COMMERCIAL BILLBOARDS IN THE CITY OF LOS ANGELES: WILL L.A. BE ABLE TO PASS AN ORDINANCE WHICH IS BOTH CONSTITUTIONAL AND EFFECTIVE?

For years, the use of billboards throughout the City of Los Angeles proliferated at a substantial rate. In a town where so many people are driving vehicles and which is a huge media market, the use of billboards and other commercial signage has spawned a mega-million dollar industry. However, while these types of signage are great for certain advertising, they have their critics. Indeed people have increasingly complained in the last decade that these billboards have become ubiquitous eyesores, another kind of urban “blight.” Moreover, as in many other municipalities, billboards have been blamed for distracting motorists and leading to numerous traffic accidents.

To address the situation in Los Angeles and with a goal to significantly restrict billboard use for commercial advertising, the Los Angeles City Council (the “Council”) has enacted a number of ordinances, some passed more than 10 years ago. Predictably, the signage industry and landlords who rent out billboard space to offsite commercial enterprises have opposed those ordinances.

Three lawsuits were filed over the years in the federal court in Los Angeles challenging the constitutionality of one or more of these ordinances on free speech grounds based on the First Amendment to the United States Constitution. All three reached the appellate level and were heard by the federal appellate tribunal for the Los Angeles region, the Ninth Circuit Court of Appeals. In all three, the Ninth Circuit ruled that the ordinance involved passed constitutional muster. Based thereon, the city’s planners and staff worked on guidelines and felt that the legal challenges were ended. They were wrong!

One of the enactments, dating back to 2002, applied only to commercial advertising on new “offsite billboards”; that is, billboards advertising commercial messages were permitted after 2002 only if they were at the actual site of the business being advertised while being prohibited if at any other location. As an example, one which was pointed out in an editorial in the Los Angeles Times this past Sunday, the 2002 ordinance if construed literally would have permitted a billboard stating “Joe’s Bagels Sold Here” but not a sign at the same site saying “Joe’s Bagels – One Mile Ahead.”

Fast forward to March of 2013. One billboard firm, Lamar Central Outdoor LLC (“Lamar”), decided to try a different approach to challenge that 2002 ordinance. Lamar filed suit against the City in the Los Angeles County Superior Court, a state forum rather than a federal one. That case was decided last month by Superior Court Judge Luis A. Lavin. Saying that he “respectfully disagrees” with the Ninth Circuit and that he is not bound by that federal tribunal’s rulings in his state court, Judge Lavin struck down the City ordinance saying that it violated the free speech protections of the California Constitution, which he found to be broader than the First Amendment to the United States Constitution. The key passage in Judge Lavin’s ruling reads as follows:

“To prohibit a sign or billboard because it displays a commercial passage advertising a product or business that is sold or conducted at a location other than where the sign or billboard is located, while permitting a structurally identical sign … that displays a noncommercial message … is to restrict speech based on its content.…”

What added to Judge Lavin’s decision to reject the 2002 ordinance is the factual inconsistency which has transpired since 2002 in the application of the law. Judge Lavin noted that, while stressing the traffic hazards and visual “blight” which billboards have created in the City, for some reason the City planners have in the 12 years since the 2002 ordinance was enacted nevertheless selectively authorized about 15,000 signs throughout Los Angeles!

Moreover, Judge Lavin took note of another inconsistent application of the City’s billboard legislation. After 2002, the City targeted two specific types of signage – digital and electronic billboards – as especially distracting and annoying. Hoping to reach a settlement in respect to those categories of signage and to avoid more litigation, the City had entered into a little publicized (some say “surreptitious”) pact with some of the major sign companies to let about 100 digital and electronic billboards be “grandfathered.” Prior to the decision in the Lamar case, that pact was found to be illegal and void, resulting (1) in an order that all those signs “go dark” and (2) with many in the City’s bureaucracy being quite embarrassed.

To say that Judge Lavin’s decision has shocked and dismayed local politicians and city planners here in Los Angeles would be an understatement. They had been confident that they could placate everyone and avoid future legal attacks with a compromise which would maintain the 2002 ordinance except that it would be modified to set out specifically defined “sign districts,” locations where billboards could continue to be added while keeping the ban on new billboards elsewhere. Judge Lavin’s policy has, for the moment, torpedoed that modification effort.

