​After a contentious legislative process where the original sponsors withdrew their support for the ordinance and the Mayor did not sign it, on June 18, 2013, the San Francisco Board of Supervisors passed an ordinance establishing the Expedited Conversion Program (“Program”).  The Program was promoted to alleviate the huge backlog for conversion of Tenancy in Common (“TIC”) units to condominiums stemming from the existing condo conversion lottery system, which limits conversions to 200 units per year.  The ordinance goes into effect July 28, 2013, and will permit hundreds of TIC owners to convert their units to condominiums, in exchange for payment of an “impact fee” of $20,000 per unit (although this may be reduced) in addition to the condo conversion application fee of over $9,600 per building.

Of course, this is San Francisco… and the ordinance includes trade-offs for offering so many TIC owners the privilege to convert to condos under the Program.  The trade-offs include: (i) existing tenants living in a converted unit must be offered a lifetime lease, (ii) more stringent tenant eviction limitations that could restrict the ability to convert, (iii) increased owner-occupancy rules requiring owners to continually occupy their units for lengthy periods of time, and (iv) perhaps most controversial, a “poison pill” provision that will suspend many condo conversions in the event anyone files a legal challenge to the ordinance (subject to exceptions).

TIC conversion to condos under the Program will occur in phases over the next several years.  Certain buildings will be eligible to convert immediately, while other buildings will become eligible in April of each year from 2014 through 2019.  TIC buildings that participated unsuccessfully in the 2012 or 2013 lotteries are the primary beneficiaries under the Program, and will be eligible to convert to condos under the Program either (a) immediately (if owner-occupancy requirements met for 5 years as of 4/15/13), or (b) beginning on 4/15/14 (if owner-occupancy requirements met for 3 years as of 4/15/14).

Other “Additionally Qualified Buildings” under the Program include those that did not participate in the 2012 or 2013 lotteries, but had a signed TIC agreement in place as of 4/15/13.  These buildings may become eligible for conversion in April of each year, beginning in 2014 and ending in 2019, with the order of eligibility depending on when the buildings meet the required owner-occupancy periods.  For example, a TIC building may apply for conversion under the Program beginning on 4/15/15 if the required number of owners continuously occupied their units for six years (from 4/15/09 to 4/15/15).  The following year, a TIC building may apply for conversion under the Program beginning on 4/15/16 if the required number of owners continuously occupied their units for six years (from 4/15/10 to 4/15/16).  And so forth until April 2019.

Future TIC owners and existing buildings that did not have a signed TIC agreement in place as of April 15, 2013 bear the brunt of the ordinance, and will be negatively impacted.  These buildings must wait until the condo lottery resumes, ten or more years from now, before becoming eligible to convert.  When the lottery does resume it will do so with much more restrictive owner-occupancy requirements and tenant eviction rules.  Conversions under the condo lottery will generally be limited to 2-4 unit buildings, with 5-6 unit buildings being eligible to convert only in very limited circumstances.

While the Program provides a path to condo conversion for many TIC owners, the devil may be in the details.  Those interested in the Program should understand the significant trade-offs contained in the ordinance.  In particular, the real possibility that a building’s condo conversion application may be suspended midway through the process pending the outcome of a lawsuit challenging the ordinance.  Owners must decide whether they can live with this risk and associated expenses, when their condo conversion could be held up for years, or potentially canceled, depending on the outcome of such a lawsuit.

Please note that the above is only a brief summary of the main points of the Program, and is not a complete description of all applicable rules.  Owner-occupancy standards may vary for 2-4 unit and 5-6 unit buildings.  The eviction history of a building may restrict or completely disqualify a building from converting to condos.  Various deadlines for payment of fees and submittal of applications apply.  All condo conversions must meet the applicable requirements of Article 9 of the San Francisco Subdivision Code and the San Francisco Department of Public Works, the lead City agency for processing of condo conversion applications.

A copy of the ordinance is available at the following link:  http://www.sfbos.org/ftp/uploadedfiles/bdsupvrs/ordinances13/o0117-13.pdf

Special thanks to law clerk Andrew Guess, who contributed significantly to this update.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

More Formula Retail (Out of) Controls

Formula retail controls are once again in the news.  This time, it is Supervisor Jane Kim’s introduction this week of interim zoning controls regulating formula retail in the Mid-Market district, on Market Street from 6th Street to Van Ness Avenue.  Interim zoning controls are important to understand because they are enacted quickly (typically within 60 days), and are subject to limited public process.  Whereas land use controls generally are submitted to the Planning Commission and the Planning Department for review and public hearings, no such process is allowed for interim zoning controls.  Interim zoning controls remain in place for 18 months or until permanent legislation is enacted, whichever occurs first, and can be extended for an additional 6 months.

Formula retail is defined as a retail sales activity or establishment that has eleven or more other retail sales establishments located in the United States.  In addition to the eleven establishments, the business maintains two or more of the following features: a standardized array of merchandise, a standardized facade, a standardized decor and color scheme, uniform apparel, standardized signage, a trademark or a servicemark.  Supervisor Kim’s proposal would require formula retail uses to obtain conditional use authorization from the Planning Commission in the manner presently required under the Planning Code, but would add a new requirement that the Planning Commission consider the “economic and fiscal impact of the proposed formula retail use in the area.”  The applicant must provide the Planning Department with an economic impact analysis of the proposed use, prepared by an independent licensed professional.  

