Many developers of condominium projects prefer alternative dispute resolution (ADR) when construction defect claims arise. ADR is seen as a more efficient way to resolve these disputes. Arbitration is one method of ADR that many developers have incorporated into their condominium documents. If you are a developer, providing for binding arbitration in your sales agreements or other documents is often advisable. You are already faced with many uncertainties during the entitlement, financing and construction process. Arbitration provisions are intended to avoid the threat and expense of protracted litigation. Accordingly, your sales agreements and association governing documents probably include binding arbitration as an expedient and efficient means to deal with potential construction defect claims. The Legal Issue Courts have become increasingly willing to invalidate arbitration provisions in construction defect cases on the basis of unconscionability. The test for determining whether a provision in any agreement is unconscionable focuses on two elements: 1) Oppression and surprise due to unequal bargaining power (procedural unconscionability); and 2) overly harsh or one-sided results (substantive unconscionability). Both procedural and substantive unconscionability must be present in order for a court to refuse to enforce an arbitration provision. The Case Law In defect cases, courts are likely to find arbitration provisions unconscionable where 1) buyers have inferior bargaining power and the arbitration provisions are “buried in the form contracts drafted by [the developer]” (Pardee Construction Co. v. Superior Court (2002) 100 Cal. App. 4th 1081, 1089) (procedural unconscionability); and 2) “the arbitration provisions are unfairly one sided [because] the builder…would have no conceivable reason to institute legal proceedings against a homeowner after escrow closed, but virtually every claim the homeowners might raise against [the builder…] would be subject to arbitration.” Thompson v. Toll Dublin, LLC (2008) 165 Cal. App. 4th 1360, 1373 (citations and internal quotations omitted) (substantive unconscionability). The typical development scenario appears to leave developers vulnerable to these claims. The developer drafts the sales agreement, CC&Rs and dispute resolution documents before the sale. (The arbitration provision is sometimes found in the CC&Rs, but is also placed in a separate agreement that is recorded against the project.) Because of this, a court may find that the buyer had inferior or no bargaining power. Second, in order to comply with statutory and regulatory requirements, and provide specific project information and disclosures, the condominium documents will be lengthy, thus arbitration provisions could easily be determined to be “buried” in the agreement. These two factors would satisfy the procedural prong of the test. The court in Thompson also noted that the developer is unlikely to have cause to sue a buyer after escrow closes, but almost all of the buyer’s claims would arise after close of escrow-a result the court found unfairly one-sided, thus satisfying the substantive prong of the unconscionability test. In these relatively common circumstances a court could find both the procedural and substantive prongs are met and refuse to enforce the arbitration provisions. Now what? What can a developer do? Is there any harm in including arbitration clauses even if they may not be enforceable? Are there alternatives to arbitration to efficiently resolve construction defect disputes? Based on current case law trends, developers should revisit how and on what basis or whether they include binding arbitration provisions in their condominium documents, and discuss alternative procedures with legal counsel. This summary is by no means a complete list of all applicable laws and regulations related to arbitration provisions, and should not be relied upon as such. For further information, please contact Kevin Rose, Jay Drake, or Shannon Lindsay at Reuben & Junius, LLP. 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 leasing, acquisition and sales, financing and workouts, formation of limited liability companies and other entities, subdivision and condominium work.