Where does that leave us? Naturally, we expect appellate review of Judge Lavin’s ruling. To that end, City Attorney Mike Feuer has already said that the City will pursue such an appeal promptly, concurrently requesting a stay allowing the ordinance to be enforced until the appellate decision is final. The next step almost certainly would be a petition to the California Supreme Court. Regardless of who wins and who loses the appeal, it is not a certainty that the justices of our highest state tribunal will agree to review such a “hot potato.”

In the meantime, will the Council try an “end run” by voting to amend the ordinance in some way to try to get it to satisfy the courts? Will the Council invite public commentary? And who is lining up on each side of the controversy? Environmentalists, residential property owners and law enforcement groups have been the most vocal proponents of tough restrictions. Opponents are not limited to the sign companies and commercial landlords but also a number of other groups and individuals who possess a huge economic stake here and who may be guided principally by their financial considerations. They include:

1. some nonprofits who are jumping in to support the signage with the hope that they can negotiate free or subsidized advertising in the process;
2. public unions and contractors, among others, who have been citing the potential increase in City revenue additional signage could bring; and
3. Los Angeles taxpayers and others who think that the City could use billboard approval as a means to get the sign companies to pay for landscaping, sidewalk repair, street paving and such as a quid pro quo (thereby enabling the City to apply funds usually spent for those services to other municipal needs).

We have not seen the end of this controversy by a long shot. Follow The Joe Cobert Report for updates.

WHAT TO DO WITH EMPTY BIG BOX STORES

Big boxes proliferated from the late 1980’s until the Great Recession two decades later.  Economies of scale encouraged not only strong companies like Wal-Mart to commit to huge commercial square footage but so too did many which have since fallen by the wayside.  In multi-tenant shopping centers, demise of a big box retailer, its “going dark,” often resulted in the death knell for satellite stores which had drawn customers from the traffic frequenting the big boxes.

At first, landlords tried to fill the void by looking for other, healthier big box users, trying to induce them to come aboard with new leases or subleases for the empty, big box space.  While some were successful in this regard, many others saw the space continue to languish and even deteriorate.  The result was the commencement of the phenomenon of the “carve-up,” dividing the big box into multiple spaces for separate users.

This Firm has dealt with a number of carve-up situations and learned that they are not easy arrangements to accomplish.  If you or someone you know has a shopping center with this kind of problem, we at the Firm can highlight the kinds of issues they may face.  Those include:

1.    how to determine approximate rental rates and lease terms for new occupants of part of the big box space;
2.    how to deal with rent reduction requests by existing tenants in satellite stores, particularly if they have complained that the big box store was what drew them in initially and that they relied on the existence of that big box retailer for their survival;
3.    should the landlord begin to carve up space even before finding occupants for all of the former big box (i.e., make changes to the space, in whole or in part, on speculation);
4.    who pays for the carve-up (the landlord, new occupants of the former big box space or some combination);
5.    what to do if replacement businesses in the big box location fail to drive a large number of customers to the satellite stores;
6.    what concessions to make to new tenants;
7.    will the new tenants have significantly greater (or, at least, different) parking requirements or hours of operation than had been the case when the big box retailer was conducting business in the shopping center; quite a distance from the traffic on the surrounding streets;
8.    if the big box was deep such that a sizable part of its space is quite a distance from the traffic on the surrounding streets;
9.    will there be challenges with respect to the activities of new prospective tenants based on exclusive rights claimed by lessees of satellite stores; and
10.    will the new tenants’ construction require substantial expenditures for the common areas in order to comply with current building codes and, if so, who will pay for those common area expenditures.

As this phenomenon runs its course, The Firm will keep its readers informed as to new issues arising from these changes in the retail real estate sector.

You may unsubscribe from future emails from the Firm by responding to this email with “Unsubscribe” in the body of the email: please DO NOT change the subject line of the email, send it as it is.

This email is a publication prepared by Joseph M. Cobert, A Professional Corporation (the “Firm”). The material provided is for informational and educational purposes only and should not be construed as legal advice. Any reader wishing legal advice from the Firm would have to make specific arrangements to retain the Firm with a written fee agreement. No reader may rely on this email as a representation by the Firm. Although the material is deemed to be accurate and reliable, there is no guarantee of its accuracy. The material contained in the newsletter is the property of the Firm and cannot be reproduced for any use without the Firm’s prior written consent. It  estate and other financial professionals only. It is not intended for consumer distribution.