These new controls are of great import to developers in the Mid-Market district.  Just as exciting development begins to take hold in this long-neglected neighborhood, these formula retail controls represent a new impediment that could slow that growth.  We will continue to monitor the progress of Supervisor Kim’s legislation and will keep readers posted.

CEQA being CEQA

The Board of Supervisors was scheduled to consider the CEQA reform measures introduced by Supervisor Wiener and Supervisor Kim this week, but continued the matter for another week.  CEQA reform always has been, and continues to be, a frustratingly slow process.  In Sacramento, the Legislature is considering its own version of CEQA reform (SB 731 – Senate President Pro Tem Darrell Steinberg).  The bill originally was quite ambitious.  Yet, as is typically the case with CEQA reform, the bill became watered down to appease the various interested parties.  The Senate recently passed the bill 39-0, and it is likely to be passed by the Assembly and signed into law by the Governor.  Interestingly, the bill is named the CEQA Modernization Act of 2013, replacing the idea of reform with modernization, in an attempt to gain wider support.

Among the bill’s provisions are the following:

• Aesthetic impacts would be eliminated as a potential environmental impact and no longer reviewable under CEQA;
• The Natural Resources Agency would develop statewide significance thresholds for parking, transportation and noise.  While this latter provision initially seems promising, the bill allows localities to impose more stringent significance thresholds for these impacts.

Enterprise Zones Being Zoned Out

Enterprise zones are not widely known but have been in existence in California for almost 30 years.  The enterprise zones program provides tax credits to businesses that create new jobs for low-income employees who perform services directly related to their particular enterprise zone.  San Francisco has the largest enterprise zone program in the state, with enterprise zones located in Bayview Hunters Point, Chinatown, the Mission, Mission Bay, Potrero Hill, North Beach, and the Financial District.  Recently, the widely respected Public Policy Institute of California published a study that proved enterprise zones to be largely ineffective.  This prompted the Legislature to pass legislation introduced by Governor Brown that would eliminate enterprise zones and replace them with more targeted tax credits.  We will continue to monitor this legislation and can assist local business in identifying the new tax credits that may be available to them in place of the enterprise zone credits.

CBIA Huffs and Puffs but Doesn’t Blow Inclusionary Housing Down

As any residential developer in San Francisco knows all too well, inclusionary housing requirements impose a significant cost on development.  Whether it is the payment of the in-lieu fee or the provision of affordable units (on-site or off-site), this requirement is usually the most expensive one imposed on development.  

The California Building Industry Association (CBIA) has led the charge around the state in challenging the legality of local inclusionary housing ordinances.  A major recent victory for CBIA came in the Patterson case in 2009 (Building Industry Association of Central California v. City of Patterson (2009) 171 Cal.App.4th 886).  In that case, the court struck down the city’s inclusionary housing requirements imposed on a particular project because the city could not meet its burden of showing that the inclusionary requirements were “reasonably related” to the impacts of the development.

Trying to build off the Patterson victory, CBIA recently lost an inclusionary housing battle in San Jose.  (California Building Industry Association v. City of San Jose, 2013 Cal. App. LEXIS 447, 2013 WL 2449204 (Cal. App. 6th Dist. June 6, 2013).)  In the San Jose case, CBIA brought a facial challenge to San Jose’s inclusionary housing ordinance in its entirety, rather than its applicability to a particular project.  This facial challenge, ruled the court, meant that the burden was on CBIA, rather than the city, as in the Patterson case.  Moreover, CBIA had to show that the inclusionary housing ordinance was an improper exercise of the city’s police power.  The court sent the case back to the trial court for a determination whether CBIA could make this showing.

We will continue to monitor the progress of this important litigation.  

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

L​ast week, the United States Supreme Court issued a ruling cautioning local governmental agencies from exerting too much leverage on developers to demand concessions during the entitlement process—particularly in the form of monetary payments.  (Koontz v. St. Johns River Water Management District, 570 U.S. ____ (2013) (slip op).)  The ruling permits a project sponsor to challenge a city or local agency’s project approval conditions even if permits or entitlement documents are never issued, and even if the conditions are only the payment of impact or off-site mitigation fees.  The ruling should serve as a caution to city agencies that impact fees must be reasonably related to a project, both in the context of single-project concessions and district or city-wide impact and mitigation fees.     

In relevant part, the Supreme Court concluded that (1) a “taking”—a government’s deprivation of an individual’s property right—can occur when a permit or entitlement application is denied; and (2) development impact and off-site mitigation fees must be related to the harm arising from the development, and the fee amount must be roughly proportionate to the amount of harm the project causes.

The facts of the case are relatively straightforward.  A landowner of 15 acres in Florida sought to develop approximately 3.5 acres of his land, and offered to foreclose any future development on the remainder of his property through a conservation easement.  A Florida wetlands agency with permitting power (the “Agency”) issued two counter-offers: (1) reduce the size of his project to one acre and dedicate the remaining 14 acres to conservation, or (2) make a one-time mitigation payment to the agency, which would be used to enhance approximately 50 acres of off-site environmental projects.  The landowner did not accept either offer, and instead sued the Agency, claiming an unconstitutional taking.  The Agency defended itself on the ground that there was no taking, because it did not issue a permit or approve any project, and because its second counter-offer was for cash and not restrictions on land. 

The Supreme Court rejected these defenses.  Whether a permit had been issued was irrelevant: “extortionate demands” may be a taking, even if the project is never approved, and even if the demand was for monetary payments and not a restriction on land use.  In essence, the Supreme Court concluded that a government should not have free reign to limit landowners’ use of their land by imposing what are essentially unrelated or excessive monetary exactions for the right to develop before issuing any discretionary approvals or building permits.