Residential condominium developers take considerable risk when developing new condominium projects. These risks are compounded in this challenging economic environment, with increased buyer defaults. Lenders providing construction financing often require presales of units in order to release the funds needed to complete a project. Thus, defaulting buyers not only result in lost sales and increased marketing costs to developers, but can also hinder a developer’s financing and completion of a project, with negative consequences to both the developer and buyers of other units in the project. In recognition that high-density infill housing development is critically important to our state, particularly in large cities like San Francisco, the California legislature recently amended state law in ways that may assist developers of high-density infill housing. Effective in 2009, for qualifying residential condominium purchases, the amount of a buyer’s deposit that may be retained by a Seller in the event of a buyer default has been increased to six percent (6%) of the purchase price. This change builds on a 2004 law that already enabled a seller to retain a defaulting buyer’s deposit in excess of three percent (3%) for qualifying condominium projects. LIQUIDATED DAMAGES Purchase agreements for residential condominiums typically contain a “liquidated damages” provision, whereby the buyer and seller agree that the amount of the buyer’s deposit will serve as the monetary damages to be retained by the seller in the event the buyer breaches the contract and does not complete the purchase of the condominium. THE STANDARD 3% RULE The rule in effect for many years is that a seller may keep up to three percent (3%) of the purchase price as liquidated damages in the event a buyer defaults and does not purchase of the property. This amount is presumed valid under the California Civil Code, such that a seller may automatically keep the 3% deposit upon the buyer’s default, unless the buyer establishes that the amount is unreasonable. Because of the 3% rule, deposits for the purchase of residential property have traditionally been 3% of the purchase price. BIG CHANGES IN 2009 – DEPOSITS INCREASED TO 6% OR MORE (LARGE INFILL PROJECTS WITH 20 OR MORE UNITS) Under Assembly Bill 2020 effective in 2009, state law on liquidated damages has been amended significantly: In the event of a buyer default, six percent (6%) of the purchase price is now presumed valid as liquidated damages that may be retained by a seller from a buyer’s deposit if the following criteria are met: 1. It is the initial sale of the unit 2. The unit is a newly constructed attached residential condominium 3. The unit is in a structure of 20 or more residential condominium units, and over 8 stories high 4. The project is high-density infill development 5. The purchase price is more than one million dollars ($1,000,000) (Minimum purchase price to be adjusted annually beginning in 2010) 6. Condominium purchase agreement must include notice of seller’s right to 6% liquidated damages A seller may be able to keep even more than 6% of a defaulting buyer’s deposit, but there is a catch. The Catch. A seller intending to keep a deposit of greater than 6% in the event of a buyer’s default must perform an “accounting” of its costs and revenues related to the construction and sale of the unit, including the cost of the delay caused by the buyer’s default. In order to keep greater than 6%, the accounting must show that the seller’s losses due to the buyer’s default are greater than 6% of the purchase price. If the seller’s losses due to the buyer’s default are not in excess of 6%, then the seller may keep only the standard 6% of the purchase price and must refund the remainder of the deposit to the buyer. The Details. A seller is required to make reasonable efforts to mitigate its damages as a result of a buyer’s default. If a new qualified buyer enters into a contract to purchase the same condominium at a price greater than or equal to the price to be paid by the original buyer, then the amount of the original buyer’s deposit in excess of 6% that may be retained by the seller will be limited to actual damages incurred by the seller after factoring in the final purchase price of the condominium. PRIOR 2004 AMENDMENTS – DEPOSITS GREATER THAN 3% (PROJECTS WITH 10 OR MORE UNITS) The 2009 changes in law described above build on prior amendments to the law that went into effect in 2004. The 2004 amendments are more inclusive and not limited to large infill projects. The 2004 amendments enable a seller to keep greater than three percent (3%) of a defaulting buyer’s deposit as liquidated damages in certain circumstances. To qualify the condominium being purchased must meet the following requirements: 1. It is the initial sale of the unit 2. The unit is in a newly constructed attached residential condominium 3. The unit is in a structure of ten (10) or more residential condominium units The same “Catch” and “Details” described above apply to the 2004 amendments, except that the operative amount of liquidated damages under the 2004 amendments is 3% of the purchase price. The 2004 amendments also require that a seller comply with the accounting rules and mitigate damages in connection with a new qualified buyer. The 2004 rules described above remain in effect today. Thus, the seller of a project that meets the requirements of the 2004 amendments but not the 2009 amendments, may still utilize the 2004 rules. Moreover, the changes do not affect the validity of the standard 3% rule for deposits. A minimum 3% deposit is still valid as liquidated damages if the increased amounts described above are not available. This summary is by no means a complete list of all applicable laws and regulations related to condo purchases and sales, and should not be relied upon as such. For further information, please contact Kevin Rose or Jay Drake at

