by right” streamlined ministerial (i.e., no CEQA, no discretion) approval of qualifying mixed-income and affordable housing development projects along commercial corridors in zoning districts where office, retail, and/or parking uses are principally permitted.

As currently proposed, AB 2243 would:

Project Review and Approval

Require the local government to approve the AB 2011 project within a specified timeframe. Once the project is deemed to be consistent with applicable objective planning standards, the local government would be required to approve the project within 180 days (for projects with more than 150 housing units) or 90 days (for projects with 150 or fewer housing units).
Require the local government to determine project consistency or inconsistency with applicable objective planning standards within 30 days when a project is resubmitted to address written feedback. The otherwise applicable timeframe is within 60 or 90 days, with the longer timeframe applying to projects with more than 150 housing units.
Provide that a density bonus under the State Density Bonus Law, including related incentives, concessions and/or waivers, “shall not cause the project to be subject to a local discretionary government review process” even if the requested incentives, concessions and/or waivers are not specified in a local ordinance. This is important because some local governments purport to require discretionary approval for specified “off menu” incentives, concessions and waivers despite the fact that AB 2011 provides for a ministerial (i.e., no CEQA) project approval process and specifically contemplates utilization of the State Density Bonus Law in conjunction with AB 2011.
Provide that the Phase I Environmental Assessment (ESA) requirement would be imposed as a condition of project approval versus prior to project approval. If any remedial action is required due to the presence of hazardous substances on the project site, that would need to occur prior to issuance of a certificate of occupancy (as specified).

Residential Density

Provide that the AB 2011 (base) residential density, which varies depending on the location and size of the project site, is now the “allowable” density (prior to any density bonus) instead of a minimum (“meet or exceed”) density requirement.
Impose a new minimum residential density requirement, which would be 75% of the greater of the applicable “allowable” residential density.
Specify that the imposition of applicable objective planning standards shall not preclude the “required” (minimum) AB 2011 residential density (prior to any density bonus) or require a reduction in unit sizes. It appears that this new provision is instead intended to apply to the “allowable” AB 2011 residential density pursuant to the cross-referenced subsections.

Commercial Corridor Frontage Requirements

Revise the definition for “commercial corridor” based on the applicable height limit. Where local zoning sets a height limit for the project site of less than 65 feet, the right-of-way would need to be at least 70 feet, which is the current AB 2011 requirement. For all other project sites, the right-of-way would now only need to be at least 50 feet.
Clarifies that the width of the right-of-way includes sidewalks for purposes of determining whether it is a “commercial corridor.”
Expand eligible sites to include conversions of “existing office buildings” that meet all other AB 2011 requirements, even if they are not on a commercial corridor.

Project Site Size Requirements

Waive the current 20-acre project site size limitation for “regional malls” that are up to 100 Regional malls is defined to include malls where (i) the permitted uses on the site include at least 250,000 square feet of retail, (ii) at least two-thirds of the permitted uses on the site are retail, and (iii) at least two of the permitted retail uses on the site are at least 10,000 square feet. Additional criteria for the redevelopment of regional mall sites is expected to be added to the bill.

Setback Requirements

Provide that density bonus incentives, concessions, and waivers permitted under the State Density Bonus Law may be utilized to deviate from specified AB 2011 setback requirements related to existing adjacent residential uses. The HCD previously opined that under existing AB 2011, only the AB 2011 height and density maximums can be modified via the density bonus approval process.

Freeway, Industrial Use, & Oil/Natural Gas Facility Proximity

Eliminate the freeway proximity and active oil/natural gas facility proximity prohibitions and replace those with specified air filtration media requirements.
Revise the AB 2011 limitation on project sites dedicated to industrial uses. Currently, project sites are disqualified where more than one-third of the square footage is dedicated to industrial use or the project site adjoins a site exceeding that threshold. “Dedicated to industrial use” would no longer include sites (i) where the most recently permitted use was industrial, but that use has not existed on the site for over three years; or (ii) where the site is designated industrial by the general plan, but residential uses are a principally permitted use on the site or the site adjoins an existing residential use.
Revise the definition of “freeway” to specify that freeway on-ramps and off-ramps are not included.

Coastal Zone Projects

Newly prohibit AB 2011 projects in the coastal zone that do not meet SB 35 coastal zone siting requirements (as recently amended by SB 423) under Government Code section 4(a)(6), exclusive of the requirement for the project site to be zoned for multifamily housing (since AB 2011 allows for multifamily housing on commercially zoned properties), including (but not limited to) where the applicable area of the coastal zone is not subject to a certified local coastal program or a certified land use plan.
Provide that the public agency with coastal development permitting authority, as applicable, shall approve the permit if it determines that the project is consistent with all objective standards of the local government’s certified local coastal program or certified land use plan, as applicable.
Provide that any density bonus, concession, incentive, waiver, and/or (reduced) parking ratios granted pursuant to the State Density Bonus Law “shall not constitute a basis to find the project inconsistent with the local coastal program.”

Residential Conversion Projects

Eliminate the residential density limit for the conversion of existing buildings to residential use, except where the project would include net new square footage exceeding 20% of the “overall square footage of the project.”
Prohibit the local government from requiring common open space beyond “what is required for the existing project site” versus required pursuant to the objective standards that would otherwise apply pursuant to the closest zoning district that allows for the AB 2011 residential (base) density, where applicable.
Exempt the conversion of “existing office buildings” from the commercial corridor frontage requirement.

Clarifications

Clarify that the AB 2011 on-site affordable housing requirement only applies to new housing units created by the project.
Clarify that the number of on-site affordable housing units required under AB 2011 is based on number of housing units in the project prior to any density bonus (i.e., the “base” project), which is consistent with the State Density Bonus Law.
Clarify the process for calculating the on-site affordable housing requirement under AB 2011 where the local jurisdiction requires a higher percentage of affordable units and/or a deeper level of affordability.
Clarify that the “allowable” density under AB 2011 is calculated prior to any density bonus under the State Density Bonus Law.
Clarify that “urban uses” includes a public park that is surrounded by other urban uses.

Implications

AB 2243 would make important clarifications in advance of the to-be-provided HCD guidance document on the implementation of AB 2011. The bill would make important amendments to the prior freeway and oil/natural gas facility proximity prohibitions by instead requiring installation of air filtration media, consistent with Senate Bill 4 (Affordable Housing on Faith and Higher Education Lands Act of 2023). The bill would also help facilitate AB 2011 projects in specified coastal zone areas. Under existing law, a qualifying AB 2011 project would be subject to streamlined ministerial approval at the local level, but not by the Coastal Commission, which could separately trigger a discretionary (i.e., CEQA) review and approval process. AB 2243 partially addresses that, but only in qualifying coastal zone areas (pursuant to SB 423, as modified) that are subject to a certified local coastal program or certified land use plan, which excludes various coastal zone areas.

