Real Estate & Construction Blog

Local Government

Fees, Fees, Fees!

In my practice representing developers and landowners, I routinely review dozens if not more, of development agreements over the course of a year. Without question, the most complained about aspect of virtually all such agreements, by a wide margin, is the extent of fees being imposed by a given city. Municipal fees are the runaway train of the development business; while this problem affects all businesses engaged in the development of land, it is crushing the housing industry, creating an artificial market condition that has all but eliminated new, more affordable, entry-level housing. I sat through a public hearing this week involving a city’s consideration of a new tree replacement ordinance. One objecting landowner has calculated that the cost of complying with that city’s new ordinance, after adoption, will exceed the cost of his land. This is not marginal land, off the beaten path in the middle of nowhere; it is prime real estate in a fast-growing region of the metro area—the land commands a premium. While the land will sell, even with the fee imposed, the added cost of the fee will be reflected in the price of the new home. I am working on another project in another city involving the redevelopment of an outdated commercial site. The site is located in a prosperous community with a highly-regarded school district with good freeway access. The land commands a premium for redevelopment. It is not a marginal site. However, in this situation, the municipal fees likely to be incurred, most significantly park fees, will also exceed the price of the land. Crazy. Ever since the “Great Recession” put cities across the country on a serious diet, a growing number of them have resorted to collecting all manner of fees to backfill their budgets in hopes of avoiding general property tax increases. Guess what—it is working. To be fair, cities are allowed to impose fees in an amount that corresponds to a service being provided or a cost incurred. But Minnesota law very clearly bans cities from imposing fees that are disconnected from a service provided or a cost incurred by that city. A Minnesota housing industry group has documented the tens of millions of dollars collected by cities which arguably violate state law. The response to this growing phenomenon is essentially a “yawn”. Various industry groups have tried for years, with Republicans and Democrats in charge, to address this problem, with little progress to show for it. In the end, state policy-makers are unwilling to limit the power of local elected officials to impose fees on anything. No wonder landowners and developers are forced to seek relief in court; nobody else with authority appears to be listening or care.

July 16, 2021

Local Government

Hollydale Golf Course: The Complex Road to Redevelopment Approval

The redevelopment of any large land area can be very difficult to accomplish, especially when it is surrounded by homeowners who like the status quo. This is especially true when the conversion involves a golf course: pastoral, quiet, well-landscaped (maybe a few stray golf balls). The surrounding landowners (most often homeowners) understandably love the open space, the seasonal nature of the sport and the relative quiet they experience as a neighbor. However, the redevelopment of golf courses has been occurring with some regularity for the past 20 years throughout the country as demographics and loyalty to the sport has changed. Throughout Minnesota, and certainly throughout the metro area of Minneapolis-St. Paul, at least a dozen golf courses have been closed and redeveloped, sometimes multiple courses in the same city. In most instances, the closures were strongly resisted by citizens, especially by the directly affected residents of a given course. Often the final decision on the redevelopment has been rendered by a judge. All of these redevelopment conversions endure a lengthy public process to entitle the replacement use, most often a housing project of some sort. They not only are costly and time-consuming to complete, but very often they are politically challenging. No elected official wants to inject controversy into their community especially if that elected official has the final word on whether the proposed redevelopment goes forward. Plymouth, Minnesota endured the most recent such redevelopment involving the former Hollydale Golf Course. (this was the 4th course to close in Plymouth over the last decade or so). The closure of Hollydale was a surprise as to timing only; its fate was known for some time as the owners had previously communicated their intentions to the city. In the Internet age, a proposal to redevelop a site like Hollydale instantly draws a crowd—both opponents (plenty) and supporters (less visible). Web site pages are quickly created, and links distributed far and wide, enabling commenters to not only weigh in from across a given city, but also literally from around the world. It’s quite a thing to read posts from individuals who are not from the neighborhood, or even the subject community, who have an opinion and want you to know it! In the case of Hollydale, the developer and landowners worked closely with city staff to create a very low-density land-use plan that tried to hit all the critical policy markers while avoiding (or fixing) obstacles to success. That was not enough, unfortunately. The neighborhood was well-organized and very active in expressing their opposition to the redevelopment and their advocacy for the city acquiring the site for some public use, even if only as open space. After careful deliberation, the city declined to pursue acquisition, in part due to the high market value being placed on the land by the owners. But even the clear decision was not enough; notwithstanding strong support of city staff and an extensive record supporting the redevelopment, opponents persisted and successfully prevailed on the City Planning Commission and the City Council to block the redevelopment, the latter decision by a narrow margin. As often happens in this circumstance, and given the strong record in support of the redevelopment, the developer and owners sued the city to overturn the denial. Fortunately, after reviewing the decision with city legal advisors, the city allowed the project to be resubmitted with several changes, but no loss of building lots. The City Council voted to approve the revised redevelopment allowing the developer and owners to proceed with it. The moral of the story: frankly not sure if there is one; persistence paid off in different ways for the developer and owners, as well as the opposed resident group. The redevelopment process was unquestionably made more difficult and expensive for the developer. And the pressure on City Council members was substantial and direct. Fortunately, the City Council had the interests of the entire City of Plymouth in mind when it decided to settle the lawsuit and approve the redevelopment essentially as previously proposed. Larkin Hoffman attorneys Peter Coyle, Gary Van Cleve and Bryan Huntington represented the Hollydale Golf Course developer in connection with its land use application and the related litigation leading to the final approval. Tags

June 24, 2021

Construction

Larkin Hoffman Ranked Highly for Real Estate and Construction by Chambers USA

Larkin Hoffman was recognized as a leading real estate firm in the 2021 edition of Chambers USA: America’s Leading Lawyers for Business, an annual guide identifying the top attorneys and firms in the United States. The publication also recognized five of the firm’s attorneys as leaders in their fields. Real Estate Chambers notes that Larkin Hoffman’s real estate practice is known for its “litigation expertise, [which] includes handling eminent domain, construction and tax disputes.” Tim Stoltman and Gary Renneke were both recognized for their practices in real estate. Peter Coyle and Bill Griffith received top rankings for their practices in zoning and land use. Larkin Hoffman is a go-to law firm in Minnesota and throughout the region, advising on all aspects of real estate, including acquisition, approvals, assembly, construction, development, financing, leasing and litigation. The firm serves clients in residential and commercial development. Commercial development includes office complexes and major facilities in the retail and hospitality industries. Construction David Hammargren was recognized as a leading practitioner in construction by Chambers. David leads the Larkin Hoffman construction and surety practice. The firm counsels clients on every aspect of the construction process, from procurement and contracting to government regulations and high-stakes litigation. The construction team represents construction contractors, subcontractors, developers, commercial building owners and sureties. Chambers USA is one of the world’s leading publishers of guides to the legal profession, ranking leading firms and lawyers in an extensive range of practice areas throughout the United States.

