New Dwelling Unit Demolition Legislation Would Require One-for-One Replacement

Yesterday, Supervisor Mirkarimi introduced a bill at the Board of Supervisors that would limit the Planning Commission’s discretion in approving dwelling unit demolitions. The bill would prohibit the Planning Commission from approving a project calling for the demolition of structurally-sound dwelling units unless they are replaced on a one-for-one basis with new dwelling units of similar affordability. The replacement units could be provided on- or off-site. The bill would also require the Planning Commission to find its approval consistent with at least a majority of the existing dwelling unit demolition criteria listed in the Planning Code.

The bill would not affect dwelling unit mergers or conversions, meaning the Planning Commission would still have the discretion to approve of such a project without requiring a one-for-one replacement of dwelling units.

We’ll keep you posted on the bill’s progress through the legislative process.

Planning Department Issues Annual Land Use Index

Are you ever in need of an area land use map and don’t know where to find it? Well, the Planning Department is attempting to make life a little easier for you by issuing its annual land use index. The index compiles the city’s multitude of land use maps and organizes them by category: Housing, Commerce and Industry, Recreation and Open Space, Public Facilities, flood maps and population density.

You can find the land use index here: http://www.sfgov.org/site/uploadedfiles/planning/Codes/General_Plan/Land_Use_Index_7-16-2009.pdf. It’s a large file, so give it some time to download.

Market Street Automobile Restrictions Gain Momentum

Reclaiming urban streets from automobiles has gotten a lot of attention lately, especially in light of the pedestrian-ization of Broadway in New York City. Not to be outdone, a San Francisco County Transportation Agency report was released in July that includes a proposal to begin implementing changes that would reduce automobile traffic on Market Street within months.

Transportation Options for a Better Market Street analyzes existing conditions on Market Street and proposes several staged recommendations for reducing automobile traffic. The report concludes that in most locations on Market Street, cars are not the primary mode of transportation, accounting for only 13%-21% of person-trips. However, the report continues, private automobiles cause significant delays, especially by blocking buses from reaching boarding islands or in the right lane when attempting to take a right turn.

The nearest-term recommendation in the report is to make right turns mandatory for eastbound automobiles at Eighth Street. This would create a traffic-restricted corridor in the eastbound lanes east of Eighth Street that could be studied to determine the effectiveness of traffic reductions on Market Street. The report states this could be implemented in the next 3-6 months. Future steps include restricting left turns onto Market Street from Hyde Street (effectively ending eastbound automobile traffic between Seventh and Eighth Streets) in the next 9-18 months and considering more global changes to Market Street traffic to coincide with a major repaving effort to begin in 2013.

You can find the report here: http://www.sfcta.org/content/view/426.

Reuben & Junius, 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 leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

In San Francisco, neighborhood commercial zoning (“NC Districts”) have been around since 1987. These zoning controls attempted to clarify various desirable and undesirable uses within the naturally occurring neighborhood commercial strips throughout the City. These zoning districts run along some of the busiest streets in the City (Geary Boulevard and Van Ness Avenue, for example), as well as some of the more “neighborhoody” streets like Union Street, 25th Street, and Chestnut Street. There are also a vast number of very small NC Districts that cover a single intersection or one block. After 20 years of these zoning controls being in place, the Planning Department has recently released a paper, “NC@20”, that takes a look back and what has worked, and a look forward to changes that need to be made to clarify and modernize the rules.

The paper is a well done and insightful review of both the history and evolution of NC zoning controls, and includes a variety of interesting facts and figures. For example, over the 20-year period from 1987 to 2007, the report indicates that applications in NC Districts seeking to convert residential uses to non-residential uses had just a 52% Planning Commission approval rate – the lowest of all conditional use application types. Applications for commercial outdoor activity areas and extended hours of operation were also not well received by the Planning Commission, being approved at rates of 58% and 63%, respectively.

It is also interesting to note that almost half of the conditional use applications filed City-wide from the period 1987 to 2007 (a total of 3,010 applications) were filed in NC Districts. This is an interesting statistic in light of the fact that only 6% of the City is zoned NC.