ASSEMBLY BILL 2560 & SENATE BILL 951 — COASTAL ZONE PROJECTS

Assembly Bill 2560

AB 2560 (Alvarez) would amend the State Density Bonus Law to partially address coastal zone projects. Currently, the State Density Bonus Law explicitly provides that it “does not supersede or in any way alter or lessen the effect or application of the California Coastal Act of 1976” (Public Resources Code § 30000 et seq.). As currently proposed, AB 2560 would revise that provision to instead provide that any density bonus, concessions, incentives, waivers, or reductions of development standards, and (reduced) parking ratios to which an applicant is entitled under the State Density Bonus Law “shall be permitted notwithstanding the California Coastal Act of 1976” but only if the development is not located on a site that is any of the following:

An area of the coastal zone that is not subject to a certified local coastal program
An area of the coastal zone subject to paragraph (1), (2), or (3) of subdivision (a) of Section 30603 of the Public Resources Code (i.e., within a specified distance of the sea, estuary, stream, coastal bluff, tidelands, submerged lands, public trust lands, or sensitive coastal resources area)
An area of the coastal zone that is vulnerable to five feet of sea level rise, as determined by the National Oceanic and Atmospheric Administration, the Ocean Protection Council, the United States Geological Survey, the University of California, or a local government’s coastal hazards vulnerability assessment
A parcel within the coastal zone that is not zoned for multifamily housing
A parcel in the coastal zone and located on either of the following: (i) on, or within a 100-foot radius of, a wetland, as defined in Section 30121 of the Public Resources Code or (ii) on prime agricultural land, as defined in Sections 30113 and 30241 of the Public Resources Code

Implications

AB 2560 should help facilitate density bonus projects in coastal zone areas, but the coastal zone area would need to be subject to a certified local coastal program (versus either that or a certified land use plan pursuant to SB 423). Again, that excludes various coastal zone areas.

Senate Bill 951

SB 951 (Wiener) would amend the State Housing Element Law (Government Code § 65580 et seq.). Existing law requires rezoning by a local government, including adoption of minimum density and development standards (as specified), when the local government’s Housing Element site inventory does not identify adequate sites to accommodate the applicable state mandated RHNA. As currently proposed, SB 951 would require local governments in the coastal zone to make “any necessary local coastal program updates” to meet the applicable RHNA.

SB 951 would also amend the California Coastal Act to target the City and County of San Francisco. Existing law provides that approval of a coastal development permit by a “coastal county” with a certified local coastal program may be appealed to the California Coastal Commission under specified circumstances, including where the approved use is not “the principal permitted use” under the local zoning ordinance or zoning map. As currently proposed, SB 351 would provide that for purposes of that provision, “coastal county” does not include a local government that is both a city and county.

Implications

SB 951 would effectively require consistency between local coastal programs and any upzoning or rezoning required under State Housing Element Law. The appealability of coastal zone permits approved by the City and County of San Francisco would also be limited by the bill, which could help facilitate new housing development projects.

ASSEMBLY BILL 1893 & ASSEMBLY BILL 1886 — BUILDER’S REMEDY AMENDMENTS

As explained in our prior legal alert, the Builder’s Remedy applies when a local jurisdiction has not adopted an updated Housing Element in compliance with State Housing Element Law (Gov. Code § 65580, et seq.), in which case the local jurisdiction cannot deny a qualifying housing development project even if it is inconsistent with the local general plan and zoning ordinance (subject to limited exceptions).

To qualify for the Builder’s Remedy, the project must currently (i) fall under the definition of a “housing development project” under the HAA (i.e., a project consisting of residential units only, mixed-use developments consisting of residential and non-residential uses with at least two-thirds of the square footage designated for residential use, or transitional or supportive housing) and (ii) dedicate at least 20% of the dwelling units in the project as lower income (or 100% of the units as moderate income), as defined in the HAA.

Assembly Bill 1893

As currently proposed, AB 1893 would (i) reduce the required percentage of affordable units for mixed-income Builder’s Remedy projects from 20% lower income to 10% very low-income; (ii) impose new size and location guardrails on Builder’s Remedy projects; and (iii) authorize local jurisdictions to require compliance with other specified objective development standards so long as they do not reduce the “allowed” residential density or result in an increase in “actual costs.” AB 1893 would also eliminate the affordability requirement for Builder’s Remedy projects consisting of 10 units or fewer, so long as the project site is smaller than one acre with a minimum density of 10 units per acre.

New Basis for Denial & New Project Requirements

AB 1893 would significantly amend the most controversial component of the Builder’s Remedy, which is that a local jurisdiction without a substantially compliant Housing Element (“Non-Compliant Jurisdiction”) cannot deny a qualifying Builder’s Remedy project unless specified findings are made, which are intended to create a high threshold for denial by local jurisdictions.

As currently proposed, AB 1893 would newly authorize a Non-Compliant Jurisdiction to deny a qualifying Builder’s Remedy project if the project fails to meet any of the following “objective” standards. In other words, Builder’s Remedy projects would need to meet all the following new requirements (unless the project is “grandfathered” as explained below):

