Real Estate, Land Use and Environmental Law Blog

California Commercial Building Owners Must Comply With New Energy Use Disclosure Rules Commencing July 1, 2013

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 01 May 2013 16:44:43 +0000

What you need to know:

The long-awaited energy use disclosure requirements, first enacted as AB 1103 (Saldana) in 2007 (codified as California Public Resources Code, §25402.10), are finally effective. Commencing July 1, 2013, owners of commercial, non-residential buildings in excess of 50,000 square feet will be required to track and disclose detailed information regarding energy consumption at each building. The reporting requirements will be extended to buildings in excess of 10,000 square feet commencing on January 1, 2014; and to buildings in excess of 5,000 square feet on July 1, 2014.

Initially, official disclosure is required only in connection with the following events: (i) sale of the building, (ii) leasing the entire building, or (iii) financing the entire building. In order to comply, you must disclose the energy usage for the building within 24 hours of execution of a lease or sale agreement or upon submittal of a loan application, as applicable.

The required disclosures include the following documents, forms of which are available on the United States EPA’s Energy Star® website as referenced below:

Disclosure Summary Sheet
Statement of Energy Performance
Data Checklist and Facility Summary

In order to comply with these newly effective requirements, a commercial property owner must be registered with the United States EPA’s Energy Star® Portfolio Management program at least 30 days in advance of a required disclosure.

Background:

AB 1103 was enacted in an effort to promote energy efficiency in California by providing a system to compare the energy usage of similar buildings. The objective of the legislation is to encourage property owners to implement procedures to reduce energy consumption and to give prospective tenants, purchasers and lenders information regarding energy expenses in order to provide an accurate valuation of the subject property.

Documents and information regarding the required disclosures are available on the United States EPA’s Energy Star® Portfolio Management website (https://www.energystar.gov/istar/pmpam/). The website also has some useful tools to familiarize building owners with the Portfolio Manager program, including training webinars, fact sheets and answers to frequently asked questions.

There is no fee for registration through the Portfolio Management program. As part of the registration process, the building owner or property manager will need to request that its utility company provide the building’s utility data for the most recent 12 month period to the building’s Portfolio Manager account. The regulations do allow that an owner may provide an approximation of the data necessary for disclosure but the owner must be able to demonstrate that it has made a reasonable effort to obtain the information and must clearly identify any such data as an approximation.

Action required:

Although at present commercial property owners are not obligated to make disclosures on a regular basis, we recommend that owners commence compliance in order to be prepared in advance for any sale, financing, or, if applicable, full building lease. The Energy Star® website will undergo a major redesign and restructuring in June 2013 in order to provide the necessary platform for building owner compliance. Once the website is available, owners can register into the new reporting requirements and in most cases arrange for automatic reporting by the providing utility. There is no stated penalty for noncompliance with AB 1103, but lenders and buyers will likely require evidence of compliance as a condition to closing a transaction involving affected buildings.

We also recommend that commercial building owners include in their leases specific provisions that (i) allow the expenses of compliance, including installation of meters, retaining of consultants and filing of necessary documents, to be included in operating expenses passed through to tenants; and (ii) confirm the tenant’s recognition of landlord’s compliance with this and similar programs and obtain their obligation to cooperate as necessary.

Additional information for required compliance in California can be found at www.energy.ca.gov. Should you have any questions, please feel free to contact any member of the Sheppard Mullin commercial leasing team:

Los Angeles
James Lonergan
Pamela Westhoff
Lydia Lake

Orange County
Aaron Sobaski

San Francisco
Doug Van Gessel
Joan Story
Katharine Allen

Del Mar
Domenic Drago

San Diego
Michael Leake

Can California Cap and Trade if Brussels Stumbles?

updates@antitrustlawblog.com (Sheppard Mullin) — Mon, 29 Apr 2013 21:40:19 +0000

By Jeffrey Rector

Last week, the European Parliament rejected a proposal to reduce the quantity of greenhouse gas (GHG) emissions allowances in order to fix a supply-demand imbalance in the European Union Emissions Trading System (EU ETS). Some view this as the beginning of the end of the European Union’s ten-year carbon cap-and-trade experiment. A high profile failure of the EU ETS is likely to provide ammunition to critics California’s cap-and-trade program.

An emissions offset or emissions allowance (representing the right to emit one metric ton of CO₂ or GHG equivalent, or CO₂e) within EU ETS is no longer trading at values that promote investment in low carbon technologies, and therefore the EU ETS is not presently serving its core purpose. The trading value of an EU Emissions Allowance was above €30 per metric ton in 2008 before the sharp impacts of the global recession. Prices halved in late 2008 and early 2009 and hovered around €15 for two years until 2011. Then prices began a steady decline to €10, then €5, and now even less. It is understood by energy and climate economists that if emissions allowances can be purchased for less than €10, a cap-and-trade system will have little if any effect on the pollution abatement decisions of heavy emitters because the allowances would be cheaper than virtually all known or developable emissions abatement technologies. Indeed, such rock bottom prices may have the effect of promoting high-emitting technologies that should be discouraged. At issue is an oversupply of credits: (i) the EU was too generous in its granting of free allowances; (ii) international offsets from the tradable credit programs under the United Nations Framework Convention on Climate Change (including the Clean Development Mechanism) outstripped demand; and (iii) the global recession reduced the demand for energy and thereby the demand for credits, which drives pricing.

The EU Parliament recently voted whether to defer the issuance of a portion of new emissions allowances (referred to as “backloading”) in order to constrain supply and raise prices. When the final votes were tallied, the backloading proposal was rejected by a narrow margin. It is said that carbon markets viewed the outcome as a vote of no-confidence in the future viability of the EU ETS, which had pushed the trading price of allowances to the current price of less than €3 per metric ton. The backloading proposal will likely be reconsidered by the EU Parliament early this summer, but its prospects are uncertain. While it is impossible to reduce the basis for opposing backloading to a single idea, it seems that, even in Europe, there is almost irresistible pressure to give economic growth precedence over reducing emissions; and it appears that Europe, much like the United States, is still struggling with the question of whether the two objectives (economic growth and emissions reduction) can be simultaneously advanced.

For at least two reasons, the European experience does not bode well for California’s fledgling carbon market. First, it demonstrates the difficulty of creating a market in tradable rights to undertake a previously unregulated activity. The cost of emitting greenhouse gasses has heretofore gone unaccounted for and been externalized. A cap-and-trade system creates scarcity in the right to emit and allocates those rights for free or fee to regulated entities. While cap-and-trade may be a “market-based” solution, the allocation of emissions allowances is, in fact, a political decision that produces winners and losers. Thus, the true test for the political viability of a cap-and-trade system is when the emissions allowances are no longer given away; the EU ETS was beginning to enter this phase, and the strength of the opposition from the heavy emitters predictably increased. The California Legislature has delegated the difficult political decision of allocation to the California Air Resources Board, which partially insulates the allocation decision from political pressure; however, the scope of the delegation to CARB arguably undermines the legitimacy, and possibly the legality, of CARB’s cap-and-trade decisions. Second, the California Legislature viewed it to be in California’s best interest to be a leader in regulating carbon (and in policy circles, a leader in cap-and-trade) on the assumption that other states and the federal government would follow. A high profile failure of carbon cap-and-trade across the Atlantic would be a setback for the prospects of a national policy being implemented in the near future, and the cost of leading when there are no followers might not be one the majority of Californians will be willing to pay.

Parties interested in the fate of California’s cap-and-trade system will likely be following this developing story in Europe and waiting for another EU vote, which is expected to come early this summer.

