Reuben, Junius & Rose, LLP hopes everyone had a great holiday and New Year.  2018 looks to be another banner year with land use issues, as we look forward to the Central SoMa Plan moving forward, a new Planning Commissioner assignment, and of course many Planning Code amendments.  As usual, Reuben, Junius & Rose will continue to monitor the latest planning and development news throughout the year.  We open our 2018 newsletter series with a “Preservation Potpourri.”

Internal Revenue Code Changes to the 20% Historic Tax Credit

On December 22, 2017, President Trump signed into law the landmark $1.5 trillion tax package, titled the “Tax Cuts and Jobs Act”.  One tax credit that was amended was the federal Historic Tax Credit (“HTC”) (26 USC 47).  Enacted in 1981 during the Reagan Administration, the HTC encourages the preservation and adaptive reuse of historic and older buildings and is widely utilized by developers.  The HTC consists of two separate tax credits: 1) a 20 percent credit for the rehabilitation costs of buildings listed on or eligible for the National Register of Historic Places; and 2) a 10 percent credit for the rehabilitation of non-historic, non-residential buildings built before 1936.

The House’s version of the Tax Cuts and Jobs Act eliminated the HTC altogether.  However, the Senate, after pressure from the real estate and preservation communities, reinstated the HTC but made several amendments to it, which became law.  Originally the 20 percent tax credit could be claimed all at once in the first year the building “came into service”, i.e., once the rehabilitation was completed.  Starting in 2018, the 20 percent tax credit is spread out over five years.  In addition, the 10 percent tax was eliminated in its entirety.

This may impact developers in several ways, as many depend upon these credits to fund projects.  It could affect the ability to get financing to start construction projects with larger rehabilitation costs, as some banks provide equity financing for rehabilitation projects by taking ownership interests in entities that hold an interest in the properties or even receive the HTCs themselves.  Some developers sell the credits to larger companies, thus getting a cash infusion into the project during construction.  By spreading out the tax credit over five years, the Tax Cuts and Jobs Act has diminished the value of the tax credit by up to 17 percent.

The HTC is a popular program and has been attributed to over $131 billion in private investment, created more than 2.4 million jobs, and preserved 42,000 buildings.  Developers who utilize this credit should consult with their accountants and tax advisors to see how the modifications in the Tax Cuts and Jobs Act may impact their projects.

Updated Guidelines to the Secretary of the Interior’s Standards for the Treatment of Historic Properties issued

The Secretary of the Interior (“SOI”) has updated the Standards for the Treatment of Historic Properties with a new document that contains Illustrated Guidelines for each of the four treatments (Preservation, Rehabilitation, Restoration, and Reconstruction).  The Guidelines have not been updated in nearly 25 years and replace the last version from 1995.

The SOI’s Guidelines help inform the Planning Department when evaluating alterations to historic buildings in San Francisco.  This includes buildings regulated under Articles 10 (Individual Landmarks and Historic Districts) and Article 11 (Downtown Buildings and Conservation Districts), as well as any property reviewed under the California Environmental Quality Act (“CEQA”).  The updated Guidelines have expanded topics and address issues pertinent to San Francisco such as mid-20^th century architecture and adapting industrial interiors for office uses.  These Guidelines may be helpful when beginning a project to a historic building.   Later this year, we will look at these new standards more closely.

The updated Guidelines can be found here: https://www.nps.gov/tps/standards/treatment-guidelines-2017.pdf  

Proposed Legislation Establishing Cultural Districts in San Francisco

Finally, we close with a local ordinance that was proposed by the Board of Supervisors in late October 2017.  Supervisors Ronen, Cohen, Kim, Fewer, Sheehy, Yee and Farrell have proposed a new chapter to the Administrative Code that would create a process for establishing cultural districts throughout San Francisco (BOS File No. 17-1140).   The stated goals of the legislation are to promote the unique neighborhoods, businesses, and communities in San Francisco while protecting them from displacement.

Cultural Districts are defined as a “geographic area or location [within San Francisco] that embodies a unique cultural heritage because it contains a concentration of cultural and historic assets or culturally significant enterprise, arts, services, or businesses, or because a significant portion of its residents or people who spend time in the area or location are members of a specific cultural, community, or ethnic group.”  Five initial cultural districts are proposed: Japantown, Calle 24, SoMa Filipino, Compton Transgender, and the LGBTQ Leather Districts.  Other districts may be adopted and approved by the Board in the future.

The legislation outlines a process for proposal and adoption of cultural districts and requires reports regarding certain characteristics of the district as well as recommendations and strategies to preserve and support the culture of the district from various city agencies/commissions: the Historic Preservation Commission, Office of Economic and Workforce Development, Arts Commission, Office of Housing and Community Development, Department of Public works, Planning Department, and Human Rights Commission.   Strategies can include new zoning controls, historic districts, funding for businesses, economic development, and affordable housing, as well as new public amenities.