The project site must be designated by the general plan or located in a zone where housing, retail, office, or parking are “permissible” uses. Alternatively, if the project site is designated or zoned for agricultural use, at least 75% of the perimeter of the project site must adjoin parcels that are developed with urban uses, as defined under AB 2011. Recall that AB 2243 would amend the AB 2011 definition of “urban use” to clarify that urban use includes a public park that is surrounded by other urban uses.
The project site must not be on a site or adjoined to any site where more than one-third of the square footage on the site is “dedicated to industrial use,” as defined under AB 2011. Recall that AB 2243 would amend the AB 2011 definition of “dedicated to industrial use” to no longer include sites (i) where the most recently permitted use was industrial, but that use has not existed on the site for over three years; or (ii) where the site is designated industrial by the general plan, but residential uses are a principally permitted use on the site or the site adjoins an existing residential use.
The residential density for the project must not exceed the “greatest” of the following density calculations, as applicable, prior to any density bonus under the State Density Bonus Law (there is no codified limit under existing law):
- For project sites within “high or highest resource census tracts” (as defined): (i) 50% greater than the “maximum” density deemed appropriate to accommodate (lower income) housing for the local jurisdiction as specified in Government Code section 65583.2(c)(3)(B) (e.g., for a local jurisdiction in a metropolitan county, “at least” 30 dwelling units per acre); or (ii) three times the density allowed by the general plan, zoning ordinance, or state law (prior to any density bonus under the State Density Bonus Law), whichever is greater.
- For other project sites, (i) the “maximum” density appropriate to accommodate (lower income) housing for the local jurisdiction as specified in Government Code section 65583.2(c)(3)(B) (see above); or (ii) twice the density allowed by the general plan, zoning ordinance, or state law (prior to any density bonus under the State Density Bonus Law), whichever is greater.
- For project sites located within one-half mile of a major transit stop, up to 35 dwelling units per acre more than the “amount allowable” specified above, as applicable.
- The project must comply with “other” objective development standards (as defined) imposed by the local jurisdiction that apply in closest zone in the local jurisdiction for multi-family residential use at the “allowed” residential density If no such zone exists, the applicable objective standards shall be those for the zone that allows the greatest density within the city, county, or city and county, as applicable.

AB 1893 would provide that in no case may the local agency apply any objective development standards that will (i) have the effect of physically precluding the construction of the project at the “allowed” residential density (see above) or (ii) result in an increase in “actual costs.” The local agency would bear the burden of proof under these circumstances.

Project “Grandfathering”

As currently proposed, the foregoing new requirements would not apply to Builder’s Remedy applications that are “deemed complete” on or before April 1, 2024. Under existing law, “deemed complete” is defined to mean that the applicant has submitted a SB 330 preliminary application or, if that has not been submitted, a complete development application (as defined) has been submitted. AB 1893 would add that the local agency shall bear the burden of proof in establishing that the applicable application is not complete.

Implications

AB 1893 is an attempt to “modernize” the Builder’s Remedy by providing clarity to developers, local jurisdictions, and courts to avoid the “legal limbo” described by Attorney General Rob Bonta. As part of that compromise, significant new requirements would be imposed on Builder’s Remedy projects, including a new “cap” on residential density where no codified limit currently exists. In return, the clarifications made by AB 1893 and the reduced affordability requirement for mixed-income projects could help facilitate Builder’s Remedy projects in Non-Compliant Jurisdictions.

Assembly Bill 1886

A recent Builder’s Remedy lawsuit exposed some ambiguity regarding when a Housing Element is deemed “substantially compliant“ with State Housing Element Law. Opposing sides of the litigation disputed where (retroactive) self-certification by the local jurisdiction was sufficient. The court ruled that it was not. See our prior legal alert for our coverage of this ruling, which appears to be the impetus for the amendments proposed under AB 1886 (Alvarez and Wicks).

As currently proposed, AB 1886 would:

Clarify the point at which a Housing Element is deemed substantially compliant with State Housing Element Law: (i) the Housing Element has been adopted by the local jurisdiction and (ii) the local jurisdiction has received an affirmative determination of substantial compliance from HCD or a court of competent jurisdiction.
Clarify that the Housing Element shall continue to be considered in substantial compliance with State Housing Element Law until either: (i) HCD or a court of competent jurisdiction determines that the adopted Housing Element is no longer in substantial compliance (e.g., where any required rezoning is not approved in a timely manner) or (ii) the end of the applicable Housing Element cycle.
Specify that Housing Element compliance status is determined at the time the SB 330 Preliminary Application is submitted for the qualifying Builder’s Remedy project, which is consistent with HCD’s prior determination that the Builder’s Remedy is vested on that filing date. If a SB 330 Preliminary Application is not submitted, then the compliance status would be determined when a complete development application (as defined) is filed for the Builder’s Remedy project.
- Require a local jurisdiction that adopted its Housing Element despite HCD’s non-compliance determination to submit the required findings, as specified, to HCD. In any legal proceeding initiated to enforce the HAA, HCD’s determination on the required findings would create a rebuttable presumption of substantial compliance or lack thereof.

Implications

AB 1886 would make it clear that a local jurisdiction cannot “self-certify” its Housing Element. Rather, an affirmative determination must be granted by HCD or, if a local jurisdiction adopts its Housing Element notwithstanding HCD’s determination to the contrary, a court of competent jurisdiction would need to agree with the local jurisdiction, notwithstanding the “rebuttable presumption” in favor of HCD’s non-compliance determination, where applicable.

ASSEMBLY BILL 3068 — ADAPTIVE REUSE PROJECTS

AB 3068 (Haney, Quirk-Silva, and Wicks) would provide for the streamlined ministerial (i.e., no CEQA) approval of qualifying adaptive reuse projects involving the conversion of an existing building to residential or mixed-uses, as specified. Qualifying adaptive reuse projects would be deemed “a use by right” regardless of the applicable zoning district, with the exception of any proposed non-residential uses.

As currently proposed, the following requirements would need to be met:

Threshold Requirements

The project must retrofit and repurpose an existing building to create new residential or mixed-uses (Adaptive Reuse). The Adaptive Reuse of light industrial buildings is prohibited unless the local planning director (or equivalent) determines that the “specific light industrial use is no longer useful for industrial purposes.”
At least 50% of the Adaptive Reuse project must be designated for residential use, which is defined to include housing units, dormitories, boarding houses, and group housing. For purposes of calculating total project square footage, underground spaces, including basements or underground parking garages, are excluded.
Any nonresidential uses must be “consistent with the land uses allowed by the zoning or a continuation of an existing zoning nonconforming use.”
If the existing building is a listed historic resource or is over 50 years old, specified requirements must be met.

Affordability Requirements

For rental projects, either (i) 15% of the units must be lower income (as defined) or (ii) 8% of the units must be very low income and 5% of the units must be extremely low income (as defined), unless different local requirements apply.
For ownership projects, either (i) 15% of the units must be lower income (as defined) or (ii) 30% of the units must be moderate income (as defined), unless different local requirements apply.
Where different local requirements apply, the project must include the higher percentage requirement and the lowest income target, unless local requirements require greater than 15% lower income units (only), in which case other specified requirements apply.
For rental projects, the affordable units must be restricted for 55 years and for ownership projects, the affordable units must be restricted for 45 years.
Affordable units in the project must have the same bedroom and bathroom count ratio as the market rate units, be equitably distributed within the project, and have the same type or quality of appliances, fixtures, and finishes.