No Relief Under CCP Section 473 For Missed Filing Deadline In CEQA Challenge

updates@antitrustlawblog.com (Sheppard Mullin) — Mon, 22 Apr 2013 17:21:25 +0000

By Daniel Bane

Alliance for the Protection of the Auburn Community Environment, et al. v. County of Placer, SCV0028200 (3rd Dist., February 18, 2013)

In Alliance for the Protection of the Auburn Community Environment v. County of Placer, the California Court of Appeal for the Third District considered plaintiff and appellant Alliance for the Protection of the Auburn Community Environment's ("Alliance") appeal from trial court's granting of real party in interest Bohemia Properties, LLC's ("Bohemia") demurrer, which was sustained without leave to amend, and the trial court's concurrent denial of Alliance's motion seeking relief on the grounds of mistake or excusable neglect under Code of Civil Procedure ("CCP") Section 473, subdivision (b) ("Section 473").

At issue on appeal was whether or not Section 473, which generally provides relief for excusable neglect, would excuse the late filing of a petition for a writ of mandate pursuant to the California Environmental Quality Act ("CEQA"; Pub. Resources Code, § 21000 et seq.). Those seeking some measure of comfort from the Court of Appeal that a missed Public Resources Code Section 21167 ("Section 21167") deadline may, under certain circumstances, be forgiven were forced to face a tough reality. In short, CEQA's aim to "ensure extremely prompt resolution of lawsuits claiming noncompliance with the act" dictates strict adherence to Section 21167 – Section 473 provides no basis for relief.

In so holding, the court brought the Third District in line with the Court of Appeal for the First District's holding in Nacimiento Regional Water Management Advisory Committee v. Monterey County Water Resources Agency (2004) 122 Cal.App.4th 961, which found Section 473's mandatory provisions inapplicable where the plaintiff failed to file a request for a hearing within 90 days of filing an action under Public Resources Code Section 21167.4, subdivision (a).

Factual and Procedural Background

In 2008, Bohemia submitted an application submitted an application for its proposed development project and a draft Environmental Impact Report ("EIR") was circulated, followed by the requisite public comment period and eventually a final EIR. The final EIR was certified on July 16, 2010. Alliance appealed and the County of Placer ("County") again certified the final EIR on September 28, 2010. A notice of determination ("NOD") was then filed on September 29, 2010, meaning that Alliance's petition for a writ of mandate ("Petition") was due by no later than October 29, 2010. Alliance filed its Petition on November 1, 2010.

Bohemia then demurred to the Petition, alleging it was not filed within the limitations period mandated by Section 21167. Alliance responded with its own motion for relief under Section 473 and opposed the demurrer. Alliance argued that the late filing resulted from a "miscommunication from its attorney service as to the deadline for receipt of the Writ." Specifically, the attorney service was provided the Petition prior to the filing deadline but arrived at the court too late on October 29, 2010 to file.

The trial court nevertheless concluded that Alliance's petition was barred by the mandatory provisions of Section 21167. The trial court therefore granted Bohemia's demurrer (without leave to amend) and denied Alliance's motion for relief based on excusable neglect.

Public Resources Code Section 21167 Is Mandatory

On appeal, Alliance argued that the trial court erred in sustaining Bohemia's demurrer based on pertinent case law mandating that the provisions of Section 473 be liberally construed and California's general policy considerations favoring the determination of lawsuits on their merits rather than technicalities. The court however was swayed by the California's Supreme Court's guidance in Maynard v. Brandon (2005) 36 Cal.4th 364 ("Maynard").

In Maynard, the Supreme Court stated "[n]or does section 473, subdivision (b) generally apply to dismissals attributable to a party's failure to comply with the applicable limitations period in which to institute an action, whether by complaint [citations] or by writ petition [citation]." (Maynard, supra, 36 Cal.4th at p. 372.) The court noted that, in Maynard , the court found Section 473 relief was unattainable due to the mandatory nature of statute of limitations.

Based on its understanding of Maynard and its reading of Section 21167, the court was satisfied that Section 21167 is mandatory in nature and makes no provision for extending the limitations period for actions alleging CEQA violations, even if Section 473 might otherwise provide relief. The court reasoned that "[w]hile CEQA should be broadly interpreted to protect the environment, CEQA also aims to ensure extremely prompt resolution of lawsuits claiming noncompliance with the act." Section 473 therefore affords no relief for parties failing to file their actions challenging CEQA violations within the applicable Section 21167 filing deadline.

New Disability Access Law Imposes Notification Requirements For Commercial Leases

updates@antitrustlawblog.com (Sheppard Mullin) — Mon, 22 Apr 2013 17:19:14 +0000

By Pamela Westhoff and Lydia Lake

What you need to know:

On July 1, 2013, pursuant to newly enacted California Civil Code Section 1938, owners of commercial real property must state on every lease form or rental agreement whether the property leased has undergone inspection by a Certified Access Specialist (commonly referred to as a “CASp”) and, if so, whether the property has or has not been determined to meet all applicable construction- related accessibility standards pursuant to California Civil Code Section 55.53.

If a commercial property has not been inspected by a CASp, the new statute does not require such an inspection; it merely requires disclosure of whether or not an inspection has been performed and the results of any such inspection. As discussed in more detail below, the intent appears to be to provide an incentive for commercial property owners to reduce their exposure to liability in ADA lawsuits by encouraging owners to obtain a CASp inspection.

Owners of property in San Francisco of 7,500 square feet or less (5,000 square feet or less after June 1, 2013), must also comply with Chapter 38 of the San Francisco Administrative Code. These requirements will be the subject of a separate posting shortly.

Background:

If a disabled person encounters an accessibility violation at a place of public accommodation, current law allows that party to immediately bring an action against a property owner without any prior notice or opportunity to cure. A plaintiff may seek recovery of compensatory damages for injuries resulting from ADA violations and minimum “statutory damages” per violation of $4,000, whether or not any injury was sustained by the plaintiff. It is quite common for a plaintiff to allege multiple violations at a single property (for instance, in the retail context, violations could include failure to provide appropriate signage, improper dressing room dimensions, merchandise located at improper heights, narrow access ways, etc.). As a result, ADA lawsuits have become quite costly, especially to small business owners, even for minor violations without injury to a plaintiff.

In response to the high volume of lawsuits based on alleged ADA violations, many of them by so-called “professional plaintiffs,” Governor Brown signed SB 1186 (Steinberg) into law. The purpose of SB 1186 is to reduce the number of ADA lawsuits and provide a means by which California property owners can reduce their financial exposure to such lawsuits. SB 1186 revises the existing laws related to actions under the ADA to ban pre-lawsuit demands for money and to provide for reductions in statutory damages in ADA lawsuits if certain conditions are present, most of which relate to whether the subject property has been inspected by a CASp for compliance or not as further discussed below. It also strengthens disciplinary measures for attorneys who fail to comply with the procedural requirements of SB 1186. California Civil Code Section 1938 was enacted as part of SB 1186 and requires that on or after July 1, 2013, commercial leases or rental agreements disclose whether or not the property leased has been inspected by a CASp and, if it has, whether the property is in compliance with all accessibility standards.

Benefits of a CASp Inspection:

As stated above, the new law doesn’t require a commercial property owner to obtain a CASp inspection. However, the underlying objective of the legislation is to “encourage” landlords to bring premises up to current accessibility standards by putting their tenants on notice of potential departures from those standards. Nevertheless, if you are not aware of any accessibility issues at your property and are comfortable that no issues are present, there are several benefits to having a CASp inspection performed. A property owner who corrects an alleged violation within 60 days of service of the complaint alleging the violation would only be liable for statutory damages of $1,000 per offense (compared to $4,000 per offense) if the property owner has either obtained a CASp inspection or received approval of new construction or improvements by the local building department on or after January 1, 2008. Additionally, a property owner who has had property inspected by a CASp and has either received a report evidencing compliance with applicable accessibility codes and regulations, or has remedied any noted violations in such report, is entitled to an early evaluation conference and an immediate 90-day stay of proceedings relating to any purported accessibility claims. Many CASp inspectors will provide an inspection sticker that a commercial property owner may display, which should reduce a property owner’s exposure to such lawsuits. Keep in mind however, that even though you are not required to obtain a CASp inspection to comply with the new law, if you do obtain a CASp inspection and it discloses violations, you will need to correct any violations to receive all of the benefits of SB 1186.