Since this legislation has been introduced, it is currently under review by each Department or Agency listed above, and is awaiting Committee action at the Rules Committee.  The impact of this legislation is unclear and Reuben, Junius and Rose, LLP will continue to monitor it and inform our readers when new action is taken.

Authored by Reuben, Junius & Rose, LLP  Attorney, Tara Sullivan

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 all of us mourn the passing of Mayor Lee, many articles have already been written about his legacy and the progress he made in San Francisco.  One of the items that was pending at the time of his death was the implementation of Executive Directive 17-02, Keeping up the Pace of Housing Production, issued on September 27, 2017, wherein Mayor Lee directed all City Departments to take steps towards process improvements that would increase housing production.  The objective behind Mayor Lee’s Directive is an important one; after the 2007-2012 “…recession, we have added more than 140,000 jobs to San Francisco, but only approved 15,000 housing units.”

The housing crisis is not solely a San Francisco problem, it is a regional issue with every jurisdiction having responsibility to do their part to solve it.  On July 26, 2017, the Association of Bay Area Governments (ABAG) and the Metropolitan Transportation Commission (MTC) adopted Plan Bay Area 2040 (Plan), which provides a long-term regional transportation and land use roadmap for future growth in the Bay Area.  The Plan acknowledges that: “The Bay Area’s housing affordability and neighborhood stability crisis has been decades in the making. Although the housing crisis has many components, its foundation is clear: there simply is not enough housing, whether market-rate or affordable, given the growing number of residents and jobs.”  According to ABAG and MTC estimates, during the first five (5) years for the 2010-2040 period, Bay Area had already added approx. 46% of the anticipated job growth, concurrently to adding only approx. 25% of the estimated housing for the same period.

Mayor Lee’s September 2017 Directive called for approval deadlines, accountability and process improvements for project entitlement and post-approval phases.  The deadlines in the Directive called for an entitlement decision to be made for housing projects (i.e. those with 250 or more net new units, or exclusively residential projects with two (2) or more net new units), within certain deadline based on the level of applicable CEQA environmental review, e.g. projects that are issued a categorical exemption must by finally approved (or disapproved) by the Planning Commission or Planning Department within 9 months.

Consistent with the Directive, on December 1, 2017, Planning Director John Rahaim submitted a plan to the Mayor that outlined proposed process improvements that would implement and accomplish the Directive objectives, which was in part also based on feedback from the Planning Commission from its October 5^th and November 16^th hearings.  The implementation plan is long and detailed, and provides some quite significant and promising steps that could have a meaningful impact on housing production and the approval processes in San Francisco.

Following are few examples of the types of measures that the Planning Department has recommended, and hopefully will be undertaking.  A full copy of the Planning Department’s plan can be accessed from: http://default.sfplanning.org/administration/communications/ExecutiveDirective17-02_ProcessImprovementsPlan.pdf.  Implementation of the following was proposed to occur within first quarter of 2018:

• PPA (preliminary project assessment) letters to be converted to abbreviated responses, with shortened 60-day deadline (instead of current 90 days), along with overall efficiency improvements to PPA processes;
• Creation of a single consolidated “Development Application” form with a master project description, with supplemental forms to be submitted for specific entitlements, such as conditional uses, variances, etc., combined 30-day Planning Department application completeness determination, subsequent 30-day Notice of Planning Department Requirements (NOPDR) issuance, and a 30-day staff review period for project sponsor’s NOPDR response, with immediate commencement of CEQA and current planning review thereafter;
• Implementation of various CEQA related efficiency and streamlining measures (e.g. re-assessment of criteria that triggers the need for consultant-prepared technical studies, and discontinuance of CEQA exemption certificates and concurrent expansion of exemption checklist applicability);
• Automatic scheduling of residential projects within the 6, 9, 12, 18 or 22-month deadlines established by the Directive; and
• Automatic scheduling of DR (Discretionary Review) hearings to occur within 45 days after the end of the 30-day notice period;

Proposed Phase 2 measures that would be implemented during the second half of 2018 would include:

• Increased capacity for over-the-counter (OTC) approvals, including elimination of the need for Historic Preservation Commission hearings for certain preservation permits and concurrent expansion of the permits that would instead be approved OTC by preservation staff;
• Streamlining of notice types, periods and mailing radius;
• Potential elimination of the need for a conditional use authorization (and a hearing) for changes of use from one formula retail use to another formula retail use; and
• Coordination and launch of an integrated and project tracking system between Planning Department and DBI.

On December 1, 2017, the Planning Department and Building Department also submitted a joint voluntary plan to allow parallel processing for certain housing development applications.  The process is available primarily to less than 240-foot tall new construction projects that have either 50 or more units without any non-residential uses, or 250 or more units with other, non-residential uses.  The parallel process could be a significant time-saver as it would allow commencement of DBI review of a building permit application to occur at the same time as Planning Department’s review, prior to completion of CEQA review.