After the opinion was released, certain city planning and environmental groups cautioned that the Supreme Court may have irreparably weakened local agencies’ power to impose mitigation conditions.  It remains to be seen if this is the case.  The Supreme Court did not decide that the Agency actually demanded too much from the landowner.  It also emphasized that reasonable government regulation—both through restrictions on land use and impact fees—are constitutional.  Nevertheless, some commentators predict the practical result of the ruling will be that the burden to prove the reasonableness of impact and mitigation measures will shift from property owners attacking the measures to city governments defending them.

Mitigation and impact fees should continue to be an important means for cities to offset environmental and other consequences of development, so long as the fees are related to identifiable and legitimate harms, and are proportional to the amount of harm the project causes.  What this ruling appears to do is caution city governments that they may not demand too much from a developer or require mitigation entirely unrelated to the project.  It also permits developers and landowners to immediately challenge in court what they believe to be “extortionate” demands after a building permit or entitlement application is denied.  It remains to be seen if the ruling will lead to increased litigation between developers and city agencies,   particularly in locations where cities conduct extensive “nexus” studies to ensure the impact and mitigation fees they put in place are reasonable in amount and adequately related to the development.

The full Supreme Court opinion can be found at http://www.supremecourt.gov/opinions/12pdf/11-1447_4e46.pdf

Mark Loper in our office contributed significantly to this update.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

As we reported recently, formula retail is a very hot topic in San Francisco.  There has been a strong push to limit formula retail stores, and while controls may seem strict now, there are many who would like to see even more restrictions on new formula retail in the City.

Currently, formula retail is defined by the San Francisco Planning Code as a “type of retail sales activity or retail sales establishment which, along with eleven or more other retail sales establishments located in the United States, maintains two or more of the following features: a standardized array of merchandise, a standardized facade, a standardized decor and color scheme, a uniform apparel, standardized signage, a trademark or a servicemark.” (Planning Code Section 703.3.)  When most people think of formula retail, they think of large national chain stores, and while large chain stores are in large part, the kind of stores formula retail regulations are aimed at, smaller businesses are also impacted. Some recent discussions have turned to the adequacy of the definition of formula retail stores. As applied today, this only applies to brick and mortar stores, but there are those who believe internet stores should also be included in the overall count when determining if a use is formula retail. While the increase in internet shopping has undeniably changed how retailers do business, would including online stores in the formula retail calculations really be wise? As more and more neighborhoods in San Francisco are strictly limiting and even outright banning new formula retail stores, the answer to that question could have a huge impact on which stores are allowed in the City. But, a policy like that may end up harming those it’s aiming to protect because big national chains won’t be the ones affected, if such policy becomes a law.

Online Instead of in Line

Shopping online has greatly increased in popularity over the past several years. (See http://www.nytimes.com/2012/01/16/business/some-shoppers-rebel-against-giant-web-retailers.html?pagewanted=all&_r=0.) 

In response, retailers have had to completely re-think their strategies to get customers into their brick and mortar stores.  Despite these efforts, for many shoppers, the allure of possibly finding a better deal online is too much to resist.  One Survey showed that as many as 44% of Americans prefer online shopping. (See http://www.marketingcharts.com/wp/interactive/6-in-10-americans-prefer-shopping-in-store-to-buying-online-25244/.)

Recently, much attention has been given to a practice called showrooming. Showrooming is when a shopper goes to a store to view and test a product, and then later purchases that product online.  One study showed that as many as 21% of shoppers engage in this practice.  To counteract this, and get people in the door, retailers use price matching, special “in store only” deals, and in some cases coupon apps that only work in the store.  Despite these efforts online sales are becoming an integral part of the retail experience.  This paradigm shift in retail sales is not only limited to large retail stores.  Small business and restaurants, and even people without physical stores, are using the numerous online retail “stores” like Etsy, Facebook, Amazon, and personal websites, to reach a wide array customers and expand their sales.

Internet Stores and Formula Retail

Because online stores play such a large role in retail, there are those who would like to see them included in the calculation of the total number of stores a retailer has, when determining if it is formula retail.  The current definition of formula retail, without question, already covers big name national retailers.  Including internet stores in the definition will not impact their status.  And while these large stores do need to be concerned with legislation limiting and banning them entirely form portions of the City, any changes in the definition of formula retail will likely have little or no impact on their prospects in San Francisco.  The ones who will be greatly impacted by a policy like this are the little guys who formula retail controls are aiming to protect in the first place.  The mom and pop store that has grown over the decades into a local household name, local restaurants with online ordering, and entrepreneurs and artists who use online stores to earn the seed money for a new business.  These are the businesses that would be most impacted by the inclusion of internet stores in the calculation of total stores in the United States.  A locally owned business with stores all around the Bay Area could be completely banned from certain neighborhoods in the City because its online stores put it over the permitted eleven stores.  An artist or craftsman with a strong internet sales presence could have trouble opening a brick and mortar establishment if online sales meet enough of the formula retail criteria.  Even small local restaurant chains could suffer if individual stores maintain separate online ordering systems.