Project Site Requirements

The Adaptive Reuse project site must be in an urbanized area or urban cluster (as defined and specified) and at least 75% of the perimeter must adjoin (as defined) parcels that are developed with urban uses (not defined in AB 3068 but separately defined in AB 2011).
Required Phase I ESA and if a recognized environmental condition is found, specified requirements must be met.

Labor Requirements

All construction workers must be paid at least the general prevailing wage of per diem wages for the type of work in the geographic area (as specified), except that apprentices registered in approved programs (as specified) may be paid at least the applicable apprentice prevailing rate.
The prevailing wage requirement must be included in all construction contracts, and all contractors and subcontractors must comply with specified requirements.
If the Adaptive Reuse project would include 50 or more dwelling units, additional requirements would apply (as specified), including but not limited to participation in an approved apprenticeship program and health care expenditures for any construction craft employees.

Project Approval Process

If the Adaptive Reuse project is determined by the local planning director (or equivalent) to be consistent with the foregoing requirements (referred to collectively as “objective planning standards”), the local agency must approve the project. That consistency determination must be based on whether there is “substantial evidence that would allow a reasonable person to conclude that the project is consistent with the objective planning standards.”
If the project is deemed to conflict with any applicable objective planning standards, the local agency must notify the project sponsor within 60 to 90 days of submittal of the development proposal, depending on whether the project contains more than 150 dwelling units. If the local agency fails to provide the required documentation (as specified), the project shall be deemed to satisfy applicable objective planning
Design review may be conducted by the local agency but must be objective (as specified) and must be concluded within 90 to 180 days of submittal of the development proposal, depending on whether the project contains more than 150 dwelling units.

Development Impact Fees

Adaptive Reuse projects would be exempt from all development impact fees “that are not directly related to the impacts resulting from the change of use of the site from nonresidential to residential or mixed-use” and any development impact fees charged must be “proportional to the difference in impacts caused by the change of use.” The project sponsor may also request that payment of development impact fees be deferred to the date that the certificate of occupancy is issued, subject to a written agreement to pay the development impact fees at that time.

Adjacent Projects

A qualifying Adaptive Reuse project “may include the development of new residential or mixed-use structures on undeveloped areas and parking areas on the parcels adjacent to the proposed adaptive reuse project site” if specified requirements are met.

Implications

AB 3068 would be another tool in the growing toolbox available to real estate developers to encourage the adaptive reuse of underutilized commercial buildings, including office buildings. Financial feasibility is likely to remain an issue due to high interest rates and construction costs. There are well-documented design challenges associated with the conversion of existing buildings to residential use due to required compliance with the strict provisions of the California Building Code, the California Residential Code, and local amendments to those codes. Even if alternate buildings standards are available for adaptive reuse projects (see the directive under AB 529), it not clear yet whether alternative standards would be available for required seismic upgrades, which are often cost-prohibitive.

Financial feasibility would be partially addressed by AB 3068, which would authorize local agencies to establish an Adaptive Reuse Investment Program funded by ad valorem property tax revenues (as specified), which could be transferred to the owners of qualifying Adaptive Reuse projects for the purpose of subsidizing the on-site affordable housing units required by AB 3068. The bill would also “align program requirements to encourage the utilization of existing programs such as the Federal Historic Tax Credit, the newly adopted California Historic Tax Credit, the Mills Act, and the California Historical Building Code.”

SB 1227 — SAN FRANCISCO DOWNTOWN REVITALIZATION ZONE PROJECTS

SB 1227 (Wiener) aims to speed the recovery of downtown San Francisco by creating a new CEQA exemption for qualifying student housing and mixed-use residential projects (along with commercial and institutional projects) in the Downtown Revitalization Zone, which includes the Financial District, Union Square, Eastern SOMA, Mid-Market, and Civic Center neighborhoods. Projects that do not meet all the requirements for the new CEQA exemption could qualify for the new CEQA streamlining process proposed under the bill. SB 1227 would also create a new property tax exemption for moderate-income housing in the Downtown Revitalization Zone.

Qualifying Downtown Revitalization Zone Projects

As currently proposed, the following threshold requirements would need to be met:

The project site must be in the San Francisco Downtown Revitalization Zone.
The general plan land use and zoning designations for the project site must allow for commercial, institutional, student housing, or mixed-uses (as specified below), as applicable to the project.
The project must not include any hotel uses, and if residential uses are proposed, the residential square footage must be less than two-thirds the total project square footage (i.e., the project cannot be a “housing development project” already protected under the HAA). The foregoing square footage limitation (see specified calculation requirements) would not apply to student housing.
To the extent that residential uses are proposed, the project must comply with applicable San Francisco inclusionary affordable housing requirements.
The project must not require the demolition of restricted affordable units, rent-controlled units, or a hotel (as specified). See also the specific requirements that apply to other existing and prior tenant-occupied housing.
The project must comply with 24 enumerated San Francisco ordinances related to development impact fees and environmental protection (including but not limited to the reduction of greenhouse gas emissions and water and energy consumption) and specified provisions of the California Green Building Standards Code.
The project site must not be environmentally sensitive, e.g., a delineated earthquake fault zone, habitat for protected species, or a hazardous waste site (as defined and specified).
The project must not result in net additional emissions of greenhouse gases from demolition or construction.

New CEQA Exemption

As currently proposed, the following additional requirements would need to be met to qualify for the new CEQA exemption:

Prevailing wage, skilled and trained workforce, and/or health care expenditure and apprenticeship requirements must be met (as specified), depending on the size of the project.
The project must not include any warehouse uses.
The project must not require the demolition of a building that is over 75 years old (regardless of its historic status) or result in “substantial harm” to a building on a federal, state, or local historic registry.
The project must be LEED Platinum certified (if over 1,000 square feet).
The project must be in an area with a per capita vehicle miles traveled (VMT) level 15% lower than the city or regional VMT.

New CEQA Streamlining Pathway

As currently proposed, San Francisco Downtown Revitalization Zone projects that meet the threshold requirements above, but not all of the additional requirements for the new CEQA exemption, could instead pursue CEQA streamlining whereby the project could be certified by the Governor prior to certification of an EIR for the project pursuant to the Jobs and Economic Improvement Through Environmental Leadership Act of 2021 (Leadership Act), which authorizes the Governor to certify qualifying projects (before January 1, 2032) for CEQA streamlining. One of the benefits of CEQA streamlining under the Leadership Act is that any CEQA litigation must be resolved (to the extent feasible) within 270 days, as specified.