The report examines a variety of trends in different NC Districts. There are interesting nuggets throughout the report, from the obvious (the NC-3 District had the most conditional use applications of any other commercial district with 349 filings), to some more surprising results (the 24th Street – Mission NCD had the highest percentage of CU approvals of any NCD, with 37 total CUs applied for, all but three of which were approved).

The report also comes to some sobering conclusions that would be of no surprise to shop owners and property owners in NC Districts. The report recommends that changes should be made “to the overall permitting process so that it is more intelligible, predictable and rational.” The staff goes on to state that current NC District controls “while making the entitlement process extremely comprehensive, have also led to redundancy and excessive process without clear need. Specifically, the entitlement process is complex, time-consuming, expensive and ultimately uncertain. The cumbersome nature of the process inherently favors large businesses which have financial backing such that they can endure a lengthy and uncertain permitting process.” As a rough barometer of the level of permit complexity, in 1987, at the onset of the NC controls, 97% of all permits in NC Districts were processed over-the-counter. In 2007 that figure had declined to just 30%. “Very few independently operated small businesses can afford to pay rent for substantial periods of time while waiting for lengthy neighborhood notices, public hearings, and approvals keyed to multiple agencies before opening their doors for business. As a result of this process and associated uncertainties, the City has actually discouraged small business from locating in our NC districts. In doing so, we have come to the aid of chain stores by precluding local competition.” (NC @ 20, at page 52.)

The Department also soberly opines on the obvious abuse of the Section 312 process (which requires notices for use changes in NC Districts) being used by competitors to keep out competition. The staff acknowledges that these types of DRs and the associated delay and threat of multiple appeals is often enough to force applicants to modify their plans or abandon their project entirely. Such is the nature of competition in San Francisco.

We encourage the Planning Department to continue their work on updating and modernizing the NC Controls. Some things still work, but a lot doesn’t. Healthy neighborhood commercial districts are the heart of the City. We need zoning controls that encourage small businesses to come to these areas without fear of being put out of business by the process before they even get a chance to open their doors.

To see the complete report, go to:

http://www.sfgov.org/site/uploadedfiles/planning/projects_reports/NC20_Draft_For_Public_Reivew_web.pdf

Reuben & Junius, 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 leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Throughout the Bay Area and state, subdivisions and condominium projects have been delayed during the housing slump due to developers’ difficulty obtaining construction financing. Many such projects have stalled in the middle of the mapping and entitlement process, before the project’s map has been recorded. Delayed maps are at risk of expiration, with the potential loss of vital project approvals and permits. In recognition of these critical issues, the California legislature passed a new law to enable developers to extend the life of tentative maps and related state agency approvals until the credit markets thaw and construction financing may be secured.

Tentative Map Extension

Assembly Bill 333, enacted on July 15, 2009, automatically extends for 2 years any existing unexpired tentative map or vesting tentative map that would have otherwise expired before January 1, 2012. To be eligible for the extension, a map must have been valid on July 15, 2009, and set to expire before January 1, 2012. The 2 year extension is in addition to any other extensions provided under state law or local ordinance. For those maps extended by last year’s similar state measure, AB 333 will provide an additional 2 year extension. See Cal. Govt. Code Section 66452.22.

Related State Agency Approvals Also Extended

Important for those projects receiving other state agency approvals, such as a San Francisco Bay Conservation and Development Commission (BCDC) Permit or California Coastal Commission (CCC) Coastal Development Permit, the new law also extends for 2 years related state agency approvals for those projects that extend their maps under AB 333.

Local City & County Approvals Not Included

AB 333 only applies to tentative maps, vesting tentative maps and related state level approvals. The new law does not extend local city or county approvals or permits. Conditional Use Permits, Variances, Special Use Permits, building permits and other local approvals remain subject to local regulations with respect to expiration periods and available extensions, if any. In San Francisco, the Planning Commission has recently signaled that many local project approvals are eligible for extension, and such requests will be reviewed favorably.