Thoughtful regulation is important for any issue, and a wide array of locally owned businesses is part of what makes San Francisco such a great City.  It is important that in the rush to protect these businesses, we don’t make it even harder for them to survive here.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.
​

Ten years ago, the state legislature passed a law making all CEQA decisions by local government agencies appealable to an elected body. In San Francisco that body is the Board of Supervisors.  Prior to this state law change, only an environmental impact report (“EIR”) could be appealed to the Board of Supervisors.  Negative Declarations could be appealed to the Planning Commission and categorical exemptions could not be appealed at all.  The change meant that even small projects – a minor addition to a house, a wireless antenna, a restaurant taking over a retail space – could be appealed.  

Although state law created appeal rights, it did not establish any procedures for exercising them.  Over the last ten years, there have been several failed attempts to put basic standards in place for CEQA appeals, including time limits for filing appeals of Negative Declarations and exemptions.  (EIR appeals, and time limits for them, have been in place for some time.)  As a result, most Negative Declarations and exemptions can be appealed at any time until final building permits are issued.  According to the Planning Department’s figures for the last few years, appeals of exemptions were filed, on average, 208 days after the CEQA document was issued. Furthermore, nearly a quarter were rejected for being filed too early or too late.  In contrast, the time-limited appeals for EIRs were filed, on average, 48 days from EIR publication; none were rejected for timeliness issues.

The upshot to the lack of clear rules is that everyone loses.  Many projects are at risk long after Planning Commission approval, in some cases right up until construction starts.  Savvy opponents can–and do–abuse the late appeal to leverage a financial settlement.  At the same time, opponents with legitimate motives and no CEQA knowledge can be denied a hearing altogether.

Last November, Supervisor Scott Wiener introduced legislation (the “Wiener Legislation”) to fix this broken system by expanding notice requirements for CEQA decisions and establishing clear time limits for appeals that would run from the first project approval.  In March, Supervisor Jane Kim introduced competing legislation (the “Kim Legislation”) that would allow multiple appeals for many projects and push appeals to the very end of the process.  Since then, the Kim and Wiener Legislation have been amended several times, with Board President David Chiu actively pushing for a consensus proposal.

This Monday’s Land Use Committee hearing marked the eleventh public hearing on the Wiener Legislation, and the eighth for the Kim Legislation.  While the proposals are not as far apart as they once were, important differences remain.  The following is a brief comparison of each, as well as amendments to the Wiener Legislation proposed by Supervisor Chiu:

• Appeal Deadlines.  Both pieces of legislation would set a 30-day time limit on most appeals of a CEQA document, and the appeal periods for EIRs and Negative Declarations would generally start at the same time.  However, there are important differences in the treatment of appeals for exempt projects – including most small projects and many larger ones that qualify for a community plan exemption.

The Wiener Legislation calls for the 30-day clock to start ticking early.  The appeal period would start on the day of the “First Approval Action.”    To simplify, the First Approval Action is generally the first commission approval of a project in reliance on the environmental document.  Where there is no hearing, the appeal period will typically start when a building permit is issued.  Under the Kim Legislation, the appeal period on an exemption would run from the “Final Discretionary Approval.”  For most projects, the final discretionary approval would be a building permit or a subdivision map.  This means that some projects could be at risk for an appeal – even after construction starts. 

• Notice of Environmental Decisions.  There seems to be a consensus that notice of environmental decisions and appeal rights are needed, particularly if time limits on appeals are established.  New notice rules are primarily aimed at exempt projects. (EIRs and Negative Declarations are extensively noticed already.)

In general, the new notice requirements in the Wiener Legislation are aligned with the permit process to avoid delays in project approvals.  On the other hand, the Kim Legislation proposes new notices that would prevent over-the-counter approvals for many types of permits.  For example, notices would be required for any alteration to a building 50 years or older that “changes the roof, adds a garage, or modifies the front façade except for replacement in kind, or expands the occupied square footage.”  Since buildings more than 50 years old are about 85 percent of San Francisco’s building stock, this new notice requirement could be quite far reaching and delay many small projects.

• Project Modifications.  A third major difference is the treatment of changes to projects after an exemption has been issued.  The Wiener Legislation is consistent with existing practice, which gives the Planning Department discretion to determine that the change is not substantial and does not require a new exemption.  Supervisor Kim takes a markedly different approach.  Literally interpreted, her legislation requires a new exemption, with its own appeal process, wherever the “Planning Department is presented with a change in the scope of a project…or…with new information regarding the environmental impacts.”  This would give project opponents a potent weapon to reopen environmental review whenever there is a minor change to a project, or by submitting a letter purportedly identifying new impacts. 

The Kim Legislation is co-sponsored by a total of five supervisors (Kim, Campos, Avalos, Mar, Yee) and needs only one more vote for passage.  Supervisor Chiu – whose vote is key to passage of either proposal – has offered  a number of amendments to the Wiener Legislation.  These would would keep the core benefits of clear time limits in place, but would augment certain notice requirements and appeal hearing procedures to address concerns raised by supporters of the Kim Legislation.  As well, Supervisor Chiu is likely to support some version of “trailing legislation” by Supervisor Kim that would better define when changes to an exempt project require additional environmental review, and setting up an appellate process when the Planning Department determines that further review is unnecessary.

The full Board of Supervisors is expected to consider both the Wiener Legislation and Kim Legislation within the next two weeks. 

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

The possibility of mechanics liens is a key issue in any construction project.  A contractor and their subcontractors and laborers want to ensure that if an owner does not pay for the work, they have recourse to recover the value of their services through a lien secured against the subject property.  An owner, on the other hand, wants to make sure that it receives lien releases prior to making payment for any work done, to limit the filing of liens against its property. 

