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JANUARY 2014 / $4
EARN MCLE CREDIT
THE MAGAZINE OF THE LOS ANGELES COUNTY BAR ASSOCIATION
The StarSystem
Los Angeles lawyers Richard H. Lee
(left) and Jay M. Lichter explain
California’s new energy regulations
for commercial buildings page 20
PLUS
RULLCA ReplacesBeverly-Killeapage 25
CellTower
Approvalspage 30
TenantBankruptcyBasicspage 8
CondoHotelspage 11
KoontzCurbsTakingspage 14
29THANNUAL
REAL ESTATE LAW
ISSUE
EXCLUSIVELY FAMILY LAW.
When the waters are uncertain,experience matters.
Divorce � Support � Premarital Agreements
walzermelcher.com
20 The Star SystemBY RICHARD H. LEE AND JAY M. LICHTER
New regulations will make energy consumption information available for all nonresidential buildings in California
25 The New LLCBY LORYN DUNN ARKOW
RULLCA’s default provisions must be considered when drafting operating agreements for real estate LLCs Plus: Earn MCLE credit. MCLE Test No. 231 appears on page 27.
30 Tower BuildingBY LYNN WHITCHER AND CYNTHIA HANSON
The Telecommunications Act of 1996 provides municipalities and serviceproviders with a framework for the approval process for cell towers
F EATU RE S
Los Angeles Lawyer
the magazine of
the Los Angeles County
Bar Association
January 2014
Volume 36, No. 10
COVER PHOTOGRAPH:TOM KELLER
01.14
7 Barristers TipsHow to help a veteran who seeks pro bono legal aidBY STEPHEN HODGES
8 Practice TipsAnalyzing the basics of a tenant bankruptcyBY JEANNE C. WANLASS
11 Practice TipsTreatment of condominium hotels as securities after SalamehBY TIMI A. HALLEM AND JASON T. TAKETA
14 Practice TipsKoontz curbs government power to impose development feesBY FERNANDO VILLA
36 Closing ArgumentLos Angeles gets a new mural ordinanceBY ERIC BJORGUM
DE PARTM E NTS
LOS ANGELES LAWYER (ISSN 0162-2900) is published monthly,except for a combined issue in July/August, by the Los AngelesCounty Bar Association, 1055 West 7th Street, Suite 2700,Los Angeles, CA 90017 (213) 896-6503. Periodicals postage paidat Los Angeles, CA and additional mailing offices. Annual sub-scription price of $14 included in the Association membershipdues. Nonmember subscriptions: $28 annually; single copyprice: $4 plus handling. Address changes must be submittedsix weeks in advance of next issue date. POSTMASTER: AddressService Requested. Send address changes to Los AngelesLawyer, P. O. Box 55020, Los Angeles CA 90055.
REAL ESTATE LAWREAL ESTATE LAW
4 Los Angeles Lawyer January 2014
VISIT US ON THE INTERNET AT www.lacba.org/lalawyerE-MAIL CAN BE SENT TO [email protected]
EDITORIAL BOARD
ChairPAUL S. MARKS
Articles CoordinatorMARY E. KELLY
JERROLD ABELES (PAST CHAIR)K. LUCY ATWOODETHEL W. BENNETTSCOTT BOYERERIC BROWNCAROLINE BUSSINPATRICIA H. COMBSCHAD C. COOMBS (PAST CHAIR)HON. MICHELLE WILLIAMS COURTELIZABETH L. CROOKEBEN M. DAVIDSONGORDON K. ENG DONNA FORDSTUART R. FRAENKELCHRISTY GARGALISMICHAEL A. GEIBELSON (PAST CHAIR)CHRISTINE D. GILLESHARON GLANCZTED M. HANDELJEFFREY A. HARTWICKSTEVEN HECHT (PAST CHAIR)JOSHUA S. HODASJOHN C. KEITHERIC KINGSLEYKATHERINE KINSEYJENNIFER W LELANDSTEPHANIE LEWISSANDRA MENDELLAMY MESSIGIANMICHELLE MICHAELSCOMM. ELIZABETH MUNISOGLUPAUL OBICOCARMELA PAGAYAMANDA PAWLYKDENNIS L. PEREZ (IMMEDIATE PAST CHAIR)GREGG A. RAPOPORTGARY RASKIN (PAST CHAIR)JACQUELINE M. REAL-SALAS (PAST CHAIR)A. JOEL RICHLINDAVID SCHNIDER (PAST CHAIR)NANCY L. SCHROEDERSTEVEN SCHWARTZHEATHER STERNKENNETH W. SWENSON (PAST CHAIR)MATTHEW D. TAGGARTDAMON THAYERTHOMAS H. VIDALALEX M. WEINGARTEN
STAFFPublisher and Editor (in memoriam)SAMUEL LIPSMAN
EditorERIC HOWARD
Art DirectorLES SECHLER
Director of Design and ProductionPATRICE HUGHES
Advertising DirectorLINDA BEKAS
Administrative CoordinatorMATTY JALLOW BABY
Copyright © 2014 by the Los Angeles County Bar Association. All rightsreserved. Reproduction in whole or in part without permission is prohibited. Printed by R. R. Donnelley, Liberty, MO. Member BusinessPublications Audit of Circulation (BPA).
The opinions and positions stated in signed material are those ofthe authors and not by the fact of publication necessarily those of theAssociation or its members. All manuscripts are carefully considered bythe Editorial Board. Letters to the editor are subject to editing.
Los Angeles Lawyer January 2014 5
LOS ANGELES LAWYER IS THE OFFICIAL PUBLICATIONOF THE LOS ANGELES COUNTY BAR ASSOCIATION1055 West 7th Street, Suite 2700, Los Angeles CA 90017-2553Telephone 213.627.2727 / www.lacba.org
LACBA OFFICERS
PresidentPATRICIA EGAN DAEHNKE
President-ElectLINDA L. CURTIS
Senior Vice PresidentPAUL R. KIESEL
Vice PresidentMARGARET P. STEVENS
TreasurerMICHAEL K. LINDSEY
Assistant Vice PresidentBRIAN S. CURREY
Assistant Vice PresidentCHRISTINE C. GOODMAN
Assistant Vice PresidentSAJAN KASHYAP
Immediate Past PresidentRICHARD J. BURDGE JR.
Chief Executive Officer/SecretarySALLY SUCHIL
Chief Financial & Administrative OfficerBRUCE BERRA
General Counsel & Chief Administrative OfficerW. CLARK BROWN
BOARD OF TRUSTEESHARRY W. R. CHAMBERLAINBRIAN K. CONDONDUNCAN W. CRABTREE-IRELANDDANIEL M. CROWLEYREBECCA A. DELFINOANTHONY DE LOS REYESHOWARD S. FISHERRICHARD B. GOETZJACQUELINE J. HARDINGMARK A. KRESSELDEVON MYERSJUAN A. RAMOSDAVID K. REINERTDIANA K. RODGERSJENNIFER S. ROMANOHARVEY I. SAFERSTEINSUSAN KOEHLER SULLIVANTERESA TRACY SULLIVANBRENDA E. SUTTON-WILLSDAVID A. TILEM
AFFILIATED BAR ASSOCIATIONS
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ITALIAN AMERICAN LAWYERS ASSOCIATION
JAPANESE AMERICAN BAR ASSOCIATION
JOHN M. LANGSTON BAR ASSOCIATION
KOREAN AMERICAN BAR ASSOCIATION OF SOUTHERN CALIFORNIA
LESBIAN AND GAY LAWYERS ASSOCIATION OF LOS ANGELES
MEXICAN AMERICAN BAR ASSOCIATION
PASADENA BAR ASSOCIATION
SAN FERNANDO VALLEY BAR ASSOCIATION
SAN GABRIEL VALLEY BAR ASSOCIATION
SANTA CLARITA VALLEY BAR ASSOCIATION
SANTA MONICA BAR ASSOCIATION
SOUTH BAY BAR ASSOCIATION
SOUTHEAST DISTRICT BAR ASSOCIATION
SOUTHERN CALIFORNIA CHINESE LAWYERS ASSOCIATION
WHITTIER BAR ASSOCIATION
WOMEN LAWYERS ASSOCIATION OF LOS ANGELES
6 Los Angeles Lawyer January 2014
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THE HOLMES LAW FIRM
To schedule your Mediation, Arbitration or otherADR process with Reg Holmes, please contact:
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As you peruse the 2014 annual Real Estate Law issue on the heels of your hol-iday season and in the throes of the start of a new year, you will see a number ofarticles on several different topics pertaining to real estate. Ranging from a discussionof securities law as it applies to condominium hotels to a primer on the CaliforniaRevised Uniform Limited Liability Company Act, this issue is a wide and varied assort-ment of brightly colored gifts. We hope that, within these pages, we can metaphor-ically offer you the gift of your equivalent of Ralphie’s Red Ryder.
The holiday season is also traditionally a time of reflection. As we enter 2014,a year already being described as feeling like the middle innings of our recoveryfrom the Great Recession, the varied nature of this issue offers a unique oppor-tunity for that reflection. Emerging trends can be seen, for example, in this issue’sfocus on wireless communication facilities as well as the discussion of new energyuse disclosure requirements affecting commercial real estate. While we can rejoicethat development is the focus of several of the articles in this issue, we must alsonote that bankruptcy law as it applies to real estate remains an important topic forour audience.
Also of note is the diversity of the sources of law important to our practition-ers. Our authors discuss new state statutes, federal statutes, state regulations,municipal ordinances, and U.S. Supreme Court precedent. Many of the new legalrequirements discussed in these articles were enacted or developed directly as a resultof the Great Recession. As we continue through the middle innings, the legal land-scape will likely continue to change. The variety of topics and sources covered inthis issue reminds us how nimble we must be as practitioners, even as we delve intoconcepts that may date back to Blackstone or earlier.
The annual real estate law issue is one of two special issues published regularlyeach year by Los Angeles Lawyer magazine and is the product of months of hardwork by our authors, the Editorial Board, and the staff. We sincerely thank ourcontributors for making this issue an engaging collection of articles. We alsothank the staff and our fellow Editorial Board members for their hard work. As we reflect on 2013, we cannot help but remember Sam Lipsman, the longtime editor and publisher of the magazine, who passed away last summer. He helpedshepherd many a real estate issue through to completion and would have been proudof this one.
Thank you also to our readers and our advertisers. Without you, we would nothave this opportunity to showcase the outstanding work of our contributors, makeour contribution to the bar through this labor of love, or, most important, wax poet-ically about Ralphie's Red Ryder. We are very pleased with this special issue and hopeyou enjoy reading it and incorporating some of the tips and information into yourpractice. n
The holiday season is traditionally a time of gift giv-ing and gift receiving. Like Ralphie for a Red RyderBB gun, we may pine for some object that has sin-
gularly captured our attention, and like Ralphie we mayend up with pink bunny pajamas from Aunt Clara instead.
Ted M. Handel is a partner in the Business Solutions practice group of Haight Brown &Bonesteel, LLP, where he represents businesses and nonprofits in real estate transactions.Heather Stern is a partner with Kralik & Jacobs LLP, where she specializes in real estate andbusiness litigation. Paul Obico is an attorney at Allen Matkins Leck Gamble & Mallory LLP, wherehe practices in the firm’s business and tax planning group.
Los Angeles Lawyer January 2014 7
HELPING LOW-INCOME OR HOMELESS VETERANS is a noble causethat many attorneys want to join. By volunteering at a stand downor for a public interest legal services provider, lawyers can improvethe lives of veterans. Matching an attorney’s practice area with a vet-eran’s legal needs is often more easily said than done, but a lawyer’sskills, knowledge, and effort can go a long way toward helping a low-income or homeless veteran change the trajectory of his or her life.
Lawyers who volunteer to help veterans should first recognize whoveterans are and what makes them unique. A veteran is generallydefined as somebody who served in a branch of the U.S. ArmedForces: the Air Force, Army, Marine Corps, orNavy. Veterans may not have served in com-bat or during a time of military conflict, buttheir common experience is that of being askedto set aside their personal desires, fears, andsafety in order to accomplish a mission thatmay involve armed conflict or other personalsacrifice or danger. Unlike many other jobs inthe civilian world, military service involvesthe sacrifice of short- and long-term wants in order to accomplishsomething for the benefit of something greater than the individual—a military unit, a branch of service, or the national security interestsof the country.
Self-Sacrifice
Many veterans have sacrificed their own well-being for the greater goodfor so long that they cannot focus on fixing personal issues that onlyaffect themselves. Additionally, the can-do attitude that the militaryinstills into its members makes it difficult for many veterans toacknowledge problems that they cannot overcome alone. This iswhy psychological or emotional wounds from war are so hard to cure;many veterans find it difficult to admit that something intangible ishindering their ability to live normal, peaceful lives as civilians.
An attorney who seeks to give legal assistance to a low-income orhomeless veteran should not underestimate how effective his or herinitial tone can be at setting the foundation for a successful partner-ship. As in any other good relationship, a lawyer must first seek toestablish trust and build rapport with the veteran with whom he orshe is working. An effective first step towards establishing trust is toclearly explain that anything the veteran says will be kept confiden-tial. A lawyer must also make sure that the environment in which theveteran and lawyer interact is private; otherwise, the promise ofconfidentiality will look like an empty one.
A lawyer must first seek to establish trust with the veteran. Theeasiest way to do so is for the lawyer to listen to what the veteranneeds. Such open-ended questions as, “What can I help you with?”or “How can I be of assistance?” are a great start toward getting vet-erans to talk about their most pressing problem. Veterans, like mostpeople, want a professional to listen to them and understand their per-spective regarding what they are going through before they disclose
anything personal or confidential.An attorney must also make every effort to manage expectations
when interacting with a veteran. Veterans often have the same per-ceptions that many people have of lawyers; as a result, a veteran ina meeting with a volunteer lawyer may have unrealistic expecta-tions about what a lawyer has the power to do. The best way for alawyer to manage expectations while building trust and rapport is toclearly explain the area of law in which the lawyer has expertise andbe sensitive to the fact that the veteran’s legal problem may be com-pletely outside the lawyer’s practice area.
At a stand down or other similar event, matching a veteran witha specific legal need with an attorney who has expertise in the rele-vant area of law is always a goal. What is just as important, however,is how a lawyer reacts to a veteran who has a pressing legal issue thatis outside of the lawyer’s practice areas. It is important not to be dis-missive. A veteran may quickly distrust an organization—even ifthat organization’s only mission is to help veterans—if the veteran hasa problem that cannot be addressed with the services that the orga-nization provides. The veteran should not be left with the feeling thatthe organization hosting the stand down is unconcerned with his orher circumstances or unwilling to look beyond what the organizationtraditionally does.
The best way to address this issue is with honesty. A volunteer attor-ney should inform a veteran without hesitation what area of law thelawyer practices. If a veteran has a legal issue outside of an attorney’spractice areas, it is critical that the attorney or host organization ofa pro bono event follow through, even if the only help provided is areferral to another lawyer, agency, or organization. The simple act ofchecking up later with a veteran to ask if the veteran found a legalresource that can help can mean the difference between a veteran whofeels overwhelmed by his or her circumstances and a veteran who feelsempowered and able to weather the problem that he or she faces.