May 20, 2021

Planning and Development

Health Care Facility Development: Navigating Uncharted Waters

The impact of the COVID pandemic is far-reaching, upending the norms of operation for businesses and families around the world. I recently moderated the Bisnow webinar panel Minneapolis Health Care Updatewhich included developers of health care facilities. The panel confirmed that the impact on the health care provider community has been especially significant and is ongoing with the ebb and flow of viral spikes. The most immediate impact was the sudden surge of patients requiring high levels of care; it’s fair to say our health care operations were not prepared for a pandemic, and their staff members have certainly borne a historic burden in meeting the needs of their patients in response to it. At the same time, health care providers were forced to alter their operations, first when they had to suspend discretionary health care services such as surgeries and other significant modes of care, and later when they had to adapt their services to safely manage patient intake or virus exposure and modify facilities in an effort to safely return to regular patient interactions. These latter requirements came at a very high cost. Taken together, the “business” of health care has been forced to adapt to a degree that was not anticipated a little more than a year ago. The most obvious change, from a consumer standpoint, has been the rapid deployment of telehealth platforms that enable patient-doctor interactions without the need to access the provider facility and potentially transmit or risk exposure to the virus. This capability has been available for a very long time, but its growth was essentially compelled by providers needing to find a safe way to continue their operations, interact with patients and generate revenue. One can assume that the reliance on this approach to patient care will be more common going forward, even when it’s possible to have personal exam visits. This use of telehealth technology will require that medical facilities be designed, or redesigned, to accommodate the virtual aspects of health care delivery. Notwithstanding the role of telehealth, the overwhelming majority of patient health care interactions will continue to occur in bricks-and-mortar health care buildings whether it be a hospital, clinic, or another specialty facility. One of the most pronounced changes in this physical aspect of health care delivery has been the consolidation of physician groups with health care providers as a means of capturing patient volumes and revenue. Concurrently, the trend of developing specialty facilities under the ownership and control of physician groups, or of large investment groups, proceeds unabated. Thus, we will likely be seeing more standalone surgery centers, urgent care facilities and the like in our future. The long-term implication of the telehealth trend for patient care, and especially for hospitals with a mandate to provide a broad range of costly services, remains unknown. The health care industry has been forever changed by the many challenges of this pandemic. It was an honor to moderate a panel of individuals working in the health care technology and real estate sectors. The panelists offered many insights into innovations, opportunities, and expansions in health care particularly relating to changes within health care facilities and future real estate needs. If you would like to learn more, please listen to the Bisnow panel discussion Minneapolis Health Care Update here. Peter Coyle advises business and institutional clients on solving problems related to federal, state and local law and regulation. He represents clients before the Minnesota Legislature and state agencies, as well as cities, counties and townships, on a wide variety of business licensing, permitting, regulatory compliance, environmental review and related matters. The main focus of his practice is advising land owners, developers and contractors who are seeking local and state regulatory approvals associated with new commercial, industrial and residential land development projects. If you would like assistance with local and state regulatory approvals associated with new commercial, industrial and residential land development projects, or have questions about real estate development please contact Peter atpcoyle@larkinhoffman.com.

May 7, 2021

Real Estate

The State of Retail

The state of retail in Minnesota and around the country is a huge question-mark. The obvious effect of the ongoing COVID restrictions has delivered an unwelcome shock to the operations of even the very best brick and mortar retailers. Nobody can say with confidence when the cloud of uncertainty around COVID and the restrictions on store operations will be lifted (or, more importantly, when customers will feel safe walking into a crowded store). The pandemic has had a double-down effect on what already was roiling the retail marketplace: online sales and delivery services. Online retailing has exploded across a broad spectrum of products and services. While the trend for online was certainly growing pre-COVID, nobody could have predicted the accelerant-effect of the COVID restrictions on retail and many more aspects of our economy (think restaurants, automotive, etc.). While online sales still make up far less than a majority of overall retail sales, the percentage gap between online and bricks-and-mortar retailing has shrunk noticeably, with e-commerce now accounting for 21.3% of total retail sales; up from 15.8% in 2019. According to Digital Commerce, total online spending jumped 44% in 2020 over 2019 spending or $861.02 billion (this excludes B-to-B transactions). Regardless, the sheer magnitude of our economy (total retail sales exceeding $4 trillion) means we will always need retail boxes for some types of products and services. In years past, when a retail site was closed for any reason, it was only a question of time before a new retail concept took its place. Landlords had to make accommodations, for sure, but the re-tenanting of the space was virtually certain especially for popular retail settings like 50th and France or Southdale or countless other high-traffic locations throughout Minnesota. It is far from certain how this transition will come about in the post-COVID/online world. It’s not only the financial ramifications of losing a tenant in a mall or prime storefront on “main street” but also the emotionally deflating impact of vacant space on the passersby. Even if one’s personal situation is positive, seeing empty storefronts sends a chill and a reminder that things change, often for totally uncontrollable reasons. Certainly not as much fun window-shopping. Imagine the challenge it must pose for large retail operations, such as regional malls, who took hits from all sides over the past year. They were shuttered entirely for months (unless they were fortunate to have an “essential service” business such as a grocery or a pharmacy retailer). Apparel, hospitality, and entertainment, all staples of retail centers, were forced to shut down for months or were allowed to hiccup along with severe restrictions on operations. Many were forced into the online space without planning or operating capacity to make the shift and suffered in spite of the efforts of local jurisdictions to assist. The real body-blow for large retail centers has been the ongoing closure of large retail brands like Penney and Sears. With few exceptions, every large retail center had one or both as tenants to attract the budget-conscious shopper while also catering more broadly to those seeking higher-end brands. Now these brands are disappearing from retail centers, and many more like it, leaving large chunks of empty space with no obvious back-fill option. To make it more complicated, often these anchor stores occupied a pad that was owned by an entirely different legal entity, if not the retailer itself; lease restrictions or bankruptcy proceedings make it much harder to immediately reposition the space for another user A further complication is that cities across Minnesota and nationally want to see large retail centers turned into pedestrian-friendly neighborhoods, with apartments, hotels and other high-traffic users. Even assuming the legal restrictions on these alternate uses is not a factor, the value of these users to a large retail operation with multiple users, multiple pad owners, each with competing business objectives and expectations is a real challenge. Cities have tried to force these discussions through their authority as local zoning regulators. Some point to Southdale in Edina, and it’s neighbor Galleria, as a perfect example of a successful transition. Not all owners of regional centers agree, or else they would all be rushing to complete their own conversions. It’s much easier to try and rework the boxes within the traditional retail format, especially given the legal framework governing retail centers. One bright spot, admittedly of limited scope, is the extent to which large bricks-and-mortar retailers have been able to use slower or even vacant store locations as fulfillment centers for their online businesses. Avoiding the capital expenditure for distribution centers that companies like Amazon are incurring is a clear advantage. So, how does this work itself out? The way it always has; there will be winners and, sadly, losers, but the free-market economy we live under always finds a way to establish a new normal. This may not be the normal we want or can easily afford in the short term, but the version of “normal” the marketplace will support. One certainty: online retail is here to stay, but so is bricks and mortar retail.