On February 19, 2009, the Planning Commission held an informational hearing to discuss its policy on previously approved entitlements that have time-restricted performance conditions pertaining to commencement of construction. The Planning Department staff recommended a favorable policy on expired entitlements citing and recognizing the impacts the current global economic crisis has on land-use development projects. We support the Planning Department staff’s timely and sound proposal and urge the Commission to adopt it. The Commission is expected to hold a second hearing in on March 26, 2008, when they will take the issue up again and may take action. The way it is now As of today, all office developments that propose more than 25,000 sq.ft. of new office space are required to commence construction within 18 months after obtaining their Section 321 “Prop M” office allocation from the Planning Commission. Projects that fail to start construction within this period risk being subjected to entitlement revocation proceedings. Residential tower projects in the Rincon Hill DTR district are subject to a similar 24-month condition. Conditional use authorizations for other types of development projects typically include a condition that requires permits and/or construction within 3 years of Commission approval. In 2002, Planning Commission adopted a policy, applicable only to office entitlements, whereby the Commission stated it would not seek to revoke entitlements for projects that have exceeded the 18 month deadline. Why Adoption of a New Favorable Policy Makes Sense Affirmation of the existing policy to not revoke office entitlements due to their failure to comply with the 18-month performance conditions and the adoption of a similar policy on other types projects is a good idea for several reasons: 1. Adoption of a favorable policy increases certainty for project sponsors, investors and lenders, particularly during the economic crisis; 2. Extension of existing entitlements provides an immediate inventory of projects that are able to commence construction upon improvement of the economy. These “shovel ready” projects will avoid delays in construction start-up, which in turn means faster creation of construction jobs, and sooner delivery of all of the economic benefits that derive from construction projects; 3. There is no need to revoke office entitlements at a time when there is no shortage of available Prop M office space (currently there is 2,601,223 sq.ft. of available allocation in the large office pool with only 891,150 sq.ft. in pending projects); 4. The average total “development time” for large projects in San Francisco exceeds the time of an average economic cycle. It has been difficult or impossible to acquire, design, entitle, prepare construction drawings, obtain a building permit and construct a project within one economic cycle. According to an survey completed in 2002 of recent office development projects in the north and south financial districts prepared in cooperation by Reuben & Junius, LLP and Grubb & Ellis, a typical large office project took an average of 46 months from the entitlement approval date to the commencement of construction; 5. In the past, most downtown high-rise developments have ultimately been constructed despite exceeding their performance conditions; 6. Revocation of entitlements would send a wrong, anti-growth message to the development community. If you would like more information about this issue, or would like to know how to contact the Planning Department or Planning Commission to show your support for extensions, please contact us. 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 San Francisco Board of Supervisors, in an effort to help close the City’s budget gap, is considering a June special election to ask the voters to approve a new gross receipts tax. If the measure makes the ballot and receives voter approval, then most businesses that operate in San Francisco would be saddled with another tax, starting January 1, 2010. The City of San Francisco previously maintained a gross receipts tax, but this tax was repealed in 2001 after successful legal challenges. Now, the Board seeks to revive this tax. The New Tax Hits Commercial Landlord’s the Hardest The proposed tax would be 1.395% of all gross receipt taken in by lessors of commercial real estate. For all other businesses, the tax is only 0.1%. This raises the obvious question, why the approximately 140% disproportionate impact on landlords? The legislative digest of the proposed ordinance explains this disparity: “The higher rate for commercial real estate leasing is intended to ensure that such businesses pay their fair share of the costs of city services in exchange for the benefits and protections afforded by the City (e.g., fire and police services, public transportation, street maintenance, etc.). These businesses received a significant reduction in their tax liability when the former gross receipts tax was repealed because of the high gross receipts, low payroll expense nature of the industry.” This comment referred to San Francisco’s payroll tax, and the perception that commercial real estate owners do not maintain a large number of employees. (The payroll tax is based on the salaries paid to employees.) The gross receipts tax is an attempt to find a way to tax these “low employee/high wage” business owners. Many property owners will ask whether the Board of Supervisors has considered the existing high real estate transfer tax charged by the City and County of San Francisco for real property sales, and that commercial property owners already pay real estate taxes. What are Gross Receipts? The calculation is simple. The entire sales price of all goods or services is used to calculate the tax. There are no deductions, with the exception of prompt payment discounts. All commercial rent, including payments made by tenants for utilities, repairs, services, and taxes, are part of the gross receipts. Notably, there is no exception for tenant improvements, which seem to fit within the definition of “services.” This could add another cost to new leases and improvements. However, gross receipts do not include the cash received for the sale of real property. Left unstated is whether the tax would apply to the sale of an entire business, or a share of the business, rather than goods in the normal course of business. Gross receipts are specifically stated to include commissions earned by real estate agents or brokers. Who is Exempt? There are some significant exemptions. These include revenue received from residential leases, and small businesses (defined as businesses that make less than $2,000,000 per year in gross receipts). Other Issues There are provisions in the ordinance for businesses that derive gross receipts inside and outside the City of San Francisco. Business owners should also be aware that the payroll tax will continue to burden business owners, in addition to the gross receipts tax. Some owners may recall that under the old ordinance, this was not the case. Only time will tell if this tax will drive more business away from San Francisco, or just be passed through to customers and tenants as a cost of doing business. Many commercial lease forms contain provisions that could allow for such pass throughs. Another possible outcome are more lease disputes (possible litigation?) where leases may not have clear pass through provisions. Status Today, the proposed legislation was on the agenda of the Board of Supervisors Budget and Finance Committee. The Committee continued the legislation, without debate or public comment, to next week’s meeting. Supervisor Avalos noted that there was plenty of time to debate these measures in the upcoming months. We will be tracking this legislation and continue to report relevant developments. For further information, please contact us. 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.  