Typically, a lien burdens the property owner who entered into the construction contract with the contractor.  But what if the lien was foreclosed upon a subsequent property owner who was not a party to the construction contract?  How is the lien valued if not based on the price in the construction contract?  These concerns were addressed in a recent Court of Appeal case entitled Appel v. Superior Court of Los Angeles County.  (214 Cal.App.4th 329 (2013)).  In Appel, the general contractor brought an action against the condominium developer and the unit owners for foreclosure of a mechanics lien related to the contractor’s work constructing the residential condominium development.  There was no dispute that the contractor had a right to foreclose on the lien even though the condominium owners were not the parties who hired and agreed to pay the contractor to do the work.  The Court provided that a mechanics lien “attaches to the improved property when the first labor or construction material is furnished for the construction work, and cannot be defeated or otherwise affected by the conveyance of the property after the lien attaches.” 

The question presented in Appel was to determine the proper standard for valuation of a mechanics lien enforced against a non-party to the contract.  Typically, the amount of a mechanics lien may not exceed the agreed-upon price of the construction contract which is the basis for the work.  Section 8430(a) of the Civil Code (listed as the former Civil Code Section 3123(a) in this case) states that the lien shall be either in “the reasonable value of the work, or for the price agreed upon by the claimant and the person with whom he or she contracted, whichever is less”.  In this case the contractor, Webcor, and the developer, Wilshire Landmark, had previously settled their claims.  In doing so they also adopted a change order which increased the original contract price from $81 million dollars to $95.5 million dollars.  Webcor argued in its case against the unit owners that the value of the mechanics lien should be based solely on the reasonable value of its services, since the unit owners were not a party to the original contract.  The unit owners responded that they should be allowed to introduce evidence as to the original value of the construction contract between Webcor and Wilshire Landmark, which was lower than the settlement amount.

The lower court in Appel interpreted Section 8430(a) of the Civil Code to mean that, the amount of the lien should be based solely on the “reasonable value” of the completed work, thus ignoring the other clause providing that it should be the lesser of that amount and the price agreed upon in the contract.  The lower court determined that the value of the construction contract between Webcor and Wilshire Landmark was not relevant because the unit owners were not parties to that agreement.  The Court of Appeal disagreed finding this interpretation conflicted with another statute, Civil Code Section 8434 (listed as the former Civil Code Section 3140 in this case), which codified the long adopted rule that if there is a valid contract, the contact price measures the limit of the amount of the lien which can be acquired against the property by the contractor or subcontractor.  The Court of Appeal held that if Section 8430(a) was construed to use the reasonable value of services solely as a basis for recovery whenever a property owner was not a contracting party, a contractor could obtain a lien in an amount that was more than the contract price if the reasonable value of the work exceeded that amount.

The decision in Appel confirms the proposition that the amount of the mechanics lien filed against a property by a contractor or subcontractor is limited to the amount of the contract price in the construction contract, regardless of whom it is being enforced against.  Owners and contractors should be cognizant of this fact when they draft a construction agreement.  Further, subsequent owners should be aware of any mechanics liens filed against a property they elect to purchase.  They are not insulated from liability even though they did not enter into the construction contract which is the basis for such liens.  Buyers should make sure they do their proper due diligence and title review in any purchase to guard against these issues. 

Development Impact Fee Deferral Program Expires July 1

The City’s impact fee deferral program is set to expire July 1, 2013.  If no legislative action is taken, beginning July 1, all impact and in-lieu fees applicable to a project will be due prior to the issuance of the building permit or first site permit addenda authorizing construction. Time is running out.  If you have any questions, please call Andrew Junius or John Kevlin in our office.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

​

The great formula retail debate is about to be joined yet again in San Francisco.  The term “formula retail” is shorthand for virtually any national retailer who has more than eleven stores in the country.  That certainly describes a lot of businesses, and in fact, many locally-grown businesses that expand to eleven stores or more unknowingly go from being viewed as a cute mom-and-pop to being thrown into the same bucket as Walmart and McDonalds.  The formula retail question is fundamentally unique in the world of land use in that it is focused not on what the business does, but who owns it.

The Issues

On one side of the aisle are those who argue that formula retailers drive out small businesses, destroy neighborhood character, give nothing back to the local community, and export their profits to corporate headquarters in far off lands, etc.  They also often argue that owners hold their properties off the market and keep them vacant in the hope that they can attract a successful formula retailer.

On the other side of the debate, well, the arguments aren’t quite as passionate, but are no less real.  What if an existing building is too large for a mom-and-pop store to use, or too expensive to retrofit?  What if a store’s front has been vacant for years and the only interest in the space is from formula retailers?  Would neighborhoods rather see a formula retail use or a vacant space that is constantly being attacked by graffiti?  Shouldn’t including more retailers in an NC district encourage competition and benefit everyone?

Unlike many of the hotly contested, case-by-case land use battles we see every day in San Francisco, the formula retail question doesn’t really lend itself to easy answers.  It’s not as simple as saying that a particular building is too tall, an architectural style is ugly, the upper floor setback is too small, etc.  The debate surrounding formula retail involves much more fundamental questions about what rights and responsibilities various stakeholders have – or should have – and what metrics the City should use to decide who gets to do business where. 

The Players

The debate is joined by four basic groups:

• The first group is comprised of residents, community activists and business owners in our Neighborhood Commercial Districts who have strong feelings one way or the other about what their commercial street should look like, and who should be allowed to do business on it;
• Second are the national retailers, who of course, are looking for business opportunities and want to be where everybody else is in terms of neighborhood locations;
• Then come the commercial property owners;
• And the final group is made up of the decision makers – the Planning Department and Planning Commission and the Board of Supervisors – they have the very difficult job of trying to “referee” this complex dance. 

