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COVER STORY, SEPTEMBER 2008
SITE DEVELOPMENT IN TODAY'S 'GREEN' WORLD
Green can be mean for developers seeking entitlements.
Frank M. Coda
In California and other western states, both policymakers and the general public exhibit a strong and ever-growing commitment to sustainability and environmental preservation. This is positive news in respect to society’s long-term environmental stewardship. But the preservationist mindset poses barriers and challenges to retail and other types of development. Through the increasingly environmentally conscious legislative efforts, the green commitment adds another tricky layer to the existing challenges the development community faces.
The Quest for Entitlement
In preservation-minded jurisdictions, environmental compliance lies at the heart of a pre-development phase that culminates in entitlement. This is the moment when developers are granted the right to build, even before actual building permits come into play.
Because of this powerful, preservationist mindset, developers and investors undertaking commercial development in states like California must understand the increasingly restrictive environmental codes that will affect the cost and timetable of their projects. They need to learn — or at least appreciate — the latest and best ways to manage the critical front end of the development process, a process that plays out well before the first shovel goes into the ground. Renderings look impressive on a computer screen or an easel. But the attractive images will never be transformed into reality if a project cannot get past square one at the point of site development.
California’s Environmental Rules
Before a development can be issued any discretionary approvals, the California Environmental Quality Act (CEQA) requires project applicants to enlighten the public about the wide range of potential environmental impacts the project may trigger, including effects relating to air quality, traffic, noise, wildlife, wetlands, storm-water quality and other consequences. For projects above a certain minimum acreage, CEQA also is being expanded to include a project’s impact on global warming.
The developer must enumerate the mitigating steps that will be taken to neutralize or diminish the anticipated impacts. The relevant jurisdiction will only allow projects to proceed under a “Mitigated Negative Declaration” of the CEQA law if the studies and facts clearly affirm that environmental impacts are being mitigated. If the analysis indicates that an impact cannot be mitigated or if there are lingering gray areas, then a full “Environmental Impact Report” will be required, which further extends the development timetable and increases cost.
In many cases, economic benefits can override mitigation requirements or a site may be located in an area with such large amounts of existing air problems that the project cannot be reasonably expected to mitigate pollution below certain thresholds. Either way, the jurisdiction must find that there are overriding benefits or considerations resulting from the project that should still allow the project to move forward.
The CEQA process also can be affected by the level of community activism in the area. For instance, if a project is highly contested, developers may find themselves required to file a full report, even if the initial documents set forth an ample mitigation regimen. The reason for this is that a Mitigated Negative Declaration is much more easily challenged and, while it may appear to be a quicker route, often it proves to be a much longer and costlier one.
Developers must clearly factor in CEQA compliance when determining project timetables and budgets. In California, for example, the development process for a 50-acre neighborhood shopping center will take from 9 months to 2 years. The time span can be prolonged as long as 3 or more years if the filing draws challenges. In the more extreme cases, this translates into as much as 4 to 6 years before a development is approved.
On the retail front, even for modest projects, costs associated with CEQA compliance will run from a minimum of approximately $200,000 up to as high as $1 million.
Success Through Consensus
Especially for ambitious projects, developers must build local consensus. The following example is unusual but instructive. From the outset, many doubters thought a large-scale retail project in the greater Sacramento area would never get built. Considerable controversy existed within the community at large. Statutory and preservationist hurdles were high. Unsurprisingly, the initial mitigation plan was rebuffed and the project was required to go through a full-blown, full-bore CEQA process. Yet after a period of 4 years, it won approval.
In this instance, the development company succeeded in large part because it was willing to understand the needs and wishes of various constituents, from elected officials to regulatory personnel to community groups to environmentalists. The developer had remained honest and accurate in its community-relations efforts and had exercised flexibility when needed. Ultimately, the project won across-the-board approval from the full spectrum of involved parties. A patient and tactical process of consensus building had delivered the project.
Brownfield Complications
Brownfield locations — such as capped landfills or Superfund sites — make for more complications. The developer faces a strategic challenge: how to create a project that will be approved on environmental grounds, but will also deliver a design that makes sense from a business standpoint.
Rules are stringent, and regulatory involvement now expands to include the federal Environmental Protection Agency. Creating a project that complies with every agency’s rules is a daunting and complex process. But in markets where available land is scarce and expensive, brownfield redevelopment may be an unavoidable option.
Because structures are not allowed to rest directly on landfills because of settlement, building codes require pilings and/or ground modification techniques. In the retail sector, the parking lot is of equal importance to the retail space itself and as such can create several challenges. It is not uncommon to have to plan for the parking lot to settle several feet over the subsequent 3 or 4 decades. Typically this will not impede approval.
Four Keys to Success
With CEQA and other factors placing substantial obligations on developers, how best can they refine their approach? After reviewing the law and a few other related topics, here are four best practices that will help developers get through the challenging early stages and create successful projects both for their bottom line and the community. Whether the payoff comes in the form of sales per square foot, residential sales/rents or commercial tenant leases, real estate development works as a business proposition. But if a development entity is targeting an environmentally conscious state like California for its next project, it will boost its chances for success by adhering to these four best-practice principles during the entitlement phase:
• No.1: Anticipate
A developer must engage in preliminary research about the length and complexity of the entitlement process in states with laws like CEQA. Realism is essential. Developers are accountable to investors, who demand accurate timetables and who increase the financing charges when projects run longer than expected.
• No. 2: Outsource the entitlement process
A developer’s core capabilities come into play after entitlement has been gained. Getting a big project through a thicket of regulatory and civic obstacles is a specialty that requires distinct skills. Developers who outsource pre-development and entitlement to consultants are always being called by their clients who tell them, “Thank you for taking all of this out of my hands so I can do my job!”
• No. 3: Tap local experience
There are many structural skills involved in working with city council members, mayors, community organizations and local regulatory officials. But a developer will enjoy maximum effectiveness in moving site development forward by tapping the expertise of local consultants who understand local dynamics and know many of the local players.
• No. 4: Seek full project
Lifecycle Consulting
Many competitors offer a wide range of professional services to the nation’s commercial real estate community, but the best consultant will be the one with the range of expertise to take a developer all the way from site development to the ribbon-cutting ceremony. Such consultants exist in the marketplace and it makes sense to seek them out.
Within every stage of the development process lie the seeds of the next stage, straight through from entitlement to design to construction to completion. If a developer works with a consultant who is on board throughout the full project lifecycle, information gaps — i.e., costly oversights — will be minimized. Content will not get watered down as it passes from one consultant to the next along the line. Proper planning and guidance at the outset of a project will save valuable time and money while eradicating some painful headaches along the way.
When it comes to real estate development, Western Real Estate Business readers know that the world is getting “greener” by the minute. Preservationist codes now applying in California and several other states are gradually becoming universalized. The message to developers is clear: Those who learn to master the site development and entitlement process put themselves in the best position for long-term success.
Frank M. Coda is an associate principal in the Los Angeles office of national architectural, planning, engineering and development consulting firm GreenbergFarrow.
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