If you are uncertain as to the compliance of your building with accessibility standards, but wish to obtain a CASp inspection to obtain the benefits listed above, it is desirable to engage counsel to obtain such inspection on your behalf so that any report generated from such inspection can be deemed “Attorney Work Product” and can be insulated from public disclosure in the event of a dispute with a tenant.

For more information:

Property owners and lessors should be mindful of the effectiveness of California Civil Code Section 1938 on July 1, 2013. We have prepared appropriate lease disclosure language for our clients. Please contact us with any questions or for more information relating to the specific requirements thereof.

Utility Pole Not A Point Source Under The Clean Water Act

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 16 Apr 2013 17:18:53 +0000

Ecological Rights Foundation v. Pacific Gas & Electric Co. (9th Cir., Filed April 3, 2013)

By Robert Uram, Keith Garner, and Alex Merritt

Last week the Ninth Circuit held that utility poles are not “point sources” of stormwater discharge nor “associated with industrial activity,” and therefore do not require an NPDES permit to comply with the Clean Water Act.

Plaintiff environmental group brought a suit alleging that the defendant utility companies treated their utility poles with a wood preservative containing a biocide and other chemicals. Plaintiff further alleged that the utility poles discharge the wood preservative into the environment in violation of the Clean Water Act (CWA) and Resource Conservation and Recovery Act (RCRA). The Ninth Circuit rejected both claims in an unanimous decision.

Clean Water Act

Plaintiff’s key claim was that the utility companies violated the CWA because they discharged contaminated stormwater from their utility poles without a permit under the National Pollutant Discharge Elimination System (NPDES). The Ninth Circuit upheld the district court’s dismissal of the claim, finding that utility poles do not require an NPDES permit because they are not “point sources” of stormwater discharge and are not “associated with industrial activity.”

NPDES permits are only required for discharge of stormwater from a point source. The Ninth Circuit explained that stormwater runoff can be either a point source or a nonpoint source, depending on the circumstances. For example, if stormwater is allowed to run off naturally, it is a nonpoint source; however, if it is collected and channeled through a discrete conveyance, it becomes a point source.

The Ninth Circuit rejected the argument that utility poles are point sources for several reasons. First, the CWA does not specifically identify utility poles as point sources, nor has the EPA issued any guidance that utility poles are point sources. Second, utility poles are not constructed for the purpose of storing or moving pollutants. Finally, in the court’s view, utility poles “simply are not discernible, confined and discrete conveyances that channel and control stormwater.” Thus, the court concluded that utility poles are not point sources requiring an NPDES permit.

Plaintiff tried unsuccessfully to argue that utility poles discharge pollutants directly into the environment (i.e., when the wood preservative drips off of the poles), and that stormwater runoff from the poles is collected into ditches, channels, and other conveyances that are clearly point sources. However, the Ninth Circuit rejected these claims without further analysis because plaintiff did not squarely allege them in its complaint.

After concluding that utility poles are not point sources, the Ninth Circuit found that plaintiff’s CWA claim failed for another, independent reason. Namely, NPDES permits are only required for discharges “associated with industrial activity,” and stormwater runoff from utility poles is not such a discharge. First, the court found that utility poles do not come within the statutory definition of “associated with industrial activity” because they are not conveyances and are not directly related to industrial facilities or activities. Second, the court noted that the regulatory classification system used to define industrial activities does not cover utility poles. Third, the EPA expressly chose to exclude “major electrical powerline corridors” from the definition of “industrial activity,” and thus it is reasonable to conclude that EPA also intended to exclude individual utility poles. Finally, the court was concerned about opening the door for regulation of many other “commonplace things” including “playground equipment, bike racks, mailboxes, traffic lights, billboards, and street signs—indeed anything that might contaminate stormwater.” Thus, absent guidance from EPA, the court was unwilling to find utility poles to be “associated with industrial activity.”

Resource Conservation and Recovery Act

Plaintiff also claimed that the utilities had violated RCRA by discharging the wood preservative into the environment.

RCRA governs the treatment, storage, and disposal of solid and hazardous waste. It authorizes a citizen suit against a defendant “who has contributed or who is contributing to the past or present handling, storage, treatment, transportation, or disposal of any solid or hazardous waste which may present an imminent and substantial endangerment to health or the environment.”

The Ninth Circuit found that plaintiff could not state a claim under RCRA because the wood preservative is not “solid waste” within the meaning of the statute. Looking to RCRA’s legislative history and the case law, the court found that the key to determining whether a product is “solid waste” is whether that product has served its intended purpose and is no longer wanted by the consumer. Applying this test, the court found that the preservative escaping from the poles was not “solid waste” because it was still serving its intended purpose and that it had not been thrown away or discarded by the utilities. The court was again concerned with the practical effect of its ruling, observing that plaintiff’s characterization of the preservative as solid waste “would lead to untenable results” because there are “36 million utility-owned wood poles in service across the United States” and it “defies reason” to suggest that each of them must be replaced.

Conclusion

This case along with the recent Supreme Court decision in Decker v. Northwest Environmental Center (Mar. 20, 2013) helps to define the limits of activities that are required to have stormwater permits to address potential contributions of pollutants to waters of the United States. The cases both reject efforts by plaintiffs to include new activities under the stormwater program.

Bill Introduced to Restore Cities' Ability to Require Affordable Housing

updates@antitrustlawblog.com (Sheppard Mullin) — Mon, 01 Apr 2013 17:04:50 +0000

By Michael Hansen

On February 22, California State Assembly Member Toni Atkins, D-San Diego, introduced a bill, AB 1229, to restore the ability of California cities and counties to require affordable housing as part of market-rate housing developments. The bill would override a notable 2009 court decision, Palmer/Sixth Street Properties, L.P. v. City of Los Angeles, 175 Cal.App.4th 1396 (“Palmer”), that rendered many inclusionary housing requirements unenforceable under California law.

In Palmer, the California Court of Appeal held that the Costa-Hawkins Rental Housing Act’s guarantee of the right of a landlord to set the initial rental rate of an apartment preempts local affordable housing requirements. The court held that “[f]orcing [a developer] to provide affordable housing units at regulated rates in order to obtain project approval is clearly hostile to the right afforded under the Costa-Hawkins Act to establish the initial rental rate for a dwelling or unit.” The court further determined that an option to pay an in-lieu fee does not save the validity of inclusionary housing ordinances because it still impinges on the right to establish rental rates provided by the Costa-Hawkins Act. The California Supreme Court denied review of the Palmer decision.

As a result of the Palmer case, which invalidated the City of Los Angeles’s affordable housing requirements at issue in the case, several California local governments, including the City of San Francisco and City of San Jose, suspended or revised their existing affordable housing ordinances until the Palmer decision was reversed by another court or the State Legislature. The City of San Mateo placed a moratorium on the construction of new rental housing until it could determine how to lawfully require developers to provide affordable housing. Other cities such as the City of San Diego have taken the position that existing inclusionary housing ordinances are valid. Some commentators have suggested that the holding in Palmer applies to for-sale as well as rental inclusionary housing ordinances.

AB 1229 is intended to supersede the holding of Palmer and eliminate any confusion on the ability of cities and counties to require affordable housing from market-rate developers through inclusionary zoning ordinances.

AB 1229 adds the following to the list of types of zoning ordinances a city or county may adopt under Section 65850 of the Government Code:

“(g) Establish, as a condition of development, inclusionary housing requirements, which may require the provision of residential units affordable to, and occupied by, owners or tenants whose household incomes do not exceed the limits for lower income, very low income, or extremely low income households specified in Sections 50079.5, 50105, and 50106 of the Health and Safety Code.”

