September 29, 2016
By Dennis Kaiser
The major economic engine in the Inland Empire is under attack. The primary weapons being used against industrial development projects now are California Environmental Quality Act (CEQA) lawsuits.
In the first day of a four-part series, leading up to Connect Inland Empire, we detailed the challenges facing developers. Today, we’ll explore what the CEQA threat is, and explain its impact on developers.
Major Impact on CRE Development
Environmental lawsuits are having a major impact on development in California, and potentially thwarting the economic growth and health of cities across the state. The CEQA battle has arrived in the Inland Empire, where industrial occupiers have emerged as an engine for the region’s recent resurgence.
The number of lawsuits filed under CEQA has been surprisingly low, averaging 195 per year throughout California since 2002, according to an August 2016 report by BAE Urban Economics. Yet, relatively few involve commercial real estate projects overall.
Currently, Western Riverside Council of Governments (WRCOG) reports there are 16 CEQA cases in its member region, with 20 cases in Riverside County. Though the group says the number is relatively small across the region, commercial real estate developers aren’t escaping unscathed.
WRCOG found 13 cases involving new construction, with seven of those targeting industrial facilities. It also found that in 15 of the 20 cases, the challenge involved a project that potentially could have impacts on air quality, greenhouse gases, noise, traffic, transportation, water supplies or resources.
As a reference, housing projects accounted for 33% of CEQA lawsuits between 2013 and 2015 in areas where roughly 48% of California’s population lives, according to a study by Holland & Knight.
So, the big question stands: Is the threat real, or are CRE developers crying wolf?
Industrial Development Targeted
Industrial facilities in the Inland Empire have increasingly become targets for a simple reason – they tend to be larger and are backed by deep pocketed interests that need to move quickly.
“All product types are being affected, but the logistics warehouse market is most affected because the financial impacts on those projects are the greatest,” said John Condas, a land use attorney with Allen Matkins. “The specter of a lawsuit is the greatest in part because of the size of leases and sales of these buildings. When you’re talking about a lease that will generate mid to high five to six figures for monthly rent, a year of delay contesting litigation can cost the developer millions of dollars in lost rent, not to mention the legal costs which are incurred.”
Opponents understand developers must invest significant amounts of capital and don’t have a big window of opportunity in which to bring a project to market. Unlike an office development, which often takes many years to take from the entitlement phase through to final lease-up, an industrial site must be completed relatively quickly in order to meet market demand or an occupiers’ requirement.
Cost of Doing Business
In general, logistics projects are not being greatly delayed because developers are generally “settling promptly for business reasons,” said Condas. Nonetheless, the financial impact caused by a labor union lawsuit or threat of lawsuit is huge. “If the threat or lawsuit leads to the entering into of a Project Labor Agreement (PLA), that’s going to be a seven figure increase in the project’s construction cost, depending on the size of the project,” he said, because the PLA drives up the cost of labor for construction.
In the logistics sector, the chance of a developer planting a flag in the sand and refusing to settle is slim. “There’s just too much money at stake, and the delay in getting the case resolved is so great,” said Condas. “No lenders will lend on a project mired in litigation, and no tenant or buyer will lease or buy a building that is subject to a CEQA lawsuit. They will shop elsewhere.”
Michelle Ouellette, a land use attorney with Best Best & Krieger, says, since she started practicing law nearly three decades ago, the groups challenging projects in court were environmental groups and sometimes neighbors. Back then, “it was usually clear what their concerns were and they often were valid concerns,” said Ouellette. “Now, given CEQA’s very liberal standing rules (standing is the ability to actually bring a lawsuit), groups that have no interest in the environment, but instead have solely economic interests have discovered that filing CEQA litigation is very profitable”
Be sure to follow Connect Media’s ongoing series this week on development challenges in the Inland Empire. The next story will focus on why CEQA lawsuits are being filed and some solutions to resolve the problem.
For comments, questions or concerns, please contact Dennis Kaiser