SAN FRANCISCO-Distressed real estate is about the only realestate game in town these days. And there’s lots of it. One of thekeys to knowing whether to take it back or invest in it isassessing its value. And according to Howard Ellman, an attorney inthe San Francisco office of Buchalter Nemer, when the real estateis a broken development project, the project’s value dependsentirely on how it can be used. How it can be used, in turn,depends on what government agencies have permitted. And accordingto Ellman, those permits are not simple, static or free.

| What is the status of the entitlements?Are some at risk of expiring? What will it take to get anextension? Is one possible, legally andpolitically?


Ellman: The various entitlements necessary tobuild a project are never all issued at the same time. Particularlybefore construction commences, knowing which entitlements have beenobtained, and which have not that could be show-stoppers, iscritical. Many entitlements have an automatic expiration if somesubsequent hurdle is not crossed. These include subdivision maps,use permits and building permits. Automatic expiration means theentitlement—and the real value that entitlement created—is lost. Itis critical to understand when the entitlements expire and what itwill take to prevent expiration. The government may or may not havethe legal authority (or political will) to extend or reissue theentitlement. Extending or reissuing also may not be free; thegovernment may want additional fees or exactions in return. Lastly,government extension or reissue of an entitlement triggersenvironmental review under the California Environmental QualityAct. That review may be perfunctory or extensive, short or long,cheap or costly. Review at all exposes the project to legalchallenges by any lurking opponents of the project (neighborhoodgroups, environmentalists, etc.).

| What government-required conditionsmust be satisfied to complete the project? What will it cost tosatisfy those conditions? How long will it take?


Ellman: Land use entitlements almost alwayscome with strings attached. Those strings are called conditions ofapproval. Essentially, the government says, for example, “Here’syour right to subdivide. Before you can do so, however, you mustsatisfy these 100 conditions.” Many conditions are not difficult orcostly to satisfy. Others are. Some can require the cooperation ofother property owners (e.g., the need for an easement across someother person’s land) or the permission of some other governmentagency (e.g., a permit from the US Fish and Wildlife Service).These types of conditions can give others a significant degree ofcontrol over whether the project succeeds. Identifying thoseconditions and what risks they carry is critical.


Identifying which conditions have been satisfied and which havenot is equally important. This is not always easy. A recorded finalsubdivision map, an issued building permit or even a completedproject does not necessarily mean that a project has paid all itsfees, or satisfied all its mitigation or exaction obligations. Acareful review of the entitlements documents and the government’sfile is necessary. Statements of government staff that a conditionhas been satisfied should be validated with some independentwritten evidence. Staff statements or comments do not bind thegovernment.

| Is the government attempting to changethe rules applicable to the project? Can they? If so, does the rulechange impact the project timeline or cost? Are there anygrandfathering protections?


Ellman: If a project is not completelyfinished, changes in law since a loan or equity investment wasunderwritten could trigger additional costs and/or obligations thatmust be satisfied to complete a project. For example, a schooldistrict may have increased its school mitigation fees, a city mayhave passed a green building ordinance that increases constructioncosts or a county could have adopted more stringent/costlyrequirements for storm water drainage. Even where laws have notchanged, and change in underlying facts could trigger applicationof pre-existing law. As an example, a project built as condos butrented instead might be forced by the local city to go back throughthe local subdivision process before those condos can be soldbecause of legal protections for renters. Importantly, there may bedefenses to all these types of attempts to change the rules and/orapply existing rules to changed facts.

| Who is best equipped to satisfy theremaining conditions, obtain remaining approvals and/or getextensions? Borrower/developer? Lender/investor? Some third party?What are the relative risks?


Ellman: The risk of leaving the property in theborrower/developer’s hands to satisfy the remaining conditionsand/or complete the project work must be weighed against the risksattendant to the lender/investor becoming directly involved.Getting directly involved could risk construction defect orhazardous materials liability. On the other hand, theborrower/developer may no longer have sufficient staff and/or mayhave lost political credibility with the government agencies.

| Is it possible to reposition orre-entitle the project?


Ellman: A project as entitled may beunmarketable or would have greater value with differententitlements. If so, it is critical first to understand theexisting entitlements. There may be an opportunity to refocus theproject within the scope of the existing entitlements with aminimum of government approval hassle. For example, if theapprovals were for an age-restricted condominium project, perhapsconverting to an apartment project (either age-restricted orun-restricted) is possible. Even if the existing entitlements aretoo specific to allow very simple repositioning, the governmentstill may be willing to issue new/modified entitlements. If so, itis important to assess the likelihood of getting the entitlementsand the associated time, cost and risk (including litigation riskfrom third party challenges such as neighborhood and environmentalgroups).

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Natalie Dolce

Natalie Dolce, editor-in-chief of and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel,, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including and Museums New York magazine.