Constant tinkering with the rules poses challenges to small building owners The San Francisco condominium conversion laws have changed in recent years and can be difficult to follow. Building owners wishing to convert must navigate through myriad rules concerning owner-occupancy requirements, tenants rights, prior-eviction issues, a complex application process, and, unless eligible for bypass, the infamous condominium conversion lottery. The following summary of the San Francisco condominium conversion rules is provided to help small building owners and investors interested in converting understand the San Francisco condominium conversion process. Properties Eligible for Conversion: 6 units or Less The City counts the number of residential units on a property to determine eligibility to convert. A property may have no more than 6 residential units to qualify for conversion. The number of commercial/retail units is disregarded when calculating the unit count. A property will be eligible to convert if it (i) meets the owner-occupancy requirements, (ii) is not prohibited by tenant eviction regulations, (iii) wins or bypasses the conversion lottery, and (iv) satisfies the “tenants rights” rules. A qualifying 2-unit 100% owner-occupied building may be eligible to bypass the conversion lottery. A 5-6 unit property also requires public notice and a hearing before the City Planning Commission. The Unlucky: Welcome to the Lottery The City permits a maximum of 200 units to be converted through the lottery per year. The lottery has been revised in recent years in an attempt to favor buildings that have previously lost, so a building’s chances of winning increase over time. However, the sheer number of lottery applicants means that all buildings face tough odds of winning the lottery. In 2008, there were applications for conversion of more than 1,900 units for the 200 lottery spots. The Lucky Few: Bypass of the Lottery for 2-unit, 100% owner occupied buildings A 2-unit building may bypass the conversion lottery if each unit has been separately occupied by a separate individual who is a record owner with at least a 25% interest in the property for at least one year prior to submittal of the conversion application to DPW/BSM. Vacant units are not considered owner-occupied for lottery bypass purposes. Tenant eviction regulations apply and may disallow a lottery bypass, in which case lottery rules for 2-unit buildings would apply.   Some of the Details: Owner-Occupancy Requirements for Any Conversion 2 Units (Lottery bypass) – See above. 2-4 Units – At least one (1) unit must have been separately occupied by a separate individual who is a record owner with at least a 10% interest in the property for at least three (3) years prior to the lottery entry deadline for that year. 5-6 Units – At least three (3) units must have been separately occupied by separate individuals who are each record owners with at least a 10% interest in the property for at least three (3) years prior to the lottery entry deadline for that year. Tenant Eviction Regulations; Special Tenant Considerations Under a San Francisco law passed in 2006, eviction of a protected class tenant, or multiple evictions of non-protected tenants, may restrict or even prohibit conversion for a property, depending on the facts of the evictions. Existing tenants in a property that is converted have several rights, depending on the circumstances. Each tenant has the right to purchase the unit in which that tenant resides. Tenants not purchasing their units have the right to remain in their units for one year after the conversion. Tenants over 62 years of age are entitled to lifetime leases. Tenants who elect to vacate their unit within 120 days after the conversion are entitled to $1,000 in moving expenses. Building Code Compliance; CC&Rs and HOA Documents If you are allowed to convert, DBI will require that certain code work be completed before a conversion may be finalized. Note that once a conversion is complete, condominium management and HOA documents (“CC&Rs,” etc.) must be prepared for the condominium project. Properties with 5 or more units will also require approval by the California Department of Real Estate. Our Services In addition to working closely with City and State agencies, Reuben & Junius’ services include coordination with land surveyors, civil engineers, title companies, sales and marketing professionals and other consultants to compete condominium conversions in a timely and cost-effective manner. Reuben & Junius’ extensive experience in condominium and subdivision practice also includes commercial condominium conversions, and new construction condominium projects of all types – residential, commercial and mixed-use throughout the San Francisco Bay Area. This summary is by no means a complete list of all applicable regulations and controls and should not be relied upon as such. For further information, please contact Kevin Rose or Jay Drake at Reuben & Junius, LLP. 