November 2, 2016 by Omar Passons
If you have joined this series in the middle, visit the overview page (HERE) for the basics and previous steps. If you are all caught up, let’s move on to a complicated step in deciding to build homes that is frequently glossed over but critical in the process: figuring out what you can build on a potential property.
I spent much of my legal career with clients whose interests were in this stage of the development process. In San Diego, as with many California cities, ‘what you can do with a property’ is an incredibly (and typically needlessly) complicated patchwork of formal and informal rules, political relationships, inconsistent interpretations and, of course, money. I have a bias that anyone with the resources to purchase a property and pay for building on that property should be able to figure out what is possible without hiring an expensive lawyer or land use consultant. But since that’s not the world we live in, this post will focus on the steps a developer must take once she has identified a property and wants to determine if it would be worthwhile to buy and build on it.
Zoning and Development: How much building and for what?
Although all the steps in the cycle are important, perhaps none is more critical – and more fraught with uncertainty and risk – than figuring out what you can do with a property. In San Diego, the Land Development Code consists of three chapters of the local Municipal Code (our city laws) that more or less explain what a developer can do with a given property. The City has a handy Land Development Manual to help explain. This question is a mixture of how much building can be legally built on a property and to what uses that building can be put.
Zoning is just a term that describes the rules for what a property can be used for. Modern American zoning has its origins in the legal case of Village of Euclid v. Ambler Realty Co. In that case, a small town outside of Cleveland sought to limit the type of homes that could be built in certain zones. The court upheld the town’s right under the police power of the Constitution to make regulations that, at least in theory, protect the health and welfare of a community. The philosophical tug-of-war with zoning rules is that on one side of the rope you have people concerned about their right to use their own land/homes for the uses they choose but on the other you have those who want to create a uniformity of uses that are limited and defined for the whole community. In the extreme, virtually everyone agrees that an industrial factory has no business next to an elementary school, but we might not all agree whether our residential neighbors should be able to rent out rooms in their homes on a short term basis.
In San Diego, if a developer is thinking about building homes on a property among the very first steps is identifying what the City says it might be able to do on that property. From a zoning perspective, the most straightforward way to figure this out is to go to the Development Services Department (DSD) in the City administration buildings downtown. Here’s the official zoning map, where the zoning for any property in the City can be found if you have the address. The zoning information will tell the developer if the property can be used for only single family homes, small or mid-sized apartments, business uses, industrial projects, and so forth. Since this series is focused on the process for residential homes, that’s what I’ll address.
The developer gets this useful zoning information about the property and then goes to the Municipal Code to see if the rules allow it. This seems like a simple process and if no one ever wanted to build more than the maximum allowed, it would be pretty simple. As I’ll explain in greater detail when we get to the part about the finances of a project, sometimes the only way to make a project financially feasible is to seek permission to do more than what is allowed without special approvals. These special approvals, called ‘discretionary approvals,’ exist to allow the City to decide that a project still fits in the spirit of the area it is proposed, but may have some additional conditions placed on what gets built. An easy way to think of this is that a given zone may only allow a condo building that has 10 homes on any given lot, but with this special review a developer might be able to build 15 homes on that lot instead.