Finally, heed the advice of the proverb: “If all you have is a ham-mer, everything looks like a nail.” Avoid assuming that since a vet-eran has been paired with a lawyer, the most pressing issue the vet-eran faces is a legal one. The focus should always be on helping theveteran. Not every veteran in need has a legal problem that needs tobe solved. Often, matching nonlegal resources for veterans with vet-erans in need is what a veteran needs most. n
barristers tips BY STEPHEN HODGES
How to Help a Veteran Who Seeks Pro Bono Legal Aid
A lawyer must first seek to establish trust and build rapport
with the veteran with whom he or she is working.
Stephen Hodges is an attorney and Operation Iraqi Freedom veteran.
8 Los Angeles Lawyer January 2014
LANDLORDS WHO RECEIVE NOTICE that a tenant has filed for bank-ruptcy face having their property sit for months without generatingrent. In addition, counsel for landlords in such a situation face hav-ing to enter what may be the unfamiliar arena of bankruptcy court,which has its own code and rules. Regardless, every attorney shouldbe prepared to assess the basics of a tenant bankruptcy.
Upon notice of a tenant’s bankruptcy, one of the initial matters toassess is the lease. For example, a basic question is whether the leasehas expired. No automatic stay applies against landlords seeking toobtain possession of their nonresidential real property when thelease has expired before the bankruptcy was filed.1 Furthermore, prop-erty of the bankruptcy estate does not include the debtor’s interest ina nonresidential real property lease that expired prepetition.2 If adebtor-tenant has a commercial lease that expired prepetition, the land-lord’s efforts to obtain possession of the property may proceed—although some clients still prefer to obtain an order from the bank-ruptcy court confirming that there is no stay. This order may besought to forestall the tenant from making any allegations that thelandlord has acted improperly, thereby violating the automatic stay.
Another initial matter to consider is whether the property is res-idential or nonresidential. The Bankruptcy Code makes important dis-tinctions regarding the treatment of these two different types ofproperty but does not define the difference.3 The majority of courtsnarrowly construe the term “residential” and generally hold that ifpeople are living on the property, it is residential, even if the prop-erty has a commercial use as well.4
Counsel should be aware that not all provisions in a lease areenforceable. For example, most leases contain a provision that the leaseis breached or terminated by the tenant’s act of filing a bankruptcypetition. A lease may also require an additional security deposit orother protection for the landlord should the tenant file for bankruptcy.Bankruptcy law does not allow for the enforcement of these ipso factoclauses in unexpired leases.5
Counsel should determine what type of bankruptcy case he or shefaces. The debtor’s bankruptcy petition will identify the chapterunder which the bankruptcy has been filed. Generally, a chapter 7bankruptcy is filed by an individual or a business in order to liqui-date assets. A chapter 7 trustee is immediately appointed to admin-ister the debtor’s available assets and use the funds, if any, to pay cred-itors. A chapter 13 case, in contrast, may only be filed by an individualwho has a regular income and debts below certain thresholds. In achapter 13 case, the tenant seeks to propose a plan to pay debt.6 Thecourt will appoint a chapter 13 trustee, but the tenant debtor still main-tains control of certain aspects of the case, such as operating the ten-ant’s business.
A chapter 11 case, on the other hand, may be filed by either anindividual or a business in order to attempt to reorganize the debt.In a chapter 11 case, a trustee is not automatically appointed, and thedebtor remains in control and operates his or her assets (including abusiness) in order to pay creditors. The type of bankruptcy the ten-
ant files affects how the landlord can and should respond.When a debtor files a bankruptcy petition, Bankruptcy Code
Section 362 imposes an automatic stay. This serves as an injunctionagainst the commencement or continuation of a judicial proceedingagainst the debtor.7 The stay includes an injunction against anyaction to obtain possession of property of the estate, such as aninterest in a leasehold.8 If the lease is not expired, and the landlordhas not served a three-day notice to pay rent or quit or filed anunlawful detainer action before the bankruptcy case is filed, he or sheis immediately stayed from doing so.
If the landlord filed an unlawful detainer action before the debtorcommenced the bankruptcy, it is important to assess the legal basispursuant to which the unlawful detainer was filed. The automatic staydoes not remain in effect in every instance. For example, if the debtoris a residential real property tenant and the landlord has filed an evic-tion action based on endangerment of the property or the illegal useof controlled substances on the property, the stay expires 15 days afterthe landlord files a certification.9 The landlord must file and serve adeclaration that this type of an eviction action has been filed or thatthe tenant “during the 30-day period preceding the date of the filingof the certification, has endangered property or illegally used orallowed to be used a controlled substance on the property.”10
However, if the unlawful detainer was filed due to nonpayment of rent,this option is not available, and the eviction action is stayed.
If the lessor obtains a judgment for possession of residential prop-erty before the date of the filing of the bankruptcy, the automatic stayunder Bankruptcy Code Section 362 will not operate to stay an evic-tion or unlawful detainer action.11 Section 362(b)(22) of theBankruptcy Code provides that a landlord may continue the evictionunless the tenant files a certification that the tenant would be allowedto cure the monetary default under state law and cures the rent defi-ciency by depositing it with the clerk of the Bankruptcy Court pur-suant to Bankruptcy Code Section 362(l).12 However, the tenantmust timely comply with the requirements of Sections 362(b)(22) and362(l), or there is no stay.13
Relief from the Automatic Stay
Under certain circumstances, a landlord can obtain relief from the stayby filing a motion for an order to proceed with the unlawful detaineror eviction.14 Grounds for relief include “cause.”15 This can includefailure to pay rent. Tenants of nonresidential property in particularare specifically required to pay any rent that comes due after the peti-tion was filed.16 Therefore, if a commercial tenant does not pay rentthat comes due after the bankruptcy case has been filed, a motion forrelief from stay can be brought for cause in order to allow the lessorto proceed with the eviction of the tenant. Likewise, relief from theautomatic stay may be obtained if the debtor does not have equityin the property and if the property is not necessary to an effective reor-
practice tips BY JEANNE C. WANLASS
Analyzing the Basics of a Tenant Bankruptcy
Jeanne C. Wanlass practices bankruptcy law at Loeb & Loeb LLP in Los Angeles.
ganization.17 Additionally, relief from thestay is possible if the landlord can establishthat the tenant’s bankruptcy filing was partof a scheme to delay, hinder, or defraud cred-itors (including the landlord). The schememay involve the filing of multiple bankruptcypetitions concerning the property.18
If the automatic stay applies, and there areno grounds to obtain relief from it, landlord’scounsel should be aware that the treatment ofan unexpired lease is largely governed bySection 365 of the Bankruptcy Code. Generally,a debtor has three options for how to treat anunexpired lease: assumption, assumption andassignment to a third party, or rejection.
Assumption of a Lease
If the lease is assumed, it becomes a postpe-tition obligation and may be enforced.19 Thetenant must abide by the terms of the lease,or the landlord can pursue available remedies.If there has been a prepetition or postpetitiondefault, before the bankruptcy trustee20 canassume the lease, he or she must cure, orprovide “adequate assurance that the trusteewill promptly cure, such default.”21 This is anopportunity for the landlord to have theunpaid rental obligations paid in full.
There are numerous situations in which atenant may want to assume a lease. The leaseterms may be favorable compared to otherscurrently available. The lease may be for aprime location. The orderly liquidation of abusiness may require remaining at the loca-tion. The debtor may seek to sell a businessas a going concern at that location. The attor-ney for the landlord should be aware that anassumed lease becomes a postpetition con-tract, and any later default gives rise to anadministrative claim that will be due a higherpriority of payment than almost all otherclaims.22
If the rent is at below-market rates, the ten-ant may seek to assume the lease and assignit to a new tenant. If the lease can be assumedand assigned, the trustee must cure prepetitionand postpetition defaults and assure the land-lord that the new tenant can perform underthe lease.23 Shopping center landlords in par-ticular typically have certain protections.These include requirements that, for example,1) the new tenant be at least as financiallysound as the debtor was when the lease wasoriginally signed, 2) the percentage rent beshown not to decline substantially, 3) theassignment not violate any radius, location, useor exclusivity provision of the lease, and 4) theassignment not disrupt the tenant mix and bal-ance in the shopping center.24 A tenant can-not, however, assume and assign a nonresi-dential real property lease that was terminatedaccording to state law before the bankruptcycase was filed.25 In such a scenario, if thebankrupt tenant files a motion seeking to
assume and assign the lease, the landlord isthereby presented with the opportunity tohave all past defaults cured as well as to pro-ceed with a financially sound new tenant.Once the lease is assumed, any liability for anyfuture breach of the lease is the responsibilityof the new tenant, not the old.26
Rejection of a Lease
Alternatively, the tenant may seek to reject thelease. The tenant is not required to wait toreject a lease. The rejection of an unexpiredlease constitutes a breach of contract. The dateof the breach is set as immediately beforethe filing date of the bankruptcy petition.27
When this happens, the unpaid prepetitionrental obligations under the lease and anyclaim for future damages become an unse-cured claim of the landlord-creditor in the ten-ant’s bankruptcy.28 However, when the ten-ant rejects the lease, the landlord can obtainan order from the bankruptcy court to forcethe tenant to vacate the premises.29
If a tenant of residential real property hasfiled a chapter 7 liquidation case, his or herchapter 7 trustee must assume or reject anunexpired lease within 60 days after the datethe tenant filed for bankruptcy. Otherwise, thelease is deemed rejected, unless the court findscause to extend the deadline.30 Under chap-ter 11 or 13, however, the trustee may assumeor reject an unexpired lease of residential realproperty at any time before the confirmationof a plan.31 In Chapter 13 cases, for example,a plan confirmation can take many months.Landlords may therefore request an early datefor the tenant to assume or reject the lease. Thecourt may therefore order the trustee to deter-mine within a specified time whether to assumeor reject a contract or lease.32
As for nonresidential leases, the unexpiredlease of nonresidential real property is auto-matically deemed rejected, and the tenantshould immediately surrender the property tothe landlord, if the trustee does not assume orreject the unexpired lease by the earlier of 120days after the bankruptcy case is filed or thedate of an order confirming a plan.33 This120-day period may be extended for an addi-tional 90 days upon a court order, for a totalof 210 days after filing.34
Another matter that a landlord’s counselmay be called upon to handle for a landlordclient is the filing of a proof of claim or arequest for payment of an administrativeexpense.35
Property of the estate will be distributedto pay claims in the order set forth in theBankruptcy Code.36 Generally, secured claim-holders may look to payment from their se-cured property. Upon court approval, admin-istrative expense claims are paid before otherunsecured claims.37 Unpaid postpetition rentis generally an administrative claim because it
Los Angeles Lawyer January 2014 9
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is an actual and necessary cost and expense ofpreserving the bankruptcy estate.38 Next in linefor distribution of estate property are prior-ity unsecured claims and, finally, general unse-cured claims.39 Unpaid prepetition rent isusually a general unsecured claim and is thusin the class of claims that are last in line forpayment. Furthermore, lease termination dam-ages in such cases are capped by the provisionsof Section 502(b)(6) to the greater of oneyear’s rent or 15 percent of the rent due underthe lease, not to exceed three years’ rent plusunpaid prepetition rent. The cap does notalways apply to all damages; however, it hasbeen held not to apply to tortlike claims, forexample physical damages to the property.40
While the field of bankruptcy is an area oflaw in which some attorneys may choose notto venture too often, a knowledge of thebasics can go a long way in addressing theconcerns and managing the expectations oftheir landlord clients. n
1 11 U.S.C. §362(b)(10).2 11 U.S.C. §541(b)(2).3 See 11 U.S.C. §101.4 In re Michael H. Clement Corp., 446 B.R. 394 (Bankr.N.D. Cal. 2011).5 11 U.S.C. §365(e)(1).6 11 U.S.C. §109(e).7 11 U.S.C. §362(a)(1).8 11 U.S.C. §§362(a)(3), 541.9 11 U.S.C. §362(b)(23).10 Id.11 11 U.S.C. §362(b)(22).12 11 U.S.C. §§362(b)(22), 362(l).13 See In re Furtado, 2011 Bankr. LEXIS 5667 (Bankr.E.D. Cal. 2011).14 The U.S. Bankruptcy Court for the Central District ofCalifornia has mandatory forms for relief from staymotions. See http://www.cacb.uscourts.gov. 15 11 U.S.C. §362(d)(1).16 11 U.S.C. §365(d)(3).17 11 U.S.C. §362(d)(2).18 11 U.S.C. §362(d)(4).19 In re Coast Trading Co., 744 F. 2d 686 (9th Cir. 1984).20 In a chapter 11 case, the trustee is usually the debtor.21 11 U.S.C. §365(b)(1).22 In re Frontier Props., Inc., 979 F. 2d 1358, 1367 (9thCir. 1992).23 11 U.S.C. §§365(b)(1), (c), (f).24 11 U.S.C. §365(b)(3).25 11 U.S.C. §365(c)(3).26 11 U.S.C. §365(k).27 11 U.S.C. §365(g).28 See 11 U.S.C. §502(b)(6).29 See 11 U.S.C. §362(d)(1).30 11 U.S.C. §365(d)(1).31 11 U.S.C. §365(d)(2).32 Id.33 11 U.S.C. §365(d)(4).34 Id.35 There is a federal form for proofs of claim.Administrative expenses are allowable after a request byan entity upon notice and a hearing. 11 U.S.C. §503.36 See 11 U.S.C. §726.37 11 U.S.C. §503.38 11 U.S.C. §503(b).39 11 U.S.C. §726.40 In re El Toro Materials Co., Inc., 504 F. 3d 978 (9thCir. 2007), cert. denied, 2008 U.S. LEXIS 3140 (Apr. 14,2008).
10 Los Angeles Lawyer January 2014
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Los Angeles Lawyer January 2014 11
ALTHOUGH THE TERM “CONDOMINIUM HOTEL” is common in the hos-pitality industry, there is no standard definition of a condominium hotel.Rather, the term generally refers to variations on one theme: a real estateproject that presents itself to the world as a traditional hotel in termsof appearance and operation, but in which some or all of the hotel’srooms, units, or free-standing lodging quarters (such as bungalows andcottages) are actually condominiums owned by individuals.
Assertions that condominium hotel units may constitute securi-ties are not novel. In 1946, the U.S. Supreme Court, in Securities &Exchange Commission v. W.J. Howey Company,1 created the test fordetermining whether a particular transaction qualified as an invest-ment contract, hence a security. The Court found a security in any“contract, transaction or scheme whereby a person invests his moneyin a common enterprise and is led to expect profits solely from theefforts of the promoter or third party.”
Under the Howey test, if condominium units are sold with certainancillary features, such as a pooling of rental income or certainrestrictions on occupancy and use, the units will be deemed securi-ties. By the early 1970s, a great deal of uncertainty had arisen aboutthe proper application of the Howey test to offerings of condomini-ums and other interests in common-use developments. In response,in 1973, the SEC published the Securities and Exchange CommissionRelease No. 33-5347,2 which clarified the SEC’s position on theproper application of the Howey test to the offer and sale of condo-miniums. In summary, the release states that a condominium offer-ing in conjunction with any one of the following collateral arrange-ments will cause the offering to be viewed as an offering of securities:1) the offering or participation in a rental pool arrangement, 2) theoffering of a rental or similar arrangement whereby the purchaser mustuse an exclusive rental agent, hold his unit available for rental for anypart of the year, or is otherwise materially restricted in his occupancyor rental of his unit, or 3) the offering or selling of units with an empha-sis on the economic benefits to the purchaser to be derived from themanagerial efforts of the promoter, or a third party designated orarranged for by the promoter, from rental of the units.
