Los Angeles County Moves Toward New “General Plan” Governing Development for Next 20 Years

The Los Angeles County Board of Supervisors yesterday took the first important step toward adopting a new General Plan, the constitution for land use policy and development for the unincorporated areas of the county.  The County’s current general plan was adopted in 1980.  This update is intended to apply to all the County’s unincorporated areas through 2035.

With little fanfare, the Board took action on the Final Environmental Impact Report for the General Plan update.  The Board also indicated its intent to approve the general plan, related zoning changes, a climate action plan, and a new Hillside Management Ordinance.  County Counsel will now prepare the necessary final documents for the General Plan update and related approvals and bring them back to the Board for final consideration.  Once finally approved, all future development in the unincorporated areas of the County must be consistent with the new General Plan.

The General Plan divides the county into 11 planning areas to accommodate a more refined level of planning.  Those areas are:

  • Antelope Valley Planning Area
  • Coastal Islands Planning Area
  • East San Gabriel Valley Planning Area
  • Gateway Planning Area
  • Metro Planning Area
  • San Fernando Planning Area
  • Santa Clarita Valley Planning Area
  • Santa Monica Mountains Planning Area
  • South Bay Planning Area
  • West San Gabriel Valley Planning Area
  • Westside Planning Area

The General Plan also establishes mechanisms to implement capital improvement plans for each of these 11 planning areas.  Once funding has been secured and priorities have been set, each capital improvement plan will include studies of necessary infrastructure improvements.

The General Plan also establishes Transit Oriented Districts within one-half mile of a transit station to promote transit-oriented development, or pedestrian-friendly and community-serving uses that encourage walking, bicycling, and transit use.

A sub-element of the plan — the Community Climate Action Plan — includes a greenhouse gas emissions inventory and specific measures to reach the County’s greenhouse gas emission reduction goals in the unincorporated areas. The plan includes a 2020 GHG emissions target for the unincorporated areas — a reduction of 11% below 2010 levels to achieve consistency with the State’s AB 32 goals and the California Air Resource’s Board’s Scoping Plan.  This reduction is the equivalent to removing 506,000 passenger vehicles from the road each year, reducing gasoline consumption by more than 272 million gallons, and providing renewable energy to power over 121,000 homes.  The majority of emissions reductions will come from state-level mandates, and the balance will come from new County policies in five areas:  green building and energy; land use and transportation; water conservation and wastewater; waste reduction, reuse and recycling; and land conservation and tree planting.

The plan sets aside additional land in the County with a “Significant Ecological Area” designation.  The designation is given to land that contains significant biological resources.  Some SEAs include undisturbed or lightly disturbed habitats that support valuable or threatened species, linkages and corridors to promote species movement, and are sized to support sustainable populations of species.  Hillside Management Areas, or lands with a natural slope of 25% or greater, are also governed by new policies to incorporate sensitive hillside design measures to preserve the physical integrity and scenic value of the hillsides.

The action taken by the Board included an amendment offered by Supervisor Hilda Solis, requesting that the Regional Planning Commission report back to the Board in 90 days on the viability of including “value capture” policies in future land use planning.  Value capture mechanisms, as commonly understood, allow local governments to require land owners to “share” the economic value created by “upzoning” changes to land use entitlements, over and above revenue that may be generated by simple increases property taxes when a new structure is finished.  It will be interesting to see how the staff reports back on this issue.

Crowdfunding Your Real Estate Project — Current Opportunities and Future Prospects

Real estate investors and developers are increasingly looking to raise money for their projects through “crowdfunding,” as legal and regulatory issues become better understood.

In the real estate context, “crowdfunding” is the raising of funds for a project through the use of social media to obtain contributions from many individuals.  Technically, each one of these investments in a real estate project by individuals is considered the purchase of a “security” from the project sponsor under federal law and regulations.  In the U.S., a project sponsor cannot offer to sell a “security” to the public without either registering the security with the U.S. Securities and Exchange Commission (a time-consuming and expensive process) or qualifying for an exemption from registration.  Therefore, the goal of any project sponsor is to structure the investment opportunity so that it qualifies for an exemption.

In the real estate context, there are several different ways of implementing a “crowdfunding” strategy.  This article will briefly address one of the most popular crowdfunding structures being used today in commercial real estate to reach high income investors and the current status of “true” crowdfunding rules.

Regulation D/Rule 506(c) “Crowdfunding” Offerings  

Most “crowdfunding” real estate investments are structured using a modified form of fund-raising that has been around for a long time. Crowdfunding offerings structured with Regulation D/Rule 506(c) allow unlimited capital to be raised from an unlimited number of “accredited investors.”   So-called “accredited investors” are those who have a net worth of more than $1 million or whose annual income exceeds $200,000 individually or $300,000 for a married couple.

Under prior law, Regulation D/Rule 506 private placements had a clear prohibition on any sort of marketing effort beyond family and friends to whom there was a prior relationship.   New rules issued in September 2013 pursuant to the JOBS Act now make it possible to market directly to investors through a number of mediums, including the internet.

