October 2, 2016
In the final installment of our four-part series on the challenges facing developers in California today, we conclude with an in-depth Q&A with Allen Matkins’ John Condas, one of the state’s most respected and experienced land use attorneys. Condas will be speaking at Connect Inland Empire on October 6th.
Q: How do you advise commercial real estate development clients about challenges they’ll face in California relating to CEQA and union lawsuits?
A: I advise our clients that they need to budget additional dollars, which will be required for a settlement, and they also need to budget for additional delays in breaking ground to effectuate settlements, if our clients intend to settle. As CEQA gets more complex every year, developers have to budget sufficient dollars and time to comply with CEQA. These expenditures are used to prepare extensive, rigorous, comprehensive technical studies and analyses on a wide variety of environmental impacts.
Q: CEQA has been around for some time, so why does it seem as though it is a more prevalent challenge to development today?
A: The reason it’s a more prevalent challenge today is because there are so many more active project opponents who are using CEQA as a tool to stop or delay development. The second reason probably would be, at least in certain product types, that developers generally are more willing to settle because lawsuits these days generally cost more to litigate and take longer to resolve. A lot of developers cannot wait the one to three years it takes for the lawsuit to be resolved, and thus the more prudent immediate business solution is to settle. The increased frequency of CEQA challenges certainly is not because CEQA compliance is inadequate or improper. To the contrary, the vast majority of CEQA documents prepared comply with the statute, are prepared primarily to comply with the statute and are reviewed by a number of sophisticated parties, including the local jurisdiction where the project is being processed.
Q: What could be done to improve the process?
A: Although difficult to accomplish, meaningful CEQA reform would be beneficial. CEQA continues to expand and become more complicated, creating new types of claims that can be brought by project opponents. Compliance incremental, low-impact CEQA reform could focus on how to process CEQA lawsuits quicker and to limit opponents’ ability to litigate through tightening the standing requirements to be able to file a lawsuit. In order to file a lawsuit, you must have standing, and standing under CEQA is very liberal, unlike other statutory frameworks.
Q: Who is filing CEQA lawsuits? What typically are the objectives? How effective are they in achieving their goals?
A: Unions are being extremely effective in influencing the development process throughout the Inland Empire, as well as outside the Inland Empire, through the use of CEQA attacks or threats to help facilitate the goals that they desire. The primary objective is negotiating a project labor agreement (PLA) between the developer’s contractor and the labor union, which is opposing the project. The PLA provides that the union’s workers are used on a construction job rather than non-union workers. These lawsuits and threats of lawsuits are extremely effective in achieving the union’s goals – generally it makes more business sense for the developer to settle rather than litigate. This is especially the case regarding logistics projects. Our clients perceive that we are in a very strong, hot market and they cannot afford to wait one to three years (including appeals) to fight these lawsuits. Therefore, they generally choose to settle quickly.
Q: Are there any product types more impacted than others and why?
A: All product types are being affected, but the logistics warehouse market is most affected because the financial impacts on those projects are the greatest. 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. Generally, logistics projects are not greatly delayed because developers are generally settling promptly for business reasons. 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 PLA, that’s going to be a seven figure increase in the project’s construction cost, depending on the size of the project. The project labor agreement drives up the cost of labor for construction.
Q: Has any developer planted a flag in the sand and refused to settle?
A: No, at least not in logistics. There’s just too much money at stake, and the delay in getting the case resolved is so great. 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.
Q: What could be done to improve the situation for developers?
A: From a development standpoint, if development slows down, it might be more likely that developers will fight these lawsuits. This could lead to a decrease in the number of lawsuits that are being filed. The more likely outcome is that the cost of settling these lawsuits will become baked into the cost of land the developers are buying. Land sellers likely will ultimately take a hit in the price of their land because these added meaningful costs have to be taken into account as part of the developer’s pro forma.
Q: So, land sellers ultimately may have to adjust their expectations on pricing their land?
A: Yes, because that’s one of the inputs that drives whether a project is going to go forward. When you have an increase in project costs, whether it’s the requirement of using union labor, which increases construction costs, or the obligation to pay-off a CEQA opponent, someone has to absorb these cost increases. Unless rents are increasing greatly, the only input that can be adjusted to make the project pencil out is the price of the land.
Q: What could be done to improve the situation for the unions?
A: For example, LIUNA, the Laborers International Union of North America, has been working on creating a streamlined, one-size-fits-all PLA to minimize the delay and PLA negotiation costs. LIUNA has been somewhat flexible on reducing the cost of using unionized labor, but it still is a meaningful and significant cost increase to use unionized labor.
Q: Has anyone discussed what the delta is on the cost difference between unions vs. non-union labor?
A: Yes. It’s difficult to generalize, but in talking with our clients and the contractors, it’s anywhere from an 8-12% increase in construction cost, due to the requirement to use unionized labor. This increase is solely attributable to employing LIUNA trades, as other construction trades need not be unionized. For a project I am working on presently, a 600,000-square-foot project, it is estimated that there will be a $3.5 million increase in the cost of construction.
Q: It doesn’t seem like anyone talks about exactly how much more unionized labor costs.
A: I think the reason for that is, at least with respect to logistics facilities, this is a new phenomenon. LIUNA only has started attacking projects since late last year, so there has been a learning curve in terms of how much extra it’s going to cost, because previously, the contractors haven’t been using union labor because of cost and lack of availability. Because of this, everyone is just trying to get their arms around these added costs. This is why we don’t have exact numbers and we won’t have complete, accurate numbers until a project is built and the amount of the cost increases can be validated.
Q: So, it’s specifically within the industrial segment? Is that because that market has been so hot recently?
A: Yes, there are so many reasons a logistics project is vulnerable. The main reason is due to the consensus that this is a very hot market, and thus product needs to get to the market as quickly as possible, unlike other product types where the market is not as strong in Southern California.
The second reason is that you’re talking about big buildings, which generate huge rent payments or large sales prices. When the developer secures a tenant for a million-square-foot building, this generates a huge monthly lease payment, so a year’s delay can cost the developer $5 million in lost rent.
For comments, questions or concerns, please contact Dennis Kaiser