The three stakeholders with “skin in the game” (the local neighbors, the property owner, and the formula retailer) all have competing interests, although there should be common ground (i.e. it is in everyone’s interest, for example, to have a vibrant, attractive, active, commercial street that offers a variety of goods and services to residents).  But real progress cannot be made unless the parties are willing to come to the table, set aside the emotion, and have a rational discussion.

The Dialogue

The City’s current formula retail process encourages this kind of dialogue by requiring mandatory public outreach meetings and a conditional use authorization process at the Planning Commission that virtually every formula retail store outside of the downtown area must go through.  But despite this established process, there are still heated battles at the Planning Commission over formula retail uses.  Here are some thoughts about how each of these groups could think about this issue going forward in order to engage in a  more productive dialogue.

The Neighbors.  Clearly this is an emotional issue for San Francisco residents across the board.  Neighborhood character is an important touch-stone in the City, and it is a legitimate (if difficult to define) neighborhood asset worthy of careful protection.  In many of the most desirable neighborhoods, residents have been extremely successful in preventing formula retailers from coming in (Hayes Valley, North Beach).  While these neighbors are achieving the specific goal of keeping national retailers out of their neighborhood, their efforts can also have negative consequences, such as a lack of additional services for the residents in the area and continued long-term commercial vacancies that can also invite graffiti, squatting or safety concerns for the community.  We believe interested neighbors have every right to air their concerns about formula retail; at the same time, these neighbors also have a civic duty to come to the table and talk to retailers who are doing outreach and considering locating in their neighborhood.

The Property Owners.  Property owners have a vested interest in keeping their spaces occupied and rents flowing.  There is no question that a “credit tenant” like a national retailer is something that most landlords and property owners love to see.  From a strictly business perspective, owners cannot be blamed for wanting what they believe are high quality tenants who can pay the rent.  That said, owners must realize that their individual properties are a part of the cumulative character of the community.  They should consider tenants (both large retailers and small mom-and-pop stores) who are willing to revitalize existing spaces, invest in the character of the surrounding community, and offer goods and services that are not already readily available.

The National Retailers.  National retailers want to be in the City for obvious reasons.  What some are starting to learn, however, is that they must be much more sensitive to store design, neighborhood concerns, signage, and a whole variety of issues that are extremely important to stakeholders in the surrounding Neighborhood Commercial District.  Many of these companies have a difficult time adjusting to these very fine grain issues and concerns.  These companies are very attached to the comprehensive national branding that they have built and are reluctant to leave that behind in order to put a single store in San Francisco.  However, recent evidence suggests that national retailers must have a productive dialogue with any community they seek to invest in, and they should be ready and willing to design their stores and their signage to account for the unique character.

In the middle of all this you find the Planning Department and Planning Commission trying to make case-by-case decisions about whether a national retailer should be allowed to go into a specific neighborhood.  This puts them in an extremely difficult position.  Planning and zoning rules generally do a good job of separating incompatible uses.  We are not sure that the same regulatory framework makes sense when choosing between businesses.  Is zoning process really the best way to decide if a specific business owner (not a use) is right for a neighborhood?  We believe we may have reached a tipping point, where zoning laws are simply no longer effective in resolving these conflicts.  We are frankly not sure what the answer is, but at a minimum a more civil, organized and thoughtful approach on the part of all the parties is in order.

RERT:  More Formula Retail Talk…Join Us

Next week at noon on June 13, our regular monthly installment of the Real Estate Roundtable will feature Evette Davis of BergDavis Public Affairs who will be giving what should be an interesting and informative talk – Survival Stories: What National Retailers Need to Know About San Francisco’s Formula Retail Policies.  If you are interested in attending, please contact Lenore Elkarou at our office (415-567-9000) to make a reservation and grab one of the remaining seats.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

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As discussed in our Update last week, urban developers often need to cross their neighbors’ property lines in order to efficiently construct their projects.  Last week we talked about installing shoring under the neighbors’ building to properly protect it from movement during excavation.  This week we shift our attention to using the airspace of other property for construction crane overswing.

The invasion of airspace by a crane overswing is not a clear cut issue.  Although property owners have rights to the “top of the atmosphere”, there are exceptions.  For example, there is a right of commercial aviation over all property in the United States.  See Cal. Public Utilities Code §§ 21402, 21403; Drennen v. Ventura, 38 Cal.App.3d 84, 87 (1974).  Believe it or not, this issue was litigated, proving the point that there are enough lawyers to take on any case.  Construction projects have created disputes between property owners over the right to use airspace.  Although such use would technically be an invasion of this property right, different states have varying rules about the penalties for doing so without permission.

In New Jersey, the owners of a nine-story building hung scaffolding over an adjacent three-story building, occasionally only six inches above the smaller building’s roof. The smaller building’s owner sought an injunction prohibiting the use of the scaffolding over the airspace of the building.  The court concluded that because the smaller building’s owner had never made any use of the airspace above the building, he had no right to prevent the owners of the larger building from hanging scaffolding.  See Slotoroff v. Nassau Associates, 428 A.2d 956 (N.J. Sup. Ct. Ch. Div. 1980).  In Illinois, in contrast, the owner of a smaller building sought both an injunction and money damages as a result of scaffolding from a larger building under construction hanging over the property line.  Concluding that the owner had not demonstrated any harm from the presence of the scaffolding other than the threat of possible future negligence from falling materials, the court dismissed the case entirely.  Geller v. Brownstone Condominium Ass’n, 402 N.E.2d 807 (Ill. App. Ct. 1980).