With the new freedom to market comes a new responsibility for the project sponsor, who must now use validation mechanisms to confirm that accredited investors actually meet the financial requirements in order to participate in the offering. While some may shy away from this latter validation exercise, those with greater courage will see that this financing method opens up huge possibilities for financing real estate projects that have a compelling business plan.

True “Crowdfunding” — Not Here Yet!

True “crowdfunding” over the internet from small individual investors who are not so-called “accredited investors” is not here yet, as regulations have been proposed, but not yet finalized by the SEC.  Those regulations are tied to a provision of the federal JOBS Act that exempts issuers from registration requirements when an issuer offers a maximum of $1 million in a 12 month period in crowdfunding securities and other conditions are satisfied.  All of the conditions can’t be listed in this short article, but some of the key issues are:

  • Issuers of the crowdfunding securities must use the services of an intermediary that is either a broker registered with the SEC or a “funding portal” registered with the SEC.  A funding portal cannot (i) offer investment advice, (ii) solicit purchases, sales or offers to buy securities offered or displayed on its website portal, (iii) compensate employees for solicitation or sale of securities displayed on its website, (iv) hold investor funds or securities or (v) engage in other SEC banned activities established by rule.
  • Dollar limits are placed on the aggregate amount that can be sold to any one investor, generally $2,000 or less depending on income.
  • A targeted offering amount is disclosed.
  • The intermediary must ensure that each investor reviews investor-education information.
  • The intermediary must conduct background checks on the project sponsor.
  • Funds raised may only be provided to the project sponsor when the target offering amount is reached, although there is some ambiguity.
  • Purchased securities cannot be transferred during the one year period after the date of purchase, unless transferred to the issuer, to an accredited investor, as part of a registered offering, or to a family member.

Crowdfunding is here for real estate project sponsors seeking investments from accredited investors.  However, true democratization of real estate investing through crowdfunding is still awaiting final SEC approval.  In some states today, other than California, other crowdfunding mechanisms may be available, such as Regulation D/Rule 504 or Regulation A structures in conjunction with applicable state laws.  However, legislation in California that would allow full use of these structures is still working its way slowly through the California Legislature.

Real estate project sponsors have a means of eliminating financing intermediaries — traditional private equity and banking sources — if they can well articulate the risks and benefits of their opportunity in a compelling private placement.  With access to an open field of potential investors over the internet, ambitious real estate investors and developers could use this tool to their advantage to find financing at attractive pricing.  At what price should project sponsors go to market with these new creative strategies?  As the market further develops for crowdfunded real estate opportunities, only time will tell.

California Supreme Court Will Hear Suit On SANDAG’s Transportation Plan

The California Supreme Court will decide whether the environmental impact report for SANDAG’s regional transportation plan must include an analysis of the plan’s consistency with statewide greenhouse gas emission reduction goals established by executive order. The San Diego Association of Governments (“SANDAG”) brought the appeal in Cleveland National Forest Foundation v. San Diego Association of Governments.

This is an important case to watch.  Greenhouse gas emissions analysis will become more complicated and expensive for local government agencies and project applicants if consistency with the executive order is required.

In 2005, Governor Arnold Schwarzenegger issued Executive Order S-3-05, establishing greenhouse gas emissions reduction targets for California.  The executive order required reduction of greenhouse gas emissions to 2000 levels by 2010, to 1990 levels by 2020, and to 80 percent below 1990 levels by 2050.  This executive order, still effective today, was at issue in the case.

SANDAG is the public body charged with preparing a regional transportation plan and sustainable communities strategy for the San Diego region. The proposed plan is the guidance document for transportation investment of approximately $214 billion over the next several decades.

SANDAG prepared an EIR to analyze the environmental impacts of the proposed transportation plan.  The EIR was held defective by the lower court for several reasons, but the most controversial reason related to the EIR’s discussion of the plan’s greenhouse gas emissions.  While the EIR did include a lengthy discussion of the plan’s greenhouse gas emissions impacts, the EIR did not specifically analyze whether the overall increase in greenhouse gas emissions levels disclosed by the plan conflicted with the executive order or would impair or impede the achievement of the executive order’s goals.  The court held that SANDAG’s decision to omit an analysis of the plan’s consistency with the executive order “did not reflect a reasonable, good faith effort at full disclosure and is not supported by substantial evidence because SANDAG’s decision ignored the Executive Order’s role in shaping state climate policy.”

SANDAG argued that the court was asking it to do something that CEQA did not require.  There is no statute or regulation translating the executive order’s goals into scientifically based emissions reductions targets.  The EIR’s analysis of the transportation plan’s greenhouse gas emissions impacts complied with CEQA because it used significance thresholds specified in CEQA Guidelines section 15064.4.  Moreover, SANDAG argued that, as the public agency with applicable authority, it had the discretion to select the criteria to determine the significance of the plan’s greenhouse gas impacts.  We will see if SANDAG takes up these arguments again with the high court.

The California Supreme Court may also answer an important question raised by the dissent in the lower court case:  whether Executive Order S-3-05 is a threshold of significance, as understood by CEQA.  A “threshold of significance” is an objective, criteria or procedure used to measure or determine the significance of the environmental effects of a project.  Thresholds of significance must be adopted through a public review process.

