Better a Distressed Property than a Distressed Client: an Overview of Land Use Due Diligence

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INTRODUCTION

No one wants to buy property for a particular intended use, only to discover later that it is planned for another use, that it violates the local code, that it cannot be served with public services or facilities, or that it may become “public open space” in the next election. Land use due diligence can help you keep such “surprises” from wrecking your client’s deal.

For example, a major European bank was seeking to purchase a significant commercial office building in the San Francisco financial district. During the course of land use due diligence, it was discovered that the building, unbeknownst to everyone involved – the seller, the seller’s attorneys, the brokers, the city – straddled a lot line. This violated the City Code, Building Code, etc., and would have prevented the buyer from securing tenant improvement building permits (the life blood of the new tenant and hence of the building) until the issue was cured. Because the issue was discovered prior to the purchase, the parties were able to devise a lot line adjustment strategy that involved the City, resolved the issue, and allowed the client to close on its purchase (with appropriate holdbacks and contingencies).

Another example: Based in part on the results of approximately $25,000 of land use due diligence on a high-profile property in the Bay Area, a potential purchaser opted not to go ahead with the transaction. Later, the potential purchaser was able to recoup the costs of the due diligence – and make a profit – when he sold the land use due diligence to another prospective buyer for $50,000. As you can see, land use due diligence can create value for your clients in very unusual ways!

In today’s volatile real estate market, where uncertainties are rampant, it will be critical for your client to understand whether a purchase opportunity presents a great buy at a very attractive price, or whether the offering price reflects serious challenges because of underlying land use issues. Worse yet, your client could find itself having celebrated its winning bid in a hotly contested foreclosure purchase and then find out several months later that its plans to rejuvenate the property is facing substantial constraints due to land use restrictions or issues.

With these types of challenges in mind, this article provides an overview of the land use regulatory framework in California and a beginning “check list” to guide your land use due diligence efforts to assure that your client will be making a fully informed decision when it considers acquisition of distressed real estate in California.

DISCUSSION

A. City, County, Other Public Agencies

Identifying which jurisdiction (city and/or county) has land use authority over your property is imperative. Only cities and counties are “land use” jurisdictions in California.

If the property is in the county’s jurisdiction, but within an adjacent city’s “Sphere of Influence,” certain Local Agency Formation Commission (LAFCO) issues may apply. LAFCO is the independent body that acts on all annexation, detachment and incorporation requests by the public agencies within its jurisdiction.

If the property is within a city’s jurisdiction (or will need to be annexed to a city to develop), then one needs to determine whether the city is a “general law” city (most cities) or a “charter” city. Charter cities (a few counties are also charter) follow their local charter instead of California statute on matters, such as zoning, determined to be a “municipal affair.”

B. General Plan

The General Plan is a city’s or county’s primary planning document. It has been described as the “constitution” for all future development. Lesher Communications, Inc. v. City of Walnut Creek (1990) 52 Cal.3d 531, 540. It provides the template for development throughout the community. The Plan must address all aspects of development, including housing, traffic, open space, safety, land uses and public facilities. (Gov. Code § 65302.)

Due Diligence questions:

  • Is the city or county General Plan in compliance with State law?
  • What is the “land use designation” for the property?
  • What “uses” are allowed and what are the goals, policies and development standards within that land use designation?
  • Will the client’s development plans require a General Plan Amendment?

C. Specific Plans

A Specific Plan is an elective entitlement; it is not required by state law. If locally adopted, a specific plan is the next level of planning below the General Plan in the land use approval hierarchy, and is used for the systematic implementation of the General Plan for particular areas. (Gov. Code § 65450). A specific plan must be consistent with the General Plan. Thereafter, zoning, subdivision, public works projects and development agreements all must be consistent with the adopted specific plan. (Gov. Code §§ 65454, 65455).

Due Diligence questions:

  • Has a specific plan been adopted (required) that includes the property?
  • Is the specific plan consistent with the General Plan?
  • Is there a specific plan EIR (already certified or being prepared) that can be used for the proposed development?
  • What zoning-level development regulations are in the specific plan?

D. Zoning

Zoning is the “granddaddy” of modern land use regulations and puts “plumbing-level” detail to the General Plan’s (and any applicable specific plan’s) “policy-level” mandates. Generally, zoning is the division of a city or county into “districts” or “zones” and the application of particular regulations to each zone. Zoning regulations can be divided into two classes: those that regulate structures (height, bulk, design, floor area ratio, etc.) and those that dictate the “use” to which the property may be put.

Due Diligence questions:

  • What is the applicable zoning district?
  • Is it consistent with the General Plan? Is it a traditional or is it a planned development type of zone? If a planned development zone, what sub-entitlements does it require (e.g., master plan, general development plan, precise development plan, etc.)?
  • What are its regulations relative to: use, density, lot size, floor area ratio, height, parking, infrastructure, services, processing, and growth?

