A Real Estate & Land Use related Legal Alert has been posted to our website and is attached for your information and review.
United States Supreme Court: State Supreme Court’s Decision Regarding Beachfront Property Owners’ Claim Did Not Amount To A Judicial Taking Of Their Property Rights Without Just Compensation
Monday, July 26, 2010
Friday, July 23, 2010
Small is the New Big
Downsizing and Creative Financing for Successful Housing Development After the Burst of the Housing Bubble
It’s no secret that housing construction has been hit as hard as any industry by the recession, and obstacles to development of new homes remain formidable. And yet the right kinds of housing projects, built by the right developers, with the right financing, are getting built today. Check out this article by KMTG real estate attorney Jon Goetz discussing how the formula for successful residential development has changed since the boom times, and what it takes to build a successful housing project today in the wake of the recent housing crash. The article looks at the trend toward smaller and more affordable new homes, new forms of construction financing being used by homebuilders, and changes in mortgage practices that have become a major obstacle to new home sales, especially condominiums. The article also looks at ways that redevelopment agencies can assist homebuilding in this new development climate.
By Jon Goetz
It’s no secret that housing construction has been hit as hard as any industry by the recession, and obstacles to development of new homes remain formidable. And yet the right kinds of housing projects, built by the right developers, with the right financing, are getting built today. Check out this article by KMTG real estate attorney Jon Goetz discussing how the formula for successful residential development has changed since the boom times, and what it takes to build a successful housing project today in the wake of the recent housing crash. The article looks at the trend toward smaller and more affordable new homes, new forms of construction financing being used by homebuilders, and changes in mortgage practices that have become a major obstacle to new home sales, especially condominiums. The article also looks at ways that redevelopment agencies can assist homebuilding in this new development climate.
By Jon Goetz
Friday, July 16, 2010
Mindbending Recent Decision of the Department of Industrial Relations
Mindbending in its circularity, a recent decision of the Department of Industrial Relations (DIR) illustrates an absurdity of SB 975, the 2001 legislation that requires the payment of prevailing wages on most projects that receive some sort of financial assistance from a public agency.
A redevelopment agency agreed to sell land to a developer of a large mixed use shopping center/residential project for $1, and pay for city fees and infrastructure required for the project. As originally structured, the developer would be required to pay prevailing wages for the construction of the project, which are roughly equivalent to union-scale wage levels. When it became apparent to the developer that a prevailing wage requirement would make the project infeasible, the agreement was restructured to require the developer to repay the agency for all of the agency assistance. The note for the developer’s reimbursement carried interest at prime plus 1½%. That is a market rate loan, said the DIR, which is not a subsidy under SB 975 and does not trigger the prevailing wage requirement. So far, so good.
But here’s the irony. The revised agreement contained an escape clause that allowed the loan to be forgiven (and another $8 million to be granted to the developer) if the DIR later found that the agreement triggered a prevailing wage requirement. According to the DIR, that escape clause makes this “money loaned …that is to be repaid on a contingent basis,” which is one of conditions under SB 975 that requires prevailing wages to be paid. So while the basic terms of the loan agreement itself do not trigger prevailing wages, the prevailing wage escape clause does! Is your brain spinning yet?
Because of the sparse record of what the legislature was trying to accomplish in SB 975, it’s hard to say whether the DIR is correct in its interpretation of the “repaid on a contingent basis” language of SB 975. But the result is certainly nonsensical. It points out the need to find a more effective way of determining whether prevailing wages are applicable to a project before entering into a multi-million dollar agreement for development.
By Jon Goetz
A redevelopment agency agreed to sell land to a developer of a large mixed use shopping center/residential project for $1, and pay for city fees and infrastructure required for the project. As originally structured, the developer would be required to pay prevailing wages for the construction of the project, which are roughly equivalent to union-scale wage levels. When it became apparent to the developer that a prevailing wage requirement would make the project infeasible, the agreement was restructured to require the developer to repay the agency for all of the agency assistance. The note for the developer’s reimbursement carried interest at prime plus 1½%. That is a market rate loan, said the DIR, which is not a subsidy under SB 975 and does not trigger the prevailing wage requirement. So far, so good.
But here’s the irony. The revised agreement contained an escape clause that allowed the loan to be forgiven (and another $8 million to be granted to the developer) if the DIR later found that the agreement triggered a prevailing wage requirement. According to the DIR, that escape clause makes this “money loaned …that is to be repaid on a contingent basis,” which is one of conditions under SB 975 that requires prevailing wages to be paid. So while the basic terms of the loan agreement itself do not trigger prevailing wages, the prevailing wage escape clause does! Is your brain spinning yet?