Offering securities without strictly complying with state and fed-eral securities registration requirements can have drastic conse-quences. For example, violations of securities laws can be grounds forcivil lawsuits by private plaintiffs or civil or criminal actions by gov-ernmental agencies, such as the SEC or state securities agencies.Private plaintiffs are generally awarded rescission damages for secu-rities laws violations but not punitive damages or attorney’s fees. Whenthere are significant resale price declines, private plaintiffs are morelikely to allege securities law violations, as evidenced by the suddenincrease in securities law claims against developers in the wake of thefinancial crisis of 2008 and the accompanying downturn in commercialand residential real estate.
In light of the legal risks, real estate securities practitioners are oftenasked by condominium hotel developers to advise on the structure ofthe developer’s marketing, sales, and rental programs to avoid hav-
ing the units later classified as securities. Unfortunately, there havebeen relatively few published decisions applying the Howey test tocondominium hotels, so attorneys generally turn to the release alongwith the numerous no-action letters issued by the SEC since the pub-lication of the release. In summary, based on the release and no-actionletters, the following general legal framework for modern hotel con-dominiums has evolved.
Rental Programs. Rental arrangements that pool all rents receivedand all expenses attributable to rental of all the units in a develop-ment project, and allocate the net proceeds to the individual ownerson a ratable basis, are strictly forbidden. However, a rotationalmethod that assigns hotel guests to condominium units participatingin a rental program based on the unit type desired by a given guestwith the lowest historic occupancy, subject to accommodating aguest’s requests for different views, bed types, and unit types, is gen-erally permissible, provided that participating owners receive thegross rental revenue derived from the rental of their specific condo-minium unit, less rental commissions and per-use charges.
Cost Sharing Arrangements. A continuing affiliation between thedevelopers or promoters of a project and the project by reason of main-tenance arrangements will not make the unit a security. The SEC hasconsistently confirmed that mandatory arrangements between a pur-chaser and a developer that pools the costs relating to maintenance,upkeep, repair, operation, and management of common areas will notcause the offering of condominium units to be a security.
Rental Program Structures. Permissible rental programs must beoptional; the purchaser must retain the authority to decide to par-ticipate in the rental program, rent the property through an unaffil-iated third party, or rent the property independently. The term of theprogram must not be for an unreasonable length of time, and par-ticipants must have a reasonable opportunity to terminate participationin the program. Finally, developers or promoters cannot offer mate-rial financial incentives to participate in an optional rental program.
Use and Occupancy Restrictions. The SEC has consistently advisedthat developers cannot mandate that unit owners make their unitsavailable for rent or impose material use restrictions, such as limita-tions on the number of days that the owner may occupy the unit.However, there is a line of no-action letters issued by the SEC imply-ing that obligations to rent and restrictions on occupancy imposedby pre-existing governmental zoning regulations, and not by a devel-oper, are permissible. The SEC has informally expressed reluctanceto continue granting no-action letter relief on this basis, which hascalled this zoning regulation exemption into question.
Manner of Offering. Condominium hotel developers must con-sciously market their units without emphasizing any economic ben-efits of ownership and adopt strict sales guidelines to ensure uniform
practice tips BY TIMI A. HALLEM AND JASON T. TAKETA
Treatment of Condominium Hotels as Securities after Salameh
Timi A. Hallem and Jason T. Taketa are partners at Manatt, Phelps & Phillips,LLP, who filed an amicus brief in Salameh on behalf of the Real EstateRoundtable and the National Association of Realtors.
implementation of marketing strategy. Dev-elopers’ sales programs must be separate anddistinct from their optional rental program.Employees and operations of developers’sales programs cannot overlap with employ-ees and operations of their rental programsin any way and should be run independentlyout of separate offices. Sales representativesmay not discuss potential income or revenueto be derived from rental of the units, possi-ble economic benefit from rental of the units,or rental experience with similar condo-minium hotel products.
The Intrawest Model
In 2002, the SEC issued a no-action letter inthe matter of Intrawest that generally easedsome of the rigid formalities separating condominium unit sales from the promotion of adeveloper-sponsored rental program.3 Intra-west posited that developers and their salesstaff could disclose the existence of a rentalprogram to prospective purchasers and intro-duce them to members of the developer’srental management team to discuss the gen-eral terms of the rental program. Previously,the SEC had indicated in several no-action let-ters that a developer could only discuss itsrental program with a prospective purchaserin response to a specific request.4 However,Intrawest argued that the SEC’s “don’t ask,don’t tell” policy concerning renting takes a“sound policy to an illogical extreme wherebyan integral part of the purchase—what doesthe purchaser do with this resort propertythe other 50 weeks of the year?—is oftenexcluded from the prospective purchaser’sinvestigation.”5 Ultimately, Intrawest suc-cessfully argued that mere disclosure of theexistence of a rental program as one of themany services offered to unit owners doesnot involve the offer of a security.
Intrawest permits rental management rep-resentatives to generally discuss the rentalprogram with prospective purchasers andprovide raw, publicly available informationregarding the rental of comparable units,such as occupancy history and rental rates,upon request.
Finally, Intrawest provides that once pur-chasers enter into agreements to purchaseunits, representatives of a developer’s rentalmanagement company may contact thosepurchasers and discuss the specific terms andconditions of the rental program and may alsoenter into agreements for rental management,provided that such agreements may onlybecome effective upon the closing of the saleof the underlying unit. The reasoning uponwhich Intrawest relied, and the SEC accepted,is that once a unit purchaser has entered intoa binding purchase agreement and paid a non-refundable deposit, that purchaser has madea decision and commitment to purchase the real
estate. As such, although the closing of the saleof real estate may not occur for several weeksor months thereafter, discussing specific rentalprogram terms and entering into rental agree-ments during such period is separate and dis-tinct from the sales process.
The Salameh Decision
The challenge facing many modern real estatesecurities attorneys is that the release andthe subsequent no-action letters are not bind-ing precedent.6 There have been relativelyfew published cases addressing the moderncondominium hotel structure (i.e., a condo-minium hotel that complies in all materialrespects with the release and prior SEC no-action letters). Thus, the ability to predicthow a court may ultimately rule on the issuehas been difficult.
In August 2013, however, the Ninth CircuitCourt of Appeals issued an important opin-ion that could establish a safe harbor to pro-tect condominium hotels from being charac-terized as securities under federal and statesecurities laws. Salameh v. Tarsadia Hotel7
arose in December 2009 when certain HardRock Hotel San Diego unit owners filed suitin district court in San Diego seeking to rescindtheir purchases and claiming that the unitsconstituted securities under federal and statesecurities laws. In characterizing the HardRock Hotel San Diego units as securities, theplaintiffs alleged that the units and the optionalrental management program operated by thehotel operator were offered as a single pack-age; therefore, they expected to profit fromtheir units based on the efforts of the hoteldeveloper or hotel operator. However, most ofthe purchasers did not sign rental programagreements until eight to 10 months afterthey had signed their purchase agreements.
The Ninth Circuit affirmed the districtcourt’s dismissal of the plaintiffs’ complaint,finding that it did not sufficiently allege factsto support claims that condo hotel units in theHard Rock Hotel San Diego developmentconstituted securities under federal and statesecurities laws. The court of appeals heldthat the plaintiffs did not adequately allegefacts demonstrating that they were offered realestate and rental program agreements as apackage or that they were induced to buy thecondominiums by the rental program. Thecourt also found that the plaintiffs did notallege that they were even aware of the rentalprogram at the time they signed unit pur-chase agreements; therefore, they could notallege that they were induced to buy the con-dominiums by the opportunity to participatein the rental program. The court’s ruling wasunderscored by the large gap in time betweenthe plaintiffs’ execution of the real estatepurchase contracts and their execution ofthe rental management agreements.
The court also rejected what appeared tobe the plaintiffs’ strongest argument: thatthe real estate sale combined with external fac-tors—such as a zoning ordinance restrictingthe occupancy of the units to no more than28 days in a calendar year and requiring thatthe units be offered to the public for rent aspart of the hotel when not occupied—gavethem no choice but to sign the rental man-agement agreement when it was later pre-sented. Although the court described thisargument as having “some force,” it foundflaws with the implicit assumption that theonly viable use for the condominiums was asan investment property and posited that“there is no plausible reason why there can-not be a viable market for owner-occupiedhotel condominiums for use as short-termvacation homes.”
Although Salameh represents just one ofseveral lawsuits filed by condominium hotelbuyers since the 2008 financial downturn incommercial and residential real estate, it isimportant in several respects.
First, Salameh is the only opinion to datethat thoroughly examines a modern condo-minium hotel that, by all appearances, com-plied with prior SEC direction. For example,rather than pool all rents and expenses attrib-utable and allocate the net proceeds to the indi-vidual owners on a ratable basis, the HardRock Hotel’s rental program employed a rota-tional method that allocated the gross rentalrevenue derived from the rental of a specificcondominium unit, less rental commissionsand per-use charges, directly to the owner ofthe unit. Furthermore, although Hard RockHotel unit owners were restricted from occu-pying their units for more than 28 days ayear and obligated to make their units avail-able to the public for rent as part of the hotelwhen not occupied, these restrictions werenot imposed by the developer but rather by apre-existing city zoning ordinance. Althoughthe hotel did promote the rental program tounit purchasers, it does not appear that thehotel did so until after the unit owners hadsigned binding unit purchase agreements.
Next, the court reached its decision despitean SEC amicus brief arguing that the HardRock Hotel units were in fact investmentcontract securities, based on the totality of thefacts and circumstances of the offering.Although courts often defer to the SEC’sopinions on the application of the securitieslaws, the court was unable to reach the sameconclusion as the SEC. Because the NinthCircuit is an influential court nationwide,the court’s divergence from the SEC’s positionmay prove to be extremely influential in otherjurisdictions in the future.
Finally, although there appears to be ampleevidence in the record that the prospective unitowners knew or should have known that
12 Los Angeles Lawyer January 2014
ROSS MEDIATION SERVICES
occupancy of their unit would be signifi-cantly restricted and that they would berequired to hold their units out for rent as partof the hotel when not occupied, the courtplaced significant weight on the plaintiffs’failure to allege that they relied on (or wereeven aware of) the actual rental programthat the developer would later offer. There-fore, condominium hotel developers may beable to insulate themselves from future secu-rities law claims based on Salameh by delib-erately withholding information about theirrental programs from prospective unit pur-chasers during the sales process.
Salemeh’s Limitations
Based on the court’s reasoning, one of the keyelements of the Intrawest model—the abilityof developers to disclose the existence andterms of a rental management program toprospective purchasers—appears to conflictwith the contours of the Salameh safe harbor.Therefore, developers may face certain inher-ent practical limitations in trying to qualify for the safe harbor, as they may be required toadopt the “don’t ask, don’t tell” policy thatIntrawest successfully argued against. Further-more, condominium hotels are no longer nov-elties, and prospective purchasers may expectto enter into a rental management arrange-ment. Thus, an integral question concerning thepurchase—what does the purchaser do withthis resort property the other 50 weeks of theyear?—could be excluded from the prospectivepurchaser’s investigation.
In light of Salameh, condominium hoteldevelopers must continue to structure theirmarketing and sales processes in accordancewith the release and re-evaluate their cur-rent sales and marketing programs to deter-mine whether they satisfy the conditions of the Salameh safe harbor. Condominium hoteldevelopers will have to reconcile the tensionbetween the safe harbor’s protections andthe practical reality of selling condominiumhotel units and strike an appropriate bal-ance. n
1 SEC v. W.J. Howey Co., 328 U.S. 293 (1946).2 Guidelines as to the Applicability of the FederalSecurities Laws to Offers and Sales of Condominiumsor Unites in a Real Estate Development, Exchange ActRelease No. 33-5347, 1973 WL 158443 (Jan. 4, 1973).3 Intrawest Corp., SEC No-Action Letter, 2002 SECNo-Act. LEXIS 787 (Nov. 8, 2002).4 See FC Beach Joint Venture (May 29, 1998);Princeville Corp. (Mar. 13, 1991); Diamond CoveAssociates (Sept. 27, 1990).5 Intrawest Corp., SEC No-Action Letter, 2002 SECNo-Act LEXIS 787 (Nov. 8, 2002).6 Some developers have sought specific no-action let-ter comfort from the SEC directly. However, no-actionletters are only binding on the SEC, and while they maybe a very persuasive deterrent against third-party pri-vate plaintiffs, they are not binding on third parties.7 Salameh v. Tarsadia Hotel, __ F. 3d __, 2013 WL4055825 (9th Cir. 2013).
Los Angeles Lawyer January 2014 13
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14 Los Angeles Lawyer January 2014
RICH
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LAST JUNE, THE U.S. SUPREME COURT handed down a ruling thatreined in government’s ability to exact fees from developers inexchange for the right to develop property. In a 5-4 decision, the Courtin Koontz v. St. Johns River Water Management District1 held thatan agency must meet the heightened constitutional scrutiny of the“essential nexus” and “rough proportionality” test before it canimpose conditions on proposed development. The Court’s decisionsignals that officials cannot evade this constitutional standard byexacting fees instead of an interest in land. It also opens the door tochallenges to fee programs and other efforts that impose financialburdens that appear disproportionate to the impact caused by a devel-opment—burdens that ought to be borne by the public, not an indi-vidual owner.
The Koontz opinion embodies the tension between a govern-ment’s legitimate interest in reducing impacts of a project and the con-stitutional imperative of protecting an owner from having to bear thecost of public improvements for which a project does not create a need.The recession has exacerbated this tension as state and local gov-ernments struggle to find financing for much needed infrastructure inthe face of dwindling tax and other revenues. Agencies have increas-ingly responded by imposing development impact fees, dedicationsof property, and construction of off-site improvements as conditionsto permit applications to provide public infrastructure. The tempta-tion lies in going too far—requiring a developer to underwrite com-munity benefits that have no relationship to the proposed project.