The Trade Off

For those projects utilizing the 2 year map extension under AB 333, there are a few tradeoffs. In order to offset any potential adverse impacts on local cities or counties from multiple extensions of tentative or vesting tentative maps, AB 333 modifies Cal. Govt. Code Section 65961 by (i) reducing from 5 years to 3 years the period of time after recordation of a map during which a city or county is prohibited from imposing new conditions on a building permit if such conditions could have been imposed as conditions of the previously approved tentative or vesting tentative map, and (ii) eliminating the prohibition on a city or county imposing new local fees upon the issuance of a building permit.

Reuben & Junius, 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 leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Real estate development ventures often begin with the formation of a limited liability company (“LLC”). This entity structure has the benefit of protecting its members from personal liability “under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the limited liability company, whether that liability or obligation arises in contract, tort, or otherwise, solely by reason of being a member of the limited liability company.” California Corporations Code (Corp. Code) § 17101.

Unfortunately this liability shield is not an iron-clad protection from liability. As the country has struggled through the current economic crisis, real estate developments that may have been viable when conceived are no longer feasible. Increasingly, in an effort to recover their losses, LLC members have begun pointing a finger at fellow members claiming that they have breached their fiduciary duties or engaged in fraud or other misdeeds. The accusing member in effect seeks to establish that, as a result of another member’s misdeeds, he or she should be allowed to hold the other member personally liable for the losses of the LLC. While the limited liability statute may protect against third-party creditor claims, it does not protect against claims that a member has breached his or her fiduciary or contractual obligations to the LLC.

If management is vested in the LLC’s members, each of them is subject to all duties and obligations of managers as set forth in the California Corporations Code (the “Code”). Corp. Code § 17150. The fiduciary duties a manager owes to the LLC and to its members are those of a partner to a partnership and to the other partners. Corp. Code § 17153. These duties include the duty of loyalty and the duty of care. Corp. Code § 16404.

Specifically, a member owes the following duties to the LLC:
• To account to the LLC and hold as trustee for it any property, profit, or benefit derived by the member in the conduct and winding up of the LLC business.
• To refrain from dealing with the LLC in the conduct or winding up of the LLC business as or on behalf of a party having an interest adverse to the LLC.
• To refrain from competing with the LLC in the conduct of the LLC business.
• To discharge his or her duties to the LLC and the other members under the Code or under the operating agreement and exercise any rights consistently with the obligation of good faith and fair dealing.

According to the Code, a member’s duty of care to the LLC and the other members in the conduct and winding up of the LLC business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. Further, a member does not violate a duty or obligation under the Code or under the operating agreement merely because the member’s conduct furthers the member’s own interest.

However, when a member of an LLC diverts LLC funds or assets to another project, fails to provide required accountings of LLC assets to the other members, or treats the LLC assets as his or her own, it is possible that a court may find that member liable for losses sustained by other members of the LLC as a result of such conduct. There are simple ways to help avoid personal liability attaching to a member of an LLC in the context described here, including maintaining the separation of LLC accounts and assets from personal or other project accounts and carefully drafting LLC governing documents to specify each member’s rights and obligations.

Reuben & Junius, 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 leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Final Members of Historic Preservation Commission Confirmed

At long last, the San Francisco Historic Preservation Commission has a full membership. Yesterday, the Board of Supervisors confirmed the Mayor’s most recent nominees, James M. Buckley and Andrew Wolfram, for the final two vacancies on the Commission.

James M. Buckley has a Ph.D. in architecture from the University of California at Berkeley. Mr. Buckley worked at the BRIDGE Housing Corporation for twelve years, ultimately becoming its vice-president. In 1998, he left BRIDGE to found his own non-profit housing development organization, Citizens Housing Corporation. Citizens has completed a range of impressive and unique projects since its founding, including the first LEED-certified residential building in Northern California, a reuse of barracks at the Alameda Naval Air Station as transitional units for homeless individuals, and a reuse of the Christian Science Church on Haight Street as apartments for very-low-income seniors. Mr. Buckley has also taught courses at San Francisco State and UC Berkeley.

Andrew Wolfram is a licensed architect and is currently a senior associate at Perkins + Will. His focus has been on the preservation and adaptive reuse of significant historic buildings. He has worked on a number of well-known Bay Area projects, including the Ferry Building renovation, the Presidio Archaeology Center, the UC Berkeley Hearst Memorial Gymnasium renovation, and was the lead designer of the master plan for the Slow Food Nation event at the Civic Center. Mr. Wolfram is also the president of the Northern California chapter of DOCOMOMO US, a national organization dedicated to raising awareness of significant works of modern architecture and design.

