On December 29, 2011, legislation to dissolve all redevelopment agencies became effective when the California Supreme Court released its opinion in California Redevelopment Association v. Matosantos, challenging the Legislature's adoption of AB 1X 26, providing for elimination of California redevelopment agencies (RDAs), and AB 1X 27, exempting from elimination any RDA that makes a voluntary contribution of its revenues. The Court has upheld the constitutionality of AB 1X 26 and struck down AB 1X 27.
The dissolution of redevelopment agencies in California may affect you if you have any of the following:
- Redevelopment Agency issues bonds or notes;
- Real property subject to an agreement with a redevelopment agency;
- A loan from a redevelopment agency;
- A lease with a redevelopment agency;
- A contract to acquire land from a redevelopment agency;
- Real property located in a redevelopment project area; or
- Any interest in acquiring redevelopment agency assets.
THE RDA DISSOLUTION LEGISLATION
AB 1X 26 and AB 1X 27 became effective on June 29, 2011, but
were stayed by the California Supreme Court pending resolution of
the challenge. The complex RDA dissolution legislation can be
simply summarized as follows:
All redevelopment agency activity is now suspended except paying
existing obligations;
All redevelopment agencies will be abolished on February 1, 2012
and "successor agencies" will be created to take over the
assets and obligation of their former redevelopment agencies;
The successor agency is required to wrap up operations of the
former redevelopment agency under the direction of an oversight
board composed of 7 members, the majority of which are selected by
the county board of supervisors or county superintendent of
education;
Property tax increment formerly payable to redevelopment agencies
will be distributed to taxing agencies after first paying amounts
due on existing obligations under current payment schedules;
and
Existing obligations, as defined in the legislation, will be
honored; however, successor agencies are tasked with terminating
contracts where savings could be created by termination
payments.
POTENTIAL IMPACTS
1. Agency Bonds or Notes. Generally, scheduled amounts payable under Agency bonds or notes for which the Agency pledged tax increments will be honored under the RDA legislation. The successor agency will continue to receive tax increments for payments. However, to be payable any such obligations must be on the RDA's Recognized Obligation Payment Schedule, so holders should confirm their obligations are so scheduled. In addition, there may be disputes among the County Controller, the State Controller, the Department of Finance and the Successor Agency as to the characterization of such obligations, and whether they are appropriate to include on the Schedule at all.
2. Other Agency Tax Increment Pledges –
Other Agency Agreements. Under many owner
participation agreements between redevelopment agencies and
property owners, a future pledge of tax increment is contemplated.
For example, under some Owner Participation Agreements (OPAs) upon
completion of the required project, the redevelopment agency is
required to issue a tax increment-backed promissory note to the
developer. In others, the redevelopment agency commits to issue tax
allocation bonds upon completion of the required project or
satisfaction of other conditions. In still others, redevelopment
agencies set aside tax increment for payment upon certain
milestones. Since the AB 1X 26 permits payment only on scheduled
liabilities, it is unclear whether such commitments, which may not
be certain with respect to timing or amounts, will be
honored.
3. Loan from an Agency. Redevelopment
agencies have frequently provided loans to developers, especially
affordable housing developers, and non-profit organizations.
Frequently, given the community development and planning goals of
the redevelopment agencies, enforcement of such loans has not been
strict. Since the successor agencies are charged with maximizing
revenues for distribution to the taxing authorities, borrowers'
assumptions regarding loan extensions, modifications,
non-enforcement or conversions to grants should now be
re-examined.
4. Lease with a Redevelopment
Agency.Where the redevelopment agency is the
landlord, no lease amendment will be possible until after formation
of the successor agency. Successor agencies are obligated to sell
all assets, so the agency's tenant should assume that all
future dealings with the landlord under the lease will be
undertaken in the context of landlord revenue maximization rather
than redevelopment agency planning and community goals. The sale
requirement may create an opportunity for the tenant to acquire the
fee interest.
Where the redevelopment agency is the tenant, no lease amendment
will be possible until after formation of the successor agency, if
at all. Since the successor agencies are to receive only limited
funding, landlords may expect successor agencies to default under,
or at least try to renegotiate, lease obligations. However, there
is nothing in AB 1X 26 to indicate that such leases would not be
treated as an enforceable obligation. Landlords should consult
their leases, since some leases with government agencies contain
tenant termination rights.
5. Agency Land Sale. Generally, a
redevelopment agency sells land pursuant to a Disposition and
Development Agreement, with closing upon satisfaction of certain
conditions, usually including obtaining financing for development
of a defined project. Successor agencies are obligated to sell all
assets, but in a way that maximizes yield. If the purchase price is
below market value, then the successor agency could attempt to
revoke such agreement, perhaps by invoking developer defaults or
failed conditions.
If the RDA previously sold property to a developer with a right to
repurchase if development did not proceed, then the successor
agency may consider whether it should invoke such right. If the
original purchase price was below market, and the debt level on the
property is low enough, it might be prudent for a successor agency
to consider exercising its option then selling the parcel for fair
market value.
6. Real Property Located in a Redevelopment Project
Area. If your real property is located in a
redevelopment project area, then any anticipation of entering into
a subsidy redevelopment deal involving redevelopment agency tax
increment should be let go. Other subsidy sources should remain
available, and there is contemplation in Sacramento of an expansion
of the infrastructure financing district laws to make alternative
financing more readily available.
There may also be land use implications. Some local jurisdictions
include the redevelopment agency in their land use planning
regulations. Examples include delegating authority to redevelopment
agencies for design review, or permitting certain variances only
for projects subject to redevelopment agency agreements. Some
cities have already made alterations to their planning regulations
regarding a transition of such powers to other agencies, such as
planning commissions.
State land use planning laws may also be implicated. For example,
the State Outdoor Advertising Act provides certain benefits for
freeway-adjacent properties located in redevelopment project areas,
the effects of AB 1X 26 on which are unclear.
7. Sale of Redevelopment Agency Assets. Under AB 1X 26, successor agencies are obligated to sell all former redevelopment agency assets in a way that maximizes yield. Some estimate that in Los Angeles County alone, there may be over 2,000 such sites. This suggests opportunities to acquire valuable sites without the baggage of typical redevelopment agency requirements (for example, no-flip provisions, development covenant with deadlines, RDA design review, tenant mix approval, opening covenants, operating covenants, prevailing wage, living wage, or local hiring requirements). While AB 1X 26 requires successor agencies to conduct such sales "expeditiously and in a manner that maximizes value", there is a possibility that successor agencies flooding the market may result in downward pressure on property values statewide.
WHAT TO DO NEXT
The intent of this message is to urge property owners and
interest holders that may be affected to analyze the RDA
dissolution legislation and determine their best course of action.
The appropriate response may be to wait and see what the successor
agency does with respect to your particular property or agreement.
Another response would be to move aggressively either by
negotiation or litigation with a successor agency in order to more
clearly establish your rights.
The above summary of the RDA dissolution legislation is not
intended as a complete summary and the description of potential
risks as a result is not intended as this Firm's opinion as to
the outcome of any dispute that may arise. Sheppard Mullin
attorneys have deep and broad experience in redevelopment, and we
stand ready to assist you. Please note more detailed analysis has
been previously published relating to the RDA dissolution
legislation in prior blog postings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