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 quantity of new land use ordinances that came out of the Board of Supervisors in 2008 was truly mind-boggling. From the very large (the Eastern Neighborhood rezoning, that we reported on in our Dec. 9 E-Letter) to the very small (legislating the size and font type for historic movie theater marquees) there was more than enough coming out of City Hall to keep everyone on their toes. That said, here are several new laws and procedures we have not yet reported on that we will be dealing with in 2009: Air Quality Assessment and Ventilation Requirements On January 5, 2009, new air quality and ventilation rules for urban infill projects went into effect. Their stated purpose is to limit the negative health effects that automobile exhaust and other air pollutants cause to those living in close proximity to freeways and other major roadways. The rules apply to newly-constructed buildings containing ten or more dwelling units located within a new Potential Roadway Exposure Zone. The Exposure Zone has been established by a map that was included in the legislation, and includes areas of the City of San Francisco that are near freeways and other major roadways. An air quality assessment must be performed on all subject projects. A subject project that has an air quality assessment that demonstrates the project has a PM 2.5 (fine particulate) concentration of greater than 0.2 ug/m3 attributable to traffic on roadways within 500 feet must be redesigned to avoid such level of exposure to air pollutants or the project must have a ventilation system installed on site. Interdepartmental Project Review Effective February 1, 2009, the Planning Department is requiring that an interdepartmental project review meeting be held for all new projects proposing eight stories or more and new construction on parcels located within Seismic Hazard Zones in San Francisco. The meeting will include representatives from the Planning Department, the Department of Building Inspection, the Department of Public Works and the San Francisco Fire Department. The Planning Department recommends project sponsors request this meeting before they submit any entitlement applications. Fees for this review meeting consist of $1,059 for projects of five or fewer dwelling units and all affordable housing projects and $1,530 for all other projects. Draft CEQA Guidelines for Greenhouse Gas (GHG) Emissions As mandated by Senate Bill 97, the Governor’s Office of Planning and Research (“OPR”) has issued draft CEQA guidelines for assessing the impact of greenhouse gases (“GHG”) a project has on the environment. SB 97 expressly includes GHG emissions in CEQA analyses of proposed “projects.” The draft guidelines include factors to consider when determining if GHG emissions from a project have a significant effect on the environment, including whether the project would help or hinder attainment of the state’s goal of reducing GHG emissions to 1990 levels by 2030, whether the project increases fossil fuel consumption, and whether the project results in increased energy efficiency of an existing facility. The draft guidelines also provide potential mitigation measures for a project with GHG emissions that have a significant effect on the environment, including reducing fossil fuel consumption, changing the project’s design, incorporating carbon sequestration, or the purchasing of carbon offsets. As of now, these guidelines are in draft form, and do not apply to current CEQA analyses. OPR will hold several public meetings on the draft guidelines, update the guidelines based on the meetings, and submit the updated guidelines to the California Resources Agency for formal rulemaking. Until the draft guidelines are adopted by the agency, OPR’s interim guidance, which recommends that lead agencies adopt systematic mitigation approaches to projects with GHG emissions that have a significant effect on the environment, applies. What does this mean for projects in San Francisco going through the entitlement process? So far we are seeing the Planning Department require some new GHG analysis be performed. But since there has been no CEQA threshold of significance established, there is really nothing that can be done with the analysis except report it in the CEQA document. Also of Note: The new Historic Preservation Commission (“HPC”) that we reported to you back in November 2008 will have its first meeting on Wednesday February 4. The four Commissioners that have been confirmed are Charles E. Chase, Courtney Damkroger, Karl Hasz, and Alan W. Martinez. There remain 3 vacant seats on the HPC. At the meeting this Wednesday, the four will elect officers and adopt its own rules and regulations. If you have any questions about this article, please contact us at 415.567.9000 or by email to one of the attorneys listed above. 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.  

