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

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.    

The implementation of the Eastern Neighborhoods (“EN”) Plan is kicking into high gear and this month the Planning Department mailed letters to property owners in the EN Plan area informing them of their potential eligibility for a newly-created “legitimization” program. The program provides “amnesty” for existing uses that were legal under the old zoning but had no building permit or other authorization to back that up, and are no longer permitted uses under EN. The background In parts of SOMA and the old industrial “M” districts, it was common for tenants to come and go in buildings over the years with little or no tracking by the City and few or no building permits filed or issued. This can create a messy situation for an owner. For example, when an owner goes to refinance or sell a building, one of the first questions a bank or buyer wants to know is “are the uses in the building legal?” Unless the owner has been particularly diligent over the years to document use changes and work done in the building, all with proper building permits, the answer is often muddled. This program, in effect now, expires on January 19, 2012, and after that, unpermitted uses discovered by the Planning Department will be subject to enforcement proceedings and will likely have to cease. We recommend that property owners in the EN Plan area consider participating in the legitimization program if eligible. The program could protect you from any future enforcement proceedings, leave you with a “clean slate” in the City records and make refinancing and sale that much easier in the future. Generally, to be eligible for this program, a use to be legitimized must have been a permitted use under the old zoning when it was established and either: 1. regularly operating on a continuous basis in the same location since at least January 19, 2007, or 2. regularly operating on a continuous basis in the same location since at least April 17, 2008 and be associated with a business or enterprise which was also in the same location prior to January 20, 2007. The Zoning Administrator makes the call on whether a property is eligible to participate in the program. If the legitimization application is accepted and approved, all current development fees must be paid as if the property was entitled today (minus any fees that were paid when the current use was established). The use would then become a legal non-conforming use within the new zoning district, and is for the most part allowed to continue indefinitely. Based on our experience, the two following property scenarios are the most likely to benefit from the program: Buildings in former industrial districts (M) that are now zoned Production, Distribution and Repair (PDR) Former industrial zoning districts, such as M-1 and M-2, permitted a broad range of uses, including residential and office. Many of these districts have been rezoned to PDR districts where residential use is prohibited and office use is severely limited. Any existing residential or office uses within rezoned PDR districts that were never properly permitted can take advantage of the legitimization program. A caution with respect to legitimization of office uses – in addition to being regulated by the specific zoning district, office uses in San Francisco are governed by “Proposition M” which imposes a cap on total new office uses permitted in any given year. The Prop M rules kick in at 25,000 square feet of new office use. After that point, a Planning Commission hearing is required for approval, and significant development impact fees are applicable (starting at about $30/sf). So if you have a building in a former M district that today has 30,000 sf of office space, but you never received a Prop M approval, participating in the program and “legitimizing” means you will ultimately need to go to the Planning Commission for approval and end up paying at least $900,000 in development fees. Buildings originally permitted for non-office uses that now more closely resemble office uses In the early 1990s, new office-like use categories were added to the Planning Code, such as business service and workspace of design professionals. These were permitted in some zoning districts where “typical” office was not. As time has passed, many uses that were permitted under these new categories have come to resemble the traditional definition of office use. Many of us remember the “business service” determinations of the early 00’s that were part of the dot-com boom. These were specific determinations made by the Zoning Administrator on a tenant by tenant and building by building basis. These uses may also be eligible for the legitimization program and, if successful, would be permitted as an office use, a broader use category than any of the office-like uses. This would be particularly useful for buildings in the MUG (formerly SLR) district and the SLI district, which both formerly prohibited almost all office uses and now either restrict office use by floor (MUG) or continue to prohibit most office use (SLI). We can help Our attorneys have spent many hours analyzing the legitimization program and discussing its implementation with Planning Department staff. We are available to determine your eligibility for the program and to guide you through the process in the case you would benefit from it. Please contact Andrew Junius, Tuija Catalano or John Kevlin if you would like to talk about whether this program may be right for you. 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.  