A claim that an agency has succumbed to this temptation lies atthe heart of Nollan v. California Coastal Commission2 and Dolan v.City of Tigard.3 The Court, relying on the “unconstitutional condi-tions” doctrine, ruled that government cannot condition approval ofa land use permit on an owner’s relinquishment of a property inter-est unless it shows an “essential nexus” and “rough proportionality”between the condition and the project’s effects.4 This doctrine has a“special application” in the land use context because it protects theFifth Amendment right to just compensation for property governmenttakes when an owner seeks an entitlement.5 The Supreme Courtobserved, “Land-use permit applicants are especially vulnerable to thetype of coercion that the unconstitutional conditions doctrine pro-hibits because the government often has broad discretion to deny apermit that is worth far more than the property it would like to take.”6
In Nollan the California Coastal Commission conditioned approvalof a coastal development permit to build a home on providing a pub-lic easement across the owner’s beachfront property to protect the pub-lic’s “visual access” to the beach. The Court found it “quite impos-sible” how the easement would help those already on the beach seethe beach, or how the easement would lower an asserted “psycho-logical barrier” to using the beach for those driving by the property,or why building the home would increase public use of the beach orhow the easement could ease that increase.7 Thus, discerning norelationship between the condition imposed and the impact of the pro-posed home, the Court invalidated this exaction.8
In Dolan the Court refined the constitutional test employed inNollan by requiring 1) an “essential nexus” between a “legitimate stateinterest” and the condition imposed and 2) a “rough proportional-ity” between the condition and the project’s impact.9 In satisfying thesecond prong, an agency must make an “individualized determina-tion that the required dedication is related both in nature and extentto the impact of the proposed development.”10 The city of Tigard con-ditioned the owner’s application to enlarge her retail store by requir-ing dedications of a “greenway” for public use and preservation ofa nearby floodplain and a pedestrian-bicycle pathway easement toease car traffic this project could generate. Although concludingthat Tigard showed a “nexus” between these dedications and its legit-imate interests in preserving a floodplain and reducing traffic, theCourt determined that this city did not meet the rough proportion-ality prong because it failed to “quantify” or individualize howthese conditions would mitigate project impacts on the floodplain or
practice tips BY FERNANDO VILLA
Koontz Curbs Government Power to Impose Development Fees
Fernando Villa is a partner at Allen Matkins Leck Gamble Mallory & Natsis LLPwho specializes in land use and environmental law.
traffic. The majority found wanting why apublic greenway, versus private open space,was needed to protect the floodplain andlooked askance at the city’s “conclusory state-ment,” without more, that the pathway “couldoffset…traffic demand.”11
Two key California Supreme Court deci-sions emerged in the wake of Nollan andDolan that sought to apply the latter rulingsto development impact fees. In Erhlich v.City of Culver City,12 the owner of a sportscenter sought to rezone his property andamend the city’s general and specific plans toallow the development of a multiunit con-dominium project. The city conditioned theseentitlements on the owner’s payment of$280,000 to replace some of the recreationalfacilities that would be lost as a result of theproposed project. The owner sued, claimingthe fees violated the Mitigation Act13 andconstituted an unconstitutional taking of hisproperty without just compensation. The Cal-ifornia Supreme Court concluded that theheightened scrutiny test formulated by Nollanand Dolan applied to this fee “under the cir-cumstances of this case.”14 It interpreted theMitigation Act’s “reasonable relationship”standard to embody this test but limited thistest’s application to exactions imposed “on anindividual, discretionary basis,”15 not to thoseimposed “generally” by “legislatively formu-lated development assessments.”16
In San Remo Hotel v. City and County of San Francisco,17 the California SupremeCourt revisited impact fees in the context ofNollan and Dolan. There, the owners of ahotel challenged in lieu fees exacted by the cityunder an ordinance that required a devel-oper desiring to convert residential hotel unitsto tourist use either to build or pay for, by anin lieu fee, housing to replace the lost units.The Court declined to apply the Nollan/Dolantest to the in lieu fees imposed because theyemanated from a generally applicable devel-opment fee:
The “sine qua non” for application ofNollan/Dolan scrutiny is thus the “dis-cretionary deployment of the policepower” in “the imposition of land-useconditions” in individual cases. Only“individualized development fees war-rant a type of review akin to the con-ditional conveyances at issue in Nollanand Dolan”…therefore, housing re-placement fees under the [ordinance] arenot subject to Nollan/Dolan/Ehrlichscrutiny.18
Enter Koontz
The Court in Koontz dealt with an ownerwho wanted to develop 3.7 acres of his 14.9-acre property that included installing a dry-bed pond for retaining and releasing stormwa-ter runoff. To mitigate the environmental
impact of this proposal, he offered to providea conservation easement on the remaining11 acres of this site. When he applied to theSt. Johns River Water Management Districtfor permits under the state’s Water ResourcesAct and Warren S. Henderson WetlandsProtection Act, the district told petitionerthat it would not approve construction unlesshe either: 1) developed only 1 acre, installinga costly subsurface water management systemand deeding the rest of his 13.9 acres to thedistrict as a conservation easement, or 2)developed on 3.7 acres, deeding the balanceof the site to the district and paying forimprovements on 50 acres of district-ownedland several miles away. He declined each
alternative and filed suit in state court, alleg-ing an unconstitutional taking without justcompensation.
The district postured that petitioner hadno cognizable claim because, among otherreasons: 1) no taking occurred since the dis-trict denied the permits, 2) it could havedenied the permits outright without provid-ing the option of granting the permit inexchange for fees to pay for the off-site im-provements, and 3) a claim under Nollanand Dolan does not extend to a demand formoney.
The Court rejected each contention inturn, opining that the principles of Nollan andDolan regarding nexus and rough propor-
Los Angeles Lawyer January 2014 15
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tionality do not change depending on whetherthe government approves a permit on a con-dition that an applicant will convey a prop-erty interest or denies a permit because theapplicant declines to do so.19 Although notaking occurs in the latter event, an “extor-tionate” demand would “impermissibly bur-den the right not to have property takenwithout just compensation.”20 “Nor does itmake a difference” that the district couldhave denied the application outright withoutconditions, since this agency cannot conditiona “gratuitous benefit” upon an owner’s waiverof constitutional rights.21 Lastly, and critically,the Court ruled that a government’s demandfor property from a land-use applicant mustsatisfy the Nollan/Dolan test, “even whenthe government denies the permit and evenwhen its demand is for money.”22
The Court’s reasoning for applying thistest to fees is instructive. The majority ex-tended heightened scrutiny to fees because itsaw these exactions as no different fromother exactions where the risk of an extor-tionate demand exists:
The fulcrum this case turns on is thedirect link between the government’sdemand [for money] and a specificparcel of real property. Because of thatdirect link, this case implicates the cen-tral concern of Nollan and Dolan: the
risk that the government may use itssubstantial power and discretion inland-use permitting to pursue govern-mental ends that lack an essentialnexus and rough proportionality tothe effects of the proposed new use…thereby diminishing without justifica-tion the value of the property.23
The Court observed that had it not appliedNollan and Dolan to fees, a governmentcould easily evade heightened scrutiny byrequiring an in lieu fee equal to the cost of theproperty exaction that would itself fail tomeet this standard.24
The majority dismissed the district’s con-cern that making money demands subject toscrutiny under Nollan and Dolan would leaveno principled way of distinguishing imper-missible exactions from property taxes. First,the Court believed that this concern “exag-gerates” the practical difficulty of drawing thisdistinction.25 Second, the district did notclaim its demand for money was a tax, andit could not plausibly have done so becauseFlorida law did not afford the district thepower to tax petitioner’s property in the man-ner it sought.26
Finally, the Court rejected respondent’scontention that an obligation to pay moneycannot form the basis of a takings claimbcause such an obligation does not operate on
or alter a specific property interest. The Courtreasoned that, quite the contrary, “thedemand for money at issue here did ‘operateupon…an identified property interest’ bydirecting the owner of a particular piece ofproperty to make a monetary payment.”27
Indeed, this “direct link…implicates the cen-tral concern of Nollan/Dolan.”28
After Koontz
Unlike the California Supreme Court inEhrlich and San Remo, the Court in Koontzmade no attempt to limit the reach of itsholding by, for example, requiring height-ened scrutiny only of money exactionsimposed on an ad hoc basis. The majority inKoontz saw as the “fulcrum” of this casethe “direct link” between a demand formoney and a specific parcel. A fair reading ofits opinion suggests that so long as a “demandfor money operates upon an identified prop-erty interest,” the demand might be subjectto heightened scrutiny under Nollan andDolan, regardless of whether that demandemanates from an ad hoc exaction, a leg-islative fee program replete with fee schedules,standards and the like, or other sources.
In her dissent, Justice Elena Kagan rec-ognized this potentially sweeping breadth ofthe majority’s ruling, and expressed graveconcern:
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By applying Nollan and Dolan to per-mit conditions requiring monetary pay-ments—with no express limits exceptas to taxes— the majority extends theTakings Clause…into the very heart oflocal land use regulation and servicedelivery. Cities and towns across thenation impose many kinds of permit-ting fees every day. Some enable a gov-ernment to mitigate a new develop-ment’s impact on the community, likeincreased traffic or pollution—or de-struction of wetlands…. All now mustmeet Nollan and Dolan’s nexus andproportionality tests.29
Justice Kagan expressed hope that theCourt would in the future attempt to con-strain the broad reach of its decision:
Perhaps the Court means in the futureto curb the intrusion into local affairsthat its holding will accomplish…. Themajority might, for example, approvethe rule, adopted in several States, thatNollan and Dolan apply only to per-mitting fees that are imposed ad hoc,and not to fees that are generallyapplicable.30
As both the majority and dissenting opin-ions in Koontz manifest, however, the Court’sdecision draws no such distinction, and placesno such limits. The absence of any apparentconstraints on this ruling could leave a broadrange of impact fee programs and other feesvulnerable to a legal challenge if they do notreflect a nexus and rough proportionalitybetween conditions imposed and a project’simpacts. State and local agencies may be welladvised that in adopting impact fee programs,they should attempt to fashion standardsthat meet this heightened scrutiny and requiresome form of individualized determinationthat the amount of the fees to be imposedrelates to the extent and nature of the projectimpacts. Fee programs—and undoubtedlyad hoc fee impositions—that do not bearthese hallmarks could very well face legalchallenges in the aftermath of Koontz.
Agencies may respond to this ruling bycorrectly noting that Koontz dealt with an adhoc fee exaction. As such, they might say, thisruling has not wrought any change in thedistinctions drawn by Ehrlich and San Remobetween such fees and those that apply gen-erally. California courts might also showreluctance to venture afield from theselodestar state court rulings and to furtherburden financially strapped California citiesby invalidating fee programs on the basis ofKoontz. Federal courts, however, might notbe so inhibited, particularly if faced with anegregious fee program that lacks any mean-ingful standards and appears to be a thinlyveiled revenue source for a city.
Koontz could affect other forms of exac-
tions in ways that may not be obvious. Forinstance, California courts have consistentlyheld that the Nollan/Dolan test does notapply to conditions imposed as a part of adevelopment agreement between a city and adeveloper that vests the right to develop prop-erty in accordance with local regulations ineffect when the agreement is approved. Thisexception to heightened scrutiny rests on theprinciple that such an agreement is freelynegotiated between a local agency and anowner.31 But what if a city, believing it couldextract fees and other concessions that theFifth Amendment would otherwise prohibit,told a developer that it had to enter into adevelopment agreement if it wants the city toapprove the project? Such a message wouldseem to fit within the paradigm of an “extor-tionate” demand from a vulnerable ownerthat Koontz found would give rise to a tak-ings claim.
Of course, the full effect of Koontz onthe viability of fee programs and other exac-tions has yet to be realized. At this nascentstage, however, it seems safe to say that thedecision has placed government on notice toproceed with caution when crafting andimposing impact fees. n
1 Koontz v. St. Johns River Water Mgmt. Dist., 133 S.Ct. 2586 (2013).
2 Nollan v. California Coastal Comm’n, 483 U.S. 825(1987).3 Dolan v. City of Tigard, 512 U.S. 374 (1994).4 Id. at 391; Nollan, 483 U.S. at 836.5 Dolan, 512 U.S. at 385; Lingle v. Chevron U.S.A. Inc.,544 U.S. 528, 547 (2005); Koontz, 133 S. Ct. at 2594.6 Koontz, 133 S. Ct. at 2594.7 Nollan, 483 U.S. at 838.8 Id. at 839.9 Dolan v. City of Tigard, 512 U.S. at 386, 391 (1994).10 Id. at 391.11 Id.12 Erhlich v. City of Culver City, 12 Cal. 4th 854(1996).13 GOV. CODE §§66000 et seq.14 Ehrlich, 12 Cal. 4th at 860 (emphasis in original).15 Id.16 Id. at 876.17 San Remo Hotel v. City and County of San Francisco,27 Cal. 4th 643 (2002).18 Id. at 670 (citations omitted).19 Koontz v. St. Johns River Water Mgmt. Dist., 133S. Ct. 2586, 2595 (2013).20 Id. at 2596.21 Id.22 Id. at 2603.23 Id. at 2600.24 Id. at 2599.25 Id. at 2596.26 Id. at 2601-02.27 Id. at 2599.28 Id. at 2600.29 Id. at 2607.30 Id. at 2609, (citing Ehrlich v. Culver City, 12 Cal.4th 854, 911 (1996)).31 See, e.g., Leroy Land Dev. Corp. v. Tahoe Reg’lPlanning Agency, 939 F. 2d 696, 697 (9th Cir. 1991).
Los Angeles Lawyer January 2014 17
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The National Academy of Distinguished Neutrals, is an association of over 800 mediators and arbitrators who have substantial experience in the resolution of commercial and civil disputes. All members have been recognized for their accomplishments through the Academy’s peer nomination system and extensive attorney-client review process.
Membership is by invitation only and is limited to individuals who devote substantially all of their professional efforts to ADR practice.
To access our FREE National Directory of over 800 trusted mediators & arbitrators, please visit www.NADN.org/directory
Daniel Ben-Zvi(310) 201-0010
Lee Jay Berman(310) 203-0700
Kenneth Byrum(661) 861-6191
Michael Diliberto(310) 201-0010
Max Factor III(310) 456-3500
William Fitzgerald(310) 440-9090
Kenneth C. Gibbs(310) 309-6205
Michael J. Bayard(213) 383-9399
Greg Derin(310) 552-1062
Steve Mehta(661) 284-1818
Deborah Rothman(800) 616-1202
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20 Los Angeles Lawyer January 2014
MIC
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NEW REGULATIONS adopted by the California Energy Commission (CEC) designed to promote environmentally con-scious practices in commercial real estate transactions may have a significant effect on contract and lease terms and cre-ate potential new sources of civil liability. These “green” regulations are the result of a process that can be traced backto 2007, when the California Legislature enacted AB 1103,1 which reflected EPA policy that improving energy efficiencyin buildings is the “fastest, cheapest, and largest untapped solution for saving energy, saving money, and preventinggreenhouse gas emissions.”2 The new regulations require nonresidential building owners to benchmark and disclosethe energy usage of their buildings before entering into major financial transactions that involve those buildings.3 “Energyusage” encompasses a building’s consumption of all different types of energy, including electricity, natural gas, fuel oil,and district steam.4
The new regulations establish a benchmarking system that makes energy consumption information for all nonres-idential buildings in the state readily accessible.5 This new system allows “building owners and operators to comparetheir building’s performance to that of similar buildings and to manage their building’s energy cost.”6 The comparisonsare expected to “motivate building operators to take actions to improve” a building’s energy use and help justify thecost of those improvements.7 The CEC’s most recent alternative regulations were adopted in October 2013 as theNonresidential Building Energy Use Disclosure Program.8 The regulations are now being phased into effect.9
Nonresidential building owners will be required to disclose a building’s energy use over the past 12 months to prospec-tive buyers, lessees, and lenders.10 The regulations also require owners to benchmark that data by providing a com-parison of the building’s energy use to that of similar buildings.11
The legislature has directed the CEC to establish a specific compliance schedule for the new disclosure mandate.12
The schedule requires each nonresidential building to comply with the new regulations at staggered dates based on thesquare footage of the building. Beginning January 1, 2014, commercial buildings with a total gross floor area measuringmore than 10,000 square feet must comply with the new regulations.13 On July 1, 2014, the regulations will become
Richard H. Lee is a partner, and Jay M. Lichter is an associate, with Salisian Lee LLP. They practice in the area of busi-ness litigation and commercial real estate disputes.