As currently proposed, the following additional requirements would need to be met to qualify for CEQA streamlining:

Prevailing wage, skilled, and trained workforce requirements must be met (as specified).
The project must be at least LEED Gold certified (versus Platinum) if the project contains residential, retail, commercial, sports, cultural, entertainment, or recreational uses.
The project must not demolish a historic structure that is placed on a national, state, or local historic register (versus a building that is over 75 years old, regardless of its historic status).
The project must avoid a substantial adverse change to the significance of a historical or cultural resource.
The project must avoid or minimize significant environmental impacts in a disadvantaged community (as defined) and any required mitigation measures must be undertaken in, and directly benefit, the affected community.
The project must not result in any significant and unavoidable impacts under CEQA that would require adoption of a statement of overriding considerations by the lead agency.
The lead agency must approve a project certified by the Governor before January 1, 2031.

Please see the text of SB 1227 for more information about the proposed CEQA streamlining provisions for qualifying San Francisco Downtown Revitalization Zone projects.

New Property Tax Exemption for Moderate-Income Housing

This new (welfare) property tax exemption would allow for a partial exemption equal to the percentage of the value of the property that is equal to the percentage of the number of units serving moderate-income households. As currently proposed, the following requirements would need to be met to qualify:

The project must be in the San Francisco Downtown Revitalization Zone.
The project must include moderate-income rental units, as defined and specified.
The project must be owned and operated by a charitable organization (as defined), which includes (but is not limited to) limited partnerships in which the managing partner is an eligible nonprofit corporation or eligible limited liability company meeting specified requirements.
A building permit or site permit for the residential units on the property must be filed before January 1, 2035, and the property owner must claim the exemption within five years following the issuance of the first building permit. The new property tax exemption would also apply with respect to lien dates occurring on or after January 1, 2025.

Implications

SB 1227 should help facilitate the development of new housing for the “missing in the middle” in the San Francisco Downtown Revitalization Zone by providing for a new property tax exemption for projects that include moderate-income rental units. That could in turn help increase the financial feasibility of converting underutilized commercial buildings to mixed-uses, including residential uses.

SB 1227 would impose robust labor requirements for both the new CEQA exemption and CEQA streamlining pathway for qualifying projects in the San Francisco Downtown Revitalization Zone, which could inhibit the utilization of those benefits.

Appellate Division Provides Insight Into Rights Inherent to Tidelands Grants and Tidelands Licenses

A new unpublished case decided by the Appellate Division provides insight into how courts view those rights granted to the holder of tidelands grant versus those afforded by a tideland’s license. In the Matter of P.T. Jibsail Family Ltd. P’ship Tideland License involved the appeal of the issuance and modification to a tidelands license affecting properties owned by appellant Janine Morris Trust (“JMT”) and respondent P.T. Jibsail Family Limited Partnership (“Jibsail”) situated along Barnegat Bay. JMT argued that the approval of the modified tidelands license to Jibsail – allowing for the construction of a 300-foot-long dog-legged dock protruding into Barnegat Bay – was arbitrary, capricious, and/or unreasonable because the dock hampered JMT’s access to navigable waters.

In analyzing JMT’s argument the Appellate Division reviewed the fundamental differences between tidelands grants and tidelands licenses, including: (1) that a tidelands grant “is [a] conveyance in fee simple of real property,” Panetta v. Equity One, Inc., 190 N.J. 307, 309 (2007), while a tidelands license allows the licensee only “to rent an area of land . . . depicted on the [associated] plan”; and (2) that a tidelands grant generally extends the full width of the ripa or the width of the adjacent upland parcel whereas a tidelands license grants to the licensee the right to use only the area of tidelands circumscribed by a “license box” or an outline that closely approximates the size of the permitted structure and generally only includes water areas, not uplands. Ibid.

The Appellate Division noted that these differences affect the riparian rights associated with each means of conveyance. More specifically, a tidelands grant conveys to the riparian owner the right to the land under the water with that land extending far enough out to allow the riparian owner to access navigable water. Conversely, a tidelands license conveys to the licensee only the right to use the land under the water contained within the limited “license box”. As such, the licensee’s right to use adjacent water is no stronger outside of the “license box” than the riparian right of any other member of the public.

Applying these principles, the Appellate Division found that JMT’s ownership of a tidelands license did not prevent the State from claiming title to and managing the tidelands outside of JMT’s licensed area, nor did the license grant JMT any greater right than that of the general public to the navigable waters ostensibly impacted by Jibsail’s dock. Accordingly, the Appellate Division found the issuance of the tidelands license to Jibsail to be neither arbitrary, capricious, nor unreasonable.

Using an LLC to Protect the Family Vacation Home

Vacation homes offer a retreat from daily life, providing a sanctuary to relax and create cherished family memories. Many owners envision passing down their vacation home for future generations to enjoy, but the lack of proper planning can often lead to intra-family disputes. Leaving a vacation home outright to children or other family members may be the easiest option, but the potential for discord over the control and usage of the property only increases as ownership is passed from one generation to the next. A limited liability company (LLC) can mitigate the risk of conflict and provide a tailored solution to the meet the specific needs of a family.

When a vacation home is owned by an LLC, the membership interests in the LLC are passed down to younger generations, which allows for the continued use and enjoyment of the property by the family. The structure also provides a framework for management through an operating agreement, which governs the LLC. An operating agreement allows the original owner to create a plan for how the property will be used and managed as additional owners are added. The agreement can determine who is responsible for property management, how expenses should be proportioned and paid, how decisions should be made and provide guidelines for scheduling family usage. By establishing clear rules and procedures, an LLC can reduce the likelihood of disputes and encourage fairness among different generations.

Another benefit of an LLC is the ability to prevent unwanted transfers of ownership thus ensuring that the property stays in the family. A well-drafted operating agreement can prohibit membership interests from being transferred to third parties, protecting the family as a whole from an individual’s divorce or creditor problems. The LLC can also hold additional assets, including rental income and deposits of other funds earmarked for property expenditures, which facilitates the proper management and use of resources to cover expenses.

An LLC offers an efficient structure to avoid intra-family turmoil and preserves the spirit of the family vacation home for generations to come.

California’s Housing Overhaul Brings Significant Changes for Landlords and Tenants in 2024

California Senate Bill 567, i.e., the Homelessness Prevention Act, which goes into effect on April 1, 2024, seeks to cap rent hikes at 10% and prevents landlords from evicting tenants without a legal cause. California Assembly Bill 12, i.e., the new residential security deposit law, which goes into effect on July 1, 2024, limits the amount landlords can charge for security deposits. Both bills were signed into law in 2023 by Governor Newsom, and while they signal new protections and legal benefits for tenants, the potential financial exposure for landlords is elevated.