February 25, 2021

Construction

Land Development: Not for the Faint of Heart

Anyone experienced with developing land realizes that the regulatory process one must complete for a given development is daunting, at once complicated and cumbersome and surely expensive. I often tell landowners who want to become “developers” in order to capture more value in the price of their land, that it is not for the faint of heart or the risk averse–I’m usually proven right. The most consistent regulatory challenge associated with developing land is regulatory inefficiency or regulatory “creep”. It is not unusual that a given development application will require a review for possible stormwater or wetland impacts; developers accept this and realize there are costs associated with this process. However, what frustrates them to no end is the multiple layers of government that are involved with even the most routine development application. In the case of stormwater and wetlands, an application likely will have to be reviewed by multiple agencies with overlapping and maybe even conflicting jurisdictions, such as the U.S. Army Corps of Engineers (USACE), local watershed districts, department of natural resources and pollution control agency, as well as the local jurisdiction in which the development is proposed. It is typical for each agency to have a permit process with their own requirements for submission and review. In fairness, they do try to coordinate their review but some are more cooperative than others. What is certain is that each will have its own technical professionals involved, often aided by private consultants; moreover, there is no prescribed timeline to reach a conclusion so any hold-out delays the process for everyone. And, of course, no application is ever perfect; invariably someone will want additional details or alternative plans created and submitted—another source of delay and added cost. Developers frequently lose the entire building season due to simple delays even if they made a timely submission for review. The crazy thing is that most developers would gladly incur the cost of the redundant process if they had an assurance that the process itself would be completed in a predictable and reliable manner. Instead, they get the cost and frustration of an inefficient process without assurance of anything. I’ve been working with a client for several years on a wetland permit for expansion of a mining operation. In 2019, after extensive back and forth with the state and local agencies involved with their permit review, the company thought they were nearly finished based on statements from the state’s lead permit reviewer. My client had been expecting its permit to be approved by the end of that year but instead, out of nowhere, they learned that the permit reviewer had retired at the end of the year; instead of receiving the promised permit, his replacement announced summarily that not only would my client not get the expected permit but that the state agency was unilaterally giving itself 6 months more to review the permit. Essentially, they were starting over with no explanation given. So here we are in early 2021 and still we have no permit; instead the process continues to drag on and more recently has gone backward. More on that below. The point is that the applicant is held hostage to a process that is time-consuming, very expensive and offers very limited due process. It is not for the faint of heart. Closely connected to the cost of delay is the risk of a shifting regulatory environment. Developers accept their responsibility to protect wetlands, erodible slopes and water bodies. Any setbacks or restrictions on the use of their land is a cost that must be borne by the balance of the development. It is not unusual to see a third or more of a development tract placed off-limits by setbacks, open space requirements, dedications or sensitive environmental conditions. Again, experienced developers recognize this as a cost of doing business. They build their project proformas around these assumed costs. You can imagine that it makes a developer very unhappy when a regulator moves the goal line while an application is being reviewed. I’ve seen state and local agencies change their position on setbacks, density or land preservation requirements on the fly with no regard to the added cost to the applicant or whether they will get a demonstrably better regulatory result in the end. This frequently happens when a project has generated controversy; for elected officials the easiest thing for them to do, short of an outright denial, is to impose additional conditions on a development to appease angry objectors. If a 25-foot setback is good, a 50-foot setback must be a lot better. The unfortunate truth is that the regulatory bodies have so much discretion in these areas that challenging them is often more time-consuming and expensive for the developer than actually achieving the desired outcome; the pragmatic response is to accept the added conditions and cost, if possible, and move on with an approval. The cost implications are not the regulator’s concern; the developer, on the other hand, needs to recalculate its proforma to absorb the loss of additional usable area and hope the project remains viable. The development business is not for the risk-averse. Back to the mining permit; after several years of review, the company recently received a written determination by the state agency confirming a new restriction on their property: no prior notice, no prior input from the company. This sort of regulatory creep is unfair and essentially unchecked short of a permit applicant’s willingness and ability to push back. In most cases the risk of challenging, not to mention the cost of delay, often forces the permit applicant to swallow their pride along with the newly imposed condition in order to simply be done. Experienced developers try to complete their due diligence on their development projects in advance of initiating the public review process. They understand that once they commit to a site and have incurred the cost of tying up the property and preparing the necessary applications, there is great risk in the public process. One would wish that the process itself would provide more confidence in the anticipated outcome. Unfortunately, the state and local regulatory bodies control the process. This means they control not only the clock but also the rulebook itself. It’s not for the faint of heart or the risk averse.

February 5, 2021

Real Estate

The Twin Cities Commercial Real Estate Market: What Does the Future Hold?