The Historic Preservation Commission meets on the first and third Wednesday of every month, at 12:30 p.m. in room 400 of City Hall.

Early Test of Planning Commission’s Approach to Expired Conditional Use Entitlements

On Thursday, June 25, the Planning Commission held an informational hearing on a conditional use authorization that had expired almost one year ago. This was the first expired CU to come before the Commission since it held hearings in February and March of this year regarding entitlement extensions. Those hearings ended with a somewhat unclear decision on CU extensions, stating a Commission policy of exercising “judicious leniency” in reviewing non-Prop M and non-DTR projects that are 100% affordable housing, LEED Gold certified or sponsored by the city. The Commission was silent on extension requests for projects outside those narrow categories.

At the June 25 hearing, the Commission agreed that the project should go forward, since it was clear the project sponsor was actively pursuing the development, by spending money on consultants, upgrading the building and communicating with the Planning Department and, importantly, he was ready to commence construction. It is unclear how the Commission would respond to a project with an expired entitlement that does not have this type of fact pattern.

Several commissioners did note that they liked the idea of bringing entitlement extension requests before the Planning Commission for an informational hearing. Probably the biggest takeaway from the hearing was that the Zoning Administrator indicated that, going forward, he will simply approve an extension and inform the Commission if it has been less than a year since it has passed. If the project is controversial, he may only be willing to approve the extension and inform the Commission within six months after an entitlement expires, and after that time has passed a hearing would be required. All projects, however, will be brought back before the Commission if their entitlements have been expired for around a year or more. Again, these were just statements made by the Zoning Administrator during this Planning Commission hearing. While not official policy, it does give some insight as to how the Planning Department will approach these cases in the future.

City Taking a Closer Look at Vacant Lots

The spotlight has been shined on the issue of vacant lots in the city – especially those where large projects have been approved but the economy has put a halt to any actual development for the foreseeable future. Many are probably already aware of this John King column in Monday’s San Francisco Chronicle, outlining what other cities have done and suggesting greenery be planted in these lots. http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/07/06/MNAP189P39.DTL.

The Chronicle ran this article yesterday, surveying a handful of local designers’ visions for beautifying some of these lots. http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/07/07/MNUG18GIBE.DTL

The city also has some new tools at its disposal to deal with vacant lots. The Board of Supervisors passed the Community Preservation and Blight Reduction Act last fall, giving the Department of Public Works a new enforcement tool to prevent blight in vacant lots. The Act defines “blight” broadly, including (1) properties not kept substantially clean from vegetation or garbage, (2) unpainted buildings or buildings with significant paint peeling, (3) properties with structural deterioration or significant graffiti, and (4) properties with non-common appliances or machinery in its outdoor area. The Act provides an abatement procedure to cure blight, which provides the property owner with notice of the violation, gives them 30 days to complete the cleanup, and authorizes fee charges in the case the violation is not cleaned or repaired. The Department of Public Works has already begun to use this new enforcement tool.

It looks like owners of vacant lots may have to pay more attention to them while they wait out the downturn.

Reuben & Junius, 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 leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

On June 18, 2009, San Francisco Planning Commission approved a resolution supporting an overhaul of the Planning Department’s Discretionary Review (“DR”) procedures. The DR process essentially allows any person to “appeal” a project to the Planning Commission while the building permit is still at the Planning Department for review (i.e. before the permit is even issued). Many building permits in residential and neighborhood commercial districts are subject to DR, even if the proposal is small (i.e. a small addition to the rear of a home) and code compliant. The current DR process has been found by many to result in arbitrary and inconsistent outcomes, and many property owners feel the process is regularly abused. DRs also take significant amount of time at each Commission meeting, time that could be used by the Commission on policy-related matters and other projects with greater City-wide impacts.