More information on the parallel plan, issued by Planning Director Rahaim and Building Director Hui can be accessed from: http://default.sfplanning.org/administration/communications/ExecutiveDirective17-02_ParallelProcessingPlan_DBIPlanning.pdf

Authored by Reuben, Junius & Rose, LLP  Attorney, Tuija Catalano

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.

This Thursday the Planning Department will make an informational presentation to the Commission on a proposal to nix the “Tantamount to Demolition” standard that regulates the scope of residential remodels that require mandatory Commission review in RH Districts, and approve a new form-based Residential Expansion Threshold policy.

Under current Planning Code Section 317, Planning Commission review is required for almost any project that would demolish an existing dwelling unit.   The goal of this legislation was to preserve existing housing stock, especially existing affordable housing.

Under existing rules, even residential remodels that don’t require a demolition permit from the Building Department can trigger mandatory Commission review if they meet the following criteria, resulting in a project that’s considered “Tantamount to Demolition”:

• a major alteration of a residential building, removing more than 50% of the front and rear façade and 65% of all exterior walls measured in lineal feet at the foundation level; or
• a major alteration of a residential building removing more than 50% of the Vertical Envelope Elements (defined as all exterior walls that provide weather and thermal barriers between the interior and exterior of the building, or that provide structural support to other elements of the building envelope) and more than 50% of the Horizontal Elements (defined as all roof areas and all floor plates, except floor plates at or below grade) of the existing building, as measured in gross square feet of actual surface area.

Ten years after this standard was adopted, the Department is less than impressed it with its impact, and concerned that it has created an almost unworkable system by incentivizing owners to design remodels just short of the threshold, resulting in awkward/inferior design proposals that skate too close to (and occasionally slipping over) the edge to full demo during construction.  The Department’s take is that the current standard is confusing and simply doesn’t work as a tool to preserve affordable housing, promote neighborhood character, or reduce the frequency of Discretionary Review hearings.  And any objective person taking a first look at this would immediately agree the system is overly complex.

On Thursday, the Department will discuss its vision to nix the Tantamount to Demolition standard and adopt a new “Residential Expansion Threshold” based on the size of a proposed project rather than its impact on what’s already built on the site.  In essence, the new proposal would bring all “large” residential expansions in RH Districts to the Planning Commission for review.

The Residential Expansion Threshold would use Floor Area Ratio (the ratio of a building’s total floor area to the size of the lot on which it’s constructed) to determine which remodel projects trigger mandatory Commission review.  If a proposed project is below the adopted FAR thresholds and meets the unit size minimum for a multi-unit proposal, then it will be subject to a staff-level review and neighborhood notification with no mandatory Commission hearing.   Projects exceeding the FAR thresholds would trigger a Planning Commission hearing and the need for approval of a new “Large Home Authorization,” regardless of whether an alteration or demolition permit is sought.

Existing rules requiring a Conditional Use hearing for the elimination of rent-controlled units would remain in place, and the new policy would have no effect on the Department’s existing design or historic resource review procedures. However, the new standard would eliminate the existing hearing exemptions for demolition of demonstrably unaffordable or structurally unsound single family dwellings in RH Districts.

As of October 2017, the proposed FAR thresholds were as follows:

Planning’s goal is to incentivize increased density by allowing multi-unit projects where permitted by underlying zoning to include more square footage without triggering a mandatory hearing. Multi-unit projects in the RH-2 and RH-3 Districts would also be subject to a minimum use-size threshold equivalent to 1/3 of the total building square footage – a standard intended to promote proportionality of new units.

If a Commission hearing is triggered, the Commission would be asked consider specific design criteria for larger residential development, such as whether high-quality design; use of contextual and compatible building siting, orientation, massing, fenestration pattern, an scale; relationship to surrounding residential density; provision of family-friendly units; and whether the project would remove an existing full-floor flat.  Their determination could then be appealed to the Board of Permit Appeals.

Further, the Department has proposed allowing administrative review for some minor (up to 10%) expansions to units in existing buildings that exceed the FAR thresholds, and similar administrative processing for additions of Accessory Dwelling Units.  No word yet on whether grandfathering for pipeline projects will be proposed.

While the new policy may provide clearer standards for whether a residential remodel in the RH Districts will trigger a mandatory hearing, the jury’s still out on whether it will streamline the approval process or provide more certainty for property owners, since even projects meeting the prescribed thresholds would remain subject to neighborhood notice and potential Discretionary Review actions.

Following Thursday’s informational hearing, the Department is targeting a January 11^th Planning Commission hearing to initiate new legislation and a February 15^th Commission hearing for recommendation of the proposed legislation to the Board of Supervisors.