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Joseph M. Cobert, A Professional Corporation
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LOS ANGELES’ BUILDING EXPLOSION IS DRAMATICALLY CHANGING THE LOOK OF THE CITY

The architecture, transportation systems and neighborhoods in Los Angeles are in incredible transformation. Construction is taking place in almost every portion of the City, both in private and public venues (and some with both private and public uses).

One project in construction which epitomizes this transformation — something you have to see to believe — is located in the “Arts District” downtown. That is a part of Los Angeles which until recently has been off the beaten track or, more accurately, right off the tracks of the rail lines south of Union Station. On a “hardhat” tour not long ago, Joe was amazed at the size and scope of this mixed-use enterprise in what was for decades an industrial part of town next to the train terminal and the Los Angeles River.

Imagine a 400+ unit apartment building with a substantial retail element extending for three city blocks from First Street to Fourth Street along Santa Fe Avenue. There are two very long buildings laid out like passing trains which will have apartments on the upper floors plus retail and restaurant sites with rental rates in the range of $3.00 per square foot along both sides of the three buildings below the residential units. To give you an idea of just how long the project is, visualize this: had the structures been erected vertically, they would have formed the fifth tallest building in the world!

Of course, this project is initially going to appeal mostly to people working downtown and those in creative fields, for whom the explosive growth of the Arts District is a boon and a real game-changer. What may prove to be even more remarkable will be what the project signifies as to rejuvenation of the City’s urban core. Like the loft conversions not that long ago in the old Bank District, One Santa Fe is stimulating developers to pursue mixed-use possibilities throughout the Arts District, thereby setting the stage for a new wave of gentrification of a previously underutilized segment of Los Angeles.

In fact, due to the excitement generated by One Santa Fe and the clamor for retail and restaurant space in the vicinity, other significant developments are in the planning stage or scheduled to break ground soon. For example, on the west side of Santa Fe Avenue at Third Street, right across the road from One Santa Fe, another sizeable mixed-use project has obtained its entitlements and is expected to commence construction very shortly.

Get over there and take a look. While you are there, drive around to see some of the other changes and try the Factory Kitchen or one of the other excellent, cutting edge restaurants which have recently opened nearby and which are, incredibly, becoming destination sites themselves.

ENERGY “BENCHMARKING” REQUIREMENTS FOR CERTAIN COMMERCIAL BUILDINGS WILL BE EXTENDED IN SCOPE ON JULY 1

If you own a commercial building in California which has more than 5,000 square feet of rentable floor area, read this.

In an earlier issue of The Joe Cobert Report (July 2013), we alerted our readers to California’s joining with a number of other states in mandating monitoring and disclosure of energy consumption data.  AB 1103 added provisions to the Public Resources Code phasing in requirements for owners of California commercial buildings of a certain minimum size to the effect that they must (a) “benchmark” energy usage in those structures and then (b) disclose such data for the most recent 12-month period in advance of three types of transactions.  Those three types of transactions and the disclosure timing for same is as follows:

  1. The data needs to be communicated to a prospective buyer no later than 24 hours prior to execution of the sale contract;
  2. The data needs to be communicated to a prospective lessee of the entire building not later than 24 hours prior to the execution of the lease; and
  3. The data needs to be communicated to a lender who is prospectively going to finance the entire building not later than the time the owner submits the loan application to the lender for that possible financing.

In the first phase, which went into effect on January 1 of this year, the above-stated requirements were made applicable to commercial buildings of more than 10,000 square feet.  On July 1, the second phase will become operative and make the same rules applicable as well to buildings having 5,001 to 10,000 square feet of rentable floor space.

This benchmarking concept was the idea of the California Energy Commission (“CEC”) as a means of assisting the state in meeting its energy and climate change goals through increasing awareness of energy use.  If you have yet to become familiar with the specifics of AB 1103, we detail the key aspects below:

Owners will have to retain companies to (a) calculate the energy usage in their buildings and then (b) compare that usage to statistics accumulated by Energy Star for similar buildings nationally.  The statistics will be utilized to rate the energy performance of a given building on a scale of 1 to 100, 100 being the best.

  1. The process will be facilitated by using the Energy Star Portfolio Manager, a web-based system which allows building managers to track and access the energy consumption.  This can be accomplished, once the owner so authorizes, by having the electric and/or gas utility servicing the building upload all of the energy consumption information to a confidential account set up with the Energy Star Portfolio Manager.
  2. That information is employed to generate a checklist that is required under AB 1103, whereupon the data in the checklist is electronically transmitted to the CEC into an account the owner will have had to open.