The role of discretionary approvals
It isn’t possible to understand the challenges of building homes without having a basic understanding of these approvals. Essentially what happens is the developer realizes that under an expanded set of rules she can do a slightly bigger or more complex project than would be allowed as long as she gets prior approval. This prior approval isn’t a short cut or sneaking around the rules or special favors – these are just rules that let more people have a say in what the developer builds. The amount of additional people who get to have a say in the process depends quite alot on the specifics of the project and is more detail than we need here. I’ll give one example that helps flesh this out:
Debbie Developer wants to build a 20-unit complex on a property that currently allows only 10 units “by right,” that is, without needing any other approval except to meet the basic rules. To get the additional 10 units into the project, Debbie has to agree to get approval from the Planning Commission – an appointed city government body that has the power to make some approval decisions for what projects go forward. Debbie doesn’t get to go right down to City Hall and make an appointment with the Planning Commission, there are several steps first. Typically, Debbie must pay a several thousand dollar deposit to the City so that staff can manage the approval and permitting process. It costs money to pay people to do this review and so many cities (ours included) passes this cost on to the developer – who in turn factors it into the home sale or rental price. Once the project is opened, Debbie has a staff person assigned and now she must complete a project proposal of sorts to tell that staff person what she wants to do. This includes design drawings of the building, pictures of what it might look like from various parts of the street, and other documents describing how the building will be used. When the City is short-staffed, either because a recession meant fewer employees or because a real estate boom means not enough of them, it can take weeks to get feedback on the project. It has to be reviewed not just by someone to make sure the project complies with zoning, but things like engineering and environmental issues are looked at by City experts in those areas as well. Once the City provides its first report on whether the project seems to comply with the rules – called a Cycle Issues Report in San Diego – then a new wave of uncertainty begins.
For Debbie to get her additional 10 units, she needs to go to the community in which the project is proposed and ask it to review the project and make a recommendation to the Planning Commission. The group empowered to make these recommendations in San Diego is called the Community Planning Group, an all volunteer body made up of neighbors, business owners, developers and others with some interest in the community. The Community Planning Group members are voted on by other members of the community, though typically the rules in most communities require that a person attend a minimum number of meetings before they are allowed to vote. The upside of this rule is that theoretically you get people who know at least a little about the process. The downside is that the sample of voters – already limited by the fact that many people don’t know these groups exist – is further limited to people who have enough time or inclination to attend multiple meetings. As a result, a community of 100,000 people might have representatives that are only voted on by 50 to 100 people. This doesn’t invalidate the work those volunteers put in, but it is an important consideration when we evaluate the nature of the input and impact of Community Planning Groups on a project. I served on my neighborhood Community Planning Group and found my fellow members mostly thoughtful and dedicated. There are no minimum requirements for training/education about building or economics or design, however, so the input has limitations.
Debbie must get a recommendation from the Community Planning Group, which has its own uncertainty built in. Some communities have sub-groups that must weigh in on a project and make a recommendation to the full committee. In an ideal world, Debbie could go to the sub-group first for its monthly meeting, get a recommendation to the full Group, then attend the full group a week or two later and get a recommendation from that body to the Planning Commission. And to be fair in many, many instances this is more or less what happens. However, these groups typically meet once per month so if you miss one opportunity you can lose a month of time. And if the sub-group asks for more information – even if the City didn’t ask for that information – Debbie can have to come to the sub-group in back-to-back months before being able to get the full group approval. And sometimes the additional information request comes from the full group after the sub-group approved, which can delay the recommendation further. As you’ll see more in future sections, the risk in this stage can result in thousands of dollars of interest payments for Debbie, payments to architects to redesign project elements, and other bills that must be paid regardless of whether the project ultimately goes forward.
If all goes well, Debbie gets her approval recommendation from the Community Planning Group and then makes an appointment with the Planning Commission. As with the Community Planning Groups, the Planning Commission sometimes has to reschedule its meetings, which don’t happen every day. And it also sometimes will postpone decisions to get more feedback or clarity from the developer. At some point, though, a decision is generally made and if Debbie has carefully planned and worked with the community about its vision for the area of the project, she can get her approval and move to the next stage.
The point of all this information isn’t to cry a river of tears of sympathy for Debbie. Developing property is a business and it comes with risk. Debbie knows those risks going in and has (or should be) prepared for the turbulence along the way. What I do hope you take away from this part of the process is that there is risk associated with building certain types of home projects. That risk isn’t just that it will get delayed and cost more money in the moment. There are also risks that the amount of money it takes to build the project will spike because of some dispute over oil in the Middle East. Or that the amount of money people are willing to pay to live in the homes Debbie plans will drop because interest rates spike while the project is in the planning phase. These are just a few of the risks, but the point is that risk isn’t free and if we are going to understand some of the complicated economic factors involved in building more homes, this issue of risk is a pretty important one.
Next time: Step 2, Part 2 – What you can build on the property
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