START h e
S y s t e mUnder new California regulations, owners ofcommercial buildings may be obligated to discloseenergy use data via the EPA’s Energy Star program
by Richard H. Lee and Jay M. Lichter
REAL ESTATE LAWREAL ESTATE LAW
applicable to buildings with a total grossfloor area measuring between 5,000 and10,000 square feet.14
The regulations address the problem thatmany nonresidential building owners lackinformation regarding their building’s energyusage.15 The EPA estimates that an averageof 30 percent of the energy consumed incommercial buildings is wasted. Wastedenergy increases costs for owners, interfereswith accurate valuation of their buildings,and results in harmful and needless green-house gas emissions.16 Specifically, energyuse in commercial buildings and manufac-turing plants accounts for nearly half of allenergy consumption in the United States at acost of over $200 billion per year.17 Accord-ingly, the regulations through their energydisclosure requirements focus on curbing themisuse of energy and promoting environ-mental efficiency and responsibility.
The CEC regulations seek to remedy theseproblems by: 1) establishing a complianceschedule, 2) specifying what building charac-teristics and energy usage information mustbe provided to prospective buyers, lessees, andlenders, 3) identifying what disclosure docu-ments must be supplied, 4) setting a deadlinefor utility releases of data to building ownerswhile also requiring that utilities protect the con-fidentiality of customer data, and 5) enablingthe CEC to access the energy use data.18
The Energy Star System
The centerpiece of the CEC’s new bench-marking and disclosure program is the EPA’sEnergy Star portfolio manager system. Theportfolio manager is an interactive energymanagement tool that allows building man-agers to track and assess the energy con-sumption of one or more buildings in a secure,online environment.19 The portfolio man-ager is designed to help a building owner setinvestment priorities, identify underper-forming buildings, and verify efficiencyimprovements.20 Consumers may recognizethe blue-and-white Energy Star logo thatappears on energy-efficient homes and appli-ances. The certification logo indicates that aproduct meets the energy efficiency require-ments of a given Energy Star product.21
For commercial real estate, the EnergyStar system employs two specific metrics todescribe overall building energy use: 1) theEnergy Star energy performance score, and 2)energy use intensity.22 The Energy Star energyperformance score compares a building to astatistically representative sample of similarbuildings. For example, a score of 50 indicatesthat a building’s energy consumption fallsbelow the consumption of 50 percent of thesame type of buildings throughout the coun-try.23 The Energy Use Intensity metricdescribes a building’s energy use, represent-
ing the energy consumed by a building rela-tive to its size.24 Currently, a building ormanufacturing plant is awarded Energy Starcertification if it performs better than at least75 percent of comparable buildings.25
Compliance with the regulations requiresknowledge of specific Energy Star documentmaintenance and data uploading procedures.A nonresidential building owner may be hes-itant to navigate through these online pro-grams because they present unknown or
uncertain technical and legal requirements.While regulatory compliance does not nec-essarily require legal assistance, lawyers withbuilding owner clients should consider learn-ing how to assist them in compliance.
Under Title 20 of the California Code ofRegulations, a building owner is required toopen or update an existing account on theEPA’s Energy Star program Portfolio ManagerWeb site at least 30 days prior to when dis-closure is required.26 In addition to provid-ing the basics—such as a building owner’scontact information—the owner must alsoidentify the year in which the building wasconstructed, list all sources of energy usedata for the entire building for the past 12months, describe each use of space locatedthroughout the building, and request all util-ity27 and energy providers28 serving the build-ing to release energy use data for the entirebuilding for the past 12 months.29 Once a util-ity or energy provider receives a request, itmust upload all applicable energy use data tothe building owner’s portfolio manager
account for the most recent 12 months.30
The building owner must then generate thebuilding’s data verification checklist fromportfolio manager and electronically submitthe checklist to the CEC.31 Once this task iscomplete, the owner must submit the data ver-ification checklist for the building to 1) aprospective buyer of the building no laterthan 24 hours before executing a sales con-tract, 2) a potential lessee of the entire build-ing no later than 24 hours prior to signing a
lease, or 3) a lender financing the entire build-ing no later than submittal of a loan appli-cation.32
Assisting in the technical requirements ofthe document upload and data log proce-dures, maintaining critical information con-cerning the building, and explaining the needto provide certain information all may becomeduties for attorneys. The strict proceduralrequirements of the new regulations will alsohave a significant effect on commercial realestate transactions. Attorneys will need toconsider whether to include provisions ref-erencing the nonresidential building energyuse disclosure program in a contract. At aminimum, provisions should be incorporatedacknowledging that the owner has disclosedthe building’s energy use over the previous 12months to the prospective buyer, lessee, orlender and has downloaded that informa-tion to portfolio manager. A more compre-hensive provision would reference the specificbuilding information disclosed in the disclo-sure summary sheet, a statement of energy
22 Los Angeles Lawyer January 2014
performance, and a data checklist. The facil-ity summary could include these documentsas exhibits to a contract.
Tenant Consent
The new regulations dictate that only build-ing owners comply with the new upload anddisclosure requirements, but in so doing theyaffect the landlord-tenant relationship. TheCEC rejected a requirement that landlordsobtain consent for release of energy usagefrom tenants because it would be “so bur-densome that it would endanger compli-ance.”33 Notwithstanding that decision, land-lords could benefit from having energy usagedata from tenants, especially when tenants areon separate utility meters. Counsel for land-lords may advise for obtaining tenant consentto disclose energy use information for pur-poses of regulatory compliance.
This may give rise to disputes relating tothe program’s incentive to reduce energyusage levels. For example, landlords maywant to incorporate language in leases allow-ing them to limit if not outright control theenergy usage of their tenants. These provisionsmay allow for such measures as automaticpower shutoff after regular business hours,limits on the use of temperature controls,and restrictions on the use of equipment thatconsumes large amounts of energy. Theselease provisions may create conflict with ten-ants who consume large amounts of energy.On the other hand, these provisions may alsoprovide tenants with an incentive to operatetheir businesses with greater energy efficiency.
Since these regulations are relatively new,they also present questions concerningenforcement and the potential for litigation.Significantly, the statutes implementing theseregulations do not provide the CEC with theauthority to impose monetary or other penal-ties for noncompliance. The absence of anyspecific enforcement mechanism, however,by no means suggests the lack of other legalmeans of achieving the policy objectives forwhich the regulations were enacted.
The threat of litigation for nondisclosureor inaccurate disclosure could expose anowner to financial liability. In California, if“the seller knows of facts materially affectingthe value or desirability of the property whichare known or accessible only to him and alsoknows that such facts are not known to, orwithin the reach of the diligent attention andobservation of the buyer, the seller is undera duty to disclose them to the buyer.”34 Abuilding’s energy usage is an important ele-ment in determining the value of a propertyand thus constitutes material information.On a positive note, higher value could beplaced on buildings for which regulatorycompliance in general and Energy Star certi-fication in particular can be demonstrated.
Likewise, failure to disclose knowledgeof the building’s energy usage could constitutea cause of action. As a result, a court couldrule against the owner and award damages oreven rescind the sale, lease, or finance agree-ment. While the latter remedy is drastic, it is expressly available for various causes ofaction, such as fraud, that might arise fromreal estate transactions.35 The new regulationsmay also support a cause of action underCalifornia’s Unfair Competition Law (UCL).36
The UCL is California’s consumer protec-tion statute and applies broadly to consumers,investors, business customers, and competi-tors. Because the UCL prohibits “unlawful,unfair or fraudulent” business acts or prac-tices,37 and because the new regulations affir-matively require disclosure of energy data,an owner’s failure to submit the requiredinformation could be deemed unlawful. Inturn, this failure to comply could constitute anunlawful act under the UCL. A court thatfinds that an owner has violated the disclosurerules could issue an order directing the ownerto disclose the energy usage of the building38
or order payment of restitution, including areturn of all money paid to the owner.39
Owners could also find themselvesexposed to claims for negligent misrepresen-tation and fraud, depending on such factorsas an owner’s intent and a buyer’s reliance on
specific representations. Energy use data con-stitutes material information relative to thepurchase, lease, and finance of commercialreal estate. The suppression or misrepresen-tation of this information could establish thebasic elements required to present causes ofaction for fraud40 or negligent misrepresen-tation.41 A cause of action for fraud furtherexposes an owner to liability for punitivedamages, which could potentially reach mil-lions of dollars in liability, depending on thenature and extent of the wrongdoing andthe financial condition of the wrongdoer.
The legal and technical burdens imposedby California’s new energy disclosure laws aresignificant. Attorneys with clients who owncommercial real estate should learn aboutthese new regulations in order to offer properadvice on compliance. California’s continu-ing advancement toward a greener futuregives attorneys an opportunity to help reduceenergy waste. n
1 See AB 1103 (2007), codified at PUB. RES. CODE
§25402.10; http://www.energy.ca.gov/ab1103.2 See Portfolio Manager Technical Reference: Source En-ergy, at http://www.energystar.gov/buildings/tools-and-resources/portfolio-manager-technical-reference-source-energy [hereinafter Portfolio Manager].3 In the matter of: AB 1103 Commercial BuildingEnergy Use Disclosure Program Rulemaking, CaliforniaCode of Regulations, Title 20, Sections 1680-1684,Order No. 12-1212-1h: Order Adopting Regulations
Los Angeles Lawyer January 2014 23
For More Information Call 213-617-7775Or visit us on the web at www.hmlinc.com
Business litigation is increasingly complex. That is why we believe valuationissues must be addressed with the same meticulous careas legal issues. Analysis must be clear. Opinions must bedefensible. Expert testimony must be thorough andarticulate. HML has extensive trial experience and canprovide legal counsel with a powerful resource for experttestimony and litigation support.
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BUSINESS VALUATION • LOSS OF GOODWILL • ECONOMIC DAMAGES • LOST PROFITS
and Directing Additional Rulemaking Activities (Dec.17, 2012) at 1, available at http://www.energy.ca.gov/ab1103/rulemaking/notices/2012-12-12_Corrected_Order_Adopting_Regulations_and_Directing_Additional_Rulemaking_Activities_TN-69057.pdf [hereinafterOrder Adopting Regulations].4 See Portfolio Manager, supra note 2.5 See Final Statement of Reasons, AB 1103 Nonresi-dential Building Energy Use Disclosure ProgramRulemaking, California Energy Commission, NoticeFile No. Z-12-0323-03 (Mar. 8, 2013) at 1, availableat http://www.energy.ca.gov/ab1103/rulemaking/documents/2013-03-08_Final_Statement_of_Reasons_TN-69881.pdf [hereinafter Final Statement of Reasons].6 See id.7 Id.8 CAL. CODE REGS. tit. 20, §§1680-84.9 See California Energy Commission Regulations: Non-residential Building Energy Use Disclosure Program:CAL. CODE REGS. tit. 20, §§1680-84.10 See Final Statement of Reasons, supra note 5, at 1.11 Id.12 See AB 531, An Act to Amend Section 25402.10 ofthe Public Resources Code, Relating to Energy (2009).13 See California Energy Commission, Notice RegardingAB 1103 Program Implementation, available at http://www.energy.ca.gov/ab1103/rulemaking/notices/2013-08-14_suspend_notice.pdf.14 Id.15 See Final Statement of Reasons, supra note 5, at 5.16 Id.17 See Energy Star Strategies for Buildings and Plants,at http://www.energystar.gov.18 See Final Statement of Reasons, supra note 5, at 1-2.19 See Order Adopting Regulations, supra note 3, at 2; http://www.energystar.gov/buildings/facility-owners-and-managers/existing-buildings/use-portfolio-manager.20 Id.21 See Energy Star Energy Efficient Products, at http://www.energystar.gov.22 See CEC Energy Use Disclosure Summary Sheet, at1, available at http://www.energy.ca.gov/2012publi-cations/CEC-400-2012-FS/CEC-400-2012-FS-001.pdf.23 Id.24 Id.25 See Energy Star Strategies for Buildings and Plants,at http://www.energystar.gov.26 See CAL. CODE REGS. tit. 20, §§1683, 1684(a).27 A “utility” is defined as an “entity providing elec-tricity or natural gas to a nonresidential building owneror tenant.” CAL. CODE REGS. tit. 20, §1681(k).28 An “Energy Provider” is defined as an “entity pro-viding sources of energy other than electricity or nat-ural gas that are recognized by Portfolio Manager.”CAL. CODE REGS. tit. 20, §1681(c).29 CAL. CODE REGS. tit. 20, §1684(a).30 CAL. CODE REGS. tit. 20, §1684(b).31 CAL. CODE REGS. tit. 20, §1684(c).32 CAL. CODE REGS. tit. 20, §1683(a).33 See CEC Initial Statement of Reasons—ProposedRegulations to Implement AB 1103: NonresidentialEnergy Use Disclose Program, at 7 (Mar. 23, 2012).34 Lingsch v. Savage, 213 Cal. App. 2d 729, 735-36(1963).35 See CIV. CODE §§1688, 1689(b)(1); see also Lombardiv. Sinanides, 71 Cal. App. 272, 279 (1925).36 BUS. & PROF. CODE §§17200 et seq.37 BUS. & PROF. CODE §17200.38 Consumers Union of U.S., Inc. v. Alta-Dena CertifiedDairy, 4 Cal. App. 4th 963, 972-74 (1992).39 People v. Superior Court, 9 Cal. 3d 283, 286 (1973).40 See Engalla v. Permanente Med. Group, Inc., 15Cal. 4th 951, 977 (1997).41 See Thrifty Payless, Inc. v. The Americana at Brand,LLC, 218 Cal. App. 4th 1230, 1239 (2013).
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Los Angeles Lawyer January 2014 25
WITH THE START of the new year, theCalifornia Revised Uniform Limited LiabilityCompany Act1 (RULLCA) has replaced theBeverly-Killea Limited Liability CompanyAct (Beverly-Killea).2 Because limited liabil-ity companies are often the entity of choicefor closely held businesses, including manyreal estate-related enterprises, the recasting ofCalifornia’s limited liability company lawshas widespread and significant consequencesfor businesses in California.
RULLCA is modeled upon the RevisedUniform Limited Liability Company Act(Model Act) published by the National Con-ference of Commissioners on Uniform StateLaws in 2006. The California Legislature,in enacting RULLCA, cited the benefit of
consistency with the limited liability com-pany laws of other states.3 While California’senactment of RULLCA brings its limited lia-bility company laws more in line with theseven other states that have adopted the ModelAct4 and others that incorporate select provi-sions, it reaffirms the gap between California’slaw and the Delaware Limited LiabilityCompany Act5 (Delaware Act), which is thepreference of many operators, lenders, andinstitutional investors. An examination of var-ious provisions of RULLCA, as compared tothe Delaware Act, highlights reasons whysponsors organizing limited liability companiesin California may opt to form their entities inDelaware and be governed by the DelawareAct rather than RULLCA.