AB 1103 does not prescribe any specific governmental penalties for noncompliance or delinquency in compliance.  Regulations are being created to address this.

Note also that some municipalities have added extra requirements.  For example, San Francisco has passed an ordinance requiring owners of commercial buildings in that city to make annual reports about energy usage in those buildings.

Failure to observe these energy rules adequately and in a timely manner could have substantial civil liability consequences, as the other parties involved in a transaction could pursue litigation for breach of contract or rescission if they successfully demonstrate that the owner’s omission or delay in disclosure materially misrepresented a material fact.  With that in mind, the Firm has alerted its clients owning buildings subject to the reach of AB 1103 to document carefully their disclosures and have the other party or parties in sale, lease or financing transactions affected by the legislation acknowledge in writing the receipt of those disclosures.  In some cases, this may entail revision of forms of leases or purchase contracts which clients have been utilizing as their “standard” documents.

The July 1 deadline is coming up soon, so action should be taken in the very near future by anyone who may be in the midst of or considering a transaction affected by the law.  If you have questions on this subject or require drafting of paperwork relative thereto, do not hesitate to contact Joe Cobert and the Firm for advice.

ARE SOME CITIES GOING TO BE ABLE TO KEEP OUT CHAIN RETAILERS?

The retail sector of the real estate market was devastated during the years of the Great Recession. Fortunately, in many locations, retail has rebounded. In some of those locations, the amount of retail space is relatively small and competition for same is intense. This is especially so in municipalities which have a unique character. This has exacerbated a situation which has become increasingly prevalent in recent years, pitting chain stores against “Mom & Pop” types of establishments.

Some new battlegrounds and additional “players” have been emerging. In a small but growing number of California municipalities seeking to hold onto their distinctive look and feel, resistance to chain stores has actively increased. Indeed, San Francisco, Malibu, Coronado, Carmel and Calistoga, among other cities in the state, have passed or are contemplating ordinances banning or limiting the addition of new “formula retail” stores or at least requiring them to obtain special permits on a case-by-case basis. “Formula retail” would include large chains in many categories — food, clothing, pharmacy and more. (For example, think Starbucks, the Gap and CVS.)

The proposed Malibu ordinance, to be considered this month by that municipality’s city council, would limit to 2,500 square feet the size of any new store and restrict formula retail to 40% of the available retail commercial space in that city. Even that is not stringent enough for some Malibu residents. As a result, the city council of that jurisdiction will also evaluate a measure proposed by actor/director Rob Reiner and his wife, both long-time Malibu residents. It would restrict formula retail to 30% of retail commercial space plus it would require a citywide vote as to any proposedretail development project of more than 20,000 square feet.

It is no surprise that many formula retailers are opposed to these restrictions, asserting that these types of ordinances are unreasonable, discriminatory and unconstitutional. The litigation on the subject has not thus far been definitive. For instance, the first lawsuit to get to the Court of Appeal (a 2003 decision involving the City of Coronado) upheld that city’s restrictions but did so on very narrow grounds in a non-published 2003 opinion.

The land use community is divided on how this will ultimately play out. Undoubtedly, there will be some upcoming legal challenges in other municipalities. One thing you can count on: we at The Joe Cobert Report will monitor this and keep you informed.

THE CITY OF LOS ANGELES WILL BE SELLING OFF 62 FORMER CRA PROPERTIES: DO YOU WANT TO BUY?

When the State of California eliminated community redevelopment agencies (“CRAs”), the majority of the properties held by CRAs were committed to be transferred to “successor agencies” established by the local governments where the projects were situated. What happened to those parcels which are in Los Angeles?

Apparently, in 2013, some 58 Los Angeles properties were transferred by the local CRA to an agency known as HCIDLA. Another four still have yet to be transferred. Would you like to have the addresses and some other information on those 62 sites in order to decide whether you would consider purchase of one or more? If so, just look at the attached four-page list handed out yesterday by Jan Perry, the former City Councilwoman and mayoral candidate who was appointed by Mayor Eric Garcetti to head a new agency tasked to dispose of all those 62 properties.

If you have any questions or wish to get some advice as to those properties, contact Joe Cobert.