Senate Bill 567

SB 567 changes the rules by which California property owners may remove tenants in certain instances. Effectively, this new law directly impacts two sets of property owners:

Property owners and their close family members (i.e. spouse, domestic partner, children, grandchildren, parents, or grandparents) who plan to move into an occupied/leased property before the expiration of the lease term with the tenant.
“Fix and flip” investors planning on substantially remodeling or rebuilding an occupied/leased property for resale.

Under the current law (California Civil Code § 1946.2), after a tenant has continuously and lawfully occupied a residential property for 12-months, the landlord is prohibited from terminating the tenancy without “just cause.” In fact, the “just cause” must be stated in the written notice to the tenant for the termination of the tenancy to be effectuated. Of note, existing law distinguishes between “at-fault just cause” and “no-fault just cause,” wherein “no-fault just cause” has nothing to do with the nonpayment of rent and/or criminal activity on premises, but rather is defined as:

the intent to occupy the premises by the owner and/or the owner’s spouse, domestic partner, children, grandchildren, parents, and/or grandparents;
the withdrawal of the residential real property from the rental market;
the owner complying with specific government orders that necessitate vacating the real property; or
the intent to demolish or to substantially remodel the residential real property.

Regarding an eviction based on an intent to occupy, the new law now requires the owner and/or the owner’s family member(s) under such a scenario to occupy (i.e., move into) the residential real property within 90-days for a minimum of 12 continuous months, and to use the property as the person’s primary residence. Historically, it was quite simple for property owners to use the “move in” provision under the law as an excuse to evict a tenant that they did not like or as a means to increase the rent by evicting the old tenant and moving in a new tenant who was willing to pay a higher rent. There were no specific guidelines and/or restrictions in this regard. But now, a strict timeline regarding personal occupancy has been codified into law, the violations of which could result in financial exposure for the property owner including, but not limited to, a civil monetary award to the tenant with potential for treble damages (3-times the actual damages amount) and punitive damages.

This new law also requires an owner who displaces a tenant in order to substantially remodel or demolish a unit to provide the tenant with written notice that includes a description of the substantial remodel to be completed and the expected duration of the repairs or the expected date by which the property will be demolished, as well as a copy of the permits required to undertake the substantial remodel or demolition. This means that the property owner must do more than just advise the existing tenant that they are being evicted due to the substantial remodeling of the property or because of the intent to demolish it. Under the new law, the property owner must provide the tenant with written notice and documents setting forth a construction timeline and copies of the permitting for said work.

Importantly, the new law prescribes new enforcement mechanisms, including making an owner who attempts to recover possession of a rental unit in material violation of this new law liable to the tenant in a civil action for damages up to three times the actual damages amount, as well as punitive damages and attorney’s fees/costs. Furthermore, the new law also authorizes the California’s Attorney General, and/or the City Attorney, and/or County Counsel within whose jurisdiction the rental unit is located, to bring actions for injunctive relief against the owner who is in violation of this new law. Also, many cities and counties throughout California have different (and often more restrictive) requirements when removing tenants. As such, it is always recommended for landlords to check the rules, regulations, and laws related to the jurisdiction where the property is located for any additional guidelines and requirements.

When using any of the “no fault” grounds for removing a tenant, the tenant is entitled to relocation costs equal to one month’s rent. However, landlords should be mindful that many cities and counties throughout California have even more stringent and/or more substantial relocations costs and requirements. As such, landlords should always check to see if there are any additional jurisdictional costs and/or requirements for removing a tenant.

Further, until January 1, 2030, the current existing law prohibits an owner of residential real property from, over the course of any 12-month period, increasing the gross rental rate for a dwelling or a unit more than 5% plus the percentage change in the cost of living, or 10%, whichever is lower, of the lowest gross rental rate charged for that dwelling or unit at any time during the 12-months before the effective date of the increase, subject to specified conditions. This new law, however, makes an owner who demands, accepts, receives, or retains any payment of rent in excess of the maximum increase allowed liable in a civil action to the tenant from whom those payments are or were demanded, accepted, received, or retained for certain relief including, upon a showing that the owner acted willfully or with oppression, fraud, or malice, damages up to three times the amount by which any payment demanded, accepted, received, or retained exceeds the maximum allowable rent. This new law also authorizes the California attorney general and/or the city attorney or county counsel within whose jurisdiction the residential property is located to enforce the new law’s provisions and to bring action for injunctive relief.

Assembly Bill 12

Under AB 12, landlords are permitted to ask for security deposits equivalent to one month’s rent for both furnished and unfurnished dwellings. This is a notable shift given that under the current existing law, landlords can charge up to two months’ rent for an unfurnished dwelling and three months’ rent for a furnished one. This law does not take effect until July 1, 2024, allowing landlords time to make any necessary adjustments to their practices given this new approach on the security deposit amount.

Also, please note that this new law has an exception for “small landlords” (as defined), if they own no more than two residential rental properties that collectively include no more than four dwelling units that are offered for rent. Additionally, to qualify as a “small landlord,” the owner must hold the real estate as a natural person, as a limited liability company where all members are natural persons, or as a family trust. If all these conditions are met, then the “small landlord” is permitted to collect up to two months’ rent as a security deposit. Again, AB 12 does not take effect until July 1, 2024, which gives California landlords who do not qualify as “small landlords” to make necessary adjustments. In enacting this new law, the California state legislators are hoping to make housing more accessible and affordable, especially for those residents who are struggling financially. Ironically, the law also is effectuating at a time when landlords are facing multiple hardships including limited rent increases, financial risk in the form of potential damage to their property and/or unpaid rent for which there will be no compensation, increasing maintenance and operational costs, having to navigate the complexities of local and state-level regulations, and stalled and/or slowed evictions of tenants who owe back-rent since the COVID-19 pandemic. These factors, amongst others, could hamstring landlords financially and potentially lead to significant portions of the housing market to fall into disrepair, as well as to cause a slow-down of development projects and community engagement. It also may cause landlords to become stricter with the screening processes of their tenants, including adopting higher income requirements and/or charging higher application fees, which can result in an even more challenging housing landscape for high-risk and/or low-income tenants. At this juncture, only time will tell.

Now What?

If you are a landlord, these new laws may seem onerous and riddled with potentially damaging financial exposure. We recommend consulting with a trusted attorney before entering into a landlord-tenant relationship, and also before terminating an existing lease in both the “at-fault just cause” or “no-fault just cause” scenarios.