The new resolution will result in some minor changes that are effective immediately. More importantly, the resolution recommends that the Board of Supervisors (“BOS”) approve legislation that would result in more significant amendments to the current DR process. The DR reform, as currently proposed, is an encouraging attempt to improve the DR process for all parties. The BOS is expected to hear the item within the next 2-3 months.

Improved Consistency and Efficiency

Defined DR Standard: The Planning Commission’s proposal creates, for the first time, a definition for “exceptional and extraordinary circumstances” that must exist before the Planning Commission can take DR and disapprove or modify a project. The definition proposed by Department staff and approved by the Commission is as follows: “Exceptional and extraordinary circumstances occur where the standard application of adopted design standards to a project does not enhance or conserve neighborhood character, or balance the right to develop the property with impacts on nearby properties or occupants. These circumstances may arise due to complex topography, irregular lot configuration, unusual context, or other conditions not addressed in the design standards.”

Elimination of Automatic DR hearings before the Commission: As of today, all DR applications are entitled to a hearing and a decision by the Planning Commission. With the proposed legislative changes, if adopted by the BOS, after a DR application is filed, an internal Planning Department Residential Design Team (“RDT”) would review the project and determine whether the DR application would meet the “exceptional and extraordinary circumstances” threshold. If the RDT determines that the DR application presents exceptional and extraordinary circumstances, a hearing before the Commission would be scheduled. However, if in the RDT’s judgment the standard is not met, there will be no PC hearing, although the DR applicant could appeal the RDT determination to the Board of Appeals.

Establishment of DR Process Schedule: The DR reform creates deadlines for the processing of a DR application to minimize delays caused by DR filings. First, the RDT must act within 30 days of the filing of a DR application. Second, within 2 weeks thereafter, the RDT must provide the DR applicant a letter indicating whether or not the application meets the exceptional and extraordinary circumstance standard and whether a Commission hearing is warranted. If the RDT determines that a hearing before the Commission is appropriate, the hearing must occur within 90 days of the DR filing (including any continuances).

Improvement of Department’s Internal Review Process: At the heart of the DR reform, the Department has committed to several procedural changes to insure uniform application of the regulations and guidelines to all DR cases. Among these measures, the RDT will use a uniform “checklist” to determine whether exceptional and extraordinary circumstances exist. Generally speaking, if a project conforms with design and code standards, there would be no exceptional or extraordinary circumstances present.

Phased Implementation

The proposed DR reform would be implemented in three distinct phases. The first, interim, phase became effective immediately and remains in place until the BOS approves the proposed legislative changes. During this interim period, each DR application will continue to be heard by the Commission. However, before the Commission will hear a DR case, the RDT will have evaluated and processed each application pursuant to the procedures proposed in the DR reform, and the Department’s staff report to the Commission will include a section indicating whether the DR would meet the newly-defined exceptional or extraordinary circumstance standard. The Department staff will also start using a standardized DR packet, will focus on improving its internal review policies in line with the proposed changes, will adhere to the DR processing schedules, will start using Commission decisions as precedent setting, and will track all RDT decisions against the Commission decisions to ensure consistency.

Phase I of the DR reform would commence after the legislative changes have been approved by the BOS (estimated to occur approximately in September 2009), and will consist of a 24-month period. Phase I will incorporate all changes from the interim period. In addition and most significantly, Phase I eliminates automatic Commission hearings so that only those DR applications that, in the RDT’s judgment, meet the “exceptional and extraordinary circumstances” standard will be scheduled for a hearing before the Commission.

Phase II of the DR reform consists of additional changes that have not yet been finalized. As currently proposed, at the conclusion of the 24-month Phase I, the Planning Commission would provide the BOS with a report indicating findings from Phase I, and the BOS could either do nothing (in which case Phase I would continue), or could elect to modify or eliminate the program. Phase II will be elaborated at a later time based on findings from Phase I, however, it could include delegation of the DR hearing authority to a Hearing Officer instead of the Commission, codification of the DR process, and adoption of a policy to require story poles on certain projects that propose an addition. We will keep you posted on the status of DR reform as events warrant.