California Court of Appeal strikes down a “free look” contract In a case that may have some scratching their heads, the California Court of Appeal refused to enforce a real estate purchase agreement because the buyer had the right to terminate the agreement at any time, without penalty. Steiner v. Thexton, 163 Cal. App. 4th 359 (2008). The purchase agreement was of a similar type that is often used by parties where entitlements or other closing conditions are at issue. Seller agreed to convey the property to buyer, and buyer was given a specific period of time to obtain land use approvals and entitlements. Buyer could also terminate at any time prior to the closing deadline. A $1,000 deposit was made, but it was fully refundable to buyer. Buyer proceeded to obtain land use entitlements and subdivision approvals. Before buyer could close the transaction, the seller terminated the contract and refused to convey the property. Buyer then sued for specific performance and monetary damages. The trial court found that the contract was not enforceable, and this ruling was appealed to the California Court of Appeal. Even though the buyer spent about $50,000 obtaining land use entitlements over a period of several years, the Court of Appeal found that the contract was unenforceable for lack of consideration. The court’s holdings include: • The contract to purchase was actually an option to purchase the property; • Because buyer did not provide seller any separate consideration for the option, seller was not required to sell the property to buyer; and • Buyer had no right to damages. The court focused on the fact that buyer was not obligated to do anything with respect to seller, and that buyer could terminate the contract at any time, without penalty. Even though buyer did have some obligations (for example, buyer was obligated to assign any entitlement applications to seller, and provide seller with due diligence reports that buyer may have obtained), the court found that this did not constitute adequate consideration, because buyer could have terminated at any time, before these obligations were due. Therefore, the purchase agreement was actually an option to purchase, and because buyer did not pay consideration for the option, the agreement was not enforceable. It is also interesting to note that the court would not enforce the doctrine of promissory estoppel – in other words, seller’s promise should be enforced as a matter of fairness. Even though buyer argued that it performed substantial work to its detriment, the court again found that buyer was without risk during the entire period of time prior to closing. So, according to the court, it would be unfair to enforce the contract against seller. As a result, buyer was out over $50,000, lost the property, and the court required buyer to pay seller’s attorneys fees – over $85,000. The lesson to be taken from this case is two fold. First, the parties to a real estate contract need to be sure that there is adequate, legal consideration at the time the contract is signed. Second, a contract can provide too much protection. If a party has a “bullet proof” right to terminate, then it should also be aware that there may be a chance that the contract is not enforceable from its side. Unfortunately, the case may raise more questions than it answers. For example, the court did not provide any guidance as to how much consideration buyer needed to provide in order to create an enforceable option or purchase contract. Parties to purchase agreements and option agreements should carefully consider these issues when making the decision to enter into an agreement. If you have any questions about this article, or would like to talk to a Reuben & Junius attorney regarding transactional work , please call Kevin Rose at 415.567.9000. Reuben & Junius, LLP provides a wide range of transactional services, including leases, purchase and sale agreements, formation of limited liability companies and other entities, and lending/workout assistance, as well as subdivision and condominium work.  