The United States is now more than 10 months into responding to the COVID-19 health care crisis. Minnesota has been grappling with it in earnest since at least March 2020 when Gov. Tim Walz initiated a series of executive orders designed to stem the spread of the disease until testing and/or a vaccine can be implemented. Meanwhile, the effects of the crisis, including the mandates imposed by the governor’s executive orders, have severely affected a broad cross-section of the economy. Some companies, especially service companies, have been able to adapt to the crisis by having their employees work from home. Others, such as health care and construction companies, have been deemed “essential” and thus have been able to keep their employees in place. However, others have either been required to cease operations entirely or severely limit their hours of operation. The net effect of these pressures has been a loss of productivity, jobs and income for companies large and small, and especially those employees suffering through extended layoffs or furloughs. Some of these impacts were mitigated by the combined spending of the federal and state governments, either through direct grants to individual workers and companies, or targeted aid to select industries such as health care or transportation. Now, unfortunately, financial props are ended or soon will be. At the federal level, we have learned that any new COVID relief measure will likely have to wait until after the November elections. We are a long way from overcoming the health risk created by the COVID-19 virus. Companies and their employees are working hard to regain their footing amidst the ongoing risk and uncertainty but have a long way to go to convince their employees and customers to resume business as usual. As we enter the months leading to winter, outdoor seating options will disappear for bars and restaurants, which will force hard decisions about their operating viability. Companies leasing officing space throughout the state continue to exercise caution which means the vast majority of their employees will continue to work from home for the foreseeable future. Even with enormous federal subsidies (now expired) airlines are facing substantial losses and have announced major staff reductions. The point of this recap is that we are now entering a very tricky and uncertain time, perhaps more consequential than earlier this year. Real estate professionals will be challenged to advise their clients about a way forward. Anyone who believes they have a crystal ball to divine the future is making it up. The best we can do is confront the situation honestly with our clients, accept that the problem is larger than one company or certainly one individual and focus on what is within our ability to manage. Every economic downturn causes companies to fail and triggers large-scale layoffs; this situation is not due to economic weakness generally so even exercising superb business judgment will not, by itself, see us through. On the other hand, downturns always create new opportunities. It has always been a hallmark of our economy. The marketplace works in mysterious ways but when there is supply and favorable pricing, good things usually happen. In this singularly unique time, let’s hope the good things are not too far off. Please join moderator Peter Coyle and panelists Tim Elam (Scannell Properties), James Freytag (CBRE), and Gretchen Camp (ESG) this Wednesday, October 28th at 2:20 pm (CDT) for the Bisnow webinar Twin Cities Deep Dive: State of the Market. In Wednesday’s webinar, the panel will discuss the Twin Cities commercial real estate market and offer their predictions about what the future holds and will specifically look into the following questions: Could the Twin Cities see a spike in interest as people and companies look to de-densify? Industrial is the only asset class to see values go up during this pandemic. What does the future of the sector look like and will it continue to see high demand? Much has been made of the office market as most professionals continue to work from home. What does the future of the office market look like? Multifamily used to be considered the safest investment in CRE as people will always need a place to live. With so many growing through difficult economic times how can the multifamily start to make a recovery? The coronavirus has sped up trends we were already seeing. Which of these trends is going to change the CRE landscape for years to come? To register for the Bisnow webinar click on the link: Twin Cities Deep Dive: State of the Market

October 23, 2020

Legislative and Judicial Updates

Who’s Paying the Price for Gov. Walz’s Eviction Moratorium?

We are nearly 9 months into the so-called COVID-19 global pandemic. While not without historical precedent, COVID-19 has wreaked havoc on the physical and economic health of millions both within the United States and around the world. In Minnesota and across the country, governors and their public health departments have exercised “peacetime” emergency powers designed both to limit the spread of the virus but also to minimize its adverse impacts, both physical and financial, to the broader population. The success of these measures has been mixed. While much is being written and debated regarding the merits of social distancing, including masking policies, as a means of protecting public health, less is being written and debated regarding the direct economic effects of some of these policies, which in any other context, would spawn enough litigation to swamp state and federal courthouses in all 50 states. In Minnesota, there have been few such challenges to the emergency powers exercised by Gov. Tim Walz. These challenges have targeted public health decrees relating to social distancing, including mandatory stay-at-home and business closure orders. The author is not aware of any such challenge finding success in a courtroom, probably due to the underlying legal authority granted to state leaders, but also the perceived public health benefit of these orders. Certainly stay-at-home orders, including business closure orders, have imposed massive economic hardship, but their public health premise has thus far shielded Gov. Walz and other national leaders from successful legal challenges. Less discussed are those policies that actually impose a government-sanctioned cost on businesses and individuals with no direct public health connection, akin to a government taking of property with no due process or compensation for the loss. The clearest example is the COVID-related policy that blocks landlords from evicting or non-renewal of a lease of a residential tenant for non-payment of rent. In Minnesota, Gov. Walz imposed a restriction on tenant evictions almost immediately, along with other prescriptive measures. The prohibition on evictions or lease terminations is nearly universal in scope, allowing evictions or lease terminations only when there is clear evidence of criminal activity occurring in the leasehold premises that endangers the safety of others, such as threats of violence or illegal drug use. But for this limited exception, landlords have no remedy for a tenant’s failure to pay rent, whether willful or otherwise. The actual economic plight of the tenant, if any, is irrelevant. What’s ironic is that thousands of tenants facing sudden unemployment have benefitted from state and federal cash grants to supplement traditional unemployment benefits. Not only have such policies not been tied to meeting existing lease obligations, they have actually led business owners to complain that they can’t attract workers back to their jobs. Yes, under the emergency orders the tenant has a continuing legal obligation to pay rent when due, but a tenant needs no excuse, no permission, no reason at all, to withhold payment of rent. Meanwhile landlords, including thousands of small property owners, are forced to eat the cost of this policy, hoping to be made whole some other day, if they are not first foreclosed upon by an unforgiving lender. Someday the moratorium on tenant evictions will be lifted and a flood of eviction proceedings will commence in district court across Minnesota and across the country, searching for the attention of a backlogged court system. Yet the high cost of seeking a court remedy paired with a low likelihood of actually collecting past-due rent means that in the end, landlords will solely bear the financial cost of this COVID-19 policy notwithstanding the undisputed government-sanctioned “taking” being imposed on private property owners

