Beware of zombie entitlements
Updated: Jul 20, 2020
Be careful what you ask for.
It was one of the busiest and most historic intersections in the city.
For years, it had been a sketchy part of town you didn’t want to find yourself after dark. But now you could see the signs of a renaissance everywhere. New restaurants and performing arts spaces were opening, and creative young people were moving in.
On three corners sat tall hotels and apartment towers, all recently remodeled and bustling. But the fourth corner was a mystery. A suspicious fire had burned down a nightclub there ten years ago, and ever since then, the empty lot had been used for valet parking. Taking in enough to pay the property taxes perhaps, but not much more than that. The site was an eyesore, and it was nowhere near its potential, or its “highest and best use” -- as real estate brokers like to call it.
My client was puzzled why no one else had tried to build anything there, so she asked me to look into it.
That’s how I found the zombies.
Land use is regulated by cities and counties using what’s called “police power.” Cities and counties -- and, to a lesser extent, state and regional agencies -- regulate development through policies like zoning, general and specific plans, and, in California, the Subdivision Map Act and the California Environmental Quality Act, or CEQA.
Some of these planning mechanisms are ministerial -- that is, they are based on the application by local government staff of standard procedures for review. Other mechanisms are discretionary -- requiring the deliberation and action of elected or appointed legislative bodies like planning commissions or city councils.
In general, ministerial processes are more straightforward and less complicated. Agency staff use well-established guidelines that usually provide a clear, objective rationale for why a project is either approved or denied.
Discretionary processes are where things get complicated. Politics often gets involved when elected or appointed councils hold public hearings to decide what to do with a project application. They have a lot of latitude when it comes to approving a project. In exchange for giving a project a green light, they can stipulate that a project has to pay special fees or meet special requirements.
An important thing to remember is...a ministerial decision can’t overrule a discretionary one. In other words, once an agency’s legislative council has decided something, its staff can’t change that decision or get rid of it.
Only another legislative action by the same agency can. Which means another public hearing. And more politics.
So it turns out that back when the neighborhood was a seedy part of town -- twenty years ago -- the nightclub owner had gone before the city council to ask for a “conditional use permit” to operate the nightclub. His permit was approved, but only on the condition that he lease at least 100 parking spaces from a neighboring landowner.
No big deal, because land was cheap back then, and not many people went into the neighborhood after dark anyway. So the owner was able to meet the parking condition without too much trouble.
Ten years later, the neighborhood was coming up in the world, and a new owner went to the city council to ask for a new “conditional use permit” -- this time, to expand and renovate the club to make it more upscale. There was a new subway line running 24 hours a day now, so the new owner argued that the parking requirement was no longer necessary since people now had more ways of getting there.
But the city council didn’t agree. The neighborhood had become a popular destination, and parking was tight. So they approved the nightclub expansion, but on the condition that the new owner still provide the 100 parking spaces -- now at much greater expense than before -- at least until an “areawide parking plan” was devised.
In other words, in perpetuity -- since such an areawide plan might never come to pass.
The next year, the fire burned the place down.
But even though the charred building was bulldozed and the empty lot paved over, the parking requirement lived on because the old permits “ran with the land” and bound future property owners by their terms.
Only a new hearing for a new project permit could get rid of that old, outdated requirement, but at what cost?
Like a zombie rising from the grave of the burned-down nightclub, the parking requirement was now a huge, extra expense any developer would need to budget for. It was hard to make any potential project make financial sense with such big uncertainty looming over it.
That’s why the property had sat empty for ten years, and that's why it might sit empty for another ten.
That’s also why you have to be very careful about what you ask for (and agree to) in any permitting process.
It’s tempting to just agree to whatever conditions you need to in order to get the permit you need for your current project and get on with your life.
But it’s important to look down the road and imagine how your business might change. Will your entitlements accommodate your growth or a change in your market? Or will your entitlements put you in a bind?
It’s also important to put yourself in the shoes of a future investor or buyer. Will they value how you managed your entitlements or discount it?
Therein lies the big secret about entitlements: they can easily turn into encumbrances.
If you don’t manage your entitlements correctly, your assets can become liabilities.
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