THE NEW PACE OF ENERGY EFFICIENCY IN LOS ANGELES COMMERCIAL REAL ESTATE

Do you or your clients own commercial real property in the City of Los Angeles?  If so, does any of that real estate need — or would it benefit from — retrofitting to reduce energy consumption?  For those who answered “yes” to both questions, does our local government have a deal for you!

The deal is L.A.’s version of a special project financing program known by the acronym “PACE,” which stands for “Property Assessed Clean Energy.”  PACE was conceived in 2009 by the White House Council on Environmental Quality as a means to stimulate energy efficiency by homeowners.  PACE programs utilize non-recourse long-term loans by local governments and have the unique feature of being repayable to those governmental sources as part of property tax bills.  (The local governments receive substantial federal subsidies to fund these loans and allocate to the federal government the great majority of the default risk.)

Beginning in 2010, PACE assistance was extended to the commercial real estate sector.  While at first limited in availability to a small number of communities, PACE financing has been expanded dramatically throughout the nation.

The particularly good news is that PACE has now come to the City of Los Angeles.  Its appearance here is big-time, highlighted by the largest PACE-financed project in the country, a $7 million retrofit of the Universal City Hilton which was completed late last month.

How do PACE financing programs typically work and how did the Hilton project specifically create huge benefits for the property owner?  Let’s look first at how the programs customarily operate and then see how the Hilton project took advantage of PACE financing.

Characteristically, the PACE financing programs which have been implemented so far:

  1. are sponsored by state, county and/or local governments, which obtain major reimbursement from the U.S. Department of Energy;
  2. call for little or no up-front money from the property owner;
  3. offer a very competitive, if not highly favorable, interest rate on the loaned funds;
  4. are coupled with savings to the landowner from various tax incentives and utility rebates;
  5. require the sponsoring governmental body to create a tax assessment district and/or to issue bonds; and
  6. involve loans amortized over either 15 or 20 years, which are billed with property taxes and assessments and secured by liens against the improved real estate just like those property taxes and assessments.

To get a glimpse of how beneficial PACE financing can be, let’s focus on what the Universal City Hilton accomplished by undertaking its retrofit project.  That hotel expects $800,000 in annual energy savings — about a 50 percent reduction — plus $28,000 more per year in reduced water costs (conserving more than 2.8 million gallons of water).  As part of the project, all the old HVAC systems were upgraded by retrofitting or replaced with longer-lasting energy efficient equipment.  On top of that, the hotel is receiving utility rebates and tax incentives which are estimated to total about $1 million!

Sound pretty good?  If so, how does one enroll in the PACE program for L.A.-based commercial real estate?  From what our law firm has experienced, the property owner will typically hire a consultant to negotiate terms with the City as well as to help analyze what specific improvements make the most sense for the given project.  The proceeds of PACE financing can then be used for a wide variety of upgrades or replacements ranging from HVAC and automation systems to elevators, manufacturing equipment, high-efficiency lighting, solar panels, fuel cells, irrigation systems and many other items.  And the project will remain eligible for depreciation or cost segregation write-offs too!

Mayor Eric Garcetti has taken a very visible stance in support of PACE.  This was evident when he attended the completion ceremony for the Universal City Hilton on January 28, where he took a scissors and symbolically cut into pieces a blow-up of the hotel’s last DWP bill.

A number of other new PACE projects are under consideration for commercial parcels throughout the Southland.  We’ll keep you posted on their extent and progress in future editions of our newsletter.

HOW FAR CAN GOVERNMENT “SNOOP” FOR “METADATA” ABOUT GUESTS IN HOTELS AND OTHER HOSPITALITY REAL ESTATE? A NEW CASE IN LOS ANGELES PROVIDES SOME INSIGHT

In the wake of the scandal concerning telephonic spying by the NSA, Edward Snowden’s release through the internet of “secret” documents and controversies about the use of drones, 2013 may well be remembered as the year of technological “spygate.”  Accordingly, much has been written about the tension between government’s need to know and privacy rights.  Now the metadata collection process is spilling over into the world of commercial real estate, an example being a case of first impression from Los Angeles just decided on December 24 of 2013.