Authored by Reuben, Junius & Rose, LLP  Attorney, Melinda Sarjapur

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.

This week the Board of Supervisors considered final approval of proposed new comprehensive cannabis regulations, but ultimately voted to continue the matter for two weeks.  The Board’s consideration of the regulations has revisited a pervasive and ongoing balkanization on the Board, with the Board torn between individual district interests and the broader interests of the City as a whole.

The new regulations fall into two broad categories.  The first category comprises a new permitting and monitoring scheme of both medical and recreational cannabis activities.  The legislation creates and regulates a whole new industry of cannabis-related commercial activities, including cannabis cultivation, cannabis manufacturing, cannabis testing, cannabis distribution, and cannabis microbusiness, all constituting new, defined land uses.  In addition, the new Office of Cannabis replaces the Department of Health as the primary cannabis regulatory and permitting agency.

The second category consists of the various new planning and zoning regulations.  These regulations establish what kind of commercial cannabis activities will be allowed in particular zoning districts, as well as review and approval requirements at the Planning Commission.  These regulations are discussed in greater detail below.

One particular area where the legislation has made some progress, but still does not go far enough, is in the appeals process for cannabis permits.  Permits to operate and approved building permits for medical cannabis dispensaries are now appealed to the Board of Appeals.  This, however, can result in highly-charged public hearings often involving technical regulatory questions with which the Board is not familiar.

These technical issues are only going to become more complicated under the new regime.  While the legislation makes progress by creating an Office of Cannabis appeals hearing officer who will have expertise in the new cannabis regulations, the hearing officer only hears appeals of permit violations and revocations.  The hearing officer’s jurisdiction should be broadened to include any permit that may be appealed to the Board of Appeals.  This would streamline and narrow the issues on appeal to the Board.

Turning back to the new cannabis zoning regulations, the adopted controls include the following:

• Medical cannabis sales and recreational cannabis sales would be combined as one new defined use known as “Cannabis Retail”. Cannabis Retail generally would be permitted where other retail is permitted.
• Cannabis Retail would be permitted as an accessory use where the Office of Cannabis has issued a permit to the Cannabis Retail establishment to operate accessory to another activity on the same premises.
• The Board is divided on whether to limit the proximity of Cannabis Retail to schools to 600 feet or 1000 feet, and whether to include daycare centers in the buffer zone.
• The legislation establishes a land use process for the conversion of existing Medical Cannabis Dispensaries to Cannabis Retail establishments.

As stated above, the proposed controls are scheduled to return to the Board in two weeks.  We will continue to monitor the legislation and keep readers apprised.

Authored by Reuben, Junius & Rose, LLP  Attorney, Thomas Tunny

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.

This week’s update focuses on a scuffle over chain stores currently taking place in Malibu. In June, an appellate court overturned a voter-approved initiative imposing a number of restrictions on formula retailers, aka chain stores. Just last week, the Malibu Planning Commission proposed a more watered-down version of the chain store restrictions, aiming to pass judicial muster. The court’s rationale for invalidating the original ordinance, and the city’s retooled current approach, present an interesting case study about the limits of a city’s land use authority to restrict a certain kind of business.

Intending to preserve Malibu’s “small-town, rural character” and prevent it from turning into “Anything Mall, USA”, in late 2014 Malibu voters passed an initiative that had two primary components. First, all mixed-use projects over 20,000 square feet needed to prepare a specific plan amendment to the Malibu General Plan, and then be put on the ballot of an upcoming election for a popular vote. Second, new chain stores were restricted in size, subjected to clustering limitations, and required to obtain a Conditional Use (“CU”) permit to open.

The formula retail CU requirement was “establishment specific” and restricted in transferability: it ran solely with the operation of that business, and could not be transferred to a different chain store at the site, even if the new chain store proposed the exact same use. For example, a CU to operate a Burger King was effective if a new owner and operator proposed to keep a Burger King on the site, but not if a new owner or operator wanted to open an In-N-Out Burger.

The trial court found both aspects of the initiative problematic, and the Court of Appeal agreed. The primary deficiency of the formula retail restriction was that it used the CU process to confer a “personal” interest that attached specifically to a permittee—and not the right to operate a certain kind of land use at a site. Malibu argued that formula retail stores are in and of themselves a certain kind of land use. The court rejected this rationale, explaining that a CU cannot be imposed against a specific kind of business, and must be grounded in the use of the land itself. The court’s example was Starbucks: Starbucks is not a land use; coffee shop or restaurant is.