Reuben & Junius, 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 leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

The power of a city to regulate (and severely limit) new land use through historic preservation policies does not extend to noncommercial properties owned by religious nonprofit organizations. This is the recent holding of the California Court of Appeal in a case that shields a local church group from the effects of a local landmark ordinance. The Court relied on a state law exemption that makes it very clear that local government cannot block a religious nonprofit organization from demolishing a noncommercial historic building for the purpose of disposing of the land for economic benefit. This could have major implications in San Francisco, where many religious groups struggle with declining membership, surplus properties (many historic), and no money to maintain or retrofit their crumbling buildings. The court made it clear that the City may not use preservation laws to stop these groups from demolishing and developing these sites.

On May 20, 2009, the California Court of Appeal issued an important decision that could impact the use of many of San Francisco’s historic old church properties. The Court’s decision provides guidance on what has been a controversial issue in San Francisco, pitting preservationists against religious organizations dealing with dilapidated old buildings and declining memberships.

The First St. John’s United Methodist Church, located on Larkin Street in San Francisco, was built in 1911, and used for religious purposes for over 90 years. However, by 2004 the dilapidated unreinforced masonry building required major seismic upgrades and structural repairs to be safe for human occupancy. Due to the hazardous condition of the property, as well as declining membership in the congregation, the building was vacated in 2005. The church concluded that the only rational decision was to demolish the building and sell the property in order to gain important revenue that would further the mission of the church by supporting its 14 other congregations located in San Francisco. Therefore, the church planned to sell the property to a developer that would construct residential housing. However, in an effort to block the demolition of the building and proposed development of the site, the San Francisco Board of Supervisors adopted Resolution No. 308-07 to designate the building as an official historic landmark, which would effectively prohibit demolition of the building and development of the site. The church filed suit in Superior Court to invalidate the Board’s action.

After the trial court ruled in favor of the church, the City appealed. In The California-Nevada Annual Conference of the United Methodist Church v. City and County of San Francisco (May 20, 2009, A122578), the California Court of Appeal ruled in a strongly-worded opinion that the San Francisco Board of Supervisors had no jurisdiction to adopt a resolution designating The First St. John’s United Methodist Church as a historic landmark under Article 10 of the San Francisco Planning Code.

The Court’s decision focused on California Government Code Section 25373. While Section 25373(b) provides the general rule that the Board of Supervisors may adopt regulations for the protection or use of buildings having a special historical interest or value, there is an exemption to this general rule (the “Religious Exemption”). Section 25373(d) provides that the general rule shall not apply to noncommercial property owned by a religious nonprofit organization, if the organization objects to the application of the general rule, and if the religious organization determines that it will suffer substantial hardship, which is likely to deprive the association of economic return on its property, or the appropriate use of its property in the furtherance of its religious mission.

The City maintained that the Religious Exemption only applies if the church had been currently using the property for a religious purpose at the time of sale. The City also argued that the church property is not noncommercial because the church had agreed to sell the building for demolition and the development of housing. However, the Court determined that both of the City’s arguments were without merit. Following the California Supreme Court in East Bay Asian Local Development Corp. v. State of California, 24 Cal.4th 693 (2000), the Court determined that the whole point of the Religious Exemption is to allow religious institutions to sell their dilapidated churches for a profit. Noting that the only reason The First St. John’s property stopped being a working church was because the property was too unsafe to be used for any purpose, commercial or noncommercial, the Court stated that a non-functional church structure, owned by a nonprofit, does not become commercial by virtue of it inactivity. Thus, the Court held that the Board of Supervisor’s adoption of Resolution No. 308-07 was improper and the landmark designation of The First St. John’s Church was invalid.

Reuben & Junius, 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 leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

The California Court of Appeal, Fourth District, recently upheld a liquidated damages clause in a commercial lease, which was enforced due to the tenant’s breach of a continuous use covenant. In El Centro Mall, LLC v. Payless Shoesource, Inc. (May 21, 2009, G040038), Payless, a shopping-center tenant, closed its store before the expiration of its lease term. The lease included a liquidated damages clause, which provided that if the tenant did not continuously operate its business, tenant would be required to pay landlord 10 cents per square foot of the premises for each day that tenant did not operate. Although Payless continued to pay rent, it refused to pay the liquidated damages, arguing it was an unenforceable penalty.