The case, Patel v. City of Los Angeles, focused on a 2006 Los Angeles ordinance (1) requiring operators of hotels and motels in Los Angeles to collect, record and maintain for 90 days detailed information about their guests and (2) permitting any LAPD officer to inspect those records with or without a search warrant.  The ostensible purpose of the ordinance was to be a nuisance abatement measure designed to deter drug dealing and prostitution.  The theory behind the ordinance was that “those who would be inclined to use hotels to facilitate their illicit activities” would be deterred by the risk of disclosure of the prescribed information.

The records to be obtained and kept pursuant to the ordinance include the following:

  1. name and address of each guest, specifying thereby as well the number of guests in the party irrespective of who actually registers at the desk;
  2. the make, model and license plate number of any vehicles which guests park on the hotel or motel grounds;
  3. date and time of arrival as well as scheduled date of departure;
  4. the room number assigned to each such guest; and
  5. the rate charged for the room, the amount actually collected and the method of payment.

For any cash-paying and walk-in guest, as well as any guest who rents a room for less than 12 hours, the operator of the lodging establishment must also include in the records the number and expiration date of any driver’s license, passport or other identification document presented on check-in.  For those checking in via electronic kiosk, hoteliers still must keep records of each guest’s name together with reservation and credit card information plus the room number assigned.

Failure to comply with a demand by an LAPD officer to inspect such records is a misdemeanor, punishable by up to six months in jail and/or a fine not to exceed $1,000 for each such incident of noncompliance.  The Patels, owners of a motel in the City of Los Angeles, refused to turn over records of that motel to an officer who showed up one day without a warrant.  The Patels were cited for that failure to comply.

The Patels challenged the ordinance under the Fourth Amendment as invalid on its face, claiming that its sanctioning of warrantless searches independent of specific facts suggesting that a crime was occurring was unreasonable.  They filed suit in the local United States District Court pursuant to a federal statute, seeking to prohibit enforcement of the warrantless inspections provision of the city ordinance.  (Interestingly, the Patels chose not to assert that the record-keeping provisions were unjustified or overreaching.)

The trial judge ruled for the city and against the Patels, determining that the warrantless search provision of the ordinance was not an unreasonable search.  The Ninth Circuit, by a 7 to 4 vote, reversed.  The majority said that the business records involved were the lodging establishment’s private property and, to protect its property interests, the hotel or motel “has the right to exclude others from prying into the contents of its records, which is also the source of its expectation of privacy. . . .”

One might be inclined to think that the guests would possess a privacy interest.  Not so.  It does not matter whether the guests are there for unlawful purposes, for a secret tryst or just to have a place to stay while visiting relatives in town.  The records belong to the hotel and not the guests, who are treated as having “voluntarily” disclosed the information to the lodging establishment (because they possessed an alternative not to stay there if they were not willing to make such disclosures).

Where will real property and Big Brother clash next?  Stay tuned.

IS “CROWDFUNDING” SOON TO BECOME A SIGNIFICANT SOURCE OF EQUITY CAPITAL FOR COMMERCIAL REAL ESTATE?

“Crowdfunding,” a much heralded but still fairly uncommon technique for raising money from many investors and usually employing social media, has developed as a phenomenon over the last year or two.  It has been utilized with some notable successes to obtain financing for start-up businesses and entertainment needs (for example, the promotion of the careers of relatively unknown singers, other entertainers, plays and independent films).

In the real estate arena, crowdfunding has thus far seen very limited use.  However, that is changing.  Indeed, as well-respected a practitioner as Michael Matkins, a founding partner of the Allen Matkins law firm headquartered in Los Angeles, has predicted that in the not too distant future “[c]rowdfunding, or the concept of crowdfunding, will revolutionize the way we raise capital for real estate at the retail level.”

Others in the realty industry think it is too early to tell how prevalent real estate crowdfunding will ultimately be, particularly before the securities law issues relating thereto are fully determined.  Nevertheless, most agree that the concept is continuing to attract more and more consideration as a means of raising equity capital.

For instance, Beverly Hills-based Realty Mogul Co. (“Realty Mogul”), which operates an online marketplace for real estate investments, recently announced what may be the first shopping center purchase by an entity which raised all virtually all of its needed equity by crowdfunding.  That shopping center deal, for a site in Salinas, was accomplished with contributions by 33 investors, some of whom put in as little as $10,000.

Realty Mogul has been registering online many “accredited investors” — individuals with at least $200,000 in annual income ($300,000 for couples) or having more than $1,000,000 in assets excluding their residences.  Once registered, these investors can select from among the investments Realty Mogul has listed on its website.  Then the documentation, including operating and subscription agreements, are emailed to the investors, who sign online.  It is therefore very likely that some investors will have little or no phone or in-person contact with a Realty Mogul employee.