August 28, 2020

Construction

How Far Can the Governor Go On His Own? Part 2

Recently I commented on a growing level of concern regarding Gov. Tim Walz’s use of his statutory public safety “emergency” authority to promulgate wide-ranging and consequential executive orders affecting the state’s economy and citizens. While many groups, including health care and service organizations, were required to suspend their operations for at least two months, the construction industry was deemed “essential” and, thus, allowed to continue normal operations, albeit subject to COVID-related “best practices”. The good news is that the construction industry has been able to maintain its operational capacity notwithstanding a general pause in business and commercial spending. The better news is that the construction industry seemingly has done so with very limited COVID-related infections. You would think that would count for something? You would be wrong. With this backdrop, it was a surprise to see the new “guidance” with Executive Order 20-74 released by the state’s Department of Labor and Industry (“DLI”) which imposes significant new mandatory requirements on the construction industry. This guidance, which has the force of law, comes with limited input from the construction industry itself. To the extent it did consult, it chose not to listen to the concerns raised by construction industry representatives about the scope of DLI’s new policies. These new policies “mandate” site-specific safety plans for all participants in the construction industry, whether they are general contractors, sub-contractors, suppliers, service consultants or owners. On the surface, the notion that this industry should have credible COVID safety plans in place makes sense—which have been required since March 2020. But DLI’s new mandatory policies turn common sense on its head by mandating an overly bureaucratic safety program for the construction industry that will be expensive, prone to errors and likely will not measurably affect safety. Construction is unique in that the “job site” can change by the day, week or hour. Sub-contractors and their workers come and go with no pre-determined schedule. Combine that with the task of managing many, perhaps dozens, of active job sites, and one begins to understand the record-keeping and compliance challenge posed by the new DLI directive. Why do this? And why do this now? Who knows? Certainly, nobody within DLI or other state agencies have identified a problem they are seeking to solve. It’s as though we’ve arrived at a spot in managing COVID risks in which someone’s random idea of public safety can be now be implemented simply at the stroke of a pen, with virtually no public input and dubious public policy justification, consequences be damned. As a reminder, the governor’s authority to promulgate “emergency” Executive Orders is essentially a policy-mandating blank check. It’s application in the modern era is without precedent and is virtually unchecked. State legislators and the electorate will (hopefully) learn a lot from the COVID-related experiences; much of it undoubtedly beneficial, but plenty to raise legitimate cause for concern. We do want state leaders to have the authority to respond to bona fide public safety emergencies, and Gov. Walz and his administration have done that. But about a month ago, they passed the threshold of true COVID crisis management and have missed the opportunity to bring the rest of the state along with their long term response to COVID. It’s not too late. Executive Order 20-74: Continuing to Safely Reopen Minnesota’s Economy and Ensure Safe NonWork Activities during the COVID-19 Peacetime Emergency Order Preparedness Plan Requirements Guidance –Construction

June 23, 2020

Legislative and Judicial Updates

How Far Can the Governor Go On His Own?

Minnesota businesses and citizens have been operating under a Peacetime Declaration of Emergency, Executive Order 20-01, since March 16, 2020. The impetus for the Declaration was the rapidly-emerging Coronavirus as a global health crisis with far-reaching implications. Since the original Declaration, the governor has issued 75 Executive Orders addressing various COVID-related topics from health care to real estate to construction to education. He also has acted several times to extend the timeline under which his Peacetime Declaration remains in effect; the most recent Order extends the emergency powers until July 13, until the Executive Order is rescinded by proper authority, or until it is terminated by a 2 majority vote of each house of the Legislature pursuant to Minnesota Statutes 2019, section 12.31, subdivision 2(b), whichever occurs earlier. The Executive Orders have legal effect; many Minnesotans have been cited for violating them, including the owner of a saloon in central Minnesota who dared to challenge the restrictions on his business. For the most part Minnesotans have accepted the governor’s Orders as a necessary component of preserving public health and safety. However, over the past 30-45 days a growing number of people are questioning how far the governor can go in implementing new Executive Orders, which have the effect of a duly promulgated law, albeit a law that was not created by the Minnesota Legislature nor even one resulting from normal public rulemaking. Here’s the thing: the Minnesota Constitution vests the authority to promulgate new laws solely in the legislature, subject to a possible veto by the governor if he disagrees with what has been passed. In addition, the governor, through his executive branch agencies, has the authority to promulgate rules to implement existing statutory authority, but those rules must go through a public review process and are subject to court review, all of which takes time. The authority exercised by Governor Walz has, thus far, superseded all traditional checks and balances imposed by the Constitution. A growing number of legislators are objecting to this usurpation of authority by the governor but, thus far, have not been able to muster sufficient bipartisan support to rein in his actions. Furthermore, no Minnesota court has yet issued a ruling enjoining Governor Walz from acting unilaterally under the Peacetime Declaration. This is likely due, at least in part, to the structure of the law which authorizes the governor’s actions, but also the unease that would attach to any court order that could unintentionally contribute to the spread of the virus.

June 19, 2020

Local Government

Restaurants and Bars Allowed to Re-open—sort of

Gov. Tim Walz has announced that restaurants and bars in Minnesota will be allowed to re-open for sit-down service effective June 1st. Sort of. The caveat is that sit-down service must be restricted to outdoor seating areas only, with criteria for maintaining social distancing amongst both guests and staff. Previously, restaurants had been allowed to provide menu services limited to drive-thru, delivery or pick-up options. Many restaurants have opened under the first set of restrictions and more still will likely try to re-open with the new outdoor seating option. As we approach the official start of summer, Minnesotans will be happy to have an entertainment option that is anywhere but their couch. But bar and restaurant owners have less to cheer about–even with the new option to serve guests, some bars and restaurants will stay closed; and many that choose to open will struggle to survive even if they re-open given the ongoing restrictions limiting customer traffic and revenue. In fact, notable restaurants such as Bachelor Farmer in Minneapolis and Pazzaluna in St. Paul have already announced they are closing for good. It’s been said repeatedly by hospitality professionals that if they can’t open 100% for business, it makes no sense to open up on a partial basis. Like all businesses, bars and restaurants have certain fixed and variable costs that require a calculated flow of customers to be viable. The reality is that these businesses operate on very tight margins and require strong customer flow to pay the bills; opening at restricted capacity won’t cut it. While bar and restaurant staffing is scalable, the rent is not, taxes and utilities are not. And planning a menu that relies on outdoor seating only, with the variability of weather and uncertain customer response will be very challenging. These are the basic business calculations to be considered. Yet, the unfortunate truth is that, notwithstanding these business realities, until bar and restaurant customers feel safe sitting inside next to a few hundred of their closest new friends, the core of these businesses is literally “off the table”. The practical consideration for many bars and restaurants is how they could even open with outdoor seating? For a freestanding restaurant with a typical parking lot, it is likely that a limited amount of outdoor seating can be created, if it doesn’t already exist. A limited amount. Because it rains. And the wind blows. Or it’s really hot. And after August, it can become cold. In these circumstances outdoor seating is not viable. The option for outdoor seating is a real challenge for bars and restaurants that lack the space to set up any sort of outdoor seating, whether in a parking lot, sidewalk or greenspace. For bars and restaurants located inside a hotel or office building, it may be physically impossible to re-open. But even if it is possible, it likely will be necessary to negotiate with a landlord for the right to use an area that has not been part of the lease. It may also be necessary to secure local government approvals to set up tables on a public sidewalk or in a parking lot not otherwise approved for this purpose. These things take time and have added costs. Even then, this option likely will provide limited seating, under variable weather conditions for a limited duration. For some, good enough. But not for all, unfortunately. The practical challenges confronting any business or other organization seeking to resume normal operations are daunting. That’s especially true for bars and restaurants. And even if the challenges can be addressed, the ongoing question is whether the employees and customers at these establishments will feel safe enough to venture out?