FinCEN’s Proposed Streamlined SAR — The Real Estate Report

On February 16, 2024, the Financial Crimes Enforcement Network (“FinCEN”) issued a proposed rule addressing “Anti-Money Laundering Regulations for Residential Real Estate Transfers.” The proposed rule would, among other things, require certain persons involved in real estate closings to maintain records regarding non-financed residential real estate transfers and to submit “streamlined SARs” (suspicious activity reports), called Real Estate Reports, to FinCEN. “The persons subject to these reporting and recordkeeping requirements would be deemed reporting persons for purposes of the proposed rule and . . . [t]he information required to be reported in the Real Estate Report would identify the reporting person, the legal entity or trust to which the residential real property is transferred, the beneficial owners of that transferee entity or transferee trust, the person that transfers the residential real property, and the property being transferred, along with certain transactional information about the transfer.”

As FinCEN describes in the Federal Register notice including the proposed rule, the Bank Secrecy Act has generally required that real estate transaction information falls within the categories of transactions that are subject to appropriate money laundering controls since 1970. However, “for many years, FinCEN has exempted such persons from comprehensive regulation under the BSA and has issued a series of time-limited and geographically focused ‘geographic targeting orders’ (“GTOs”) to the real estate sector in lieu of more comprehensive regulation.” In particular, in 2016, FinCEN specifically extended a Residential Real Estate GTO to “require title insurance companies to file reports and maintain records concerning non-financed purchases of residential real estate above a certain price threshold by certain legal entities in select metropolitan areas.” As a result of that 2016 GTO, the information received has indicated to FinCEN that more comprehensive regulation is necessary, when it comes to non-financed real estate transactions. The goal of this permanent rule would be to “connect non-financed residential real property purchases by certain legal entities with the true beneficial owners making the purchases, thereby decreasing the ability of criminals to hide their identities while laundering money through real estate.”

Effectively, the proposed rule would require that at least one person involved in the real estate transaction would have to submit the Real Estate Report. And, that one person would not need to exercise any discretion regarding whether to file the Real Estate Report (unlike when traditional SARs are filed) and the proposed rule would not require confidentiality to be maintained by any of the persons involved in the filing of the Real Estate Report (again, unlike the confidentiality covered institutions must maintain regarding whether they have filed a SAR). While there is a hierarchy in terms of which person would, under the rule, be obligated to submit the Real Estate Report, the parties may also sign a “designation agreement” that would designate a particular person identified in the hierarchy as being the reporting person. Primarily, that person should be “the person listed as the closing or settlement agent on a settlement (or closing) statement.” If there is no agent on the closing statement, then the person that has prepared the closing statement should submit the Real Estate Report. If there is no closing statement, then the person that underwrites the title policy should submit the Real Estate Report. And, if there is no title policy underwritten, then reporting should be done by the “person that disburses the greatest amount of funds in connection with residential real property transfer”, meaning disbursement from an escrow account, a trust account or from a lawyer’s trust account, but excluding direct transfers between transferees. If there is no person disbursing on behalf of the transferees, then the person who prepares an evaluation of the title should submit the Real Estate Report. And, if all else fails, then the person that prepares the deed for the transaction should submit the Real Estate Report. This so-called “reporting cascade” is designed to “capture both sales of residential real estate and non-sale transfers of residential real estate . . . to ensure uniform coverage of non-financed transfers and to ensure that nominees do not purchase homes for criminal actors and then transfer the title on free of charge to a legal entity or trust.”

There are three elements that determine whether a transaction is a “reportable transaction”:

1) Is the kind of property involved in the transaction covered by the rule?

2) Is any transferee considered a “transferee entity” or “transferee trust”?

3) Is the transaction not covered by any of the following exceptions?

Transaction is financed;
Transaction is low-risk because it involves an easement, death, divorce or bankruptcy; or
Transaction involves transfer directly to an individual person.

In terms of the transactions that would be subject to being reported through the Real Estate Report, FinCEN cast an intentionally broad net. “The proposed rule is meant to broadly capture residential real property such as single-family houses, townhouses, condominiums, and cooperatives, as well as apartment buildings designed for one to four families. These properties would be captured even if there is also a commercial element to the property, such as a single-family residence that is located above a commercial enterprise.” Further, many kinds of land-only transactions would be reportable.

In terms of the types of transferees involved, as mentioned, any transfer directly to an individual, even if that transfer was not financed and was not deemed to be low-risk, would not result in a reportable transaction. But, if the transferee is any person other than an individual and that transfer is not financed or is not low-risk, then the transfer would most likely be deemed a reportable transaction. The definition of “transferee entity” generally means “any person other than a transferee trust or an individual.” The definition of “transferee trust” generally means “any legal arrangement created when a person . . . places assets under the control of a trustee for the benefit of one or more persons . . . or for a specified purpose, as well as any legal arrangement similar in structure or function[,] whether formed under the laws of the United States or a foreign jurisdiction.” There are specific exemptions to both of these transferee definitions, including statutory trusts and trusts that are securities reporting issuers, and for the most part, FinCEN points to protocols described in its rules under the Corporate Transparency Act (“CTA”), especially its Beneficial Ownership Reporting Rule, as being applicable to defining which entities and trusts may or may not be exempt from these transferee definitions. Having said that, the inclusion of most trusts involved in non-financed transactions is especially interesting.

In addition to the proposed rule provisions, FinCEN lists no less than 50 questions for comment from interested parties. These questions include everything from how likely “designation agreements” are likely to be used to concerns that may arise in transactions that are partially non-financed to whether concerns relating to non-financed real estate transactions extend to commercial real estate, as well. Comments are due to FinCEN on or before April 16, 2024.

Open Permits, Empty Pockets

Real estate transactions can be influenced by various factors. One often-overlooked aspect is the existence of open building permits at a municipal building department. These seemingly minor components may significantly affect the dynamics of buying or selling commercial or residential properties, potentially causing delays, financial burdens, and legal complications.