San Francisco’s Acting Permit Services Manager and former Chief Building Inspection Officer, Laurence Kornfield, recently announced creation of a “sustainability plan” as one of every building owner and manager’s “must do’s” in 2009. Kornfield is right: whatever the market may bring in 2009, it is surely just the beginning of increased environmental regulation for buildings. While the exact requirements of coming regulations are not clear now, the types of regulations that will follow are increasingly foreseeable, and can be planned for in advance. Why now? Energy use and related activities by buildings are the second largest contributor to California’s greenhouse gas emissions. Almost one-quarter of California’s greenhouse gas emissions can be attributed to buildings. In response, the building sector is increasingly subject to state and local mandates to operate more efficiently, reduce its carbon footprint, and disclose energy use. For instance, on and after January 1, 2010, California’s newly passed AB 1103 will require that a nonresidential building owner or operator disclose Energy Star Portfolio Manager benchmarking data and ratings, for the most recent 12-month period, to a prospective buyer, lessee, or lender. Building owners should begin preparing for this now. Similarly, twenty-seven cities and counties in California, including San Francisco, have now enacted green building standards, typically by incorporating the LEED and Build It Green rating systems. In addition, the California Air Resources Board passed its Scoping Plan in December, 2008, which lays out the state’s long-term policies for reducing greenhouse gas emissions. A few of the policy recommendations affecting buildings in the Scoping Plan that will guide future lawmaking include: making the state’s voluntary Green Building Standard Code mandatory in 2011; requiring 25 percent of all new buildings to reduce energy and water consumption by at least 25 percent beyond code by 2011; and establishing a state environmental performance rating system for homes and commercial buildings to replace third-party rating systems, as well as creating retrofit regulations. Such policies will set the trend for future rulemaking in the building sector. The existing green building mandates, as well as the anticipated future regulations, can be economically friendly, if planned for effectively. Statistics show that a 30 percent reduction in energy consumption can lower operating costs by $25,000/yr for every 50,000 square feet of office space. For every $1 invested in energy efficiency, asset value increases by an estimated $3. And though costs can vary widely, the United States General Services Administration recently noted it has been able to consistently build LEED Silver buildings within a budgeted 2.5 percent cost premium, and often cost-neutrally. Sustainability planning is about easing this burden and taking advantage of these efficiencies. What is a sustainability plan? A sustainability plan is a long-term road map of actions items and policies for how the buildings you own, manage, or are building will keep pace with increasing climate-change regulation, as well as market pressures for “green buildings.” This may include: • Familiarize staff with the LEED, Build It Green, and other rating systems. • Determine how green building is changing your market, both in terms of market expectations and how you will structure rental rates. • Determine how to respond to a tenant’s claim that its build out adds LEED points to the building, and the rent should be reduced to reflect this. • Establish procedures to track regulations and incentives. Legal aspects of a sustainability plan may include: • Revise standard leases to be consistent with your sustainability plan: This could include (i) modifying the operating expense provisions to allow for recovery of specified green building costs; (ii) confirm tenant’s obligation to construct improvements and alterations in compliance with your green building standards; (iii) provide for specified maintenance procedures; (iv) require tenants to comply with other green building policies and regulations; and (v) impose penalties for violation of these provisions. • Update contracts, RFPs, and RFQs to reflect that green building experience is required. • Strategize for addressing experimental or innovative systems, such as extended warranties or performance guarantees. • Satisfy any lender requirements for existing loans or refinances. Getting Started Now is the time to start planning for what will surely become a more complex regulatory environment. Contact Reuben & Junius LLP to discuss sustainability planning for your operation or development, and how to make the transition to the new green building world as smooth as possible. There are a number of excellent resources on sustainability planning and incentives available for free. Here are some of the best: Best Practices Guide: Commercial Office Buildings (http://www.fypower.org/bpg/index.html?b=offices) Green California: Resources Library (http://www.green.ca.gov/ResourcesLibrary/default.htm) Flex Your Power Rebates & Incentives Finder (http://fypower.org/com/tools/rgl.html) California Air Resources Board Scoping Plan (http://www.arb.ca.gov/cc/scopingplan/document/psp.pdf) San Francisco Green Building Initiatives (http://www.sfenvironment.org/our_programs/topics.html?ssi=8&ti=19#LegislationInitiatives) San Francisco Solar Power Initiatives (http://sfwater.org/detail.cfm/MC_ID/12/MSC_ID/139/MTO_ID/361/C_ID/3910)