Delaware has long been a state of choicefor entity formation because of its overridingcommitment to uphold freedom of contract,as embodied in the Delaware Act,6 in addi-tion to Delaware’s generally business-friendlybody of law. In accordance with the ModelAct, RULLCA pays homage to freedom ofcontract: “It is the policy of this title andthis state to give maximum effect to the prin-ciples of freedom of contract and to theenforceability of operating agreements.”7
Nonetheless, RULLCA enumerates more than
Loryn Dunn Arkow is a partner in the Los Angelesoffice of Kelley Drye and Warren LLP, where shecounsels real estate investors, lenders, developers,and sponsors.
MCLE ARTICLE AND SELF-ASSESSMENT TEST
By reading this article and answering the accompanying test questions, you can earn one MCLE credit.
To apply for credit, please follow the instructions on the test answer sheet on page 27.
by Loryn Dunn Arkow
REAL ESTATE LAWREAL ESTATE LAW
NEW LLCThe
RULLCA’s default provisions must beconsidered when drafting operatingagreements for real estate LLCs
20 restrictions on what members of a limitedliability company can agree upon. Further,RULLCA provides new default standards(i.e., provisions that apply in the absence ofthe parties’ providing otherwise in the oper-ating agreement) that may complicate com-pany operations, creating a potential trap inthe event that members 1) fail to addresssuch matters in their operating agreements, or2) in the case of existing companies, hadrelied either on prior default rules that arenow supplanted by RULLCA or on the
absence of the extensive array of default rulesthat appears in RULLCA.
Limits on Contractual Variation
Among other things, RULLCA prohibits anoperating agreement from varying any provi-sion relating to mergers and conversions pro-vided for in Articles 10 and 12 of RULLCA.8
The restrictions also limit the ability to varyapplicable law and the power of the court incertain contexts.9 However, the restrictions oncontractual flexibility set forth in RULLCAparticularly emphasize limitations on theability of the operating agreement to modifyfiduciary duties and related obligations, withno less than nine subsections of RULLCASection 17701.09 pertaining to these issues.10
Addressing a previously existing ambigu-ity under California law, RULLCA states thatan operating agreement is prohibited fromeliminating the duty of loyalty, the duty ofcare, or any other fiduciary duty.11 Nor mayan operating agreement eliminate the con-tractual obligation of good faith and fairdealing consistent with which a member isrequired to perform its duties and exercise itsrights with respect to the limited liabilitycompany.12
Ambiguity remains, however, with respectto the extent to which fiduciary duties may bemodified. For example, RULLCA lists whatthe duties of loyalty that a member in a mem-
ber-managed limited liability company (orof a manager in a manager-managed limitedliability company) are:
(1) To account to a limited liabilitycompany and hold as trustee for itany property, profit, or benefit derivedby the member in the conduct andwinding up of the activities of a limitedliability company or derived from a useby the member of a limited liabilitycompany property, including the ap-propriation of a limited liability com-
pany opportunity.(2) To refrain from dealing with a lim-ited liability company in the conductor winding up of the activities of alimited liability company as or onbehalf of a party having an interestadverse to a limited liability company.(3) To refrain from competing with alimited liability company in the con-duct or winding up of the activities ofthe limited liability company.13
While Section 17701.10(c)(14) of RULLCAprohibits elimination of these duties, it specif-ically allows an operating agreement to qual-ify them by 1) identifying specific types or cat-egories of activities that do not violate theduty of loyalty, if not manifestly unreasonable,or 2) specifying the number or percentage of members that may authorize or ratify,after full disclosure to all members of allmaterial facts, a specific act or transaction thatotherwise would violate the duty of loyalty.14
This statute raises some questions.First, does the inclusion of these specifi-
cally authorized modifications preclude anyother type of modification of the duty of loy-alty? Second, could typical provisions includedin operating agreements potentially be foundby courts to be “manifestly unreasonable”?For example, many operating agreements,including operating agreements of real estate-related companies, authorize the members
and managers to participate in activities thatmay be competitive with the company, with-out incurring any obligation to offer anyinterest in these activities to the company orto the other members. This provision couldbe read as negating the duty of a member torefrain from competing with the company,making it “manifestly unreasonable.”
Further, how do managers completelyavoid situations in which they would be act-ing on behalf of parties having an interestadverse to the company when, for example,
very often the manager’s affiliate is the prop-erty manager of the company’s property, the guarantor of the company’s debt, or astakeholder in a community where the com-pany owns property? Inevitable divergencesof interest are difficult to identify in advancewithout describing them in a manner sooverly broad it becomes “manifestly unrea-sonable.”
Given these challenges, the right underDelaware law to contractually eliminatefiduciary duties15 appeals to sponsors as away to mitigate unexpected liability notcontracted for by the sponsor. The DelawareAct cautions that, while fiduciary dutiesmay be contracted away, the operating agree-ment “may not limit or eliminate liability for any act or omission that constitutes a badfaith violation of the implied contractualcovenant of good faith and fair dealing.”16
The requirement of good faith and fair dealing, also inviolable under RULLCA,17
arguably sufficiently protects passive in-vestors from true bad acts of managers, asmerited by public policy.
When proceeding under RULLCA, spon-sors should precisely craft limitations on fidu-ciary duties tailored to the specific businessplan and scope of the enterprise accountingfor RULLCA’s limitations and should fur-ther consult California case law for guidancein interpreting what actions constitute a
26 Los Angeles Lawyer January 2014
When proceeding under RULLCA, sponsors shouldprecisely craft limitations on fiduciary dutiestailored to the specific business plan and scopeof the enterprise accounting for RULLCA’slimitations and should further consult Californiacase law for guidance in interpreting whatactions constitute a breach of fiduciary duty.
Los Angeles Lawyer January 2014 27
MCLE Test No. 231The Los Angeles County Bar Association certifies that this activity has been approved for MinimumContinuing Legal Education credit by the State Bar of California in the amount of 1 hour.
MCLE Answer Sheet #231THE NEW LLC
Name
Law Firm/Organization
Address
City
State/Zip
Phone
State Bar #
INSTRUCTIONS FOR OBTAINING MCLE CREDITS
1. Study the MCLE article in this issue.
2. Answer the test questions opposite by markingthe appropriate boxes below. Each questionhas only one answer. Photocopies of thisanswer sheet may be submitted; however, thisform should not be enlarged or reduced.
3. Mail the answer sheet and the $20 testing fee($25 for non-LACBA members) to:
Los Angeles LawyerMCLE TestP.O. Box 55020Los Angeles, CA 90055
Make checks payable to Los Angeles Lawyer.
4. Within six weeks, Los Angeles Lawyer willreturn your test with the correct answers, arationale for the correct answers, and acertificate verifying the MCLE credit you earnedthrough this self-assessment activity.
5. For future reference, please retain the MCLEtest materials returned to you.
ANSWERS
Mark your answers to the test by checking theappropriate boxes below. Each question has onlyone answer.
1. nn A nn B nn C nn D
2. nn True nn False
3. nn True nn False
4. nn True nn False
5. nn True nn False
6. nn True nn False
7. nn True nn False
8. nn True nn False
9. nn True nn False
10. nn A nn B nn C
11. nn True nn False
12. nn True nn False
13. nn True nn False
14. nn True nn False
15. nn A nn B nn C nn D
16. nn True nn False
17. nn True nn False
18. nn True nn False
19. nn True nn False
20. nn True nn False
1. The limited liability company law of which state hasa policy of giving maximum effect to the principles offreedom of contract and enforceability of operatingagreements?
A. California.B. Delaware.C. Both.D. Neither.
2. The California Revised Uniform Limited LiabilityCompany Act (RULLCA) permits elimination of the fidu-ciary duties of the manager.
True.False.
3. The Delaware Limited Liability Company Act(Delaware Act) permits elimination of the fiduciaryduties of the manager.
True.False.
4. RULLCA allows an operating agreement to elimi-nate the contractual duty of good faith and fair dealingof the members.
True.False.
5. The Delaware Act allows an operating agreement toeliminate the contractual duty of good faith and fairdealing of the members.
True.False.
6. Under RULLCA, one element of the duty of care thata manager in a manager-managed LLC has is to refrainfrom competing with the LLC in the conduct or windingup of the activities of the LLC.
True.False.
7. Under RULLCA, one element of the duty of loyalty thata manager in a manager-managed LLC has is to refrainfrom acting on behalf of a party having an interestadverse to that LLC.
True.False.
8. RULLCA allows an operating agreement to qualify theduty of loyalty by identifying specific types or cate-gories of activities that do not violate the duty of loy-alty, if not manifestly unreasonable.
True.False.
9. Under RULLCA, a member is bound by a provision inthe operating agreement modifying the fiduciary dutiesof the manager even if the member has not signedthe operating agreement.
True.False.
10. Unanimous consent of the members of a manager-managed, California LLC is required for the sale of all orsubstantially all of the property owned by the company:
A. Under all circumstances.
B. Even if the operating agreement allows for thesale upon majority approval.C. If the operating agreement does not specifywhat vote is required.
11. Pursuant to RULLCA, unless otherwise specified inthe operating agreement, taking of any action outsidethe ordinary course of the LLC’s activities by the man-ager requires unanimous consent of the members.
True.False.
12. RULLCA defines activities in the “ordinary course”as the day-to-day activities of the company.
True.False.
13. The default rule for the percentage vote required toamend the operating agreement under RULLCA is thesame as it was under Beverly-Killea.
True.False.
14. In a manager-managed LLC, the members canremove the manager without cause upon a majorityvote.
True.False.
15. A charging order is available as a remedy for judg-ment creditors of members of an LLC in:
A. California.B. Delaware.C. Both.D. Neither.
16. California law permits foreclosure on membershipinterests in a multimember LLC as a remedy against ajudgment debtor.
True.False.
17. California law permits foreclosure on membershipinterests in a single-member LLC as a remedy againsta judgment debtor.
True.False.
18. Delaware law permits foreclosure of membershipinterests in a multimember LLC as a remedy against ajudgment debtor.
True.False.
19. Delaware law permits foreclosure of membershipinterests in a single-member LLC as a remedy againsta judgment debtor.
True.False.
20. Under RULLCA, a merger must be approved byunanimous consent of the members of each constituentLLC involved in the merger.
True.False.
breach of fiduciary duty.18 RULLCA alsoprovides that the fiduciary duties of a man-ager of a limited liability company may onlybe modified in a written operating agreementwith the informed consent of the members.19
Accordingly, care should be taken that theoriginal members, as well as any transferees,whether by operation of law or otherwise, pro-vide their written informed consent to theseprovisions. In addition, the operating agree-ment perhaps should include recitals regard-ing the informed consent of the members.When proceeding under the Delaware Act, itis also necessary to explicitly specify if the par-ties have agreed to eliminate fiduciary dutiesrather than attempt to contract them away byomission. The Delaware Supreme Courtpointed out in 2012 that whether the Dela-ware Act imposes default fiduciary dutieswas unsettled,20 and in response the DelawareAct was amended to specify that the rules oflaw and equity relating to fiduciary dutiesapply by default.21
Default Voting Specifications
RULLCA necessitates that an operating agree-ment also address the percentage vote ofmembers, if any, required for a company totake particular actions. A lack of specificationregarding whether a vote of members isrequired in a manager-managed limited lia-bility company, without affirmative languagethat a manager can act without a vote ofmembers on any unspecified matters, likelyresults in application of RULLCA’s newdefault rule requiring approval by a vote ofmembers. This default rule, set forth in Section17704.07(c)(4), requires unanimous consentof all members of the limited liability com-pany to do any of the following:
(A) Sell, lease, exchange, or otherwisedispose of all, or substantially all, of thelimited liability company’s property,with or without the goodwill, outsidethe ordinary course of the limited lia-bility company’s activities.(B) Approve a merger or conversion.…(C) Undertake any other act outside theordinary course of the limited liabilitycompany activities.(D) Amend the operating agreement.The prior default rule under Beverly-Killea
imposed a lower hurdle for decisions nototherwise addressed in the operating agree-ment, requiring the vote of a majority ininterest of the members for “matters in whicha vote is required,” except in the case ofamendment of the operating agreement orarticles of organization, which specified unan-imous consent as the default rule.22 In theabsence of a contrary provision in the limitedliability company agreement, the DelawareAct default rule similarly calls for unanimousconsent for amendments, unless otherwise
provided by law, such as in the context of amerger wherein only a majority in interest isrequired for an amendment.23
However the Delaware Act does not im-pose a hurdle of unanimous consent or anyparticular voting requirement for actions by the limited liability company that fall out-side of an undefined “ordinary course,”including sale, lease, exchange, or other dis-position of the company’s property, as doesRULLCA.24 Under RULLCA, it is not clearwhat constitutes the “ordinary course,”including whether financings or other trans-actions are within the ordinary course.Providing for unanimous consent of the members to authorize actions of the managerconfers upon minority members a dispro-portionate power over the destiny of thecompany.
Further, RULLCA includes a default pro-vision that a majority of the members canchoose a manager or, with or without noticeor cause, remove a manager at any time.25
The Delaware Act has no similar provision.In the absence of express requirements regard-ing appointment and removal of managers,very different results would arise with respectto removal of the manager of a California lim-ited liability company versus a Delaware one.In California, a manager can easily be oustedfrom control unless alternative arrangementsappear in the operating agreement.
Accordingly, an operating agreementshould set forth with specificity that certainenumerated actions require a specific thresh-old of consent (less than that set forth inRULLCA) and that the manager can act with-out the vote of any other member except asexplicitly constrained by the operating agree-ment. The operating agreement should alsospecify appropriate requirements for appoint-ment and removal of managers, which mayinclude removal of the manager only withcause. Note that the adoption of RULLCAalso behooves lenders to require unanimouswritten consents of members up the chain ofownership if the relevant limited liabilitycompany agreements are not completely clearthat the manager of the company has author-ity to bind the company in a loan transactionwithout such consent.
Rights of Judgment Creditors
Also of concern to sponsors, lenders, andinvestors in limited liability companies are therights of judgment creditors against mem-bership interests in the limited liability com-pany. In closely held companies, it would beproblematic if a judgment creditor couldinterfere in the operations of a limited liabilitycompany or in any way supplant the intendedmembers of the company. In addition, own-ers of membership interests are loath to for-feit the entire value of an interest in a limited
liability company due to foreclosure of ajudgment lien against the interest (which maybe for a judgment of a much lesser value)because liquid funds to pay the creditor arescarce.
RULLCA provides that a court can issuea charging order as a lien on the trans-ferrable interest of the judgment debtor in alimited liability company and require thatany distributions that would otherwise bepaid to the member be paid instead to thejudgment creditor. RULLCA further allowsfor the foreclosure of the lien on the mem-bership interest upon a showing that distri-butions under the charging order will notpay the judgment debt within a reasonabletime.26 In Delaware, on the other hand, theability to foreclose in this context has beensquarely rejected.
In fact, the Delaware legislature amendedthe Delaware Act in August 2013 to firmlyestablish that a charging order is the exclu-sive remedy that a judgment creditor canpursue with respect to the judgment debtor’sinterest in a limited liability company. Theamendment states explicitly that attachment,garnishment, foreclosure, or other legal reme-dies are not available to the judgment credi-tor. Further, the amendments also codifiedthat the result will be no different if the judg-ment debtor is a single member or a multi-member limited liability company.27 Thisdeclaration is significant, given that somecourts have viewed foreclosure by a judg-ment creditor against the interests in a singlemember limited liability company as moreequitable.28 In contrast, RULLCA providesthat foreclosure is available upon a showingthat distributions will not pay the judgmentdebt in a reasonable time, which is particu-larly suited to allow for a foreclosure in thecontext of a single-member limited liabilitycompany.