The California Supreme Court declined to hear Malibu’s appeal of the Court of Appeal’s decision in early August, making the appellate decision final. Just last week on October 30, Malibu’s Planning Commission recommended that its City Council approve a new watered-down version of the formula retail restrictions intended to correct deficiencies the court identified in the original ordinance. The two most important changes are (1) replacing the Conditional Use requirement with a new “formula retail clearance”—a ministerial approval processed by department staff that compared the proposal against size and clustering restrictions; and (2) allowing the “formula retail clearance” to be transferred to other businesses proposing the same use. It remains to be seen if the shopping center owners that challenged the original formula retail restriction will accept the retooled program. According to one news article, one of the lawyers who challenged the voter initiative expressed doubt about the legality of any land use restriction on what kind of tenant a property owner can rent to.

Malibu’s past legal defeat and current proposal could be informative for how other jurisdictions structure their own rules. A number of cities regulate chain stores, including San Francisco. For example, San Francisco bans formula retail businesses in some parts of town and requires a CU to open a formula retail store in many others. Malibu’s initial effort to require a CU for new formula retailers was rejected by the courts, so it is now suggesting a ministerial approval so long as the chain store meets certain size and clustering restrictions.  Also, unlike Malibu’s initial proposal, San Francisco does allow a change from one business to another within the same use category without a new CU. But only in some circumstances:  the space cannot increase in size or add a commercial kitchen, and the new business must have fewer locations worldwide than the business which secured the CU. Malibu’s proposed new ordinance has a restriction on transfer when the new retailer would increase size, but does not attempt to limit the transfer to a chain store with more locations or a similar business proposing a commercial kitchen.

It will be interesting to see if Malibu’s City Council adopts a program in line with what the Planning Commission recommended, and how opponents of the initial formula retail restrictions react to the ultimate proposal. Here in San Francisco, it seems unlikely that after years of increasing regulations on chain stores, the city will change its approach to eliminate process and discretionary land use authority in order to make it easier for those businesses to open.

Authored by Reuben, Junius & Rose, LLP  Attorney, Mark Loper

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.

Rent control has been on the march in the Bay Area as of late.  In just the last year, rent control has been newly established in 3 cities, expanded in 3 cities, and considered and denied in another 3 cities in the region.  A repeal of the Costa Hawkins Act – the 1995 law that defines the boundaries of a rent control scheme a city may adopt – was proposed in the State Legislature this term.  While that proposal died in committee, it lit a match – a group called the Alliance of Californians for Community Empowerment just submitted a ballot initiative that would repeal the Costa Hawkins Act, which would put the future of landlord/tenant rights in the hands of California voters in November 2018.

As originally approved, the Costa Hawkins Act struck a delicate balance between landlords and tenants.  The Act allowed California cities to apply rent control on older, more naturally affordable housing stock to protect existing tenants.  Newer housing units (those built after 1995) were exempted from rent control; the idea being not to discourage the construction of new housing with limits on rent rates.  Rent control was also limited to “vacancy decontrol” only – that is, even a protected unit could be re-rented at market rates when an existing tenant legitimately vacated.  This allowed existing tenants to stay in place without major rent increases while allowing landlords to increase their return on investment once a tenant voluntarily vacated a unit.

That delicate balance appears to be teetering.  The median rent in the entire state of California (population 39M; land area 163k square miles) is now $1,410/mo. – nationwide only behind Washington, D.C. (population 681k; land area 68 square miles) at $1,470/mo. and Hawaii (population 1.4M; land area 11k square miles) at $1,490/mo.  These next stats should affect the entire political spectrum:  From 2000 to 2015, 800,000 residents near the poverty line left the state – and studies show the lack of affordable housing is costing the state $143B to $233B annually.  People may disagree on the solution, but you don’t meet many people these days that don’t recognize the problem with housing costs.

What would be the effect of repealing Costa Hawkins?  Cities could enact or expand rent control to apply to housing built any time (including single-family homes and condos) and could apply vacancy control (prohibiting landlords from raising rents to market rate when a unit is voluntarily vacated).  Clearly, this would be a major policy shift, so expect an intense debate over the next year.  The initiative needs 366,000 signatures to make the ballot – but if it makes it on, just 50%+1 of the vote would be needed for it to pass.

Authored by Reuben, Junius & Rose, LLP  Attorney, John Kevlin

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.

What happens if you are a seller of real property and the purchase contract puts the full onus on the buyer to do its own due diligence and includes no affirmative representations by seller as to the condition of the property?  Are you exculpated from liability if a defect is discovered later by the buyer of which you actually knew or must have known?  A recent case RSB Vineyards, LLC v. Orsi (“RSB Vineyards”) discusses the potential liability of sellers of real property, whether commercial or residential, with respect to knowledge or imputed knowledge of material defects in such property.  (15 Cal.App.5^th 1089 (2017)).

