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Los Angeles Daily Journal As development fires back up, cities overhaul zoningAugust 13, 2014

Article first appeared in the Los Angeles Daily Journal - Top Development Supplement.

As the real estate market continues to recover, the faces of many California cities are changing more dramatically than they have in several generations past. With a massive development surge, cities such as San Francisco are tweaking their zoning codes, and some, such as Los Angeles, are taking the opportunity to undergo the first complete overhaul of their codes in many decades.

For many municipalities, these changes are coming with growing pains and legal headaches. Outdated zoning provisions present major hurdles for infill development plans, and constrain the tools used to spur such projects, lawyers say.

High on the list of concerns for many cities in modifying their codes is a process involving the transfer of development or density rights, in which a developer who has already received approval to build a project on one site can transfer that right to another location. Typically the transfer is accompanied by some type of payment to the city in the form of community benefits like street beautification, libraries or parks.

Fernando Villa, land use partner in the L.A. office of Allen Matkins Leck Gamble Mallory & Natsis LLP, said the market for the transfer of density rights remained moribund during much of the recession. As the economy continues to improve, such programs are bouncing back.

"The growth in commercial real estate activity has increased a new market for programs like the transfer of density rights," Villa said. "Many developers need these tools."

Jerold B. Neuman, a partner in Liner LLP's real estate, land use and government department, said that as cities create greater density and their zoning laws do not allow for that density to be fully utilized, pressure intensifies to take the density from underutilized properties and transfer it to where density is needed, most often near transit lines.

"As the pressure for mass transit grows, the conversation to create alignment throughout cities has to happen," Neuman said.

But with a possible rise in the transfer of development rights come various legal worries and pitfalls. Villa cited concerns about propriety, the constitutionality of the conditions under which the transfer is agreed upon, and concerns from the community.

Benjamin M. Reznik , chair of Jeffer Mangels Butler & Mitchell LLP 's government, land use, environment and energy department, is currently involved in litigation regarding the legality of a density rights transfer in L.A.

In the suit, Reznik's client, the Beverlywood Homes Association, alleged that developer Casden Properties' plans for a proposed high-rise housing project in West
L.A. ignored zoning laws that did not permit a rights transfer in the in the area.

The transfer of density rights can only be done where a city has allowed it by ordinance. Century City and portions of downtown L.A., for example, have specific plans outlining how and when the transfer can be used. Reznik said Casden's project was outside of these designated areas.

In response, the developer backed down and reduced the project so that the transfer tool was not necessary, Reznik said. Beverlywood Homes Association vs. City of Los Angeles, BS144600 (L.A. Super. Ct., filed Aug. 22, 2013).

"There are other instances where the transfer of density rights are appropriate," Reznik said. "But this was an illegal abuse of that tool."

But the case remains as an example of how such tools can conflict with zoning laws and also how some cities - especially those that remain financially strapped after the downturn - may take advantage of such programs to fund other projects that aren't related to a development .

"The temptation looms large for some cities to use transfer of development rights to fund something that shouldn't be funded, or which has no relationship to the project," Villa said.

That's why, Villa said, the transferee or developer should proceed very carefully and should have counsel advise it to make sure that what the city is doing is lawful.

Outdated zoning provisions often present roadblocks in real estate work, said Edward J. Casey , a partner at Alston & Bird LLP in Los Angeles. Many developers are looking to modify the entitlements they received right before the real estate market crashed, but old zoning provisions and CEQA issues make it harder to achieve.

"All of that sudden what seemed to be common sense becomes a bit of an ordeal," he said.

Earlier this year, the Los Angeles planning department kicked off Re:Code L.A., a comprehensive revision of the city's zoning code, which was first adopted in 1946 and has not changed dramatically since. A complete revision is expected by 2017.

Part of Re:Code L.A. includes a recommendation to look over the development transfer provision to see if it could be redirected to better suited certain areas, as well as develop a more systematic approach to how the payments are made and what they are used for.

While the transfer of development rights has been successful in designated spots in L.A., Casey said, there are still some concerns, including if it is happening in places that are beneficial to the city, and if the payment for the rights is being used in the right way.

Casey said he is encouraged by L.A.'s effort to redo its zoning codes but realizes there are tough policy issues to work through.

"Whether or not we will be able to sort through those in a way that moves us significantly ahead I don't know," he said.

Another problem posed by outdated zoning laws are limits placed on the floor area ratio for new developments, Neuman said. Downtown L.A.'s general plan, for example, allows developers a floor area ratio - a building's total floor area divided by the size of the land on which it is built - of 6 to 1, but most areas are zoned to half of that.

Neuman is currently working on two projects in Downtown L.A. in which he intends to file an application to remove the artificial caps and then apply for a transfer of density rights. He has previously had success removing artificial caps in similar ventures in Hollywood, where there is no transfer of density process.

The variation of zoning codes from city to city also causes headaches. In San Francisco, the transfer of development rights is coupled with historic preservation.
Steven L. Vettel, a land use partner at Farella Braun & Martel LLP in San Francisco, said the only properties in the area that can sell transferable development rights are those with historical or architectural significance.

But because there are only so many historical buildings, the city is looking at other ways of increasing allowable density, Vettel said. For example, the area near a new Transbay Transit Terminal on Mission Street has been extensively rezoned for new development, and in that area additional development rights can only be obtained by paying a fee to the city to support neighborhood infrastructure.

Vettel said he is currently handling projects in high-rise districts that are have been significantly "upzoned" - changing the zoning designation of a neighborhood to allow taller buildings - for new infill development.

"Older codes tend to conflict with a lot of new thinking about infill development, such as reducing or eliminating parking requirements," Vettel said. "In parts of the city that have not been rezoned recently, there is often a need to update the codes to facilitate smart development."

John P. Erskine, partner at Nossaman LLP in Orange County who represents landowners and developers, said new higher density developments, particularly infill
projects, often create significant tensions in established communities, leading to challenges for land use attorneys and their development clients.

"Developers' counsel must be sensitive to existing residents, who are generally in favor of maintaining the status quo," he said. "It takes an experienced project team that has 'been to the movie' to anticipate objections to more dense residential product."

In Orange County, cities have allowed developers to use a variant of the classic transfer of density rights that essentially reallocates zoning density from one parcel to an adjoining parcel within the same community planning or statistical area. Erskine served as land use counsel on a recent mixed use infill development in Newport Beach that utilized this type of density transfer.

Erskine said that while planners and developers like such mixed-use infill projects, community concerns must be carefully addressed in the California Environmental
Quality Act documents.

Villa and others anticipate that the transfer of development rights and other such tools will come up with more frequency as urban sprawl is discouraged and infill development increases. More developers and property owners are resorting to transfer tools to reposition, increase, or enhance the value of a property.

"If we look at urban infill development as a driver of commercial growth, the prospects for increased work in the transfer of development right is significant," Villa said.