The bill text is silent as to whether it applies to for-sale or rental units, meaning it will most likely be interpreted to apply to both. Last year Senator Mark Leno, D-San Francisco, introduced a similar bill, SB 184, which died in the Senate due to lack of support. Sen. Leno is a co-author of AB 1229.

The bill will likely be set for hearing before the Assembly Committee on Housing and Community Development on April 17 or May 1, and if passed out of committee, will then be referred to the Assembly Committee on Local Government. Sheppard Mullin will continue to track AB 1229 as it progresses through the legislative process.

Recent tax law changes of 2013

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 15 Jan 2013 22:38:55 +0000

On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 into law. Summarized below are highlights of those and other changes to Federal tax laws affecting income, payroll, gift and estate, and generation-skipping transfer taxes beginning in 2013.

New top federal marginal rates – ordinary income, capital gains, and qualified dividends

39.6% top ordinary income tax rate

In tax years beginning on or after January 1, 2013, for individuals above the threshold taxable incomes listed below, the highest marginal ordinary income tax rate increases from 35% to 39.6%. The 39.6% rate is a reinstatement of the highest rate from before the 2001 Bush-era tax cuts.

Filing Status	Threshold taxable income amounts
Single	$400,000
Married filing jointly	$450,000

The threshold amounts will be adjusted for inflation annually.

20% top capital gain and qualified dividend tax rate

In tax years beginning on or after January 1, 2013, for individuals above the threshold incomes listed above, the tax rate on long term capital gains and qualified dividend income increases from 15% to 20%.

3.8% Medicare tax on net investment income

For individuals above the threshold “modified adjusted gross income” amounts listed below, the net investment income tax, or NIIT, of 3.8% applies. The NIIT applies to a wide range of investment income, including certain long term capital gains and qualified dividends. In effect, the top tax rate on long term capital gains and qualified dividend income will be 23.8% for those whose income exceeds $450,000 ($400,000, if single).

The NIIT also applies to certain short term capital gains, ordinary dividends, interest, rental and royalty income, nonqualified annuities, income from businesses involved in trading of financial instruments or commodities, and income from businesses that are passive activities for the taxpayer.

Filing status	Threshold modified adjusted gross income amounts
Single	$200,000
Married filing jointly	$250,000

Phaseout of itemized deductions reinstated

Beginning in 2013, the itemized deduction phaseout will be reinstated for taxpayers above the applicable threshold amount listed below. The phaseout reduces itemized deductions by the lesser of 3% of the adjusted gross income amount above the threshold amount, or 80% of the otherwise allocable itemized deductions.

Filing status	Threshold adjusted gross income amounts
Single	$250,000
Married filing jointly	$300,000

Permanent AMT relief

Beginning in 2012 tax years, the AMT exemption amounts are permanently increased as listed in the table below and will be adjusted annually for inflation.

Filing status	Increased 2012 exemption amounts
Single	$50,600
Married filing jointly	$78,750

0.9% additional FICA Medicare tax

Beginning on January 1, 2013, an additional 0.9% FICA Medicare tax applies to earnings above the threshold amounts listed below. The highest applicable FICA Medicare tax rate for employees increases from 1.45% to 2.35%, and for the self-employed from 2.9% to 3.8%.

Filing status	Threshold earnings amounts
Single	$200,000
Married filing jointly	$250,000

Expiration of 2% FICA Social Security tax cut

Beginning on January 1, 2013, the 6.2% rate is reinstated for the employee portion of FICA Social Security tax. This is due to the expiration of the temporary 2% rate reduction in the employee portion of FICA Social Security tax from 6.2% to 4.2% on December 31, 2012. For the self-employed, the FICA Social Security tax rate of 10.4% reverts to 12.4%. The FICA wage base for 2013 is $113,700 and will be adjusted annually for inflation.

Section 1202 tax break extended through 2013

The 100% exclusion of certain gains from the sale of qualifying small business stock, or QSBS, under Section 1202 has been extended to acquisitions of QSBS from January 1, 2012 to December 31, 2013. Generally, QSBS must meet the following conditions: the stock was acquired at original issue from a domestic C corporation with gross assets of no more than $50,000,000, the C corporation met certain active business requirements, and the stock was held for more than five years. The amount of excludible gain is limited to the greater of $10,000,000 in aggregate gains, or 10 times the aggregate basis in QSBS.

Section 1374 built in gains relief extended through 2013

The previously reduced five year recognition period for computing built-in gains tax of an S corporation under Section 1374 has been extended to taxable years beginning in 2012 and 2013. The recognition period was to increase to ten years in 2012 until the five year recognition period was extended through 2013.

This tax applies if, during the recognition period, a C corporation converts to an S Corporation and then sells, for a gain, assets that were appreciated in value at the time of the conversion. Those “built-in gains” are taxed at the highest marginal corporate tax rate of 35%. Normally, the recognition period is the ten year period from the first day of the first taxable year for which the S election is effective.

Gift and estate tax exclusion, rates, and portability of deceased spouse’s unused exclusion amount

$5,000,000 gift and estate tax exclusion

The gift and estate tax, and generation-skipping transfer tax exclusion amount has been permanently set at $5,000,000, adjusted annually for inflation. The exclusion amount for 2013 is $5,250,000. Without this change, the exclusion amount would have fallen to or around $1,000,000 as of January 1, 2013.

40% top gift and estate tax rates

The gift and estate tax rate on transfers as of January 1, 2013 above the exclusion amount were increased as listed below. The highest rate increased from 35% to 40%. Without the new 40% rate, the highest marginal gift and estate tax rate would have increased to 55%.

Portability of deceased spouse’s unused exclusion amount made permanent

A surviving spouse’s election to include his or her deceased spouse’s unused exclusion amount will now be a permanent option. This portability election would have expired on December 31, 2012 without this change.

Conveyance of Polluted Water Within River Involves No 'Discharge' Under Clean Water Act

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 10 Jan 2013 17:45:23 +0000

Los Angeles County Flood Control Dist. v. Natural Resources Defense Council, __ U.S. __ (2013)

By James Rusk

The flow of polluted water from a concrete-lined portion of a river into a downstream portion of the same river does not involve a “discharge” for purposes of the Clean Water Act (“CWA”) and thus involves no CWA violation, the Supreme Court held in an opinion filed January 8. The Court’s opinion reverses a Ninth Circuit judgment that held the Los Angeles County Flood Control District (“District”) liable for CWA violations based on sampling data that showed polluted water leaving portions of the Los Angeles and San Gabriel Rivers controlled by the District and entering downstream portions of the same rivers. The opinion addresses only a very narrow issue that is controlled by the Court’s prior decision in South Fla. Water Management Dist. v. Miccosukee Tribe, 541 U.S. 95 (2004), and does not reach larger questions about the scope of liability for operators of municipal separate storm sewer systems (“MS4”).

In the proceedings below, the District conceded that water quality monitoring data showed violations of water quality standards in the Los Angeles and San Gabriel Rivers downstream of its MS4 facilities. The CWA permit issued for the District’s MS4 system prohibited discharges that would cause or contribute to violations of water quality standards. But the District argued that the evidence did not show it had caused or contributed to the water quality violations because (1) other entities also were permitted to discharge pollutants into the Rivers upstream of the monitoring stations, and (2) the District’s MS4 facilities convey, but do not generate, the collective discharges generated by many other MS4 co-permittees located “up-sewer.” The district court agreed, finding no evidence that the pollutants measured at the monitoring stations had been discharged by the District.

The Ninth Circuit reversed, apparently believing that the monitoring stations were located within the MS4 system owned and operated by the District—not downstream of it—and thus that the pollutants detected by the monitoring stations necessarily would be “discharged” from the MS4 into the Rivers, in violation of the District’s MS4 permit. NRDC v. County of Los Angeles, 673 F. 3d 880, 899-901 (9th Cir. 2011). According to the Supreme Court, however, the monitoring stations were located within portions of the Rivers that had been channelized and lined with concrete for flood control purposes. Thus, the monitoring data only showed a discharge from portions of the Rivers controlled by the District to other portions of the same Rivers.

