Ethics Issues in Real Property Development Projects

• Citation: Vol. 2024 No. 2
• Publication year: 2024
• Author: Written by Dianne Jackson McLean

ETHICS ISSUES IN REAL PROPERTY DEVELOPMENT PROJECTS

Written by Dianne Jackson McLean^*

This article explores that many ethics issues that arise in business development transactions⁰¹ The issues will be explored in the context of a complex mixed financed affordable housing development. However, the ethical issues are applicable in most complex business transactions. The article is organized to provide a list of issues that should be considered as follows: (i) the initial inquiry; (ii) the transaction; (iii) the client, (iv) the engagement letter; (v) the conflict letter; (vi) the client files; (vi) the former client; and (vii) the on-going ethical obligations.

I. INTRODUCTION.

Business transactions can be extremely complex and are often developed and constructed in phases. This is especially true in the context of complex affordable housing developments that are generally financed with public and private funds, and subject to a host of governmental regulatory restrictions. Factors that can influence the transaction include the financing, market conditions, weather, natural resources, land conditions, locality, government agencies having jurisdiction over the project, the ownership structure of the seller and buyer, the lenders to the project, the community, and the objective of the project. These variables will have an impact on the ethical obligations of the attorneys involved. The California Rules of Professional Conduct (hereinafter "CRPC") require that an attorney be competent.⁰² Competency will be measured in the context of the complexity of the transaction. In this regard, it is crucial that an attorney determines the nature and scope of the transaction to establish if the attorney is able to provide competent representation to the client.

II. THE TRANSACTION.

Understanding the transaction or the scope of the representation is crucial for the attorney to determine if she/he can provide competent representation to the client.⁰³ In business transactions, this may create a dilemma in that initially the nature and the scope of the transaction may not be fully known. The client may request representation on a transaction and may not be quite sure of the scope of the transaction. Of course, this will depend on the sophistication level of the client.

Here is a typical scenario for an affordable housing development:

The client may be interested in developing a 200-unit affordable housing project in an urban area. The project will require financing from the private sector through both private bank financing and an investor under the low-income housing tax credit program, as well as through the issuance of tax exempt bonds, and funding from local, state, and federal government sources. At the initial request for representation, none of the financing is confirmed. However, each source of financing

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will have separate requirements, and will be represented by separate legal counsel. In addition to financing issues, the project will be subject to certain land use and entitlement requirements. Since it is in an urban area, the project may have issues related to hazardous materials, subdivision, general plan amendments, design review, conditional use permits, and rezoning requirements. The client may not know the full extent of the representation required. Thus, the client with advice from the attorney will decide the scope of the representation.

The discussion may entail the attorney informing the client of the complexity of the transaction and the scope of the representation necessary to meet the client's objectives.

Once the attorney fully understands the nature and scope of the proposed representation, the attorney can decide if they are competent to fully represent the client and/or if the attorney and the attorney's law firm need to associate with another attorney or law firm to provide competent representation in each of the various areas applicable to the transaction.⁰⁴

III. THE CLIENT.

The next topic to be discussed is determining who is the client. In most business transactions, a client is a business entity; either a corporation, limited liability company, or a general or limited partnership. In addition, the attorney may be required to form a single purpose entity affiliated with the initial client. The attorney should inform the person representing the organization, that the client is the organization and not the person.⁰⁵ It is important to advise the client of the obligation of the attorney when the attorney is representing the organization, and some of the consequences to the individual if the individual's actions are contrary to the best interest of the organization.⁰⁶ It can become an issue if the individual requests a course of action that the attorney "knows" or "reasonable should know" is in violation of the law or that would cause substantial injury to the organization. It can put the attorney in an awkward situation since the day-to-day interactions of the client are generally with a person acting on behalf of the organization. However, if there is a conflict, the attorney must...