United States: West Coast Real Estate Update: Nov. 14, 2016

Susan Jennifer Booth is a Partner in Holland & Knight's Los Angeles office

Stacie Andra Goeddel is a Partner in Holland & Knight's San Francisco office

Robert M. Haight Jr. is a Partner in Holland & Knight's San Francisco office

Karl J. Lott is a Partner in Holland & Knight's Los Angeles office

Douglas A. "Doug" Praw is a Partner in Holland & Knight's Los Angeles office

Ashley K. Jason is an Associate in Holland & Knight's Los Angeles office

Paul J. Park is an Associate in Holland & Knight's Los Angeles office

Geoffrey M. Geddes is a Public Finance Project Manager in Holland & Knight's Los Angeles office

New Study Finds $6.7 Billion of Private Investment Along Foothill Gold Line

According to a new study, the extension of the light rail line east of Los Angeles, known as the Foothill Gold Line, has attracted billions of dollars in private investment. In the 13 years since passenger service began on the Gold Line, the report shows that transit-oriented development (TOD) projects have resulted in $6.7 billion in private investment and have created more than 70,000 jobs and $50 million in tax revenue. The developments include 12,500 new housing units, 3.6 million square feet of commercial space and 1,400 hotel rooms built within a half-mile radius of a Gold Line station. The study was commissioned by the Foothill Gold Line Construction Authority and compiled by Beacon Economics and the Maxima Group.

The Foothill Gold Line extends northeast of downtown Los Angeles to Pasadena and then east to Azusa. The part of the line from east Pasadena to Azusa opened for passenger service in March 2016.

"The Foothill Gold Line is being built along a historic freight corridor that was originally built to service the citrus industry," said Lisa Levy Buch, director of public affairs at the Foothill Gold Line Transit Authority. "Land uses along the route were therefore industrial in nature. Those industrial uses are shifting to higher and better uses of the land."

Currently, there are plans to extend the Foothill Gold Line farther east to the City of Montclair. Although the final environmental impact report for the proposed extension has been completed, funding has not yet been secured. The $1.2 billion cost could be paid by a half-cent sales tax if Measure M is approved by Los Angeles County voters. If Measure M passes, the project could spur investment that far exceeds its cost.

"The TOD study anticipates a potential of another $9 billion in private investment opportunities in the 11 extension cities from Arcadia to Montclair," Buch said.

As the prospect of passenger light rail service has drawn interest from developers to introduce new uses near the Foothill Gold Line, cities along the rail line have updated their general plans and created specific plans to encourage development around the stations within their jurisdictions. The Foothill Gold Line serves as a testament to the impact that infrastructure improvements can have on private investment in an area. It also shows how municipalities can meet the needs of their citizens and unlock the potential for increased tax revenue by adapting development regulations to changing environments.

Court Says Government Owes $207 Million to California Wind Farm Owners

The Court of Federal Claims held, in a decision released Oct. 31, 2016, that the U.S. Department of the Treasury incorrectly excluded a wind farm's "turn-key value" from its basis when calculating the amount of a federal renewable energy grant to owners of the wind farm. As a result, the grant actually received by the owners of the Alta Wind Energy Center, located in the Tehachapi Pass north of Los Angeles, was approximately $207 million less than what they were owed.

In the wake of the Great Recession, Congress passed the American Recovery and Reinvestment Act of 2009 (ARRA). Section 1603 of the ARRA aimed to stimulate the U.S. economy by providing cash grants to owners of certain renewable energy facilities. The grants were equal to 30 percent of "the basis of such property."

In its opinion, the court stated that, generally, basis is the cost of property to its owner, and, therefore, the basis of a wind farm facility is the facility's purchase price. However, the government argued that the basis of the wind farm could not be its entire purchase price. The government argued that the purchase price contained the value of property that was ineligible for the federal grant, such as intangible goodwill and going concern value.

The court disagreed, saying that the plaintiffs did not pay for goodwill or going concern value, but did pay for turn-key value, which the court described as "value over and above the sum of [a piece of property's] construction and development costs ... when it is ready for immediate use after purchase." This distinction was critical "because turn-key value, unlike going concern value or goodwill, is part of the tangible assets in a transaction rather than a separate intangible asset," said the court.

Therefore, because the plaintiffs purchased the wind farm facilities at a point when they were ready to be put into immediate production, the entire purchase price, including any portion that represented the wind farm's turn-key value, was the proper basis of the property for purposes of calculating the amount of the renewable energy grant.

Tiny Homes Look Good on Television, But Are More Difficult to Pull Off in Real Life

Television shows, lifestyle websites and magazine photo spreads that tout the tiny home craze make it appear that the tiny home market is challenging more traditional forms of real estate. However, prospective owners of tiny homes face several legal, regulatory and practical challenges.

Tiny homes usually range from 100 to 400 square feet and offer an affordable, energy-efficient option for many segments of homebuyers, including millennials burdened by student debt and baby boomers with minimal retirement savings. However, tiny homes are sold as just the building – buyers must find their own land on which to put them. This can be difficult in urban areas where vacant land is scarce and zoning laws restrict the number of units that can be on one lot.

Obtaining insurance and financing for a tiny home can be difficult as well. Many tiny homes are built on trailers and thus occupy a gray area between being legally defined as real property or vehicles. As a result, many insurance companies and lenders shy away from dealing with the uncertainty of the legal and regulatory ramifications of servicing tiny homes.

Most difficult of all are laws in many cities and counties that mandate new single-family homes be at least 1,000 square feet in area.

Some local authorities are starting to adapt their laws to accommodate tiny homes. Fresno, Calif., recently changed its zoning and development code to permit small homes on wheels to be used as independent living quarters. Prior to the amendment, the mobile units could only serve as temporary lodging. As more state and local lawmakers address this growing trend, land use officials and legislators have the opportunity to make tiny homes a realistic option for many homebuyers.

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