Land Use Development in a Time of Distress: Preserving Entitlements
- Entitlements typically are valid for a defined period of time (either by contract or law), and will expire unless the project either achieves certain benchmarks or is granted extensions.
- Preservation of necessary entitlements often can be more difficult than winning initial approval, but ensuring their continuity is almost always more favorable than allowing them to expire.
- If approvals lapse, or if any special conditions of approval are not completed prior to the applicable deadlines, the government may be under no obligation to reinstate discretionary approvals, and leaders may be less inclined to support the project.
The Bottom Line
Although the cost of maintaining a non-performing asset will seem daunting, attention to the maintenance of the project’s entitlements, to the site’s safety, and to the project’s relationship with the community will prove invaluable when it comes time to move forward.
The current economic climate has cast a shroud of uncertainty over many development projects, both proposed and under development.
Owners and developers–stalled by the threat of a recession and escalating interest rates–may be faced with the grim reality of suspending or abandoning a project, which may present greater legal challenges than starting a project from the ground up.
Although the cost of maintaining and investing in a non-performing asset will seem daunting, attention to the maintenance of the project’s entitlements, to the site’s safety, and to the project’s relationship with the community will prove invaluable when it comes time to move forward with the project or to position it for sale.
Constructing a new project typically requires the owner and/or developer to go through an entitlement process. A variety of government agencies review the proposed project according to applicable codes and policies, including master plan and zoning issues, utility commitments, and compliance with building and fire codes. Since entitlements typically are valid for a defined period of time (either by contract or law), they will expire unless the project reaches certain benchmarks or is granted extensions. When financial pressures put a project on hold, these approvals require continued attention in order to prevent the entitlements from lapsing.
The preservation of necessary entitlements often can be more difficult than securing initial approval, but ensuring their continuity is almost always more favorable than allowing them to expire. When applications for approvals are submitted, the required development reviews are based upon the codes and regulations in place at the time of application. If the approvals expire, an applicant may need to comply with new codes and regulations, and a change in those codes may require changes to the project itself.
It also is important to recognize that many of the key approvals required for the construction of a project are discretionary. A project that had the support of community leaders and the surrounding neighborhood when first proposed may not have that support years later when the project requires an extension or re-entitlement. For example, a project involving construction in an undeveloped area initially may receive no community opposition and receive a unanimous vote of approval for its land use applications. But years later−when the surrounding neighborhood has been developed with homes, schools, and churches−the project may attract widespread opposition. This can be true even though millions of dollars have been spent prior to the suspension of the project.
If approvals lapse, or if any special conditions of approval are not completed prior to the applicable deadlines, the government may be under no obligation to reinstate discretionary approvals, and leaders may be less inclined to support the project at all−or without substantial revisions that can greatly reduce the viability and profitability of the project.
Public perception and community support may be particularly difficult to address when approvals contain special conditions requiring off-site improvements or other amenities benefiting the surrounding neighborhood that have not been completed. Agreeing to such amenities may have seemed a small price to pay for community support when the economy was good, but when money becomes scarce it is difficult to allocate funding to non-revenue-generating improvements. If the cost of these amenities appears to be a deal-breaker, special negotiations may need to take place to determine whether entitlements can be changed to keep the project viable.
Government agencies also may be subject to impediments that can limit their ability to reinstate (or extend significantly) approvals under the terms previously granted, especially in the case of building permits and utility commitments. Building permits carry separate expiration dates from zoning entitlements and typically require that certain construction and inspection thresholds be met in order to remain active. Failure to satisfy these progress thresholds can lead to a cancellation of the permits and create a need to go through the entire process of submitting plans and paying permitting fees.
In addition, building codes are regularly updated in order to keep pace with new developments in safety and efficiency. If the version of the International Building Code used by the issuing building department has changed since the project was originally designed, plans may need to be updated to bring the development into compliance with the new code. Potentially more problematic, certain portions of the project that already have been constructed may require remediation to satisfy the updated requirements. While a certain amount of leeway may be available under waiver or hardship provisions, circumstances may exist where life-safety requires that the updates be made. Further, state or federal standards may make some waivers difficult or impossible to obtain.
Utility connection approvals obtained at the commencement of the project normally provide a guarantee that service will be available for a certain period of time. If that clock runs out, service commitments can be withdrawn and may require significant effort and cost to re-establish. Changed conditions also may create significant burdens to replacing utility connections if the originally anticipated construction date passes and the project can no longer follow its construction plan. Capacity in the original connection points may have been exceeded by other development. Cost sharing for mutual improvements in public rights-of-way may no longer be available. A project without utilities is worthless, and selling the project or obtaining financing for completing construction will be difficult to promote if there is any risk that utilities may not be available.
Keeping the site safe and secure will improve the prospects of the project’s ultimate success. It is important to prevent conditions that could constitute an attractive nuisance or create liability for injury. It is also critical to keep the property clean and free from disrepair or vandalism that could result in nuisance citations or liens. If the property isn't fenced, install one. Dangerous or unsightly conditions at the site also are likely to create a disincentive among neighborhood and government officials charged with reviewing and approving entitlements. It also is important to confirm that appropriate maintenance to the existing improvements is performed regularly. Records of this maintenance will be invaluable when it comes time to re-commission the project and prove to the building department that the portion of the project that already has been constructed remains safe. If any machinery or equipment is left on the property, care must be given to its safekeeping.
Periodic communication with project partners and regulatory entities is critical to maintaining control during times of uncertainty. Regular consultation with the various governmental departments charged with the oversight of construction projects can help prevent unpleasant surprises: With a little notice and forethought, municipal officials, developers, and lenders can usually develop a joint course of action.
What happens next?
Maintaining good relationships with governmental authorities is particularly important to preserving entitlements on troubled projects.
Suspending construction can create wide-ranging problems. The most obvious and immediate relate to contractual issues with lenders, contractors, and suppliers. But the long-term problems associated with preserving entitlements cannot be overlooked. Owners, developers, lenders, and lien-holders all have an interest in avoiding the waste that can occur if the project entitlements are not carefully tended to and preserved.
Attorneys must remain vigilant to protect their clients’ interests during a time when many are content to simply wait for the economy to improve with the hope that abandoned projects can be restarted without consequence. The cost of inattention can range from total extinguishment of development rights to expensive and difficult modifications of existing construction to comply with new building codes.
Ballard Spahr's multidisciplinary Distressed Assets and Opportunities team is ready to meet clients where they are and assist through the turbulence of a macro economy where the cost of capital is likely to continue to increase over the foreseeable future, and its availability may become further constrained, creating both challenges and opportunities.
Ballard Spahr is a recognized national leader in Real Estate—serving clients in every segment of the industry. With across-the-board strength, regional market knowledge, and a strong national platform, we can assist from zoning and land use through acquisition, development, and lease-up. Please contact us for more information.
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