Delaware Law in California
A question remains as to whether a Californiacourt would enforce the choice of Delawarelaw to govern the remedies available to thejudgment creditor. According to the Delawarestatute, “a limited liability company agree-ment that provides for the application ofDelaware law shall be governed by and con-strued under the laws of the State of Delawarein accordance with its terms.”29 However,RULLCA states that the law of the jurisdic-tion of formation governs 1) the organizationof the company, its internal affairs, and theauthority of its members and managers, 2) theliability of a member as member and a man-ager as manager for the debts, obligations, orother liabilities of the company, and 3) theauthority of the members and agents of alimited liability company.30 It is unclearwhether these categories are exclusive of all
28 Los Angeles Lawyer January 2014
other matters addressed by RULLCA, andSection 17713.04 exacerbates this ambiguity,declaring that RULLCA applies to all foreignlimited liability companies registered inCalifornia.31 Perhaps the scope of applicationis meant to be limited to the provisions ofRULLCA that specifically address foreignlimited liability companies (such as registra-tion, merger, and conversion), or perhapsinstead the section makes a far-reachingattempt to override the choice of any otherstate law except for very limited purposes.While a California court may attempt to as-sert its domestic law regarding the rightsof judgment creditors in the case of a Del-aware limited liability company operating inCalifornia, especially considering Section17713.04, it is certain that forming a Cali-fornia limited liability company will result inthe availability of foreclosure for judgmentcreditors.
The Issue of Practicality
In light of the changes in the California lim-ited liability company statute, some havecounseled that limited liability companiesamend their operating agreements to ensurethat there are no unintended consequences ofomissions from existing operating agree-ments. However, given that such amendmentswould likely be unpopular with those whosefiduciary duties or approval rights are soughtto be altered, as well as that lender consentin most cases would be required to amend theoperating agreement if a lender is involved,amendment of existing agreements seemsimpractical. California limited liability com-panies may want to consider conversion toDelaware limited liability companies, whichgenerally requires only a majority in interestapproval,32 although in many instances con-version will also require lender consent, ifapplicable.
The emphasis of RULLCA on fiduciaryduties and rights of nonmanaging investors aswell as its grant of foreclosure rights to judg-ment creditors when a charging order seemsinsufficient is reflective of California’s publicpolicy. Those who prefer the public policy ofDelaware, which proclaims itself the corpo-rate capital of the world,33 may alternativelyopt for organization of their limited liabilitycompanies in Delaware. n
1 CORP. CODE §§17701.01 et seq.2 CORP. CODE §§17000 et seq.3 SB 323 BILL ANALYSIS, SENATE RULES COMMITTEE,JAN. 13, 2012.4 Florida, Idaho, Iowa, Nebraska, New Jersey, Utah,Wyoming, and the District of Colombia. See SB 323BILL ANALYSIS: SENATE JUDICIARY COMMITTEE HEARING
(Jan. 10, 2012) and National Conference ofCommissioners on Uniform State Laws, LegislativeFact Sheet: Limited Liability Company (Revised), avail-able at http://www.uniformlaws.org.
5 DEL. CODE ANN. tit. 6, §§18-101 to 18-1109.6 DEL. CODE ANN. tit. 6, §18-1101.7 CORP. CODE §17701.07.8 CORP. CODE §§17701.10(c)(10) and (12). Note thatwhile CORP. CODE §17704.07(c)(4)(B) provides for adefault rule of unanimous consent for a merger absentany other provision in the operating agreement, CORP.CODE §17710.12(a), which cannot be modified, indi-cates that the agreement of merger shall be approvedby all managers and a majority in interest of eachclass of membership interests of each constituent lim-ited liability company, unless a greater approval isrequired by the operating agreement of the constituentlimited liability company (subject to additional require-ments if any member becomes personally liable forany obligations as a result of the merger).9 CORP. CODE §§17701.10(c)(2), (3), and (7).10 CORP. CODE §§17701.10(c)(4), (5), (14), (15), (16),(d), (e), (f), and (g).11 CORP. CODE §17701.10(c)(4). It is unclear what ismeant by “any other fiduciary duty.” See §17704.09.12 CORP. CODE §§17701.10(c)(5), 17704.09.13 CORP. CODE §17704.09.14 CORP. CODE §§17701.10(c)(14), 17704.09.15 DEL. CODE ANN. tit. 6, §18-1101(e).16 Id.17 CORP. CODE §17101(10)(c)(16).18 Beverly-Killea referenced that fiduciary duties a man-ager owes to the company and the members are thoseof a partner. CORP. CODE §17153. See also CORP.CODE §§15904.08, 16404.19 CORP. CODE §17101(10)(e).20 Gatz Props., LLC v. Auriga Capital Corp., 59 A. 3d1206 (Del. 2012).21 DEL. CODE ANN. tit. 6, §18-1104.22 CORP. CODE §§17103(a)(2), (3). Beverly-Killea pro-vided a minimum threshold, unalterable by the oper-ating agreement, of a majority in interest for votes onthe amendment to articles or operating agreement,dissolution, and merger. CORP. CODE §§17103(b), (c),17350, 17551(a).23 DEL. CODE ANN. tit. 6, §18-302(f).24 The Delaware Act creates a default requirement ofunanimous consent for admission of new membersand a two-thirds vote for dissolution. DEL. CODE ANN.tit. 6, §§18-301 and 18-801.25 CORP. CODE §17704.07(c)(5).26 CORP. CODE §17705.03. Beverly-Killea allowed fore-closure “at any time” without requiring a showingthat distributions under a charging order will not paythe judgment debt within a reasonable time. CORP.CODE §17302.27 DEL. CODE ANN. tit. 6, §18-703.28 See In re Albright, 291 B.R. 538, 539 (Bankr. D.Colo. 2003); Olmstead v. FTC, 44 So. 3d 76 (Fla.2010). The Florida legislature subsequently amendedits statute to provide for a charging order as the soleand exclusive remedy for a judgment creditor, exceptthat if the interest charged is an interest in a single mem-ber limited liability company and the judgment credi-tor makes a showing that distributions under a charg-ing order will not satisfy the judgment within areasonable time, the creditor has the option to forecloseand become the sole member of the company. FLA.STAT. §608.433.29 DEL. CODE ANN. tit. 6, §18-1101(i).30 CORP. CODE §17701.06.31 CORP. CODE §17713.04.32 See CORP. CODE §17540.3(b) (until Dec. 31, 2013)and CORP. CODE §17710.03(b)(1) (from and after Jan.1, 2014); DEL. CODE ANN. tit. 6, §18-214. A higherthreshold of approval is required if any of the membersbecomes personally liable for the obligations of the con-verted entity as a result of the conversion.33 See http://sos.delaware.gov.
Los Angeles Lawyer January 2014 29
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AM
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O
WIRELESS COMMUNICATION hasbecome one of the most important sectors ofthe national economy.1 Many U.S. house-holds have given up their landline telephoneentirely in favor of reliance on wireless ser-vices.2 Businesses have also greatly increasedtheir demand for wireless services as retailersuse mobile devices to scan purchases anddocuments and to complete sales transac-tions. The connected car of the future is antic-ipated to allow drivers to manage e-mail,access the Internet, and program televisionrecordings by voice command. Healthcare isgoing wireless as well, as doctors and hospi-tals are increasingly able to monitor patientsremotely. This augmented demand has result-ed in a need for the wireless industry toexpand, modify, and replace its wireless net-work infrastructure. Consequently, serviceproviders are constantly required to obtain
local governmental approvals for new wire-less facility construction as well as modifica-tions to existing wireless infrastructure.
Each wireless facility (commonly referredto as a cell site) can only provide servicewithin a given area (the facility’s coverage)and to a certain number of users (capacity).Therefore, wireless carriers are continuallymonitoring their capacity to identify areaswhere new facilities may be needed. Customercomplaints of dropped calls and failed callsare part of this process. The geographic areain which a new facility will be considered,known as a search ring, is literally repre-sented by a circle, or ring, on a map. The car-riers then select potential locations (candi-dates) within the search ring for consideration.For each candidate, computer modeling testsforecasting the coverage for the proposedsite are prepared in order to help the carrier
assess how the proposed candidate will ben-efit the overall network. This is often fol-lowed by radio frequency (RF) testing in thefield that helps confirm the actual signalstrength predicted by the computer modeling.These tests are submitted to the municipality.
Infrastructure Selection
There are various types of wireless facilities.The most commonly recognized facility isthe tower, which typically comes in threedesigns: the monopole, the self-supportinglattice tower, and the guyed lattice tower. Inurban areas, monopoles are quite common.This type has a single pylon or pole to which
Lynn Whitcher is associate general counsel forMd7, a wireless services company. Cynthia Hansonis the land use project manager for Md7 and anattorney.
TOWERBUILDINGFederal, state, and municipal laws are all implicated in the siting
and approval of wireless communication facilities
by Lynn Whitcher and Cynthia Hanson
REAL ESTATE LAWREAL ESTATE LAW
various antennae are mounted. Monopolesare often camouflaged as trees, such as apalm (monopalm), pine (monopine), or euca-lyptus (monoeuc). Monopole facilities typi-cally range from 50 to 200 feet in height. Thelattice tower can be much taller and is cus-tomarily installed in rural areas where cov-erage must be much broader. Generally, thetaller the tower, the broader the coveragearea.
In addition to tower facilities, cell sites canalso be mounted to various existing struc-tures, including light poles, water tanks,building exteriors, and rooftops. The place-ment of a cell site on an existing structure isknown as a collocation. Collocations may becamouflaged by faux building facades oreven an extension of the building, such as afaux cupola or clock tower. A camouflagedsite is referred to as a stealth facility, and thecreation of a camouflaged cell site design iscalled stealthing. The creativity of stealthfacades is endless and may range from fauxboulders to faux cacti, even a faux bison.While community members and local prop-erty owners may prefer stealthed sites, theycome with their own set of complications. Attimes, community opposition to a cell sitemay force a carrier to consider unique stealthdesign solutions that may be economicallyand logistically impractical for the carrier. Forexample, one local community’s efforts torequire a cell site design of a faux angelproved unsuccessful due to space limitations.This design would actually have negativelyimpacted existing property use.3 Moreover,communities that seek to limit the visualeffects of a cell site by requiring stealthingshould be aware that stealthed sites mayprovide reduced coverage levels and limitcollocation opportunities, which eventuallymay result in the need for additional cellsites in the community.4
Collocation may also refer to the practiceof subleasing space at an existing cell site,usually a tower. Collocations involve thenegotiation of RF interference concernsamong the carriers, minimum space separa-tion requirements of the various kinds ofequipment, and structural considerationsarising from the installation of multiple piecesof hardware on a single-tower structure,which may require reinforcement of thetower. While an existing tower may be apotential candidate for collocation, theremay be technological, legal, and businessbarriers. The available space at the tower maybe at the wrong height, the sublease termsmay be too risky, or the rent may be toohigh. While a municipality may not be ableto force a carrier to collocate, a carrier maynevertheless have an incentive to consider col-location for various reasons, including agood working relationship with the tower
owner or the potential for an expedited landuse process made available under a new fed-eral law.5
The Approval Process
Although wireless communication siting,much like the zoning for any real estatedevelopment, is handled at the municipallevel, federal and state laws play some partin the approval process. Almost two decadesago, Congress recognized the benefits toAmerican businesses and consumers result-ing from streamlined wireless siting.6 TheTelecommunications Act of 19967 confirmsthat state and local governments maintainauthority over the placement, construction,and modification of wireless facilities,8 butit also provides certain protections to serviceproviders. For example, municipalities can-not unreasonably discriminate among carri-ers providing similar services9 or deny anapplication because another carrier servesthe area.10 Additionally, municipalities can-not act in a manner that prohibits or has theeffect of prohibiting wireless services.11
Municipalities reviewing zoning applicationsfor wireless facilities also must act within areasonable time after the request is submit-ted.12 Under what are referred to as the shotclock requirements, reasonable responsetimes have been defined as 90 days for sitemodifications and collocations13 and 150days for a new cell site,14 unless otherwiseagreed between the parties.15 Municipalitiesmay not deny or regulate wireless facilitiesdue to environmental concerns arising fromRF emissions16 so long as the equipmentcomplies with FCC regulations.17 Finally,any land use denial must be in writing andsupported by substantial evidence within thewritten record.18
Municipal regulations governing the landuse approval process for wireless facilitiesdiffer widely. Whereas some regulations allowwireless communication facilities in certaindistricts as a matter of right, others requirevariances, and still others impose heightrestrictions and setback requirements or visualscreening of some type, including landscap-ing, or may treat wireless facilities as a spe-cial use or require site plan approval.19
Regardless of the applicable process, the car-rier should confer with the jurisdiction earlyin the application process to discuss the pro-posed project and confirm the requirements.Many jurisdictions will agree to a preappli-cation meeting at which both the applicant (orits representative) and a planning officialmeet and confer regarding the design andlocation of the proposed facility. This meet-ing allows the applicant to get importantfeedback from the municipality and to makeany requested changes prior to submittingthe application.
The carrier should expect to provide thejurisdiction with information regarding thesite selection process, such as maps identify-ing the search ring, the location of the pro-posed candidate, and the proposed coveragearea. The carrier also should provide infor-mation on the types of services and the pro-posed facility equipment and design, includ-ing identification of the applicant andproperty owner, as well as their respective rep-resentatives; a description of the property,including geographic features and vegeta-tion; site plan drawings showing the dimen-sions of facility components; the type of infra-structure proposed (monopole versuscollocation), including any foundation orother support structure; the number, type,and dimensions of antennae; tower lightingas may be required by federal law;20 and thedimensions and construction materials of theequipment shelter that will house the carrier’snontower equipment. To this end, standardsubmission requirements include construc-tion drawings signed and sealed by a state-licensed engineer showing in detail the groundlayout, the tower, equipment dimensions,and electrical details, along with an engi-neer’s structural analysis attesting to the abil-ity of the proposed facility to handle theequipment load.
As part of the approvals process, the car-rier may also be required to establish, amongother things, that the height of the facility isthe lowest technically feasible to accomplishthe carrier goals and that collocation onanother tower, building, or other structure isnot a viable option. In addition, the carriermay have to show that the site will haveemergency backup power sources in the eventof a power outage at the property; that thesite design minimizes visual and other impactsof the site, including by stealth design orlandscaping; and a detailed analysis of whyan alternative candidate was not selected.A carrier may also have to demonstrate aviable plan for the removal of the facility andrestoration of the site upon discontinuanceof use.