In RSB Vineyards, Orsi (“Seller”) sold a property which had originally been a residential home and thereafter converted to a tasting room.  The conversion had occurred during the Seller’s ownership pursuant to plans approved by the County of Sonoma and a certificate of occupancy for a “winery/tasting room” was issued.  In advertising the property to potential buyers, Seller stated that the property had a vineyard vested winery permit and an active tasting room.  RSB Vineyards LLC (“Buyer”) entered into contract with Seller to purchase the property.  The purchase contract required that Seller deliver a property statement questionnaire (“PSQ”) to Buyer which required responses to certain questions regarding the condition of the property.  However, the PSQ was never delivered to Buyer and Buyer ultimately waived all contingencies and closed on the purchase.  Upon its ownership, Buyer’s architect discovered that the renovated residence was structurally unsound for commercial use and Buyer was forced to demolish it.  Buyer brought an action against Seller for, amongst other things, breach of contract, intentional misrepresentation, and fraud.  The lower court granted summary judgment in favor of Seller and Buyer appealed.

The Court in RSB Vineyards reiterated that a real estate seller has both a common law and statutory duty to disclose.  Where the seller knows of facts materially affecting the value or desirability of the property and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer.  Undisclosed facts are material, such that a seller is required to disclose them in a real estate transaction if they would have a significant and measurable effect on market value.  When a seller fails to disclose a material fact, they may be subject to liability for nondisclosure since the conduct amounts to a representation of the nonexistence of the facts they have failed to disclose.

In RSB Vineyards, Buyer’s architect alleged that the many deficiencies in the property should have been known by the Seller’s constructional professionals when completing the renovation and that this knowledge should be imputed to Seller.  The Court held that yes, if Seller was aware of these deficiencies, it had a duty to disclose.  However, the Court found the obligation to disclose only arose if Seller had actual or constructive knowledge of the deficiencies.  Since there was no evidence of direct knowledge by Seller, it must be proven that Seller “must have known” rather than “should have known”, in order to impute actual knowledge to Seller.  The Court found that the defects were not so apparent that Seller, as a layperson and not a construction professional, “must have known”.  The Court also considered whether knowledge of the deficiencies could be imputed to Seller through its architects and construction team, but ultimately found that such professionals were not acting as Seller’s agents in such capacities.  In light of the foregoing, the Court held that no fraud was committed by Seller.

Buyer also alleged that Seller made affirmative misrepresentations about the property in the offering memorandum by implying the property was suitable for a commercial tasting room.  The Court held that the statements regarding the winery permit and active tasting room were those of fact and not a warranty about the propriety of the activities at the site.  Therefore, since there was no affirmative assertion by Seller, there could be no cause of action for misrepresentation.

Finally, Buyer alleged a claim for breach of contract based upon Seller’s failure to deliver the PSQ to Buyer.  The Court held that this claim too failed because Buyer could not establish a causal connection between the alleged breach and its claimed damages.  The PSQ only required disclosure of “known” problems.  Therefore, the failure to provide such document, although required by the contract, would not have prevented the Buyer’s loss.  Regardless, the Court determined that Buyer waived Seller’s failure to provide the PSQ when Buyer waived all contingencies prior to its receipt.

The Court in RSB Vineyards did not find that this seller of real property was culpable, but the Court did reiterate that such liability could be imposed, depending upon the facts.  This case highlights that a seller could be held liable for failing to disclose known defects (or those that they “must have known”, including through an authorized agent), even if there are no affirmative representations about the property by seller in the purchase contract and the buyer is solely responsible to do its own due diligence on the property.  Sellers may be well served to contemplate what matters about its real property are incapable of being discovered by potential buyers and consider disclosure to avoid any potential damages.

Authored by Reuben, Junius & Rose, LLP  Attorney, Lindsay Petrone

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.

In the midst of the ever consuming housing crisis, it may be a good idea to take a step back and consider projections of future job creation in the City, and critically important, where those jobs should be located.  There is no question that job growth in the bay area has outpaced housing production.  That is hardly surprising when you think about it:  businesses don’t need a permit from your local government to create a job; a developer needs a permit, time, money, skill, and some luck these days to create housing.  But that doesn’t mean we should not be looking at where the next job centers are going to be located.

The Planning Department is nearing the end of the Central SOMA planning process. Started in 2010, it was and continues to be a “jobs plan.”  San Francisco needs this type of jobs zoning in order to stay competitive in the decades ahead.  Unfortunately, some in the community are now raising San Francisco and the Bay Area’s jobs-housing imbalance as a reason to reconsider the basic premise of the Central SOMA plan.  We do not agree with these voices.   On October 5, 2017, the Planning Department staff presented an excellent response to these concerns.  The full presentation can be found here:

Jobs-Housing Capacity and Growth

Planning staff makes well reasoned arguments for why Central SOMA is an obvious choice for this growth, even with the existing housing shortage:

• City-based jobs are transit accessible and therefore accessible to a greater range of workers, regardless of income or car ownership. They are denser, greener, cleaner and more energy efficient than jobs located outside of the urban core.
• Regardless of the jobs-housing balance between various cities, there is a huge San Francisco intercity commute (i.e. many more residents work in the City than commute to the City);
• Without locating a significant share of future job growth in key San Francisco locations, it will be impossible for the Bay Area to meet its greenhouse gas reduction targets;
• The bottom line for Central SOMA is this: whether San Francisco zones for this type of job growth or not, the jobs are going to come and they’re going to have to be located somewhere.