Today is the 39th Earth Day. Happy birthday, Earth Day. It goes without saying that the world is more environmentally conscious today than that first Earth Day in 1970. Green building methods that were in their infancy then are commonplace now. We have acknowledged the urgent need for sustainable development, and this new direction has dramatically altered how development is done. This spring, real estate professionals will want to take note as another revolution occurs in the green building movement when the U.S. Green Building Council’s LEED program (Leadership in Energy and Environmental Design) gets a major overhaul, including updates of all rating systems; updates to accrediting procedures for green professionals; and a new online project management system. What is LEED? LEED provides standards for environmentally sustainable construction and design. These standards are increasingly adopted by local governments and recognized by the development community as a reliable measure of sustainability. LEED provides an objective certification process where the technical criteria proposed by the USGBC are applied to individual projects to determine whether a project meets defined energy and efficiency goals. Since its inception in 1998, LEED has been used in thousands of projects across the country. Grandfathering for New Projects Projects can still register under the existing LEED version 2 rating systems. Registration for projects under the new LEED version 3 rating systems will become available on April 27, 2009. From April 27, 2009 to June 26, 2009, new projects can be registered under either version 2 or version 3. Registration for certification under version 2 will not be accepted after June 26, 2009. Registration of projects is relatively quick and inexpensive. Projects registered under the LEED version 2 rating system can be transferred to LEED version 3 after April 27, 2009. This transfer will be free of charge until October 26, 2009, after which there will be a new registration fee. Projects that remain registered under LEED version 2 will be unable to use the new version of LEED Online. We generally believe there will be a benefit for projects proceeding under version 2, and so registering prior to the deadline is critical. For those projects that register under version 2 and that later realize version 3 turns out to be more advantageous for a project, a project can simply transfer registration to LEED version 3 at that time. San Francisco Requirements The City and County of San Francisco green building ordinance requires the use of LEED version 2 or a “more recent” version of LEED, such as the new version 3. San Francisco also permits projects to be verified as meeting LEED standards by a “green building professional of record,” which is typically an architect or engineer, rather than officially certified. Many San Francisco projects still seek certification for a variety of reasons, and thus sponsors for all covered projects should consider whether to register under LEED version 2 at this time if they have not already done so. Projects in other cities or counties should also review relevant local green building ordinances closely, as regulations governing LEED version changes vary widely between jurisdictions. Reuben & Junius LLP Can Help Attorneys Andrew Junius and Stephen Miller are LEED Accredited Professionals, and can offer counsel on the issues arising from these LEED version changes, LEED requirements and process in general, and updates on the status of green building code requirements in San Francisco and other cities throughout the state. Reuben & Junius, LLP is also available to register projects with LEED prior to the June 26, 2009 deadline. This process can be completed quickly and without any specific commitment to achieve a specific LEED standard. To learn more about changes to LEED, visit the U.S. Green Building Council’s website at: www.usgbc.org. 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.  

Last month we reported to you that the Planning Commission was reconsidering its policies related to the extension of various land use entitlements. On March 26, 2009 the Commission adopted three new resolutions that reflect refinements in its various policies on entitlement extensions. Unfortunately, the Commission’s actions do not necessarily provide developers (specifically office developers) and lenders the kind of comfort they were looking for. The Commission Action   With respect to office entitlements specifically, the Planning Commission adopted Resolution No. 17846A which states: “The Planning Commission recognizes that the current global economic crisis has exceeded the depth and breadth of recent economic downturns, resulting in a profound impact on a liquidity and stability of credit markets and the availability of financing for a range of land use development projects; and The Planning Commission believes that a policy of monitoring projects authorized under Planning Code Section 321 (Office Development Annual Limit), but not yet under construction, and ensuring that those projects under construction proceed as expeditiously as possible under the circumstances, serves the City well; however, the Planning Commission believes that authorized projects that are not diligently pursued should be revoked.” The Commission identified two office projects approved in 2001 and directed the Planning Commission’s staff to schedule a hearing for revocation of those entitlements. It then went on to identify four other projects that have also exceeded the 18-month performance timeline set forth in the Planning Code, and asked the staff to set each of those for “informational presentations” before the Planning Commission. Analysis of the Policy   The Planning Commission’s actions are internally inconsistent. On the one hand, it is saying that it understands the difficult economic times we are facing and that these problems are preventing virtually any project from moving forward at this time. Then, in virtually the next breath, the Commission says that it still expects project sponsors to “diligently pursue” their projects and entitlements and presumably if such diligence is not forthcoming, further action may be taken. As we reported to you in March, there are a variety of reasons why revocation of any entitlement serves little or no purpose to the City, the property owner, or the developer. Developers need certainty that their entitlements are still valid while they wait out an economic downturn. A Commission policy that demands that developers “diligently pursue” their entitlements at a time when everyone acknowledges financing for development is non-existent sends a confusing message to the development community at a time when the last thing the City should want is to create more uncertainty about the City’s development process. Another problem with the Commission’s resolutions is that they do not state any rationale for their actions. Why is this such a big deal, and why, of all times, is this happening now, in the middle of the greatest economic crisis in 50 years, at a time when there is no shortage in the available office allocation square footage for new projects? It should not be enough to just rely on the Planning Code’s 18-month performance requirement. There is significant evidence in the record that it is virtually impossible to get a large project permitted and under construction within this short period. The Commission should not pressure developers to move forward without clearly articulating the reason why such pressure is needed. We also disagree with the Commission’s direction to schedule “informational presentations” on four other office entitlements that have exceeded the 18-month performance condition. At the two Planning Commission hearings on the matter of extensions generally, the Commission heard from a wide variety of stakeholders that financing is unavailable but the entitlements need to be preserved so that the projects can move forward quickly once there is a turn in the economy and money starts flowing again. The purpose of holding further informational hearings to explore the status of individual projects is not entirely clear when it is uniformly accepted that no project can get financing right now. If you would like a copy of the Resolutions adopted by the Planning Commission on March 26 related to entitlement extensions, or have any related questions, please contact either Andrew Junius or Tuija Catalano. 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.