California applies a “reasonable use” standard.  Hinman v. Pacific Air Transport, 84 F.2d 755 (9th Cir. 1936).  The oft-repeated right to the “top of the atmosphere” is not literally true in California.  Instead, a landowner owns only so much of the airspace above ground as it can “make good use of.”  An adjacent landowner has violated this right when there is some “actual interference” with the landowner’s use and enjoyment of the land.

In the context of tower cranes, developers need to consider the property over which the crane would swing.  For example, if a crane is hundreds of feet in the air and hangs over a two-story building or a parking lot, the presence of the crane likely does not impede the existing use of the property.  If the crane hangs over a public park or open space, the presence of shadows on the property may technically interfere with the use of the park by depriving the park of sunlight.  However, the amount of harm caused by shadows that only cover a small portion of the park would be minimal.  Nevertheless, a best practice may be to avoid casting shadows during the times of day when people would use the park, such as the lunch hour.  Finally, even if a tower crane traverses airspace over a high-rise building, unless there is some use made of the airspace above the building, or the crane interferes with light, the high-rise owner might not have any harm on which it could sensibly seek an injunction or damages in a California court.

While developers must apply for permission to use tower cranes, the application process does not involve notifying neighbors that a crane may cross over the airspace above the neighbor’s property.

Of course, it is always better to obtain permission for the use of airspace, if possible.  The threat of litigation, or complaints to the City Building Department, are never helpful to the project and could cause delay.  Early discussions with the neighbors will best serve the developer and avoid disputes.  It will significantly benefit the developer to come up with a package of protections to show the neighbor, including comprehensive insurance, experience and safety record of the construction company, and a depiction showing that loads will not be carried over the neighbor’s property. 

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

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As reviewed in our Update last week, urban developers often need to cross their neighbors’ property lines in order to efficiently construct their projects.  Last week we talked about installing shoring under the neighbors’ building to properly protect it from movement during excavation.  This week we shift our attention to using the airspace of other property for construction crane overswing.

The invasion of airspace by a crane overswing is not a clear cut issue.  Although property owners have rights to the “top of the atmosphere”, there are exceptions.  For example, there is a right of commercial aviation over all property in the United States.  See Cal. Public Utilities Code §§ 21402, 21403; Drennen v. Ventura, 38 Cal.App.3d 84, 87 (1974).  Believe it or not, this issue was litigated, proving the point that there are enough lawyers to take on any case.  Construction projects have created disputes between property owners over the right to use airspace.  Although such use would technically be an invasion of this property right, different states have varying rules about the penalties for doing so without permission.

In New Jersey, the owners of a nine-story building hung scaffolding over an adjacent three-story building, occasionally only six inches above the smaller building’s roof. The smaller building’s owner sought an injunction prohibiting the use of the scaffolding over the airspace of the building.  The court concluded that because the smaller building’s owner had never made any use of the airspace above the building, he had no right to prevent the owners of the larger building from hanging scaffolding.  See Slotoroff v. Nassau Associates, 428 A.2d 956 (N.J. Sup. Ct. Ch. Div. 1980).  In Illinois, in contrast, the owner of a smaller building sought both an injunction and money damages as a result of scaffolding from a larger building under construction hanging over the property line.  Concluding that the owner had not demonstrated any harm from the presence of the scaffolding other than the threat of possible future negligence from falling materials, the court dismissed the case entirely.  Geller v. Brownstone Condominium Ass’n, 402 N.E.2d 807 (Ill. App. Ct. 1980).

California applies a “reasonable use” standard.  Hinman v. Pacific Air Transport, 84 F.2d 755 (9th Cir. 1936).  The oft-repeated right to the “top of the atmosphere” is not literally true in California.  Instead, a landowner owns only so much of the airspace above ground as it can “make good use of.”  An adjacent landowner has violated this right when there is some “actual interference” with the landowner’s use and enjoyment of the land.

In the context of tower cranes, developers need to consider the property over which the crane would swing.  For example, if a crane is hundreds of feet in the air and hangs over a two-story building or a parking lot, the presence of the crane likely does not impede the existing use of the property.  If the crane hangs over a public park or open space, the presence of shadows on the property may technically interfere with the use of the park by depriving the park of sunlight.  However, the amount of harm caused by shadows that only cover a small portion of the park would be minimal.  Nevertheless, a best practice may be to avoid casting shadows during the times of day when people would use the park, such as the lunch hour.  Finally, even if a tower crane traverses airspace over a high-rise building, unless there is some use made of the airspace above the building, or the crane interferes with light, the high-rise owner might not have any harm on which it could sensibly seek an injunction or damages in a California court.

While developers must apply for permission to use tower cranes, the application process does not involve notifying neighbors that a crane may cross over the airspace above the neighbor’s property.

Of course, it is always better to obtain permission for the use of airspace, if possible.  The threat of litigation, or complaints to the City Building Department, are never helpful to the project and could cause delay.  Early discussions with the neighbors will best serve the developer and avoid disputes.  It will significantly benefit the developer to come up with a package of protections to show the neighbor, including comprehensive insurance, experience and safety record of the construction company, and a depiction showing that loads will not be carried over the neighbor’s property. 

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

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Underpinning – Can You Dig It?