The dissent argued that there is no authority for the proposition that the Governor has the power to establish thresholds of significance, qualitative or quantitative.  Rather, the Legislature has retained control over the regulation of environmental planning, vesting responsibility in the California Air Resources Board in particular to help implement greenhouse gas emissions policy.

This latter, exciting “separation of powers” issue is more apparent than real.  The executive order established greenhouse gas emissions targets, certainly.  But was the governor’s executive order intended to have a CEQA purpose? More specifically, was it intended to establish a threshold of significance?  Since all seven members of the Supreme Court voted in favor of taking this case, could this suggest that they are willing to take on this tough issue raised by the dissent?

Court Protects CEQA Categorical Exemptions by Limiting Unusual Circumstances Exception

Real estate developers who have opponents alleging that CEQA exemptions are unavailable to them because the environmental impacts of their projects alone are unusual won an important victory this week in the California Supreme Court.  Even if a project has negative environmental impacts, a categorically exempt project is spared from CEQA review so long as the project itself is consistent with the class of projects that typically qualify for the exemption, the Court held.

The Court’s holding is an important victory for developers and public agencies. Both will have an easier time relying on so-called “categorical exemptions,” which exempt a proposed project from California’s Environmental Quality Act (“CEQA”).  Categorical exemptions are classes of projects that are exempt from complying with the environmental study procedures of CEQA because, as a policy matter, the projects are unlikely to have a significant impact on the environment.  Developers and public agencies rely on categorical exemptions to streamline the processing of projects and more efficiently use public resources on other projects that are likely to have significant environmental effects.  Project opponents, on the other hand, often seek to disqualify a project from using a categorical exemption so that CEQA review is required.

Berkeley Hillside Preservation v. City of Berkeley concerns a property owner who sought approval to build an almost 6,500 square foot house with a separate 10-car garage on a steep, wooded slope in the hills of Berkeley, California.  The homeowner claimed that the project was exempt from environmental review because it qualified for two “categorical exemptions:” one for single family residences and another for in-fill development projects.  The City of Berkeley agreed with the owner and approved the project.

Opponents of the project sued, arguing that the homeowner’s claimed categorical exemptions could not be used because an “exception-to-the-exemption” in the state’s CEQA regulations says:  “A categorical exemption shall not be used for an activity where there is a reasonable possibility that the activity will have a significant effect on the environment due to unusual circumstances.”  This “unusual circumstances” exception-to-the-exemption attack is frequently used by project opponents in an attempt to “backdoor” a project into CEQA review.

In this case, the argument was over how to interpret the text of the unusual circumstances “exception-to-the-exemption.”  Opponents were able to persuade the lower courts to hold that the fact that a proposed project may have a significant impact on the environment is itself an unusual circumstance that renders a categorical exemption inapplicable.  Fortunately, the California Supreme Court did not accept that interpretation, reasoning that opponents and the lower courts did not give meaning to all of the words in the exception:  the significant effect must be due to unusual circumstances.

Going forward, if a project opponent sues arguing that the “unusual circumstances” exception applies, a reviewing court must apply a two-step inquiry. First, a court must determine whether a particular project presents circumstances that are unusual for projects in the class described in the categorical exemption.  In making this evaluation, the court applies a “substantial evidence” standard of review.  After resolving all evidentiary conflicts in the public agency’s favor and indulging in all legitimate and reasonable inferences to uphold  the finding, the court must affirm the agency’s decision if there is any substantial evidence, whether contradicted or uncontradicted, to support it.

In light of this first prong, developers and public agencies will do best to place in the record evidence and reasoning showing how the project under consideration is typical for its class.  Project opponents may introduce evidence in the record that the environmental effects of the proposed project tend to show that the project is unusual for its class; however, that evidence alone is not dispositive of the issue. Therefore, it is crucial for the public agency to make a specific finding of fact that the project does not present “unusual circumstances.” A specific finding made by a public agency in light of the evidence in the record will be entitled to great deference at this step in the analysis. This is important, because if a person relying on a categorical exemption prevails on the first prong of the test, the inquiry ends.

The second prong of the test is whether there is a reasonable possibility that the unusual circumstance will produce a significant effect on the environment.  In making this evaluation, the court reviews the record.   If substantial evidence supports a “fair argument” that there is a reasonable possibility of a significant effect on the environment due to the unusual circumstance, then the “exception to the exemption” would be triggered.  The claimed categorical exemption cannot be used to exempt the project from CEQA review.

The “fair argument” standard should be familiar to CEQA practitioners. It is the same standard under which an agency must prepare an EIR whenever substantial evidence in the record supports a fair argument that the project may have a significant effect on the environment.  The “fair argument” standard has killed many negative declarations prepared by public agencies that may not have relied on a carefully prepared record of decision.

The Court’s decision in the Berkeley Hillside Preservation case was eagerly awaited by CEQA practitioners.  Its impact will be felt not only in the single family residential and urban infill context, but also in every case in which a categorical exemption is relied upon by a project applicant and a local government body.