The Court therefore granted certiorari on a single question: does a “discharge of pollutants” occur when polluted water “flows from one portion of a river that is [a] navigable water of the United States, through a concrete channel or other engineered improvement in the river . . . into a lower portion of the same river?” All the parties agreed that this question was answered by the Court’s 2004 Miccosukee decision, which held that the transfer of polluted water between “two parts of the same water body” does not constitute a discharge of pollutants under the CWA, because a discharge requires the addition of a pollutant to navigable waters from a point source.

Because of the unusual factual situation and the narrow issue certified for review, the scope of the Court’s holding is limited. In particular, it does not address the District’s potential liability if the plaintiffs provide evidence showing that a “discharge” of pollutants did occur from the MS4 system to the Rivers, nor the District’s argument that it should not be held liable for pollutants contributed by “up-sewer” permittees.

What Will It Cost for California to Save the World? California Conducts its First Greenhouse Gas Cap-and-Trade Auction

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 05 Dec 2012 19:02:36 +0000

By Whitney Hodges, Randy Visser & Olivier Theard

The landmark Global Warming Solutions Act of 2006 (“AB 32”) tasked the California Air Resources Board (“ARB”) with reducing greenhouse gas (“GHG”) emissions to 1990 levels by 2020. In adopting a scoping plan assembling a number of differing, but complementary, GHG reduction strategies, the ARB included a “cap-and-trade” program as one such strategy to help satisfy AB 32’s goals while allowing industry flexibility in choosing emissions reduction options (i.e., facilities could choose to buy pollution credits, or could choose to reduce emissions and sell credits on the market). The “cap-and-trade” program was deemed preferable to other potential options such as a carbon tax.

On November 14, 2012, ARB conducted the first of these auctions, distributing 23.1 million vintage 2013 carbon allowances and 39.5 million vintage 2015 allowances. The vintage 2013 allowances can be used in the first compliance phase of the program starting January 1, 2013 or be saved for use in subsequent years. The vintage 2015 allowances can be used for the second phase of the program starting in 2015 or later.

Regulated sectors are subject to declining emissions caps during each of the compliance periods and must submit GHG allowances to ARB at the end of each period to cover the total volume of GHG emitted. The first regulated sectors include power plants and large industrial facilities emitting more than 25,000 tons of GHG pollution annually, such as oil refineries and cement manufacturers. Transportation fuel and natural gas distributors will be regulated beginning in 2015.

If an entity does not have enough GHG allowances to meet its obligation, it must purchase additional allowances to remain in compliance. During the first compliance period, 90% of the allowances will be free in order to avoid economic harm to the industries. However, the free allowances are scheduled to decline over time to between 50% and 75%, depending on the industry sector. Because free allowances will decrease and the market price of credits is expected to rise, companies will have the incentive to curb GHG emissions by installing new control technologies (selling any allowance “room” below the companies’ cap to help finance the new controls) rather than to buy allowances.

The results of the November 14, 2012 auction, released on November 19, 2012, indicated that ARB sold 100% of the vintage 2013 allowances at $10.09 and approximately 14% of the vintage 2015 allowances at $10.00. $10.00 was the reserve price “hard floor.” Purchasers were primarily compliance entities subject to the program. The gross revenue is estimated as follows:

23.1 million vintage 2013 allowances at $10.09 equals $233 million. These funds are primarily consigned utility allowances, and the revenue will be used to benefit ratepayers, as regulated by the Public Utilities Commission.
5.5 million vintage 2015 allowances at $10.00 equals $55 million.

All unsold advances will be held by ARB and offered for sale in late 2014 or early 2015, when vintage 2015 allowances become “current.” The maximum bid for a vintage 2013 allowance was $91.13, with a median price of $12.96. Early market reaction to the future sale of the vintage 2013 trading indicated the trade prices to be between $10.75 and $11.75; meaning, the market anticipates the vintage 2013 allowance prices will rise to approximately $11.25 by December.

Despite selling out of vintage 2013 allowances, the auction fell short of expectations for vintage 2015 allowances. California's Legislative Analyst's Office earlier this year estimated that this auction would generate between $650 million and $1 billion in allowance sales, assuming that all vintage 2015 allowances were sold in addition to all vintage 2013 allowances. For its part, the Legislature expected that auction revenue would be $500 million, which was already set aside to “backfill” the General Fund for the current fiscal year budget. The actual revenue was much lower, however, raising questions about how to make up the shortfall.

Legal Challenges

The day prior to the auction, the California Chamber of Commerce (“CalChamber”) attempted to halt the sale of the allowances by filing a lawsuit in Sacramento Superior Court. CalChamber alleged that the cap-and-trade legislation had never authorized the State to be an active participant in the program. Specifically, CalChamber asserted that AB 32 does not authorize ARB to impose any fees other than those needed to cover the administrative costs of the regulatory program. Consequently, the suit states that if ARB was permitted to auction such allowances, then ARB is essentially imposing a tax. For this to be legally permissible, the Legislature would be required to approve such a measure with a two-thirds vote. According to the suit, the Legislature approved AB 32 by a simple majority, and the fee amounts to an unauthorized, unconstitutional tax. The complaint sought to stop the auction and have the auction-authorizing regulations declared invalid. This legal challenge did not derail the auction, but uncertainty about its outcome may have depressed auction revenue. Interestingly, because Democrats now have a two-thirds super majority in both houses of the Legislature and can pass any tax they choose, CalChamber’s legal challenge may end up being mooted by legislative action.

In addition, the Pacific Law Foundation (“PLF”), a group that advocates property rights and limited government, is expected to file one or more lawsuits challenging AB 32. Among PLF’s claims is the allegation that AB 32 violates the Constitution’s interstate commerce clause because, in some instances, imported electricity would be more expensive.

Lastly, some experts assert that cap-and-trade regulations’ treatment of imported power intrudes upon the Federal Energy Regulatory Commission’s exclusive jurisdiction over pricing of wholesale power in interstate commerce under the Federal Power Act.

Conclusion

Though cap-and-trade is now in effect, both legal and economic challenges remain. In addition, only time will tell whether the cap-and-trade program will have any impact on reducing greenhouse gas emissions, a global issue, or otherwise spurring sub-global climate action by other states and regions.

Zoning Director Approval Triggers Section 65009 Statute of Limitations

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 29 Nov 2012 09:30:52 +0000

Stockton Citizens for Sensible Planning v. City of Stockton, Super. Ct. No. CV024375 (Nov. 13, 2012)

By James Rusk

A letter of approval finding a project consistent with a City’s Master Development Plan triggers the running of the 90-day statute of limitations under Government Code subsection 65009(c)(1)(E), the Third District Court of Appeal has held. Stockton Citizens for Sensible Planning v. City of Stockton involved the approval of a Wal-Mart store by the City of Stockton’s Community Development Department Director. Plaintiffs argued that the Director’s approval did not fall within the types of actions covered by section 65009 because it did not involve a “variance or permit” and was not made by a legislative body. The Court of Appeal disagreed, holding that section 65009’s short statute of limitations extends to land use approvals issued by zoning administrators and zoning boards exercising delegated authority.

The California Supreme Court had already held, in Stockton Citizens for Sensible Planning v. City of Stockton (2010) 48 Cal.4th 481, that plaintiffs’ CEQA claims in the same suit were time-barred because not filed within 35 days after the City’s Notice of Exemption. In that opinion, the Supreme Court also held that the Director’s letter constituted final approval of the Wal-Mart project. Thus, the only issue before the court in this appeal was one of statutory interpretation: whether the Director’s approval was sufficient to trigger the statute of limitations in subsection 65009(c)(1)(E), which applies to a broad range of local planning and zoning decisions.