May 21, 2020

Legislative and Judicial Updates

Shelter in Place: Take It or Leave It?

Minnesota, like many states across the country, is gradually trying to loosen the restrictions on its citizens so that we can try to return to some level of normalcy. Most recently, Gov. Tim Walz (D-MN) let his “shelter in place” executive order lapse. This means that a broad mix of businesses, non-profits and government agencies can attempt to resume normal operations. However, the governor has retained a prior order that will keep bars, restaurants, theaters, etc. and other similar uses closed for a few more weeks. For many, especially small business owners and their employees, re-opening means a chance to save their company or organization and/or get a paycheck to pay the rent and buy groceries. But what does the push to “re-open the economy” really mean? If you are in the construction business, your life, along with your employees, goes on pretty much as it has since the governor’s original shelter order went into effect at the end of March. The construction industry, including suppliers and service providers, was declared “essential” under the governor’s original order and, thus, allowed construction companies and their employees to continue their work. This was a big relief to the construction industry and, especially, the home construction industry given the acute and growing demand for housing of all types and price ranges. There may have been suppliers or service providers who were affected by closure orders in other states or countries which, in turn, affected the construction industry in Minnesota but these impacts were limited from we have seen and heard. But that isn’t the same as saying that the affected employees at these companies are universally happy to be at work given the real health risk that has influenced everyone’s thoughts and actions over the past two months. In fact, the real question is whether the general public will react to the removal of shelter orders with a shrug and essentially ignore it. After all, the coronavirus risk is still present, testing is not yet widely available, contact tracing is even less available and no vaccine is available for general inoculation. Just because it’s possible to walk into a store doesn’t mean the public will feel safe in doing so, especially given the ongoing safety practices being recommended for businesses and organizations of all types. In the face of this fact, a larger percentage of public and private organizations will have a very hard time convincing a skeptical public, whether employees, consultants, customers or world travelers, that it is safe to venture out and reengage the world. After all, who wants to venture out to a restaurant to be served by a waiter wearing a mask keeping his or her “social” distance from you? Plus, only a quarter to half of the available seating can be occupied (and for now likely will have to be outside the building, which is fine for a summer day, but not fine in December or in a rain storm). For homebuyers, the opportunity to tour homes personally vs online will be challenging as both the potential buyer and the seller will be leery about exposing each other, respectively to a risk of infection. At a minimum, those assisting with the sale of a home will need to take care that all surfaces likely to have been touched during a tour are sanitized—not good. We all want to resume our lives in the most normal way possible. But the honest truth is that until each of us feels safe in venturing out that sense of normalcy is a long way off. Please Join Us Join Peter Coyle on Thursday, May 21st at 3:30 PM for Bisnow’s Twin Cities Deep Dive: Projects in Progresswebinar. Peter will be joined by Blake Hastings, President of Oppidan, Anne Behrendt, CEO of Doran Companies and Mark Jepson, Executive Director and Managing Partner of Commercial Investment Properties to discuss “How Developers are Weathering the Storm and Completing Projects Amidst Uncertainty”. Topics discussed will include: What cost implications has the pandemic had on development projects? What measures are developers taking to ensure the safety of their workers on construction sites? How are developers managing investor relations and delayed timelines. How are companies handling supply delays? What will the Twin Cities real estate market look like after this pandemic? Please click here to register: Twin Cities Deep Dive: Projects in Progress

May 20, 2020

Legislative and Judicial Updates

Navigating State and Local Governments During a Pandemic: How Continuing Government Action on Major Issues Can Impact Your Investments

Peter Coyle and Jacob Steen discuss the land use, government relations and regulatory environment during the COVID-19 pandemic. They share examples of how Larkin Hoffman has been able to assist clients in overcoming the unique challenges presented by a statewide stay-at-home order and discuss the ways that the global pandemic has shaped the local land use and zoning approval process. About the Larkin Hoffman Podcast Briefings The Larkin Hoffman Podcast Briefings series was developed to discuss issues affected by the COVID-19 crisis. Our attorneys will address corporate, employment, real estate, construction, franchise, bankruptcy, insurance, litigation and other matters in this series. Over the next few weeks, there will be several podcasts on developing matters. Larkin Hoffman is available to help. Please reach out for additional guidance

May 1, 2020

Construction

Guidance on Managing PPP Proceeds to Maximize Loan Forgiveness

My colleagues, Todd Freeman and Dan Kadlec from our Corporate Group, have put together a podcast providing guidance on managing proceeds from the Paycheck Protection Program to maximize loan forgiveness. Here’s a brief description of the program followed by the link to the podcast. The information here will be valuable to many in the real estate and construction industries. Your business has successfully applied for a loan under the Paycheck Protection Program. You either have received the loan proceeds or are awaiting receipt of the proceeds. This podcast addresses the management of the proceeds to ensure proper use of them and maximize the amount of proceeds that may be forgiven. Given the complex interplay among the various sets of rules for use, forgiveness, reduction in forgiveness and relief from reduction in forgiveness, compiling pertinent information to develop a game plan for these proceeds will not only allow you to maximize use and forgiveness, but also provide guidance on the support that you may provide to your workforce funded by this government program. About the Larkin Hoffman Podcast Briefings The Larkin Hoffman Podcast Briefings series was developed to discuss issues affected by the COVID-19 crisis. Our attorneys will address corporate, employment, real estate, construction, franchise, bankruptcy, insurance, litigation, and other matters in this series. Over the next few weeks, there will be several podcasts on developing matters. Larkin Hoffman is available to help.Please reach out for additional guidance.