Because each jurisdiction may have itsown unique process, it is difficult to list thepossible additional steps that may be requiredof the carrier in order to complete the landuse approval process, but, as one example,the carrier may need to subdivide the land sothat the communication facility is located ona separate parcel. As another example, somemunicipalities require carriers to regularlysubmit construction plans so that the munic-ipality can have some general understandingof potential future site applications.21 Manymunicipalities make the building permitprocess an integral part of the zoningapproval process with the building permitapproval contingent upon the zoning
32 Los Angeles Lawyer January 2014
approval or vice versa.22
The public hearing is a sensitive compo-nent of the land use approval process in juris-dictions where it is required. These hearingsmay attract community interest as concernedcitizens sometimes express a preference thatthe facility be located “not in my back yard.”Carriers must develop a good rapport with thecommunity in order to address their con-cerns. The local zoning department staff cantherefore provide valuable insight into localcommunity responses to previous siting appli-cations, which helps the prospective carrieridentify issues that may arise in the publichearing process.
Other Considerations
As part of the land use process, the localjurisdiction must conduct a California En-vironmental Quality Act (CEQA)23 review inaccordance with CEQA guidelines.24 An envi-ronmental impact report must be prepared,adverse environmental impacts of the pro-posed facility must be disclosed to the pub-lic, and feasible environmental mitigationmeasures must be determined and adopted.Additionally, a Phase I Environmental SiteAssessment report must be prepared disclos-ing any preconstruction recognized environ-mental concerns at the site and a plan foraddressing these concerns. Implementation ofthat plan and any subsequent remediationefforts are also disclosed to the municipality.25
Similarly, a National Environmental PolicyAct review must be conducted to determinewhether the site is located in a wildernessarea, wildlife preserve, floodplain, wetland,or area with high intensity lights; whetherthere are threatened or endangered species;whether the site is located within view ofhistoric properties or within designated his-toric districts; whether the site is located ona Native American religious site; and whetherthe site will be compliant with certain RFemission-related requirements.26
All wireless facilities must be evaluated todetermine whether the site will be locatedwithin an area that is registered, or may beregistered, for listing in the National Registerof Historic Places. Placement of wireless facil-ities within these environmentally sensitiveareas will require FCC approval.27
For facilities located on the Californiacoast, the applicant must determine whethera local coastal plan applies in order to ensurethat the facility will meet the plan require-ments. For other coastal areas, the applicantmust work with the California CoastalCommission to ensure that the facility is con-sistent with Coastal Commission require-ments.28
Notwithstanding the ubiquitous natureof wireless facilities and the federal imposi-tion of timely review requirements under the
shot clock, carriers have reported persistentdelays in the land use approval process. Basedupon information collected by CTIA,29 wire-less service facility siting applications havewaited for approval anywhere from one tothree years, even with respect to collocationson existing towers and the simple replacementof existing equipment.30 Processing time forapplications in several California communi-ties has been reported to range from 28 to 36
months.31 The California Wireless Associationhas taken an active role in working withlocal jurisdictions throughout the state toreduce the length of time that applications arein process.
As part of the Middle Class Tax Reliefand Job Act of 2012, recognition of the vitalimportance of a streamlined approval processresulted in the passage of important wirelessfacility deployment legislation. With respectto the placement of new equipment on anexisting facility, or the sublease of space at anexisting facility by a new carrier to the site (i.e.,collocation), the federal act provides that localgovernments must approve such land useapplications so long as the changes will notsubstantially change the physical dimensionsof the tower facility.32 This effectively pre-empts zoning review processes and condi-tional approvals. The FCC has confirmed thatthese site modifications may be handledthrough an application for administrativeapproval.33 The authority of the FCC to pro-mulgate and enforce these regulations wasrecently upheld by the U.S. Supreme Court inArlington v. FCC.34 Accordingly, it would
seem that many local wireless ordinances mayrequire rewriting to incorporate these newstreamlined processes. In September 2013,Los Angeles instituted a new zoning processto implement the act’s procedures by allow-ing certain wireless facility modifications to be handled by administrative sign-off andadministrative plan approval.35 The states ofMichigan, Missouri, and New Jersey haveenacted similar provisions.36
As wireless technology and demand con-tinue to advance, the land use approvalprocess has adapted as well. From the juris-dictional standpoint, local authorities havebegun to accept land use applications via e-mail. These submissions are easily tracked,saved, catalogued, and reviewed. Additionally,electronic materials are more easily forwardedto all necessary parties. This is a faster, greener,and more cost-effective approach.
From a technology standpoint, wirelessnetworks are adapting as well. The tradi-tional wireless network model built on large,outdoor wireless facilities (macrosites) hasevolved to include smaller wireless facili-ties known as microcells, small cells, and Dis-tributed Antenna Systems. The advantage ofthese smaller cell sites is that they providecontinuous coverage to a select group ofusers located in close proximity to the site.Because these small cells are often located onprivate property or outdoors, but withinthe public right-of-way, they often require nozoning approvals. Small cells thus provide abenefit to both the community and the car-rier by being visually unobtrusive and eas-
Los Angeles Lawyer January 2014 33
ily deployed.The potential benefits from wireless devices
and services are limitless. Therefore, expedi-tious wireless facility siting will continue to bean essential part of the conveniences we havecome to expect in everyday life. n
1 Petition for Declaratory Ruling to Clarify Provisionsof Section 332(c)(7)(B) to Ensure Timely Siting Reviewand to Preempt Under Section 253 State and LocalOrdinances that Classify All Wireless Siting Proposalsas Requiring a Variance, Declaratory Ruling, 24 FCCRcd 13994, ¶5 (rel. Nov. 18, 2009), available athttps://hraunfoss.gov/edocs_public/attachmatch/FCC-09-99A1.pdf [hereinafter Petition].2 STEPHEN J. BLUMBERG & JULIAN V. LUKE, CENTERS FOR
DISEASE CONTROL AND PROTECTION, WIRELESS SUB-
STITUTION: EARLY RELEASE ESTIMATES FROM THE
NATIONAL HEALTH INTERVIEW SURVEY, 1 (May 2010),available at http://www.cdc.gov/nchs/data/nhis/earlyrelease/wireless201012.pdf.3 Verizon Clips the Wings of Proposed Glassell ParkAngel, theeastsiderla.com (Oct. 14, 2011), available athttp://www.theeastsiderla.com/2011/10/verizon-clips-the-wings-of-proposed-glassell-park-angel.4 Wireless Facility Siting 101: A Resource for Localand State Planning Authorities, at 24, available athttp://calwa.org/wp-content/uploads/2012/01/PCIA-Wireless-Infrastructure-101-FINAL-6.pdf.5 The Middle Class Tax Relief and Job Creation Act of2012 (Tax Act) provides that local governments mustapprove modifications of existing wireless facilitiesthat would not result in a substantial change in the phys-ical dimension of the site. See Pub. L. 112-96, §6409,126 Stat. 156 (2012). For example, the addition of a
limited number of antennas on an existing monopoleby a new carrier subleasing space at the site may poten-tially qualify. See also Wireless TelecommunicationsBureau Offers Guidance on Interpretation of Section6409(a) of the Middle Class Tax Relief and JobCreation Act of 2012, FCC Public Notice (Jan. 25,2013).6 Peter M. Degnan, et al., The TelecommunicationsAct of 1996: § 704 of the Act and ProtectionsAfforded the Telecommunications Provider in theFacilities Siting Context, 3 MICH. TELECOMM. TECH.L. REV. 1, 3 (1997), available at http://www.mttlr.org/volthree/mclaren.pdf (citing H.R. Conf. Rep. No.104-458, at 113 (1996), as reprinted in 1996U.S.C.C.A.N. 124).7 Telecommunications Act, Pub. L. 104-104, §704,110 Stat. 56 (1996), partially codified at 47 U.S.C.§332(c)(7).8 47 U.S.C. §332(c)(7).9 47 U.S.C. §332(c)(7)(B)(i)(I).10 Petition, supra note 1, at ¶56.11 47 U.S.C. §332(c)(7)(B)(i)(II); §253(a).12 47 U.S.C. §332(c)(7)(B)(ii).13 Petition, supra note 1, at ¶46.14 Id. at ¶48.15 Id. at ¶50.16 47 U.S.C. §332(c)(7)(B)(iv).17 See 47 C.F.R. §1.1310.18 47 U.S.C. §332(c)(7)(B)(iii).19 See, e.g., SANTA BARBARA COUNTY ARTICLE IICOASTAL ZONING ORDINANCE §35-144 F, availableat http://www.sbcountyplanning.org/permitting/ldpp/auth_reg/ordinances.cfm.20 Towers of a certain height or located within a cer-tain proximity to airports must be reviewed by the FAA.Upon a determination by the FAA that the tower doesnot pose a danger to air traffic, the site must be regis-tered with the FCC. The FCC, based on recommen-dations issued by the FAA, may require tower lights,paint, or other markings to ensure the tower is visibleto aircraft.21 See, e.g., COUNTY OF SAN DIEGO ZONING ORDINANCE
§§6980 et seq., available at http://www.sdcounty.ca.gov/pds/zoning/z6000.pdf.22 See, e.g., BERKELEY, CAL., CODE SUB-TITLE 23B.23 PUB. RES. CODE §§21000 et seq.24 CAL. CODE REGS. tit. 14, §§15000 et seq.25 47 C.F.R. §§1.1307(a)(4), 1.1312(a).26 42 U.S.C. §§4321 et seq.27 36 C.F.R. §800, Subpart B.28 PUB. RES. CODE §30251. 29 The CTIA is an international nonprofit organizationrepresenting the wireless communications industrywhose members include wireless carriers and theirsuppliers, as well as providers and manufacturers ofwireless data services and products. See http://www.ctia.org/aboutCTIA.30 Petition, supra note 1, at ¶33.31 Id.32 Tax Act, Pub. L. 112-96, §6409, 126 Stat. 156(2012).33 Wireless Telecommunications Bureau Offers Guidance on Interpretation of Section 6409(a) of theMiddle Class Tax Relief and Job Creation Act of 2012,FCC Public Notice (Jan. 25, 2013), available atftp://ftp.fcc.gov/pub/Daily_Releases/Daily_Business/2013/db0128/DA-12-2047A1.txt.34 Arlington v. FCC, 569 U.S. ___, 133 S. Ct. 1863(2013).35 Wireless Telecommunication Facilities: Section6409(a) Policy and Review Procedures, Office of Zon-ing Administration, City of Los Angeles, Memorandum(Sept. 3, 2013).36 MICH. COMP. LAWS §125.3514 (2012); N.J. STAT.ANN. §40:55D-46.2 (2012).
34 Los Angeles Lawyer January 2014
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LAST OCTOBER, PURSUANT TO THE NEW CITY MURAL ORDINANCE,1
the Department of Cultural Affairs (DCA) of Los Angeles processedits first applications for new public art murals, ending a decade inwhich they were in legal limbo. Older murals had been haphazardlypainted out or left in disrepair, and uncertain landowners commis-sioned no new murals.
In 2008, Judge Collins of the Central District held that exemp-tions to the ban on off-site advertising and supergraphics vested toomuch discretion in the city. However, in 2010, the Ninth Circuit overruled that holding, finding that the city’s regulation of super-graphics and off-site advertising was consti-tutional. In 2011, the city council commis-sioned a Mural Working Group that approveda general plan for time/place/manner per-mits, and after dozens of meetings held aroundthe city, including with graffiti artists, a near-final version of the law made its way to thecity’s Planning and Land Use ManagementCommittee last summer.
The new ordinance distinguishes between advertisements andmurals, defining an “original art mural” as a “one-of-a-kind, hand-painted, hand-tiled, or digitally printed image on the exterior wall ofa building that does not contain any commercial message” that“advertises a business conducted, services rendered, or goods producedor sold.”2 Older murals are grandfathered in.3
Most significantly, the ordinance allows permitted and registeredmurals on private property. The DCA’s rules include “neighborhoodinvolvement requirements,” meaning that an applicant for muralapproval must send a notice to the appropriate neighborhood coun-cil 45 days before the DCA registers the mural. The DCA retains soleauthority to approve the application under a content-neutral deter-mination. When the mural is registered, the building owner must recorda covenant with the county and DCA.4
By definition, a mural must remain unaltered for two years. Theordinance contains additional miscellaneous exclusions of murals overbuilding openings, certain lighted murals, and murals extendingbeyond structures upon which they are placed or 100 feet above grade.
Currently, murals cannot be painted on single-family residences.This provision was controversial, as one version with the single-family residence restriction and one without were considered by thecity council. The more limited version passed, but council membersGilbert Cedillo and José Huizar moved that their districts be allowedto establish a pilot program permitting murals to be created onhomes, and other neighborhoods (in Venice and South Central LosAngeles) are joining. A certain public reluctance regarding permittingmurals on single-family residences is understandable in view of con-cerns over property values, but the proposed opt-in procedure forDistricts 1 and 14 will be a testing ground for these fears. Indeed, theordinance as written could also exclude traditional tiled entries or artremoved from the common concept of a mural.
The ordinance exists alongside other laws regulating art, includ-ing the federal Visual Artists Rights Act (VARA) and the CaliforniaArtist Protection Act (CAPA),5 the Copyright Act,6 and common lawrules concerning ownership of property.7 CAPA was the nation’sfirst moral rights law. VARA, more complex and limited than CAPA,was passed a decade later and preempts CAPA, although not com-pletely.8 Under VARA and CAPA, the landowner can destroy art aftergiving the artist 90 days’ notice. I have worked on a few VARA dis-putes, and whether the artist can be found is always an issue.
It remains to be seen how VARA and CAPA will interface with the
new ordinance. For instance, the statute provides that a building ownercan remove a mural within two years upon request. DCA regulationscall for the 90-day waiting period of VARA and CAPA, but a build-ing owner may believe he or she can remove a mural once the cityapproves removal. Also, one can assume that constitutional challengeswill arise from the billboard industry. Meanwhile, murals are alreadybeing painted, and unless enjoined, the law should result in a flow-ering in public art in Los Angeles. Most of the revered murals in LosAngeles are over 20 years old. Many street artists and graffiti artistsare chomping at the bit to get to work on new public art.
Overall, the new mural ordinance is a boon for the city. Artists arenow challenged to create great works of public art. Building ownersand art dealers can commission these works without fear of destruc-tion by the city. Artists and building owners—under common respon-sibility of their rights, including moral rights, copyrights, and the lawof ownership of the physical work of art—should bargain and cometo agreement in writing. Most importantly, public art may somedaybe as much as a part of property law as easements or fixtures. n
1 See L.A., CAL., CODE §§14.4.2, 14.4.3, and 14.4.20 (all as amended), L.A., CAL.,ADMIN. CODE §22.119, available at http://clkrep.lacity.org/onlinedocs/2011/11-0923_ord_182706.pdf, and Rules promulgated by the DCA.2 L.A., CAL., CODE §14.4.2 (as amended).3 L.A., CAL., ADMIN. CODE §22.119(c).4 L.A., CAL., ADMIN. CODE §22.119(b); see also http://www.muralconservancy.org.5 117 U.S.C. §106A; CIV. CODE §987.6 17 U.S.C. §§101 et seq.7 See Lubner v. Los Angeles, 45 Cal. App. 4th 525, 527 (1996); CIV. CODE §987.8 See 5 PATRY ON COPYRIGHT §§16:39 et seq.
closing argument BY ERIC BJORGUM
Los Angeles Gets a New Mural Ordinance
Murals are already being painted, and unless enjoined, the law
should result in a flowering in public art in Los Angeles.
Eric Bjorgum is a shareholder at Karish & Bjorgum, PC, an intellectual prop-erty firm in Pasadena.
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