E. Subdivision Maps

Before any parcel of property may be sold, leased or financed, it must comply with the Subdivision Map Act. (Gov. Code § 66499.30). New parcels generally are created through the approval and recording of a subdivision map. As conditions to a map approval (parcel map or tentative map), a local government may require the dedication/improvement of public infrastructure, fee payments and many other matters reasonably required to promote the public’s health, safety and welfare.

Due Diligence questions:

  • Has a tentative map, parcel map, or tentative parcel map been approved? If so, is it a “vested” map?
  • If a tentative map or tentative parcel map, when does it expire? Were extensions granted? What extensions are still available?
  • Any conditions of approval still applicable to the property?
  • Has a parcel or final map been filed or recorded?

F. Development Agreements

Development Agreements (Gov. Code § 65864 et seq.) between a developer and a local government control the power of that government to apply newly enacted ordinances to ongoing developments. Unless otherwise provided in the agreement, the rules, regulations and official policies governing permitted uses, density, design, improvements and construction, for the duration of the agreement, are those in effect when the agreement is executed. (Gov. Code § 65866). Development agreements also regularly provide for unique obligations of the developer.

Due Diligence questions:

  • Is there a development agreement applicable to the property?
  • What is its “life” or “term”?
  • What does it “vest” and what does it not vest?
  • What are its other terms and conditions and have they been satisfied?

G. CEQA

Under the California Environmental Quality Act (CEQA) (Pub. Res. Code § 21000 et seq.), “projects” that may have a significant environmental effect require the preparation of an environmental impact report (EIR). (Pub. Res. Code § 21080). CEQA also provides certain “exemptions” from this EIR requirement and allows abbreviated compliance documents (negative declarations,
supplemental EIRs, addenda, etc.). A “project” is any activity undertaken, supported or authorized by a public agency that may cause a direct physical change in the environment, or a reasonably foreseeable indirect physical change, including activities involving the issuance of permits and entitlements. (Pub. Res. Code § 21065).

Due Diligence questions:

  • What prior CEQA work has been done to date for this property and can you use it for your project?
  • If so, what are the mitigation measures and which have been satisfied?
  • If not, is any environmental review needed (EIR, etc.)?
  • Is there anyone in the public who would challenge your CEQA work?

H. Development Fees

More and more, cities and counties are defraying the costs of public improvements through the imposition of development (“impact”) fees. (Gov. Code § 66000 et seq.)

Due Diligence questions:

  • What development fees currently exist?
  • Are any new fees proposed?
  • Have vested rights been secured that affect the applicability of fees, and if not, are such vested rights available?

I. Infrastructure

The General Plan, Capital Improvement Plans, Public Facilities Plans, Infrastructure Management Plans and other policy-level regulations of cities and counties address infrastructure needs, expansion, cost, responsibility and timing. Such plans and regulations should be reviewed to answer the following questions concerning water, wastewater/ sewer, drainage, and traffic: (1) Is there adequate supply and/or capacity available
to your property and project? (2) Is the necessary infrastructure in place? If not, what responsibilities might you have towards the construction of such infrastructure?

J. Ballot Measures

Legislative action by the electorate continues to grow and evolve in California. Initiatives (enacting new laws) and referenda (seeking to undo laws enacted by the local entity) can drastically effect the land use regulations applicable to your property.

Due Diligence questions:

  • Are there any planning and zoning regulations that have been enacted by initiative?
  • Are there any pending initiatives or referenda affecting the property? If so, what effect would they have if passed?

K. Other Issues

(1) Is the property within the Coastal Zone? The Coastal Act established, among other things, state policies and regulations for public access and development on the coast. (Pub. Res. Code § 30000 et seq.) The Coastal Commission’s jurisdiction includes generally the area extending from a line 3 miles offshore to a line 1,000 yards shoreward of the mean high tide of the Pacific Ocean, from Oregon to Mexico.

(2) Is this property within the ALUC’s Airport Land Use Plan area? If so, what restrictions apply? Every county (except Los Angeles County) with airports served by scheduled airlines must establish an Airport Land Use Commission (ALUC). (Public Utilities Code § 21670). The purpose of the ALUC is to ensure the orderly growth of each public airport and compatibility with the area surrounding the airport through the adoption of an Airport Land Use Plan (ALUP). If a General Plan or specific plan is not compatible with the ALUP, the ALUC must notify the local entity so that they may reconsider their General Plan or specific plan. The ALUP can be overruled by a two-thirds vote of the legislative body of the local entity (as long as it is determined that its own plan adequately protects the public health, safety, and welfare).

(3) Are there local regulations regarding historic structures? If so, do they apply here? If so, what do they require? Many different regulations (federal, state, local) can apply to buildings and neighborhoods designated as having “historic” significance. Often, local regulations control the owner’s ability to expand, remodel o demolish structures that have been designated as “historic” in character, and/or structures that are located in a “historic district.”


- Michael Patrick Durkee is Co-Chair of Allen Matkins’ California Land Use Practice. He is a resident in the firm’s Walnut Creek office, where he focuses his practice on land use, local government and elections (ballot measures) law in both administrative and judicial proceedings. Mike is a frequent teacher and writer and runs www.landusenavigators.com

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