According to an article published last month in the Los Angeles Daily Journal, a number of other companies like Realty Mogul have popped up during the last 12 to 24 months.  They include firms in Los Angeles, New York, San Francisco, Miami and Oregon.

What is holding up a potential floodgate of crowdfunding real estate deals?  Most significant appears to be concern about what standards will apply to potential crowdfunding transactions involving nonaccredited investors.  The SEC is actively focusing on this issue.  In that regard, draft regulations or rules, which would, among other things, permit companies to raise up to $1 million a year from nonaccredited investors through regulated portals, were promulgated on this subject in October.  Those drafted regulations or rules have been circulated and are still out for comment.

How the regulations or rules will compare with those governing REITs and other pooled capital investment vehicles for real property will likely be known soon.  Whether the regulations or rules ultimately adopted will help stimulate or, instead, discourage crowdfunding for small, nonaccredited investors is something we expect to learn in the near future.

Joseph M. Cobert, A Professional Corporation, a law firm whose practice focuses on real estate matters, will keep monitoring developments on this subject.  Through later issues of this newsletter, we will keep our readers informed.

You may unsubscribe from future emails from the Firm by responding to this email with “Unsubscribe” in the body of the email: please DO NOT change the subject line of the email, send it as it is.

This email is a publication prepared by Joseph M. Cobert, A Professional Corporation (the “Firm”). The material provided is for informational and educational purposes only and should not be construed as legal advice. Any reader wishing legal advice from the Firm would have to make specific arrangements to retain the Firm with a written fee agreement. No reader may rely on this email as a representation by the Firm. Although the material is deemed to be accurate and reliable, there is no guarantee of its accuracy. The material contained in the newsletter is the property of the Firm and cannot be reproduced for any use without the Firm’s prior written consent. It is designed for real estate and other financial professionals only. It is not intended for consumer distribution.

WHAT OWNERS AND DEVELOPERS NEED TO KNOW ABOUT THE NEW COMMON INTEREST LAW APPLICABLE TO COMMERCIAL REAL ESTATE

Among the host of California legislative enactments signed into law by Governor Brown during the last month or so is one which — despite virtually no fanfare — could have a significant impact on you if you own or develop commercial real estate.  That law stemmed from Senate Bill 752 and bears the name “Commercial and Industrial Common Interest Development Act” (hereinafter simply referred to as the “New Act”).  What does the New Act provide?  When will it apply and where can its provisions be found?  Read on.

We are all familiar with the use of CC&R’s and other governing documents for residential condominiums and other planned unit developments.  Some of us have even worked with commercial condos in industrial parks and other unique locations.  Akin to these items are some documents known as reciprocal easement agreements (“REA’s”) used when a project, typically a shopping center, functions as a unit even though the project consists of two or more parcels with different ownerships.

Until the passage of the New Act, there was no body of law designed to focus on issues arising in a commercial common interest project.  As a result, lawyers and courts had to draw on the statutory scheme existing for residential common interest developments primarily contained in the Davis-Stirling Common Interest Development Act (Civ. Code Section 3250 et seq.), which dates back to 1985 and is being repealed effective January 1, 2014.

The New Act (appearing as Civil Code Section 6500 et seq.) is operative now and it pertains solely to common interest developments which are restricted to commercial uses by virtue of CC&R’s, REA’s and/or zoning laws.  “Commercial use” is a term defined broadly in the New Act.  For example, it includes most hotels, motels and other hospitality sector projects which, for financial remuneration, permit “overnight stays.”

Unfortunately, it is not presently clear whether residential apartment projects, where they may share common driveways or other facilities, are supposed to be considered “commercial use” properties.  That will likely be clarified quite promptly.  Moreover, there needs to be explanation of how the laws will operate as to mixed-use realty.

The New Act will no doubt have ramifications as to liability (and, perhaps, casualty) insurance.  It definitely changes the playing field with respect to dues and assessments levied against the owners of common interest commercial properties, specifically permitting owners to assess liens and enforce other rules pertaining to such levies.

How will all of this affect the commercial real estate market?  Will it alter any developers’ game plans?  It is, of course, too soon to tell.  However, in all events, Joe Cobert and his Firm will keep readers of this newsletter well informed