Mcle Self Study Article: Local Government Subsidies for Commercial Real Estate Projects
| Publication year | 2017 |
| Author | Bruce Galloway |
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Bruce Galloway
Bruce Galloway is a shareholder at Richards, Watson & Gershon and a member of the Firm's Real Estate Department. As a transactional real estate attorney, he has extensive experience in real estate financing, leasing, acquisitions and dispositions, workouts and foreclosures, and construction- related documents. Mr. Galloway has represented public entities in connection with the acquisition, disposition, development, and financing of real estate, as well as low income housing loan and grant programs.
Before 2012, the Community Redevelopment Law1 provided for the establishment of redevelopment project areas and included statutes intended to permit redevelopment agencies to eliminate "blight," as defined in the Community Redevelopment Law.2 Through the use of tax increment financing, commercial real estate redevelopment projects received redevelopment agency financial subsidies. However, effective February 1, 2012, redevelopment agencies in California were dissolved.3
Although the dissolution of California redevelopment agencies eliminated a major source of financial subsidies for real estate redevelopment projects, local governments can still provide financial subsidies. However, such subsidies are subject to specific and evolving legal limitations. This article discusses the primary legal limitations, including the prohibition against gifts of public funds, the constitutional debt limitation, requirements for public hearings and public reports, and prevailing wage requirements. The prevailing wage requirement can significantly increase a project's costs and make the project infeasible absent an even greater public financial subsidy.
This article focuses on types of financial assistance from local government entities for commercial real estate projects, as opposed to other benefits that the law permits, such as development agreements under Government Code sections 65864 through 65869.5. The many types of possible public financial subsidies include: (i) the conveyance of local government land at below-market value; (ii) the grant of a ground lease for lower than market rent; (ii) a loan at lower than fair market terms (including purchase money loans, construction loans, and permanent loans); (iii) contingent loans, also sometimes referred to as "forgivable loans," or "conditional grants"; (iv) payments to a developer based on a percentage of sales/use taxes or property taxes generated by the project, or, in the case of hotels, transient occupancy taxes ("TOT") generated by the hotel project; and (v) waived, discounted, or deferred development fees.
Since January 1, 2014, Government Code section 53083 has provided that local governments could approve economic development subsidies by providing that, before approving an economic development subsidy, a local government must provide certain public information and hold a public hearing. The statute defines "economic development subsidy" as any expenditure of public funds or loss of revenue of $100,000 or more for the purpose of stimulating economic development, excluding subsidies for affordable housing.4
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Government Code section 53083 requires that the following information first be provided by the local government to the public in written form and through its website: (i) the names and addresses of all corporations or any other business entities, except for sole proprietorships, that would be the beneficiaries of the economic development subsidy; (ii) the start and end dates and schedule, if applicable, for the economic development subsidy; (iii) a description of the subsidy, including the estimated total amount of expenditure of public funds by, or of revenue lost to, the local agency; (iv) the public purposes for the subsidy; (v) the projected tax revenue to the local government as a result of the subsidy; and (vi) the estimated number of jobs created by the subsidy, broken down by full-time, part-time, and temporary positions.
Under Government Code sections 53083(b) and (f), the local government must also provide a public hearing regarding the economic development subsidy, which must be coordinated with the local government's regularly scheduled hearing. Section 53083 goes on to require that the local government issue a report with information similar to the initial public information within five years after granting the subsidy, and hold a public hearing to consider comments on the report. Finally, if the subsidy has a term of ten years or more, a hearing must be conducted at the conclusion of the subsidy with the same information available to the public in written form and on its internet website.
2. Government Code Sections 52200.2, 52200.4, 52201, and 52202Since January 1, 2014, Government Code sections 52200.2, 52200.4, 52201, and 52202 have provided a safe harbor for local governments that received properties from dissolved redevelopment agencies for future development under Long Range Property Management Plans or "LRPMPs"5 to re-sell or lease the subject properties at less than fair market value—much as was formerly permitted for redevelopment agencies under Health & Safety Code section 33433.6 Significantly, however, Government Code sections 52200.2, 52200.4, 52201, and 52202 were amended as of January 1, 2017 to apply to any real estate acquired by a city or county in furtherance of an economic opportunity, or sold or leased by a city or county to create an economic opportunity.
The term "economic opportunity" in Government Code section 52200.2 is defined differently than "economic development subsidy" in Government Code section 53083 (discussed in Part III.A.1 above). Under Government Code section 52200.2, an "economic opportunity" means an agreement that the city, county, or city and county finds will: (i) create, retain, or expand new jobs where the legislative body finds that the agreement will create or retain at least one full-time equivalent, permanent job for every thirty-five thousand dollars of city, county, or city and county investment in the project after full capacity and implementation; (ii) increase property tax revenues to all property tax collection authorities where the legislative body finds that the agreement will result in an increase of at least fifteen percent of the total property taxes resulting from the project at full implementation when compared to the year prior to the property being acquired by the governmental entity; (iii) create affordable housing, if a demonstrated affordable housing need exists in the community, as defined in the local government's approved housing element or required housing needs assessment; (iv) meet the goals articulated in SB 3757 and have been included in an adopted sustainable community strategy, alternative planning strategy, or a project that specifically implements the goals of those adopted plans; or (v) pertain to transit priority projects, as defined in section 21155 of the Public Resources Code.
Government Code section 52201 requires that an acquisition, sale, or lease by a local government to create an economic opportunity must first be approved by resolution following a public hearing. In connection with the public hearing, the local government must make a report available to the public. The report is similar to that formerly required under Health and Safety Code section 33433, which permitted a redevelopment agency to sell property for development at less than its fair market value. The report required under Government Code section 52201 must include (a) a copy of the proposed acquisition, sale, or lease; and (b) a summary that describes (i) the cost of the agreement to the local government, including land acquisition costs, costs of improvements to be provided, and costs to the local government of any related financing; (ii) the estimated value of the property to be sold or leased at the highest and best use permitted under the general plan or zoning ordinance; (iii) the estimated value of the property with the conditions, covenants, and development costs required by the sale or lease8 and, if the sale price or rent is less than the fair market value, an explanation of the reasons for the difference; and (iv) why the acquisition, sale, or lease will assist in the creation of an economic opportunity, with reference to all supporting facts and materials relied upon.
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Government Code section 52200.6(b) provides that the creation of an economic opportunity will be subject to the provisions of section 53083. Presumably, this means that if the creation of an economic opportunity under Government Code sections 52200 through 52203 involve a subsidy of more than $100,000, then both the report required by Government Code section 52201 and the report required by section 53083 would need to be prepared. A single public hearing should satisfy the public hearing requirements of both sections; however, note that Government Code section 53083(f) requires that the public hearing for a subsidy be held at the local government's regularly scheduled hearing (as opposed to being conducted as a separately scheduled hearing).
Significantly, Government Code section 52200.6(c) provides that the statutes are alternatives to local governments' existing authority to create economic opportunities or acquire...
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