Civil Code section 1671(b) governs the enforceability of a liquidated damages clause. In 1977, the California legislature deleted the presumption that a liquidated damages clause in a commercial context was invalid, and replaced it with a presumption of validity, thus shifting the burden to the challenging party to prove the provision was unreasonable. In a commercial lease context, a liquidated damages clause is proper if the damages for breach of the covenant cannot be reasonably determined at the time the lease is entered into, but that the amount is a reasonable estimate of the damages that would be incurred by landlord.

In El Centro, the landlord argued that the liquidated damages in this “continuous use” context were intended to reimburse landlord for the loss in goodwill and patronage at the shopping center if Payless ceased operations. Since that amount was not easily determined, the parties included a liquidated damages clause to reasonably estimate the amount of damages for such breach. The standard for determining the amount of liquidated damages in this context is based on the theory that a tenant’s prospective generation of patronage, synergy, goodwill and sales to the retail center, is directly proportionate to the amount of space the retail tenant leases. The tenant contended that the liquidated damages provision was arbitrarily included in some, but not all, of the other tenants’ leases at the shopping center, regardless of the other tenant’s size and gross sales, thus it could not be a reasonable estimate of potential damages.

The court held that a liquidated damages clause could be an unenforceable penalty if the evidence showed that the liquidated damages provision was included arbitrarily in other tenants’ leases at the center, and not based on distinctions in the amount of damages that would be incurred by landlord due to the amount of space leased and the stature of the tenant. However, in this case, Payless did not provide sufficient evidence to the court to meet that burden. This case illustrates that courts will uphold a liquidated damages clause in a “continuous use” context, but the liquidated damages clause amount must be a reasonable estimate of damages at the time the lease was signed, based on the amount of space leased and the stature of the particular tenant.

Reuben & Junius, 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 leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

In this Update issue we will be reviewing the Planning Department’s latest Transit Center District Plan public presentation that focused on development fees, a new city-wide TIDF (Transit Impact Development Fee) study, intended to expand TIDF reach, as well as the Whole Foods project at Haight and Stanyan that just died because of the lengthy approval process and high development fees and exactions.

Planning Department Announces New Fee Proposal for Transit Center District Plan

On May 21, at a public presentation on the Transit Center District Plan (TCDP), the Planning Department announced an ambitious fee proposal intended to generate funds for the new Transbay Terminal and other public improvements in this proposed downtown district. The TCDP is an area plan for the vicinity of the new Transbay Terminal that includes height increases for several development sites. The fees and taxes would be levied exclusively on new developments. The three-tier fee proposal includes a new development fee, a new Mello-Roos district and a new transfer tax.

The development fee has several components. It would consist of a $5/gsf fee on every square foot of new development, a $25/gsf fee for every square foot above a 9:1 floor area ratio (FAR), and another $5/gsf fee for every square foot above a 20:1 FAR. The proposal would also require developers to purchase TDRs for each square foot between a 6:1 and a 9:1 FAR. FAR limits on properties in the district would be eliminated, and it is likely that the TDR program would also have to be modified, as the last cycle proved that the current supply of TDR has been virtually exhausted.

The Plan would also create a Mello-Roos district that would levy a special .35% property tax on new developments within the Transit Center District. This would be bring the total property tax rate for newly developed properties to 1.45%. It is expected that the City will require individual developers to “opt-in” to the Mello-Roos District as a condition of project approval.

Finally, the Plan would establish a transfer tax, referred to as a “benefit covenant,” applicable to newly developed properties within the district. The tax would be the equivalent of 1% of property value, and it would apply to individual condominium transfers as well as commercial building transfers.

The Department foresees as much as $700-$850 million in new revenue generated by the proposed fees. At the meeting, the Planning Department also announced the expected schedule of the Transit Center District Plan, with the Plan to be published by the end of this month, a draft Environmental Impact Report (EIR) to be published in by the end of 2009, a final EIR to be published by mid-2010, and adoption hearings to begin shortly thereafter.