Today the Board of Supervisors passed on second reading the Eastern Neighborhood Plan (the “Plan”); it is now official. Barring a veto, this action brings to an end a long and complex process and rezones a broad area of eastern San Francisco (East SoMa, Central Waterfront, Showplace Square, Potrero and Mission neighborhoods). The Plan is a major milestone in the San Francisco planning process. Reuben & Junius, LLP will be making presentations on the Plan to clients, consultants and friends starting next week. If you are interested in attending a future presentation or would like to schedule a presentation for your group, please contact Tuija Catalano. Some of the highlights of the Plan include: New Zoning: The Plan creates new zoning districts and changes others: new PDR districts (residential prohibited; office severely restricted); new NCT districts geared towards harmonizing high- and moderate-density housing and commercial uses close to transit services; and the new UMU district (Urban Mixed Use, affectionately pronounced “OO-Moo,”), to act as a buffer zone between residential and PDR districts. There are others. Heights: A potpourri of changes over the entire Plan area. About 60% of lots received a small increase (5 to 20 feet), while about 30% actually lost height. Specific areas near AT&T park and in upper SOMA received 45 to 95 foot increases. Density Limits – Gone: In most new districts residential density limits are eliminated. Larger Units – Required: The Plan requires a certain percentage of units to have 2 or more bedrooms in an effort to create more family housing. The developer can choose to provide (1) 40% 2-bedroom units; (2) 30% 3-bedroom units, or (3) in EN Mixed Use districts, a required number of on-site inclusionary affordable housing units as 2-bedroom units. Less Parking: For most properties, the potential amount of parking will be less than before due to the elimination of minimum parking requirements and introduction of parking maximums. More Fees: Includes a new Community Improvement Fee intended to fund infrastructure improvements. Fee ranges are as follows: Fee “Tier” / Residential / Non-residential: TIER 1 (no height increases, 100% affordable housing projects, and housing projects within UMU): $8/gsf (Res) $6/gsf (Non-Res) TIER 2 (1-2 story ht. increases): $12/gsf (Res) $10/gsf (Non-Res) TIER 3 (3+ story ht. increases + MUR zoning) $16/gsf (Res) $14/gsf (Non-Res) Increased Affordability: UMU projects will be subject to higher requirements, but will have more compliance options. New on-site requirements range from 18% to 22%, and off-site requirements range from 23% to 27% depending on if the site received a height increase under the Plan. Other new alternatives: middle-income affordability and land dedication (in lieu fee still available). Entitlement Processing (Faster?): The Plan attempts to provide greater certainty by permitting more uses as-of-right, and by eliminating many conditional use authorizations. Planning Commission approval will be required for “Large Projects” that (1) add more than 25,000 sf of floor area, (2) add or construct above 75-foot height, or (3) contain more than 200 linear feet of street frontage. CEQA Streamlining: The anticipated use of Community Plan Exemptions (“CPE”) for projects in the Plan area could result in a more streamlined CEQA process, which in turn could reduce total entitlement processing time. A CPE is available for projects that are consistent with the Plan. While the exact process has yet to be worked out, we are hopeful that it will allow entitlement applications to move faster. The Plan becomes effective 30 days after the Mayor signs the legislation, which means the effective date could fall anywhere between January 8th and January 19th, 2009. Note that this email only scratches the surface of this major piece of legislation: the package is large and complex. Please call Andrew Junius, Joel Yodowitz or Tuija Catalano on specific questions.          

San Francisco’s new green building ordinance went into effect on November 3, 2008. Almost every new building in the City—from the single-family home to the high-rise tower—is affected by this legislation. Projects required to comply include: New construction, Group R (residential) occupancy buildings; New construction, commercial buildings of Group B (business) or M (mercantile) occupancies that are 5,000 gross square feet or more; New first-time build-outs of commercial interiors that are 25,000 gross square feet or more in buildings of Group B or M occupancies; and Major alterations that are 25,000 gross square feet or more in existing buildings of Group B, M or R occupancies where “interior finishes are removed and significant upgrades to structural and mechanical, electrical and/or plumbing systems are proposed.” The method of compliance with the new ordinance depends on the project: Non-high-rise residential projects will have to be certified in accordance with the Build It Green “GreenPoint” system or meet an equivalent standard. All commercial buildings will have to be certified in accordance with the U.S. Green Building Council’s Leadership in Energy and Environmental Design (“LEED”) system or meet an equivalent standard. High-rise residential projects can choose whether to use the LEED system, or a combination of GreenPoint system and LEED prerequisites. Compliance requirements are phased in gradually through 2012. All projects must also meet other requirements in addition to those of the GreenPoint and LEED systems. The ordinance will bring new challenges to all projects.