So we have to plan for the next area to accommodate significant job growth.  We believe the City’s planning for Central SOMA is spot on.  There are fewer and fewer such areas close to transit, so we need to plan them carefully.

The City’s downtown financial district is nearing complete buildout. There are virtually no soft sites North of Market, and the new office building at 350 Bush is likely to be the last major project in the area for a very long time.  And the South of Market financial district also appears to be nearing full buildout. Many of the remaining sites along Folsom Street are under post-redevelopment control and set aside for housing already.

Most of the City’s planning in the last couple of decades has been housing focused.  The Rincon Hill Area plan was pure housing.  The Market-Octavia plan allowed for the creation of high-density residential at the intersection of Market and Van Ness – which is now transitioning into the HUB plan – again a primarily housing plan.

The Eastern Neighborhoods plan adopted in 2008 was a bit of a mixed bag, but certainly opened up as much land for housing as it did for commercial uses. And the significant downzoning of many industrial parcels essentially kept the status quo in that part of town: no housing or office is permitted.

The Transit Center District Plan, approved by the Board of Supervisors a few years ago, arguably includes significant up-zoning for job creation.  This was the plan that allowed the Salesforce Tower at 1000 feet high to go forward, as well as several other tall buildings coming out of the ground right now.  But the plan doesn’t preclude significant residential development, and several high-rise housing projects have moved forward under the plan.

Rezoning a small portion of SOMA to allow for and encourage job creation is the right way to go.  The Central SOMA Plan area generally goes from Second Street to Sixth Street and Townsend to Folsom Street.  This also happens to be where the new Central Subway (under Fourth Street) is rapidly nearing completion.  This seems like an obvious area to zone for job creation.  This portion of SOMA has languished for decades under zoning that simply didn’t work.  Not permitting either housing or office, the area has essentially been undeveloped since the 1980s.

So it seems a bit odd that as the City tries to bring the Central SOMA plan in for a safe landing after years of work, several critics have emerged attacking the plan for not being housing friendly enough.  The Planning Department has done an excellent job in addressing these concerns.  Despite the ongoing housing crisis, good planning requires that a diverse array of uses be encouraged towards building a complete city.  Forcing every planning effort to combat the housing crisis will inevitably lose sight of our other priorities, such as providing for new job space and promoting the fast-growing PDR sector.

What seems to have been forgotten in this entire dialogue is that San Francisco is a regional job hub and the Bay Area’s transit infrastructure – BART, CalTrain – was specifically designed to bring workers into the City.  Muni also acts like a giant funnel, bringing workers from the far corners of the City to our job center downtown.  The critics of the current jobs plan are conveniently forgetting that San Francisco has been and will continue to be a big part of the Bay Area’s economic job-creating engine for the foreseeable future…and it is very good for the City to anticipate that and, well, plan for it.

Authored by Reuben, Junius & Rose, LLP  Attorney, Andrew Junius

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.

It is common for owners of commercial real property to hold title through a separate legal entity.  By doing so, owners can generally maintain their Proposition 13 tax basis and avoid an increase in property tax – notwithstanding changes in the ownership of the entity – until a transfer of ownership occurs.  A transfer may occur by a sale of the asset or by a change in the controlling interest of the legal entity.  Payment of documentary transfer tax – on the other hand – could be avoided in some jurisdictions until the sale of the asset to a third party, notwithstanding internal transfers of ownership of the legal entity.

The California Supreme Court recently determined that local jurisdictions may use the “change-in-control” framework established under Proposition 13 to impose documentary transfer tax when there is a change in the beneficial ownership of an entity that holds title to real property.  The decision disregards the textual distinctions between the statutory language of Proposition 13 and the Documentary Transfer Tax Act (“Act”).  It does, however, validate the aggressive documentary transfer tax interpretations made by some jurisdictions, including the City and County of San Francisco, which has adopted a standard that interprets “realty sold” as including “any acquisition or transfer of ownership interest in a legal entity that would be a change of ownership of real property. . . .”  See San Francisco Bus. & Tax Regulations Code § 1114.  The documentary transfer tax imposed on commercial real property sales can significantly increase transaction costs.

The Relevant Statutory Framework

Proposition 13 provides considerable property tax benefits to the owners of real property, insofar as the tax basis for commercial real property is not increased to fair market value unless and until ownership of the property is transferred.  One relevant exception is that property may be reassessed when there is a “change of ownership” in the entity that owns the real property.  Generally speaking, if more than 50% of the ownership of a legal entity that owns real property changes, all property owned by that entity is subject to reassessment.