City Moves To Expand Existing Transit Fee, Creat New Transportation Mitigation Fee

A major overhaul is underway that could change how the City analyzes traffic generated by development projects, and in turn how traffic and transit fees are calculated. In April 2008, the Board of Supervisors enacted Section 326.8 of the Planning Code, which calls for the creation of a task force begin the process of recalculating and expanding the current Transportation Impact Development Fee (TIDF). Concurrently, the Planning Department has been working on an overhaul of how it studies traffic impacts of proposed developments. This process has included the consideration of a new city-wide Auto Trip Mitigation Fee (ATMF), with the purpose of mitigating transportation-related environmental impacts of new developments. This past Tuesday, the MTA approved a consultant contract for preparation of a nexus study to justify these fees.

Right now the TIDF is $8-$10/gsf fee on all new non-residential development anywhere in the city. The new/revised fee, called the Comprehensive TIDF, would expand the fee to apply to residential development.

The ATMF is proposed to apply to all new development and transportation projects throughout the city. It will not be calculated on a square foot basis, but rather on the number of automobile trips generated (ATG) by the proposed development. The Planning Department is proposing to measure a project’s impact through increased automobile usage by the ATG as opposed to preparing a traffic study for each project and using intersection “level of service” as a measure of traffic impacts. The elimination of individual project traffic studies would be relief to the development community. Project traffic studies are expensive but more importantly can slow a project’s entitlement process to a crawl. A new trip focused system of calculating impacts would streamline the process and allow for the City to collect transit fees from projects that generate the most traffic. If adopted, these new methodologies and fee structures would have a significant effect on the development community.

Whole Foods in the Haight Cancelled: An Example of the “Impact” of Impact Fees?

And to close out our fee-themed update this week is a recent example of what fees can do to a project that could have provided a grocery store and 62 residential units at the vacant grocery at the corner of Haight and Stanyan Streets. The developer of the proposed Whole Foods project in the Haight pulled the plug on the project last week, citing an unreasonably long entitlement process (32 months) and prohibitive development fees ($5-$6 million). According to an article in the San Francisco Business Times, the developer claims the commercial space would have been ready for Whole Foods to move in by now if the approval had come just a year earlier.

Reuben & Junius, 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 leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

A couple weeks ago, we told you that the U.S. Green Building Council had updated its LEED rating system and discussed the implications for projects. But LEED isn’t the only green building code updating this year.

Build It Green’s GreenPoints Rated rating system, which is used for residential projects covered by San Francisco’s green building ordinance, is updating its guidelines and checklists for single-family home new construction. These new guidelines and checklists are slated for release in June, 2009.

San Francisco’s ordinance will continue to permit a project to show it meets the GreenPoints Rated 2007 version requirements, rather than under the new checklists. There will likely be a grace period in which projects will be able to register to be certified under the 2007 version requirements after release of the new system, although Build It Green has not announced a time frame for the grace period as of yet. After the expiration of this grace period, projects registered after the release date will likely need to meet the requirements of the new GreenPoints Rated system to be officially certified under GreenPoints Rated.

The applicability of these changes will differ depending upon each city’s green building ordinance. For instance, San Francisco does not require a project to be officially GreenPoint Rated, but rather to show that it would achieve thresholds unique to the City. San Francisco requires single-family homes obtaining a site permit in 2009 to show the project will achieve a minimum of 25 GreenPoints. As of January 1, 2010 through 2011, a single-family home must achieve a minimum of 50 GreenPoints. After January 1, 2012, a new single-family home must achieve a minimum of 75 GreenPoints. In showing that a project meets these point thresholds, either the GreenPoint Rated 2007 version or the new version may be used in San Francisco. Other local governments use different approaches, and their green building ordinances should be consulted to determine the effects of these changes.

The most substantial changes to the new GreenPoints Rated system for single-family homes will derive from energy efficiency revisions to Title 24. The new GreenPoint Rated system will still require the home to achieve an efficiency of at least 15% above Title 24; as the 2008 Title 24 is more stringent than the 2005 Title 24 requirements on which the current rating system is based, the new GreenPoint Rated rating system will also become more stringent. All of the proposed changes can be reviewed at Build It Green’s website, which is http://www.builditgreen.org/single-family-updates.

Reuben & Junius, 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 leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.