Urban developers often need to cross their neighbors’ property lines in order to efficiently construct their projects.  Two of the more difficult challenges are (i) using the airspace of other property for construction crane overswing, and (ii) installing shoring under the neighbors’ building to properly protect it from movement during excavation.  While using the property of another without permission is a legal trespass, there are different “ground rules” (pun intended) for going below the earth, compared to using airspace.  This week we cover underpinning agreements; in a future issue we will be discussing tower crane swing issues.

California has detailed rules for protecting a neighbor’s property during excavation which can be used to force developers to make substantial payments to their neighbor or incur major costs.  Each property owner is entitled to lateral and subjacent support from neighboring landowners.  (Cal. Civ. Code § 832.)  At the same time, the law permits landowners to “make proper and usual excavations” on their land for construction and improvements.  These sometimes-competing rights of support for one landowner and excavation for another create a quandary for developers who must conduct extensive excavation while preventing subsidence on their neighbors’ land.

Landowners who intend to excavate their foundation must provide “reasonable notice” to their neighbors.  (Cal. Civ. Code § 832.)  The code provides that at a minimum the notice must state the depth of the excavation and when it is scheduled to begin.  Although the statute does not define the when or how notice must be made, landowners should provide notice in writing, preferably by certified mail or verifiable means, with a sufficient amount of time for neighbors to prepare their property for the excavation.  It is also wise to notify neighboring tenants of the upcoming excavation to avoid surprising the tenants, and receiving complaints.

Also, a landowner making excavations must not only use “ordinary care and skill,” but also has an obligation to take “reasonable precautions” to sustain the lateral and subjacent support its land provides to adjacent properties.  (Cal. Civ. Code § 832.)  Furthermore, if excavation is to be deeper than nine feet and the foundation of an adjacent building is also deeper than nine feet, the developer has an additional duty to protect the adjacent land and any buildings on the adjacent land, provided that the necessary license is given to enter the property, and is liable for any damage to the adjoining property and any buildings on it.  (Cal. Civ. Code § 832.)

In practice, for many projects the only way to ensure an adjacent building’s stability is substantial underpinning, tiebacks or shoring.  However, the statute does not permit a developer to enter the neighbor’s property unless the neighbor grants a license to the developer. Id.  The developer has an obligation to protect its neighbor’s property—including buildings on the property—but has no right absent a negotiated license to enter the property to install underpinning or shoring.  Some attorneys use this tension as leverage in negotiations by taking the position that if the neighbor does not grant a license, the developer has no obligation to protect the neighboring property.  However, it is highly questionable whether this defense would work if damage occurred, and most contractors would not take this risk.  Local building departments often carefully review the shoring plans to confirm that there is no risk of damage to a neighboring property.

Unfortunately, since there is no way to force a neighbor to grant access, developers are sometimes asked to pay for the right to underpin their neighbor’s property.  Sophisticated real estate developers and owners often times consent to these agreements without requiring payment, knowing that underpinning and tiebacks will, in almost every case, make their building safer and improve their foundation at no cost.  Smaller property owners and residential projects often use an adjacent construction site as an opportunity to increase revenue.  In either case, the developer can expect to be required to provide a hefty insurance policy and broad indemnity for any damage that occurs.  What is often negotiated is whether the developer is responsible for any loss of business or tenant claims for disruption during the construction process.  The parties’ bargaining power and relationship will often be a major factor in how these negotiations turn out.

It seems that this problem would be ripe for a legislative solution, especially in urban environments where infill development has caught fire.  Unfortunately, no solutions are pending at the State or local level.  This may continue to be a cost of doing business since the thorny issues of private takings and giving benefits to developers may be a tough sell.

Development Impact Fee Deferral Program Set to Expire July 1

The city’s fee deferral program, which allows for up to 80 or 85 percent of project impact fees and BMR in-lieu fees to be deferred until the first certificate of occupancy is issued, is set to expire July 1, 2013.  The program had been enacted in 2009, in the middle of the economic crisis, and was meant as a stimulus measure, and included a sunset clause.  In our experience, this has been a very successful program, with virtually all projects taking advantage of it since its adoption.  Action by the Board of Supervisors would be required to preserve the program.  The Planning Commission will be holding a hearing on the effectiveness of the fee deferral program on June 13.  The result of that hearing will be a recommendation to the Board of Supervisors to extend the program or let it expire.

DBI is currently informing the public that projects can take advantage of the fee deferral program so long as they have a complete permit application on file prior to July 1, as well as a fee deferral request on file.  If no legislative action is taken, beginning July 1, all impact and in-lieu fees applicable to a project will be due prior to the issuance of the building permit or first site permit addenda authorizing construction. 

RECON Is Upon Us

We are sure that many of our clients will be making the trek down to Las Vegas for the Annual meeting of the International Council of Shopping Centers (ICSC).  Kevin and Andrew will be attending to take in some of the talks and make the rounds.  For those of you who will be in Lost Wages for RECON, if we haven’t already talked and set something up, give either of us a call if you would like to connect during the show.

Hurtling Hurdles in the Upper Market

As a number of readers noticed, the title of the May 1 firm Update (“New Hurtles for Formula Retailers Looking at Upper Market Street”) included a grammatical gaffe.  The title should have contained the noun “hurdle,” meaning an upright frame, typically one of a series, that athletes in a race must jump over, but instead contained the verb “hurtle,” which means either to move with great speed, or to fling with great force.  Next time we edit a document containing homophones, we’ll apply more thyme and patients!

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

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