United States: West Coast Real Estate Update: June 14, 2016

Susan Booth, Karl Lott and Douglas Praw are Partners in Holland & Knight's Los Angeles office
Ashley Jason and Paul Park are Associates in Holland & Knight's Los Angeles office
Geoffrey Geddes is a Public Finance Project Manager in Holland & Knight's Los Angeles office

Stacie Goeddel and Robert Haight Jr. are Partners in Holland & Knight's San Francisco office

California Governor Proposes "Build By Right" Approval Process for Affordable Housing

Recognizing the extreme need throughout California for construction of new affordable housing units, on May 13, 2016, Gov. Jerry Brown proposed a new, streamlined process for approval of multifamily projects that include an affordable housing component. Under the proposal, called the Streamlining Affordable Housing Proposals, certain types of multifamily development projects that include affordable units would be able to obtain ministerial, or "by-right," entitlements. Qualifying projects would be exempt from local government reviews (such as conditional use permits, planned unit development permits or other discretionary local government reviews or approvals) if the projects are already zoned and approved for housing, and if between 5 percent and 20 percent of the newly constructed units are set aside for low-income residents.

Because of the urgency of California's housing crisis, the proposal would take away local governments' ability to impose restrictions on qualifying projects. Local governments, including charter cities, would be required to approve a development without imposing additional requirements if the development satisfied certain specified criteria. These conditions include the following:

  • The developer must notify the local government that it is electing to take advantage of the statute.
  • The development must comply with the local government's existing general plan and zoning standards.
  • The development must be in an area developed with urban uses.
  • Between 5 percent and 20 percent of the proposed units must be set aside for low-income residents.
  • The development must not be located on certain specified types of properties.

The proposed legislation also requires local governments to process the application rapidly, and to provide any disapproval detailing the reasons for the disapproval within 30 days after receipt of the application. If the local government misses that deadline, the development will be deemed approved.

The governor's proposal has been receiving considerable support by developers and affordable housing organizations, and we can expect to see quick legislative action on the proposal.

View larger version of chart.

FinCEN Final Rules Send Message to Financial Institutions: Know Your Customers

Money laundering is like a malevolent magic trick. See these sullied, illicitly acquired greenbacks? Presto: Clean as a white rabbit. Reasons for laundering money vary like detergents, ranging from anti-federalist mistrust to financing terrorist operations. Regardless of the motivation for secrecy, the federal government has taken the position that more rigorous due diligence and reporting by financial institutions results in fewer opportunities for financial crime.

As our monetary system has grown in size and sophistication, one of the favorite tools of the money launderer has become the "shell" company, which is organized to disguise the actual owner or beneficiary of a business. In an effort to unmask these beneficial owners, and thereby reduce the opportunity for malfeasance, the Financial Crimes Enforcement Network (FinCEN) recently published its Final Rules relating to customer due diligence (CDD) that must be performed by covered financial institutions (e.g., banks, securities broker-dealers, commodities brokers and mutual funds). The stated purpose of the Final Rules is to prevent "criminals, kleptocrats, and others looking to hide ill-gotten proceeds" from anonymously accessing the financial system.

The Final Rules are based on the following four core elements, which FinCEN considers essential to an effective CDD program:

  1. customer identification and verification
  2. beneficial ownership identification and verification
  3. understanding the nature and purpose of customer relationships to develop a customer risk profile
  4. ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information

The Final Rules codify items 3 and 4 in the list above by revising 31 CFR §1020.210(b) – a revision referred to by FinCEN as the "fifth pillar" of an effective anti-money laundering program. This fifth pillar requires financial institutions to, among other things, take reasonable steps to identify all nominal and beneficial owners of an account. (See the Final Rules for a description of the other four pillars.)

The fifth pillar sparked some criticism from financial institutions prior to the publication of the Final Rules, primarily due to fears about increased costs related to compliance. FinCEN addressed this concern by permitting covered financial institutions to rely on the beneficial ownership information provided by the customer, so long as the institution does not know of any facts that might cast doubt on such information.

The Final Rules become effective on July 11, 2016, and covered financial institutions must comply with the rules by May 11, 2018.

California Ballot Initiatives: Indispensable Development Tool or CEQA Dodge?

Advocates point to the initiative and referendum process as one of our country's few remaining examples of "direct democracy." In 1911, California became the 10th of only 24 states that permit citizens to bypass their lawmakers and legislate with their ballots. Since then, Californians have exercised their initiative to, among other things, abolish a poll tax (Proposition 10, 1914), establish daylight savings time (Proposition 12, 1949), reinstate the death penalty (Proposition17, 1972) and, in one of the most famous examples, impose unprecedented restrictions on the state's authority to collect property taxes (Proposition 13, 1978).

Since the passage of Proposition 13, a sharp decline in tax revenues available for infrastructure improvements, coupled with stringent and often costly environmental regulations under the California Environmental Quality Act (CEQA), has impeded residential and commercial development across the state. Many developers and municipalities have responded by encouraging local voters to use their initiative power to change or bypass land use regulations and environmental restrictions in order to lower costs and accelerate the development process.

The California Supreme Court generally has supported using the initiative process in connection with land development. It has upheld the use of a ballot initiative to amend a local general plan. More recently, the court upheld the adoption by a city of a voter initiative that approved the expansion of a retail store into a "supercenter" without having to comply with CEQA.

When a local governing body receives an initiative petition signed by at least 15 percent of the locality's registered voters, the officials have the option of directly adopting the initiative rather than submitting it for a vote at a special election (CA Elections Code §9214). Opponents worry that this power to implement the will of only 15 percent of the voters provides developers and local officials too much power to circumvent environmental and other land use restrictions.

Proponents counter that, until the CEQA process can be modified to eliminate the often years-long environmental reviews and seemingly limitless lawsuits, the ability of a locality to bypass those impediments is crucial to the state's economic future. Moreover, say advocates, the support of 15 percent or more of a locality's voters, together with the required public hearings, represents a noteworthy indicator of the wishes of the people who will be most affected by those development decisions.

Notwithstanding the continuing debate, the initiative process remains a viable development tool in California. The most recent examples include: 1) an initiative approved by the City of Inglewood to rezone the former Hollywood Park racetrack for the construction of a new football stadium for the Rams, 2) an initiative approved by the City of Carlsbad to change the zoning surrounding the Agua Hedionda Lagoon to accommodate the construction of a shopping center and 3) an initiative approved by the City of Moreno Valley to clear the way for the construction of a 40-million-square-foot warehouse project.

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.

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