New Sea Level Rise Policies Will Have A Major Impact on California Coastal Development

The California Coastal Commission adopted this week a new, major statewide policy document to help guide its decision-making when analyzing the impact of sea level rise on new permit applications and coastal land use plans.

The nearly 300-page policy document analyzes current science, technical information and best practices in a single resource to help coastal regulators at the state and local level.  While the document is intended by the Commission to guide planning and development decisions, it is advisory and does not alter or supersede existing legal requirements, such as the dictates of the California Coastal Act and certified local coastal programs.  (“Local coastal programs” are the land use regulatory documents prepared in accordance with the Coastal Act that govern land use and development in the coastal zone.)  In practice, the document will likely establish the beginning design or negotiating position with staff, unless project applicants or local governments have a persuasive case that varying from the policy document is warranted.

When should sea level rise issues be evaluated?

Sea level rise should be considered in the project analysis when the project or planning site is:

  • Currently in or adjacent to an identified floodplain.
  • Currently or has been exposed to flooding or erosion from waves or tides.
  • Currently in a location protected by constructed dikes, levees, bulkheads, or other flood control or protective structures.
  • On or close to a beach, estuary, lagoon, or wetland.
  • On a coastal bluff with historic evidence of erosion.
  • Reliant upon shallow wells for water supply.

New 5.5 Foot by Year 2100 Sea Level Rise Standard

The Commission has concluded that the “best available science” on sea level rise projections today can be obtained from the National Research Councils 2012 Report, Sea-Level Rise for the Coasts of California, Oregon and Washington: Past, Present and Future.  For most of California, regulators will be starting with a 5.5 foot sea level rise by year 2100 assumption, as shown in the following table.

Sea Level Rise Projections for California.  Year 2000 as baseline.

Time Period North of Cape Mendocino South of Cape Mendocino
By 2030 -2 to 9 inches

(-4 to 23 cm)

2 – 12 inches

(4 – 30 cm)

By 2050 -1 to 19 inches

(-3 to 48 cm)

5 to 24 inches

(12 to 61 cm)

By 2100 4 to 56 inches

(10 to 143 cm)

17 to 66 inches

(42 to 167 cm)

The policy document recommends that coastal regulators use a precautionary approach by planning and providing adaptive capacity for the highest amount of possible sea level rise.  The Coastal Commission has used for many years a sea level rise assumption of 3 feet when evaluating shoreline projects.  Now, new development and redevelopment will likely have to design and plan for 5.5 foot sea level rise at the property, unless other contrary evidence can be provided to the NRC study or unique coastal processes exist for the property in question.

Selected Sea Level Rise Policy Recommendations

An exhaustive analysis or restatement of the policy guidance document is beyond the scope of this article.  However, real estate owners and developers in the coastal zone should keep the following new Commission policies in mind:

  • Permitting authorities should avoid siting development within areas vulnerable to flooding, inundation, and erosion, so that long-term shoreline protective devices are unnecessary.
  • Continuing a controversial policy, new development and redevelopment generally may not use bluff retaining or shoreline protective devices.
  • Local Coastal Programs should encourage and require redevelopment to be brought into conformance with current sea level rise standards, including removal of seawalls or other armoring.
  • New development should be approved with conditions that require future modification, relocation, or removal of buildings when they become threatened with natural hazards, including sea level rise.
  • Improvements to existing at-risk structures should be limited to basic repair and maintenance. Permitting agencies should not allow property owners to extend the life of such structures or expand-at risk elements of the development, consistent with the Coastal Act.
  • Continuing and formalizing another policy, local coastal programs and coastal development permits should require recorded assumptions of the risk, “no future seawall” conditions, and/or other appropriate mitigation measures that require the private property owner to internalize the risk of developing in the coastal zone.
  • When sea level rise causes the public trust boundary to move inland so that a protective device that was located on uplands becomes subject to the public trust, the property owner should either obtain permission from the applicable governmental agency or apply for a permit to remove the encroachment.
  • For impacts to sand supply or public recreation due to sea walls or revetments and the loss of sandy beach from erosion in front of shoreline protection devices, require commensurate in-kind mitigation, a sand mitigation fee, and other necessary mitigation fees.

This is only a small sample of the issues raised by the sea level rise policy document. Before seeking a coastal development permit on or near the shoreline, property owners should carefully review the policy guidance document with counsel.  Going forward, project costs will likely be increased – both at the planning and design stage and at the construction stage.

In addition, this policy document is the most recent policy pronouncement that coastal regulators may use to pursue so-called “managed retreat” of private development so that a public shoreline can come into being over time as sea levels rise.  As the policy document points out, federal and state takings law may be triggered in the particular case.

These new changes will have a significant impact on future permitting in the coastal areas of California. We will see how these new policies are implemented by state and local government and, if necessary, challenged by real estate owners and developers.

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.