April 16, 2020

Construction

We May Soon Find Out What “Force Majeure” Means

I had been pondering a new post to my law firm’s blog, focused on a traditional real estate topic. Now, of course, we are way beyond “traditional” as governments, companies and the public at large struggle to respond in a coherent way to a relentless viral invasion. Members of our firm have been pursuing various regulatory, legislative and political strategies to protect our clients’ businesses, while being mindful of the public health implications of doing so. We anticipate a “shelter in place” order from Gov. Tim Walz could issue any day based on the actions being taken in recent days. This will place a severe restraint on the economy and our lives as we used to know it. At least for now. However, even when the virus risk begins to disappear (and it will, we are told), the ripple-effect of the rapid curtailment of the economy will continue for some time. As lawyers, we routinely review agreements with an eye toward establishing clear terms and conditions governing the conduct of the parties. We pay special attention to the terms governing the circumstance in which the one party is not performing. One of these terms is referred to as “force majeure.” While fancy-sounding, the gist is that there are some things that are beyond the control or even the expectations of the parties such that reasonable performance of the contract can be suspended or even terminated. Typically, the contractual definition of the provision includes war, natural disaster or similar “acts of God” manifestations. In my professional experience, I’ve never seen this provision invoked or enforced; that’s about to change. While there will undoubtedly be many valid circumstances under which force majeure will be used to terminate or suspend a contract, the worry is that this provision, backed up by a worldwide health and financial crisis, will be used to avoid contracts that can and should remain in effect. I believe the vast majority of businesspeople will, under the circumstances, do all they can to help a business customer or consumer manage their way through the current situation. Those conversations undoubtedly already have begun. The most critical factor in this conversation will be the duration and severity of the global downturn; notwithstanding the U.S. economy seemed to be thriving, it is not possible for many companies to simply throw a switch and magically return to the days before the virus erupted. The bad actors, including those seeking unfair advantage, will make this more challenging. So, the implications of the present crisis will be far-reaching and possibly long-standing; I’m betting on the positive forces of human nature, including instincts for survival, to see us through to the other side. Stay safe.

March 24, 2020

Planning and Development

Mediation Can Resolve More Than Monetary Matters

I recently wrote about the merits of using mediation as a tool to resolve business disputes relating to land and business acquisition, land development, public permitting and related conflicts. Mediation is especially helpful, in my opinion, when money is less the object in dispute and it is more so about a difference of opinion. Of course, some disputes center on bona fide legal issues in which resorting to the courts may be an essential first step; but even then, mediation is frequently used to bring resolution to the disputed issues, including those involving public agencies. Developers often feel that cities just aren’t listening to them. That was the case in a recent mediation in which the dispute was premised on a land development project and a difference of opinion with the local jurisdiction about the correct manner to move the project ahead. Out of frustration that his objections were not being heard, our client resorted to litigation to get the attention of the local jurisdiction. While money was involved, it was not an enormous sum. Of greater concern was our client’s objection to how he was being treated by city representatives. It was affecting his business and his future relationship with the city. In this case, mediation provided a forum, moderated by the mediator, who not only provided an objective sounding board for the client, but also was a reputable messenger to the city participants in the mediation. In the end, the matter settled on terms that, while not ideal, were nonetheless acceptable. More importantly, the parties brought the dispute to a conclusion that will enable the underlying project to advance to final approval. The lesson here is that it’s not always (or even only) about the money; business people are usually pretty adept at figuring out how to compromise a purely financial dispute. Disputes that are more personal and involve someone’s view of “principle” usually require an official venue to voice the objection. When the party or parties feel they have had their opportunity to speak their mind(s), it becomes easier for them to accept the need to move ahead and to accept compromise.

February 26, 2020

Construction

Mediation Can Pull Matters Out of the Litigation Rabbit Hole

One of the most challenging aspects of an attorney’s job is to advise a client regarding possible litigation. I think of myself as a pragmatic business lawyer whose primary job is to help my clients achieve their business objectives. I much prefer to accomplish this through time spent on advocacy, negotiation and problem solving. Litigation typically is not part of the strategy to achieve client objectives unless that is the reason the client has come to me from the outset. When litigation becomes a question or even a tactic to be considered (if the client has been sued already, that’s a different topic entirely), I try hard to give objective advice about the merits or lack thereof vs other options, as I see them. The fact is that even when litigation goes exceedingly well, there often is substantial staff and executive time spent in pursuit of a court claim (along with mental and emotional distraction), not just dollars; and, of course, there will be dollars spent, often substantial sums, for lawyers, consultants and related costs, with no assurance of success, let alone an opportunity to recoup the spending (with some narrow exceptions). This is time and money that could be spent either in resolving the source of the impasse or pursuing other business opportunities with a greater prospect of successful completion. Minnesota’s court system has, to its credit, aggressively pushed parties to use various forms of alternative dispute resolution (ADR)(which includes mediation) to short-circuit litigation. Mediation can be a very effective tool for negotiating a resolution to an issue that led to actual or potential litigation; it is very flexible, usually cost-effective and based on a schedule set by the parties. However, it is not a sure-thing. Based on my experience with numerous mediation sessions over the years, one of the most important factors leading to a successful mediation process is timing: how much discovery has been completed so that the parties feel they are well informed about the facts in question; how much money has been expended or is anticipated to be spent if the litigation runs its course; and how much pressure exists for one or both parties to the litigation to reach a resolution on a timely basis. Another important factor is the willingness of the parties to sincerely engage in the mediation process; if one or both parties are not motivated to resolve the dispute, a successful mediation outcome is more challenging. In that case, the first factor (timing) becomes more important. For those not familiar, mediation is a controlled form of negotiation involving a neutral third-party, often a lawyer but not necessarily so. The mediators job is foremost to facilitate direct conversation between the parties for the purpose helping them see the merits of a resolution of their litigation, if possible. In the first instance, the parties may not feel they are ready to mediate (egos, principle, anger, lack of pressure, etc.); the mediator has to find a way to give parties a voice so that they can focus more honestly on the source of the dispute. If parties are represented by lawyers, then the mediator can encourage consultation privately to make sure each party knows what lies ahead for them if a lawsuit either is commenced or continues. If the parties are not represented for some reason (maybe no lawsuit yet), the mediator needs to educate them about what a court process entails, both in time and money, as well as the uncertainty of a satisfactory outcome. In my experience, mediation sessions often run several hours if not a full day (including well into the evening if progress is being made and the parties see an end to the dispute). Sometimes a mediation will extend over a couple of days to allow parties to regroup and investigate settlement options or underlying facts. Sometimes, in spite of best efforts, mediation does not result in a conclusive settlement; but even then, mediation can positively contribute if it does nothing more than allow the parties to clarify positions, exchange pertinent information and voice objections. Perhaps a negotiated settlement can still be achieved outside of mediation at some future point in the process (see my discussion of Factor 1 above). While I am not a fan of litigation, I realize that it is a reality for my clients in some instances, sometimes not of their choosing, but sometimes part of a business strategy. In such case, mediation can be a useful tool to bring closure to the dispute without the extensive investment of time and money that would otherwise be required to bring a matter to conclusion through trial. But for mediation to work, parties have to want it to work and be motivated to try. Everything else is just details.