The “change of ownership” framework that applies under Proposition 13 is not used under the Act.  Instead, documentary transfer tax may be imposed by a city or county whenever real estate is “sold” within its jurisdiction.  Cal. Rev. and Tax Code § 11911 [emphasis added].  The Act contemplates that the documentary transfer tax will be imposed on “each deed, instrument, or writing” pursuant to which a conveyance of real property is made.  Id.

The 926 North Ardmore Avenue, LLC v. County of Los Angeles Decision

In late June of 2017, the California Supreme Court issued its much-anticipated decision in 926 North Ardmore Avenue, LLC v. County of Los Angeles.  Rehearing was denied.  In North Ardmore, the Court considered whether documentary transfer tax may be assessed when beneficial ownership of real property is conveyed, i.e., when there is a change of ownership of a legal entity that indirectly owns the property, through another entity.  The Court determined that documentary transfer tax may be imposed when the beneficial ownership of real property is conveyed in exchange for the payment of money or other consideration, i.e., circumstances which the Court determined “reflects a sale.”

The facts of North Ardmore illuminate the complexities of some estate plans and the potential consequences of those complexities.  There, the original owners of the commercial property – Husband and Wife – held title in the name of a family trust.  Approximately 35 years later, the Husband passed away, and the trust assets passed into an administrative trust (“Trust”) for the benefit of the Wife (“Spouse”).  The adult children of Husband and Wife were named as successor trustees (“Trustees”).

After Trustees received control over the Trust and the Property, they then formed other legal entities and completed a variety of transactions pursuant to which the indirect ownership of the property was conveyed to other legal entities that were under their sole control.  The entity that held title to the asset did not change.  In exchange for the various transfers, however, several promissory notes were conveyed to the Wife, by means of other trusts created for her benefit.

The Trustees reported the various transfers in the ownership of the entities by filing a Change in Ownership Statement with the Board of Equalization, as required by California Revenue and Taxation Code section 480.2(a).  Based on that filing, the Los Angeles County Assessor determined that a change of ownership occurred and issued a supplemental property tax assessment.  The County also levied documentary transfer tax, which was challenged.

The Supreme Court’s Analysis

The California Supreme Court identified the issue in North Ardmore as whether the County had authority to tax the written instruments that transferred the beneficial ownership of the property from the Trust to the legal entities they controlled.  It characterized the task as one of statutory interpretation.  The Court then noted that the statutory language provides that “when realty is sold . . . the document effecting that sale is subject to taxation.”  The taxpayer argued that the mere conveyance of an interest in a legal entity – even an entity that owns real estate – does not result in the sale of realty.  It also argued that documentary transfer tax was not properly assessed because no document conveying the property was recorded.

The relevant section of the Act – California Revenue and Taxation Code section 11911 – was found to be ambiguous because it makes no distinction between a written instrument that conveys a direct interest in real property and an instrument that conveys an interest in a legal entity that owns real property, i.e., an indirect interest.  The Court resolved the ambiguity with reference to California Revenue and Taxation Code section 11925, which contains an exemption that relates to partnerships, and provides that the documentary transfer tax will not be imposed if the entity is a “continuing partnership” that continues to hold title to the realty.  The Court also referenced a similar exemption in the Federal Stamp Act, on which the Act is based.

The Court reasoned that the Act’s inclusion of an exemption that relates to partnerships, but not to other legal entities, meant that the legislature intended that the Act could be triggered by the transfer of interests in a legal entity, and the indirect transfer of real property.  It disposed of the taxpayer’s argument that the Act only applied to documents that were recorded by commenting – in a footnote – that the documentary transfer tax is an excise tax, imposed “on the privilege of conveying real property by means of a written instrument.”  Ultimately, the Court concluded that a written instrument – recorded or not – that conveyed an indirect interest in real property may be taxed under the Act.

After reaching its conclusions on the legal framework, the Court evaluated the facts presented by North Ardmore.  It was determined that a taxable transfer occurred when beneficial ownership of the property was transferred from Wife to the Trustees.  The Court reached its decision with reference to the “change in ownership” rules that are established under Proposition 13, and trigger a reappraisal of property for tax purposes.  Specific reference was made to statutory language that provides that the transfer of a “present interest” in real property occurs when there is a change in the beneficial ownership, which has a value substantially equal to the value of the fee interest.  Critical to the outcome: when the indirect ownership in the real property was transferred, Wife received promissory notes as payment.

The Likely Consequences of the Decision

Following the decision in North Ardmore, it is likely that many jurisdictions in California that impose documentary transfer tax will adopt a reading of the Act that implements the “change-in-control” framework that previously applied only to Proposition 13 reassessment.  We also expect that jurisdictions will become more aggressive with their collection efforts.

Authored by Reuben, Junius & Rose, LLP Attorney Corie A. Edwards

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.