Because of the sparse record of what the legislature was trying to accomplish in SB 975, it’s hard to say whether the DIR is correct in its interpretation of the “repaid on a contingent basis” language of SB 975. But the result is certainly nonsensical. It points out the need to find a more effective way of determining whether prevailing wages are applicable to a project before entering into a multi-million dollar agreement for development.
By Jon Goetz
Thursday, July 8, 2010
Lower Median Incomes May Lead to Rent Drops in Some California Counties
As the economy continues to struggle, you wouldn’t think it surprising that California median income figures have dropped. Actually, only eight of the state’s 58 counties had lower median incomes in the 2010 figures published June 17 by the
Department of Housing and Community Development. The largest drops included Santa Clara County, home to San Jose and much of Silicon Valley, which experienced a 1.9% drop. Monterey County had a 1.8% drop, and San Joaquin County, home to Stockton and other cities hit hard by the housing meltdown, had a 0.8% drop.
And yet this is unusual, because median income figures published by the state and federal governments have not dropped in past years, even during recessions. Under HUD’s “hold harmless” policy, published median incomes were not allowed to drop, and as a result rent limits at affordable housing complexes were also prevented from declining.
HUD abandoned the hold harmless policy this year, allowing published median incomes to decline up to five percent per year. HUD was comfortable doing this in part because the Housing and Economic Recovery Act of 2008 (HERA) adopted a statutory hold harmless policy for existing affordable housing projects which receive Low Income Housing Tax Credits or bond financing. Those existing projects will not see any decreases in allowable rents under the regulatory agreements that accompany those forms of financing.
But that new federal policy does not apply to rent limits set under California redevelopment law or most other municipal programs, which set rent formulas based on current HCD or HUD median incomes. This means that locally imposed rent limits will be dropping in places like San Jose and Stockton, possibly jeopardizing the economics of existing affordable housing projects in those cities that counted on rents never declining. It may also reduce the financing available to new tax credit and bond-financed projects, which may now be underwritten with the assumption that rents will go down before the projects are complete and the federal hold harmless protection begins to apply.
Developers will have a better idea in coming months and years whether drops in median incomes actually threaten the viability of their projects. If they do, there will doubtless be calls for legislative reform, or changes to the way that HCD determines median incomes.
KMTG has prepared printouts of the new California 2010 median income figures, affordable rents and affordable housing costs for a number of California counties. Click here to download a free copy for one or more counties.
By Jon Goetz
KMTG Redevelopment and Housing
Department of Housing and Community Development. The largest drops included Santa Clara County, home to San Jose and much of Silicon Valley, which experienced a 1.9% drop. Monterey County had a 1.8% drop, and San Joaquin County, home to Stockton and other cities hit hard by the housing meltdown, had a 0.8% drop.
And yet this is unusual, because median income figures published by the state and federal governments have not dropped in past years, even during recessions. Under HUD’s “hold harmless” policy, published median incomes were not allowed to drop, and as a result rent limits at affordable housing complexes were also prevented from declining.
HUD abandoned the hold harmless policy this year, allowing published median incomes to decline up to five percent per year. HUD was comfortable doing this in part because the Housing and Economic Recovery Act of 2008 (HERA) adopted a statutory hold harmless policy for existing affordable housing projects which receive Low Income Housing Tax Credits or bond financing. Those existing projects will not see any decreases in allowable rents under the regulatory agreements that accompany those forms of financing.
But that new federal policy does not apply to rent limits set under California redevelopment law or most other municipal programs, which set rent formulas based on current HCD or HUD median incomes. This means that locally imposed rent limits will be dropping in places like San Jose and Stockton, possibly jeopardizing the economics of existing affordable housing projects in those cities that counted on rents never declining. It may also reduce the financing available to new tax credit and bond-financed projects, which may now be underwritten with the assumption that rents will go down before the projects are complete and the federal hold harmless protection begins to apply.
Developers will have a better idea in coming months and years whether drops in median incomes actually threaten the viability of their projects. If they do, there will doubtless be calls for legislative reform, or changes to the way that HCD determines median incomes.
KMTG has prepared printouts of the new California 2010 median income figures, affordable rents and affordable housing costs for a number of California counties. Click here to download a free copy for one or more counties.
By Jon Goetz
KMTG Redevelopment and Housing
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