On December 29, 2011, in the case of California Redevelopment Association v. Matosantos, the California Supreme Court upheld Assembly Bill ABX1 26 ("AB 26"), which provides for the termination of all California redevelopment agencies ("RDAs"). The court also struck down legislation known as ABX1 27 that would have allowed RDAs to continue in existence by paying a greater share of tax revenues to the State of California (the "State") and other agencies.

The immediate future for RDAs and other agencies in California has, quite simply, shifted in tectonic proportions. So, with the Governor's current position on RDAs, and with the pace and uncertainty of the legislative and political process, Goodwin Procter hopes to shed an important light on the impact of AB 26 on real estate within the context of redevelopment and what remains in the aftermath.

For those real estate stakeholders in existing relationships with RDAs - specifi cally those holders of notes or bonds tied to a redevelopment project, a development agreement with an RDA, a loan with the RDA, or an owner of property located in an RDA project area that is under contract to be acquired - the impacts can be immediate.

Given the absolute nature of this ruling, supporters of RDAs have been crafting legislation to postpone the formal dissolution process, which is to occur on February 1, 2012. The chances of passing and implementing legislation to reestablish RDAs in such a short time frame seem remote. But, a delay in the commencement and strict enforcement of some or all of AB 26's requirements is not beyond the realm of possibility. Yet, at least for now, AB 26 is in effect.

HOW DOES AB 26 IMPACT REAL ESTATE DEVELOPMENT?

One of the goals of AB 26 is to reallocate property taxes that used to fl ow to RDAs to local taxing agencies for core governmental services. However, AB 26 recognizes that these same revenues must, in many cases, be used to satisfy preexisting contractual arrangements.

Section 34175(a) states explicitly:

"It is the intent of this part that pledges of revenues associated with enforceable obligations of the former redevelopment agencies are to be honored.

It is intended that the cessation of any redevelopment agency shall not affect either the pledge, the legal existence of that pledge, or the stream of revenues available to meet the requirements of the pledge."

To balance these competing goals, AB 26 provides that only "Enforceable Obligations" may be paid from property tax revenues that would have otherwise been allocated to the RDAs. Please see Diagram 1 of the AB 26 Summary for a comprehensive discussion of AB 26 and Enforceable Obligations.

Given the reach, intent, and impact of AB 26, it is prudent to review the outstanding documents between all public sector and private sector stakeholders and an RDA to determine whether a subject project has one or more Enforceable Obligations associated with it.

In general terms, there are three baskets that a development may fall into under AB 26:

1. When the developer and an RDA were in negotiations over a redevelopment project but no agreement was ever in place between the parties.

In this case, it may likely be an uphill battle to establish an Enforceable Obligation. A review of the documentation and the public approval process and record is essential.

2. When a developer and an RDA are operating under an Exclusive Negotiation Agreement ("ENA"), but without a defi nitive property development agreement in place - usually taking the form of a purchase and sale document, an Owner Participation Agreement ("OPA"), or a Disposition and Development Agreement.

ENAs may constitute an agreement to discuss confidential information for a mutual project vision. But an ENA sometimes set forth greater obligations and thus may evidence an Enforceable Obligation.

3. When a developer and an RDA have entered into a property development agreement, but the RDA has not yet commenced or prosecuted to completion its obligations - such as the sale of property, the issuance of bonds, or the condemnation of easements or outparcels.

Arrangements that fall into this third basket should receive attention by the relevant Successor Agency seeking to retain tax increment to implement redevelopment plans. Likewise, these arrangements could expect to receive a reasonable amount of scrutiny by the relevant Oversight Board and county Auditor- Controller, with further review from the State Department of Finance and the State Controller.

ENFORCEABLE OBLIGATIONS

AB 26 provides that only Enforceable Obligations may be paid from the Redevelopment Property Tax Trust Fund (see New Flow of Funds) and that such Enforceable Obligations must be disclosed in an adopted Enforceable Obligation Payment Schedule. Any documents associated with an Enforceable Obligation shall be subject to review by the State.

"Enforceable Obligations" are defined in AB 26 as bonds, loans required to be repaid pursuant to a repayment schedule, payments required by governmental agencies, judgments or settlements, or contracts necessary for the continued administration and operation of the Successor Agency to the extent permitted by AB 26. The following diagram helps illustrate what constitutes an Enforceable Obligation under the new law.

FINANCIAL COMMITMENTS AND OTHER OBLIGATIONS

Arguably, three of the more significant obligations an RDA undertakes for a development include real property assemblage, tax increment financing, and affordable housing. Under many OPAs and DDAs between RDAs and property owners, a pledge of tax increment is set forth within the documents. In some cases, the RDA is required to pay tax increment directly to the developer after certain benchmarks are met.

A variation on this approach is when the RDA promises to issue a tax increment-backed promissory note to the developer in exchange for meeting certain milestones. The RDA may also have promised to use best efforts to issue tax increment bonds to the public and use the proceeds of the bonds to pay for infrastructure or other authorized public improvements.

With AB 26 requiring Successor Agencies to make payment on scheduled and reported liabilities, the enforceability of open-ended expectations and commitments to issue debt or pay for public improvements from tax increment will certainly be the topic of significant legislative and judicial debate.

ON THE ROPS

As covered in the AB 26 Summary, Successor Agencies may only make future payments on Enforceable Obligations that are set forth on a schedule known as the Recognized Obligation Payment Schedule ("ROPS"). The obligations listed on the ROPS are subject to review and scrutiny by the Oversight Board, State Department of Finance, and State Controller.

ALTERNATIVES TO RDA FINANCING

Meanwhile, in addition to reviewing existing arrangements with RDAs, developers may wish to evaluate whether other public financing alternatives exist. Although, no alternative is as broad and powerful as RDA tax increment financing, there are several other options that can be explored.

These alternatives use a variety of revenue sources to finance projects through special taxes, enterprise revenues, hotel taxes, sales taxes, lease payments, and property tax increment. They are discussed in detail in We have also provided a detailed examination of IFDs in Infrastructure Financing Districts: An Alternative to RDA Financing? These alternatives, taken separately or in combination, may prove to be viable sources of project financing.

A FINAL NOTE

Opportunities may also arise from the sale of redevelopment agency assets at some point in the future, since one of the Successor Agency's tasks is to liquidate RDA property in an efficient manner. Vacant parcels, parking lots, or other infill sites could become available for acquisition and development. We look forward to continuing our dialogue on this topic with you.

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Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2012 Goodwin Procter LLP. All rights reserved.