UNDERSTANDING OPEN PERMITS:

Open permits refer to permits that have been issued for construction or renovation projects and that appear as uncompleted at the local building department. They may have been left open because the construction was commenced but not completed, or the contractor failed to obtain final inspections, or the required land use or operational approvals were not obtained, such as a board of health license. Such permits remain open in the property’s records until properly closed out, potentially posing significant challenges when buying or selling commercial real estate. This occurrence is especially problematic in the context of commercial real estate where a landlord may have multiple tenants who engage contractors for construction projects. Such permits may remain open without landlord’s knowledge. Landlords may also be unaware of the specific contractor undertaking the work, thus preventing landlord from directing such contractor to cause the permit to be closed. The COVID-19 pandemic exacerbated this problem, as closures of municipal offices interfered with filings and on-site inspections, and the tenants that engaged the contractors (and sometimes the contractors themselves) went out of business, resulting in numerous permits being left open.

THE IMPACT ON COMMERCIAL REAL ESTATE TRANSACTIONS:

Open permits can complicate real estate transactions in several ways. Firstly, they can signal potential safety or code compliance issues, raising concerns for buyers about a property’s integrity and potential code violations. Moreover, open permits can hinder the closings, as lenders may hesitate to provide financing; buyers may similarly be unwilling to take on the burden of owning a property subject to open permits. Resulting delays may jeopardize a deal, or result in price reductions to offset risks associated with open permits. Sellers may also be required to spend time and money to undertake necessary filings and obtain inspections. Longstanding open permits may result in fines or penalties, further complicating matters and potentially souring the deal.

MITIGATING AND PREVENTING HARM:

To mitigate the impact of open permits on real estate transactions, proactive measures are essential. For buyers, conducting thorough due diligence is paramount, including comprehensive inspections of building records at the municipal building department to identify any open permits and/or notices of building violations early in the sale process. Sellers should prioritize closing out permits before listing a property in order to streamline the transaction and enhance marketability.

Commercial landlords should take additional measures with tenants to ensure these issues do not arise in the first place. For example, landlords should include lease provisions requiring tenants to obtain landlord’s prior consent for any work requiring a permit, and require that all open permits be closed within a stated period of time (within 30 days of completion), with proof of closure furnished to landlord. Landlords can enforce such provisions by mandating that the failure to adhere constitutes an event of default under the lease. They may also stipulate in the lease that a security deposit will not be released unless and until all open permits attributable to the specific tenant are closed out.

CONCLUSION:

In conclusion, open permits can pose significant complexities in commercial real estate transactions. By taking proactive steps to address them, stakeholders can minimize disruptions and facilitate smoother transactions.

The Silicon Valley Bank Failure: Implications on Commercial Leasing

This past Friday, March 10, 2023, the Federal Deposit Insurance Corp. (FDIC) announced its takeover of the failed Silicon Valley Bank (“SVB”) after a run on the bank late last week caused the largest-scale U.S. bank failure since Washington Mutual in the 2008 financial crisis. Two days later, New York regulators shuttered Signature Bank (“Signature”). The federal government has made it clear that, while FDIC will guaranty all deposits, including uninsured ones, bailouts of these banks will not occur. The failures of SVB and Signature are likely to have widespread ramifications across many industry sectors, including commercial leasing.

How will the bank failures impact landlords in the commercial leasing sector?

SVB was a very common issuer of tenant letter of credit security deposits. A letter of credit security deposit is the issuing bank’s contractual obligation to pay the landlord beneficiary the amount that such landlord’s tenant is in default.
Landlords holding tenant letters of credit issued by SVB or Signature as security deposits will be directly impacted by the bank failures. Any undrawn standby letters of credit issued by SVB, Signature or any other bank under FDIC receivership may be repudiated by the FDIC, making any such letter of credit worthless. Any affected landlord will want to act promptly to provide proper protection of their interests under any applicable lease.

How can landlords protect their interests under such leases?

Any landlord holding a letter of credit security deposit should identify the issuing bank.
In any lease where the security deposit is a letter of credit issued by SVB or Signature, the landlord should carefully review the terms of the lease regarding the security deposit and the landlord’s approval rights over the issuing bank, but in any event require the tenant to provide it with a letter of credit issued by a different financial institution.
All landlords should review the terms their lease agreements relating to landlord approval rights over issuing banks, draw procedures and requirements and the process for replacing a letter of credit.
In the event the lease agreement in question does not provide landlord with adequate approval rights over the issuing bank, clear draw procedures and stringent replacement requirements, the landlord should consider amending the lease agreement to so require.

Article By Jeff Bates and Blake Young of Winstead

For more finance and banking legal news, click here to visit the National Law Review.

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PART I: RECENTLY EFFECTIVE STATE HOUSING LAWS

SENATE BILL 423 — EXPANSION AND EXTENSION OF SENATE BILL 35

ASSEMBLY BILL 1287 — ADDITIONAL DENSITY BONUS UNDER STATE DENSITY BONUS LAW

ASSEMBLY BILL 1633 — EXPANSION OF HOUSING ACCOUNTABILITY ACT PROTECTIONS: CEQA

ASSEMBLY BILL 1485 — STATE ENFORCEMENT OF HOUSING LAWS

PART II: PENDING STATE HOUSING LAWS

ASSEMBLY BILL 2243 — AB 2011 AMENDMENTS

Project Review and Approval

Residential Density

Commercial Corridor Frontage Requirements

Project Site Size Requirements

Setback Requirements

Freeway, Industrial Use, & Oil/Natural Gas Facility Proximity

Coastal Zone Projects

Residential Conversion Projects

Clarifications

Implications

ASSEMBLY BILL 2560 & SENATE BILL 951 — COASTAL ZONE PROJECTS

Assembly Bill 2560

Implications

Senate Bill 951

Implications

ASSEMBLY BILL 1893 & ASSEMBLY BILL 1886 — BUILDER’S REMEDY AMENDMENTS

Assembly Bill 1893

New Basis for Denial & New Project Requirements

Project “Grandfathering”

Implications

Assembly Bill 1886

Implications

ASSEMBLY BILL 3068 — ADAPTIVE REUSE PROJECTS

Threshold Requirements

Affordability Requirements

Project Site Requirements

Labor Requirements

Project Approval Process

Development Impact Fees

Adjacent Projects

Implications

SB 1227 — SAN FRANCISCO DOWNTOWN REVITALIZATION ZONE PROJECTS

Qualifying Downtown Revitalization Zone Projects

New CEQA Exemption

New CEQA Streamlining Pathway

New Property Tax Exemption for Moderate-Income Housing

Implications

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UNDERSTANDING OPEN PERMITS:

THE IMPACT ON COMMERCIAL REAL ESTATE TRANSACTIONS:

MITIGATING AND PREVENTING HARM:

CONCLUSION:

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How will the bank failures impact landlords in the commercial leasing sector?

How can landlords protect their interests under such leases?

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