Plaintiffs argued that the Director’s approval did not trigger the statute of limitations because (1) it was not a “variance, conditional use permit, or any other permit” within the meaning of the Code, and (2) it was not a decision by a legislative body. The Court rejected both arguments, holding that subsection 65009(c)(1)(E) is not so limited. The 90-day statute of limitations in that subsection applies not only to proceedings challenging a “variance, conditional use permit, or any other permit,” but also to actions attacking “any decision on the matters listed in [Government Code] Sections 65901 and 65903.” Sections 65901 and 65903, in turn, authorize a zoning administrator, zoning board or board of appeals to issue approvals and take other actions authorized by local ordinance. The Director was acting as the City’s zoning administrator and was exercising powers granted by local ordinance when he approved the Wal-Mart project by finding it consistent with the applicable Master Development Plan. This was sufficient to bring the approval within the scope of subsection 65009(c)(1)(E) and trigger the statute of limitations. For the same reason, the Court of Appeal concluded that a reference in subsection 65009(c)(1) to “the legislative body’s decision” was meant to include decisions by zoning administrators or boards pursuant to section 65901 and 65903.

Arthur Friedman and Robert Stumpf of Sheppard Mullin represented Wal-Mart in the case.

City May Adopt Housing Element Revisions Inconsistent With General Plan If City Also Adopts Timeline To Correct Inconsistencies

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 28 Nov 2012 09:06:12 +0000

Friends of Aviara v. City of Carlsbad (November 1, 2012, Case No. D060167)

By Kyndra Casper

Recently, the Fourth District Court of Appeal in Friends of Aviara v. City of Carlsbad affirmed the trial court’s judgment directing the City of Carlsbad to adopt a timeline for proposed changes to its general plan that would correct inconsistencies created by the City’s revision of its housing element. The appellate court interpreted Government Code section 65583 to create an exception to the requirement that general plans be facially consistent, as long as the municipality identifies a program with a timeline for resolving any inconsistencies arising from its adoption or revision of a housing element.

The City was required by Government Code section 65588 to revise the housing element of its general plan and in particular adopt provisions which fulfill the City's obligation to provide low cost housing in the region. The City adopted the revision and also certified a mitigated negative declaration (MND) because it found the revision would not have a substantial environmental impact. Besides identifying the inventory of sites that could accommodate the City’s assigned share of the region’s low cost housing needs, the revision also identified several amendments to the general plan’s land use element which would be necessary to permit development of affordable housing on the identified sites.

Friends of Aviara filed a writ of mandate challenging the City’s adoption of the housing element revision, alleging the MND violated CEQA and the revision impermissibly created inconsistency in the general plan. The trial court denied the CEQA claim, found that the revision created an conflict between the housing element and the land use element of the general plan, and issued a writ of mandate directing the City to adopt a timeline for the proposed amendments to the land use element. Friends of Aviara appealed, contending that notwithstanding a timeline for adoption of changes to the general plan, the revision to the housing element created unlawful inconsistencies in the general plan, and therefore the trial court should have issued a writ requiring that the City rescind its adoption of the revision.

The appellate court’s determination focused on Government Code section 65583, subdivision (c)(7), which requires a housing element to include “an identification of the agencies and officials responsible for the implementation of the various actions and the means by which consistency will be achieved with other general plan elements and community goals.” (Gov. Code, § 65583, subd. (c)(7), italics added). The court concluded that although consistency is required, the Legislature’s use of the future tense in the statute demonstrated a “legislative preference that municipalities promptly adopt housing plans which meet their numerical housing obligations even at the cost of creating temporary inconsistency in general plans.” As such, the appellate court held that the trial court acted properly to require the City to adopt a timeline for the amendments to the land use element and was not required to order the City to rescind its adoption of the housing element revision and wait for the land use element to be amended before fulfilling its housing obligations.

Further Confirmation Notice of Exemption Filed Before Project Approval is Void

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 30 Oct 2012 08:57:51 +0000

Coalition for Clean Air v. City of Visalia (Oct. 4, 2012, No. F062983M)

By James Pugh

The partially published opinion in Coalition for Clean Air v. City of Visalia brightened the line regarding when a California Environmental Quality Act Notice of Exemption (NOE) is valid. In a nutshell, the Fifth District Court of Appeal concluded that an NOE filed before the final approval of a proposed project is invalid and does not trigger the 35-day statute of limitations set forth in CEQA. This is not new law. However, it confirms the principle set forth in the recent California Supreme Court’s Stockton Citizens for Sensible Planning v. City of Stockton (2010) 48 Cal.4th 481 decision, which is that a petitioner has 35 days to challenge an NOE that is valid on its face.

Here, the City of Visalia was considering a project to build a large distribution facility (the Project). The City filed an NOE on November 3, 2010, but did not approve the Project until November 8, 2010. On December 28, 2010, (which was 55-days after the City filed its NOE) the Coalition for Clean Air filed a petition alleging that the City violated CEQA by failing to conduct any environmental review of the Project. The City asserted, of course, that the claim was barred by the 35-day statute of limitations (triggered by the NOE) set forth in Section 15062 of the CEQA Guidelines. As a side note, the statute of limitations for a CEQA challenge of the City’s action would have been 180 days without a valid NOE. Ultimately, the court concluded that the City’s NOE was invalid because the language of Section 15062 unambiguously states that an NOE shall be filed after project approval.

The court pointed to the logical reasoning of the California Supreme Court, which is that an NOE must satisfy two general requirements to be compliant and thus trigger the 35-day limitation period. First, the NOE must be “facially valid,” which means it must contain the information required by Section 15062(a)(1) through (5) of the CEQA Guidelines. Second the NOE must be properly filed, which means it must comply with the filing requirements specified in Section 15062(a) through (c). Most importantly for this case, Section 15062(a) requires the NOE be filed after project approval. Simply put, the City process was chronologically backwards. Therefore, it was easy for the court to find that the NOE was void and did not preclude Coalition for Clean Air from filing suit past the 35-day statute of limitations that would otherwise apply with a valid NOE.

The message from this case is clear: only a facially valid NOE filed after project approval triggers the shortened 35-day statute of limitations.

The Amorphous "Unusual Circumstances" Exception to CEQA's Categorical Exemption Strikes Again

updates@antitrustlawblog.com (Sheppard Mullin) — Fri, 26 Oct 2012 16:48:07 +0000

Voices for Rural Living v. El Dorado Irrigation District, Super. Ct. No. PC20080398, (Oct. 4, 2012)

By James Pugh

The recent Voices for Rural Living v. El Dorado Irrigation District case from the California Court of Appeal’s Third District applied the “unusual circumstances” exception to overturn a categorical exemption used to approve a water supply memorandum of understanding (MOU) for an existing Native American casino. As is typically the case, the court’s application of the “unusual circumstances” exception was highly fact-specific. This case demonstrates yet another way that potential plaintiffs may use the always amorphous “unusual circumstances” exception to attack a categorical exemption. The case also touches on the proper standard of review and annexation issues.

Factually, the El Dorado Irrigation District (EID) entered into an MOU to provide water to a casino located on tribal land held by the Shingle Springs Band of Miwok Indians (the Tribe). EID determined that the project was exempt from environmental review under CEQA because it fell under a Class 3 categorical exemption for small projects. The MOU increased water supply for the Tribe’s land from 45 equivalent dwelling units (EDUs) to 261 EDUs, which represented a significant increase in allotted water and was approximately 14% of EID’s unallocated water supply. EID further determined the MOU was not subject to annexation conditions imposed by the El Dorado County Local Agency Formation Commission (LAFCO) limiting the amount of water it could provide because EID determined that those conditions were unconstitutional. In part, EID based that determination on legal analysis provided to the Tribe from the Office of the Solicitor for the federal Department of the Interior, which proclaimed that conditions imposed by LAFCO that regulate land use rather than water delivery are likely preempted by federal law because they conflict with the federally prescribed use of the land. As discussed below, reliance on that advice was misplaced.

Procedurally, the plaintiff, Voices for Rural Living (VRL), filed suit to vacate EID’s approval of the MOU arguing that the categorical exemption did not apply due to the unusual circumstances surrounding the water supply issue. Further, VRL asserted that EID exceeded its authority by ignoring the LAFCO conditions. The trial court granted VRL’s petition for writ of mandate and invalidated the MOU because: (a) the unusual circumstances exception to Class 3 categorical exemption applied based on a fair argument of significant environmental effects from the increased water supply; and (b) EID had no authority to ignore LAFCO’s conditions imposed on the service area that covered the Tribe’s land. The trial court ordered EID to prepare an EIR. Both parties appealed. The Court of Appeal reversed the trial court’s direction regarding the EIR, but otherwise affirmed the judgment.

Regarding the categorical exemption issue, the Court of Appeal concluded that the MOU “project” (i.e., increased water supply and limited improvements to the water infrastructure system) constituted “unusual circumstances.” Although the water infrastructure improvements were minor, there was a nearly a five-fold increase in water supply associated with the project. In the court’s words, “[t]he sheer amount of water to be conveyed under the MOU obviously is a fact that distinguishes the project from the type of projects contemplated by the Class 3 categorical exemption.” The court’s holding indicates that when assessing whether the unusual circumstances exception to a categorical exemption applies, one should consider not only the project’s possible environmental effects, but also whether the particular project’s circumstances differ from the general circumstances associated with a particular categorical exemption.

The Court of Appeal further noted that a fair argument standard should apply when determining whether the exception to a categorical exemption applies. Courts have split between two standards of review in determining whether an unusual circumstances exception applies; the “fair argument” standard and the “substantial evidence” standard. The fair argument standard requires the agency or court to inquire whether there is substantial evidence in the record on which a fair argument can be made that the project may have significant environmental effects. In contrast, the substantial evidence standard is more deferential to the agency and asks whether substantial evidence exists to support the agency’s decision that the project will not have significant environmental impacts. Here, the Court of Appeal applied the fair argument standard. In doing so, it found that VRL had made a fair argument – supported by the record – that the MOU project may have an adverse effect on EID water supply and ability to provide water services to its customer base. Thus, the Court of Appeal directed EID to go back and perform adequate CEQA review, which in this case would mean preparing an initial study to determine whether further CEQA review was required.

With respect to the LAFCO issues, the Court of Appeal upheld the trial court’s ruling that EID had exceeded its authority in determining that the LAFCO conditions were unconstitutional. It noted that approval of annexation conditions are quasi-legislative determinations. Thus, public agencies (such as EID) charged with complying with those conditions have no authority to disregard the conditions. The Court of Appeal reasoned that the Legislature vested LAFCO with the exclusive authority to approve annexations of territory into special districts. That authority includes the power to impose conditions of approval that are enforceable against any public agency serving that district. It follows that EID was charged to enforce or comply with the conditions and had no discretion to disregard them. Therefore, when EID approved the MOU, the LAFCO conditions were binding and EID could not at that time disregard the conditions on the grounds that they were unconstitutional. Accordingly, the Court of Appeal pointed out that, as an irrigation district, EID’s powers are limited to those vested in it by constitution or statute, and do not include the fundamentally judicial authority to determine the validity of annexation conditions imposed by LAFCO.

Avoiding Things That Can Make You Go Bust In The Student Housing Boom

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 25 Oct 2012 09:01:06 +0000

By Miriam Montesinos

While ground up development has dried up in many sectors, off-campus student housing is one commercial real estate sector where development is booming. Unlike what other sectors are experiencing, there is both demand and capital for off-campus student housing developments, particularly ground-up development. These market conditions have led many developers to enter the student housing development arena in hopes of catching the wave before it is too late. Before getting in too deep, though, developers should consider various factors that drive the market in order to try and ensure a successful venture. Below are some items to consider when deciding whether to enter into off-campus student housing development.

1. Research the market. While demand for off-campus student housing has grown significantly over the past few years, not every state has seen enrollment increases that translate to growth in the number of students living off campus. In some cases, states have been able to provide sufficient dorm beds to meet the increased residency levels. Developers need to carefully research a target school to determine if it is anticipated to see a growth in enrollment and, if so, whether it has capacity for the increase, either existing or planned. Also, consider how much financial aid a state grants to students: the more money given to parents via financial aid, the more they’ll have to spend on housing.

2. Know where your competition is strongest, and consider going elsewhere. Over the past 10 years, a group of well capitalized, established developers has emerged in the student housing development field. More often than not, these developers are pursuing a first-tier market strategy, which targets colleges and universities that are the primary higher education institutions of a state. The student housing market is still fragmented, though, leaving opportunity for development in second-tier markets, many of which have just as many – if not more – colleges and universities that are growing. If you are considering entering a market which already has well established players, consider looking into under-built second-tier markets.

3. Location, location, location. Many successful student housing developers are of the mind that location is key, with the preference being to have a site located within 1 ½ miles from campus. In certain instances, though, being beyond this magic circle may still work – such as if the product located close to campus is aging inventory. Larger parcels may also be more available as one gets further from campus, allowing for greater flexibility in the product type that can be developed. In addition, zoning may be less restrictive.

4. Amenities, amenities, amenities. Unlike in the “old days” where students simply expected a decent unit close enough to campus to walk and/or bike, Generation Y, the group also knows as the millennial generation, has come to expect properties that feature high-end amenities, such as clubhouses, resort style pools and spas, community lounges, theaters, fitness centers, and business centers. In addition, Gen Y’ers are looking for units that provide separate bathrooms paired with each bedroom, gourmet kitchens, expansive living areas, ample closet space and full-size washers and dryers.

5. Have a great asset management team. Unlike typical apartment or condominium development, student housing has additional layers of complexity because the number of lessees is often greater, plus many have no established credit and therefore require an additional form of guarantee, such as a parent. In addition, the “client satisfaction” issues are generally tougher because not only is one dealing with the tenant directly, but one often also has a very involved parent who has opinions regarding the state of site amenities, furniture, etc. More importantly, if one is new to the game, lenders may require an experienced manager to be on board.

Sheppard Mullin Richter & Hampton has domestic offices in California, Illinois, New York and Washington D.C. If you would be interested in participating in a roundtable discussion regarding student housing in one of our locations, please send a message to Ann Cheney at acheney@sheppardmullin.com.

Redevelopment: Rising From The Ashes Or Final Death Rattle?

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 02 Oct 2012 09:35:19 +0000

By Phillip Tate and Michael Kiely

Two cases filed in Sacramento County, City of Cerritos v. State of California and Syncora Guarantee Inc. v. State of California, have challenged the constitutionality of AB 1X 26, the 2011 bill that provided for the elimination of redevelopment in California. While the California Supreme Court previously upheld the constitutionality of AB 1X 26 in California Redevelopment Association vs. Matosantos, the new cases raise an issue not raised in Matosantos: whether AB 1X 26 violates the provisions of both the California and United States constitutions prohibiting legislation impairing existing contracts. A previous post on this blog discussed a potential challenge to AB 1X 26 based on unconstitutional impairment of contracts.

Article I, Section 10 of the Constitution provides "No State shall . . . pass any Bill of Attainder, ex post facto law, or law impairing the Obligation of Contracts …." Similarly, Article I, Section 9 of the California Constitution provides that "a bill of attainder, ex post facto law, or law impairing the obligations of contracts may not be passed." These constitutional provisions prohibit states from enacting bills that prevent the performance of existing contractual obligations. Legislation running afoul of these constitutional protections can be invalidated. Teachers Retirement Board v. Genest (2007)154 Cal.App.4th 1012; Valdes v. Cory (1983) 139 Cal.App.3d 773.

City of Cerritos v. State of California, Case No. 34-2011-80000952, was the first of the Sacramento County cases to raise the unconstitutional impairment issue.[1] Cerritos was filed before the California Supreme Court rendered its decision in California Redevelopment Association vs. Matosantos and was put on hold while that case was decided. After Matosantos was resolved, the Cerritos petitioners sought an injunction to prevent AB 1X 26 from going into effect, but the trial court declined to grant the injunction, stating that the petitioners had failed to meet their burden of demonstrating a likelihood of success on their claims. Since that time, the Cerritos case has been working through various pre-trial motions and is still awaiting a hearing on the merits.

The second case is Syncora Guarantee Inc. v. State of California, Case No. 34-2012-80001215. Syncora sued the State to prevent the State from eliminating redevelopment agencies, claiming that AB 1X 26 deprived bondholders of money owed under existing contracts. Redevelopment agencies had sold bonds to fund local redevelopment projects. Each bond issue was secured by a pledge of property tax increment (the term for the increased property tax revenue resulting from such projects). Syncora had provided bond insurance supporting several such bond issues. As surety on the bonds, Syncora is subrogated to the rights of bondholders.

Syncora claims that application of AB 1X 26 violated provisions in both the California and the U.S. constitutions against impairing existing contracts by changing the nature and certainty of the funding available for repayment of the bonds. Under redevelopment law, the bonds were issued with assurances, based on the California Constitution, that all property tax increment earned in a project area would be used solely for redevelopment activity in that project area, thereby increasing the likely availability of increasing property tax increment streams to pay such bonds. Under AB 1X 26, however, funds previously allocated for the exclusive purpose of redevelopment area debt service and project area redevelopment will now be diverted for schools and other local services. Thus, rather than having a senior-most priority pledge of particular tax revenues from a particular project area — the tax increment — AB 1X 26 left the bondholders with a claim for payment out of property taxes generally, with the same priority as all other claimants against such property taxes.

Syncora offers as evidence that AB 1X 26 has negatively impacted the tripartite contracts between Syncora, the redevelopment agencies and the bondholders, the June, 2012 downgrading by the ratings agency Moody's Investors Service of all California tax allocation bonds rated Baa3 or higher. Moody’s cited increased uncertainty over timely debt repayments due to the elimination of the redevelopment agencies as the basis for this action. In addition to the unconstitutional impairment claims, Syncora also alleges that AB 1X 26 is an unconstitutional takings without just compensation.

To establish an unconstitutional impairment, however, it is not enough to show that AB 1X 26 negatively impacts existing contractual obligations; the impairment must be constitutionally impermissible. In U.S. Trust Co. v. New Jersey (1977) 431 U.S. 1 ("U.S. Trust"), the U.S. Supreme Court in striking down two New York and New Jersey statutes established a three-part test for determining whether a contractual impairment is unconstitutional: (1) whether there is a contractual obligation; (2) if yes, whether the legislation imposes a "substantial impairment"; and (3) if yes, whether the legislation is "reasonable and necessary to serve an important public purpose."[2] The Court also noted that when reviewing impairments to contracts to which a state is a party, courts should not give complete deference to the legislature's assessment of reasonableness and necessity, as the state's self-interest is at stake.

In determining whether legislation is reasonable and necessary to serve an important public purpose, the California Supreme Court in Sonoma County Org. of Pub. Employees v. County of Sonoma (1979) 23 Cal.3d 296 pointed to the factors established by a Depression era U.S. Supreme Court case, Home Building & Loan Assn. v. Blaisdell (1934) 290 U.S. 398 ("Blaisdell"). The issue before the Court in Blaisdell was the constitutionality of a mortgage moratorium law in Minnesota that was designed to provide relief to landowners whose property was threatened with foreclosure. The statute in question was passed on April 18, 1933 and declared that the Depression created emergency conditions; required the statute to sunset at the earlier of the end of the emergency conditions or May 1, 1935; authorized the courts to extend the redemption period on foreclosures and postpone execution sales; required the homeowners to continue to pay to the bank the reasonable rental value of the property; and did not alter the principal or interest due on the loan.[3] In upholding the constitutionality of the statute, the Court identified four factors that led to its conclusion. First, the legislature had declared an emergency as a justification for the law and that declaration had an adequate basis. Second, the legislation sought to protect a basic interest of society rather than the advantage of particular individuals. Third, the law was an appropriate response to the emergency and the conditions imposed by the law were reasonable. Finally, the legislation was temporary.

In two later cases, El Paso v. Simmons (1965) 379 U.S. 497[4] and Veix v. Sixth Ward Assn. (1940) 310 U.S. 32[5], the Court clarified that the Blaisdell factors are not a pass/fail test, but rather factors to consider in evaluating whether a contractual impairment is unconstitutional.

The trial court will likely evaluate AB 1X 26 under the four Blaisdell factors. In passing AB 1X 26, the Legislature found that California was in a fiscal emergency, for which most would acknowledge there was an adequate basis. The Legislature further found that the elimination of redevelopment was necessary to ensure adequate funding for essential government services such as schools, hospitals and public safety. On this factor, litigants may attempt to challenge the notion that such services represent a “basic interest” of society, especially when compared with other State-funded programs that were spared in the 2011-2012 budget process. Another issue may be whether the court is able to consider the actual results of implementation of AB 1X 26, which has freed from redevelopment substantially smaller sums than predicted for application to schools and other local services. The third factor — whether the law was an appropriate response to the emergency and whether the conditions imposed by the law were reasonable — seems like the area that may be subject to the greatest argument. Certainly the State faced a major budget crisis and cuts in funding were made to many programs in a massive and complex budget. And in another context, the California Supreme Court has already upheld the propriety of eliminating the 65-year-old redevelopment regime in that context. With regard to the fourth factor, unlike the law in Blaisdell, AB 1X 26 is permanent. There is no means by which the tax increment pledges are reinstated after a period of time or upon achievement of fiscal or other economic goals.

The trial court is not limited to either striking down AB 1X 26 as unconstitutional or upholding it. The court could find that it results in an unconstitutional taking and order the State to pay compensation.

While the trial court's denial of the petitioners' requested injunction in the Cerritos case is certainly not a good omen for these cases, that Moody's later downgraded all redevelopment bonds means that these cases are far from over. On September 5, 2012, the trial court ordered that the Cerritos and Syncora are related, and both are currently scheduled to be heard in early March, 2013.

[1] In addition to the contract impairment claim, the Cerritos case raises two other main claims. The first is that AB 1X 26, which was passed by a simple majority, effectively redefines redevelopment's tax increment as an ad valorem property tax, thus fundamentally changing the nature of the tax. That sort of change, petitioners argue, required a two-thirds majority vote in the Legislature. Second, petitioners claim that the Governor and the Legislature exceeded their authority by going after redevelopment funds, thereby responding to a short-term budget emergency with a remedy with effects that may last for 30 years, the lifespan of a redevelopment project area. These issues are beyond the scope of this post.

[2] U.S. Trust Co. v. New Jersey (1977) 431 U.S. 1, 22-27.

[3] Blaisdell at 415.

[4] In El Paso, a Texas statute limiting to a five-year period previously unlimited rights to reinstate interests in lands purchased from the state was upheld on the grounds that (1) a perpetual right to reinstatement was not a substantial inducement for the purchase, (2) the state's prior policy of allowing unlimited reinstatement privileges had unexpected and unforeseeable results, and (3) the purchaser was not seriously disadvantaged by the legislation in question whereas the state's interest in the subject matter of the legislation was an important one.

[5] In Veix a New Jersey statute that altered the withdrawal rights of shareholders in a savings and loan association was upheld on the ground that, while the statute might not have constituted emergency legislation, building and loan associations were vital to the state's economy and when the appellant purchased his shares such institutions were “already regulated in the particular” to which he objected. 295 U.S. at p. 62. Blaisdell was distinguished on the ground that the statute involved there was less restrictive.