January 9, 2020

Local Government

A Sobering Reminder of Who is in Charge of Your Land

Imagine you are a landowner whose property is dedicated to a use that has run its course—say a golf course for example. The land represents a sizable family investment and naturally your thoughts turn to what other uses are possible to assure the land is put to a productive and, hopefully, profitable use for the benefit of your family. While the property is surrounded by a mix of low density housing, it nonetheless sits adjacent to city streets with ample capacity for added traffic, available transit service and easy access to the interstate highway. The market seems to favor higher density market-rate housing right now, either work-force or senior housing. You have been reading that cities are seeking out more dense projects including housing to attract young families and to retain seniors. And, your property is one of a few private land areas of any size left for development within an otherwise fully developed community. It would seem a good time to convert the land to a new use that is supported by the market, but only if you can secure the necessary land use and zoning changes that are needed to bring this about. Unfortunately, once you begin the public approvals process to convert your land use, you are abruptly reminded that you have virtually no control over (or say in) what happens next. I frequently receive calls from landowners or business owners who are trying to convert property to a new use and need to understand what this entails. Invariably, we confirm for these owners what a specific city process will require to complete a land use or zoning amendment. While the process of changing a land use designation seems simple and fair on its face, in practice it may be far from simple or fair. Here’s a real-life example. Our owner above, submits an application to change the land use designation of his property to allow the possibility of higher density housing to be constructed. Obtaining the land use change is important as any potential buyer wants to understand what is going to be allowed before pursuing a purchase agreement and a formal development application. The use allowed will determine the value, ie. price, of the land. Once the owner submits the necessary land use application to change the allowed use, she is rendered a spectator to what happens next, with virtually no power to affect the ensuing course of events. State law gives cities in Minnesota very broad authority to decide the land use designation for all property within a given jurisdiction. This means that the owner’s well-reasoned plan to change the land use designation for her property is essentially irrelevant from the city’s point of view. A city could accept the application and approve it, it could deny the change or go a different direction entirely, whether the owner is supportive or not. Moreover, a land use application, by law, must be reviewed in a public hearing conducted by a planning commission or city council. This requires public notice and opportunity to comment from surrounding residents. What the owner quickly learns is that the surrounding residents earnestly believe they have a right to dictate the future land use designation (or that it not change at all). If enough residents rise up to oppose the landowner’s application, it becomes politically treacherous for city leaders to ignore the residents’ objections. It is hard enough on the landowner to hear residents who she may not even know speak critically of the proposal to change the land use, attributing it to the owner’s greed or complete disregard for the impact of any change on the surrounding residents. More than a few will avow that it should be converted to a city park. It is even harder on the owner when the city’s leaders make it clear that they are listening to the residents, first and foremost, and effectively ignore the interests of the landowner. But the real “topper” is when the city not only rejects the landowner’s request but then decides to initiate a land use change of its own for the property, without regard to the owner’s interest or financial consequences, including whether the new, alternate land use designation will be viable in the marketplace. The sad truth is that the landowner in this situation has little choice but to let the process play out, hoping that some good will come of it. Meanwhile, if a new land use designation is approved, the county assessor will likely revalue the property based on whatever new designation is approved by the city, putting a new property tax burden on the owner without any certainty that the land can be sold for its newly designated use. It’s a sobering reminder that as the landowner, the only certainty you have is your obligation to pay your property taxes; the rest is out of your control.

November 13, 2019

Local Government

Cities Making it Harder to Supply Affordable Housing

The fact that Minnesota, and especially the metropolitan region of St. Paul/Minneapolis, is experiencing a severe affordable housing crisis is not disputed. The Metropolitan Council recently released data documenting that the metro region of Minnesota is growing substantially but that the supply of new housing, affordable across a broad range of housing types, is lagging. Within this dire circumstance, the supply of affordable rental housing is especially acute and apt to get worse. Published reports indicate that vacancy rates for rental housing of all types in the metro region is at approximately two percent. The repercussions of this fact are two-fold: rental rates across the board are rising, outstripping the growth of wages; and the supply of rental housing defined as “affordable” based on federal housing standards continues to shrink. Ironically, rather than pursue policies to increase the supply of all types of housing, especially for those most in need of entry-level or “work force” housing, local governments are increasingly adopting policies that likely will impede the supply of such housing. We’ve recently documented the trend of cities in the metro region to adopt policies which compel builders of new housing units (multi-family and, in some cases, single family) to set aside some percentage of the constructed units (typically 10 percent) for sale or rental to individuals whose income falls below established affordability thresholds. This policy will make it harder to justify the investment in new rental (and some single-family) housing. Let’s assume a builder proposes to build 100 market rate apartment units. Under these policies (as an example), 10 of the units must be reserved and priced to be affordable to eligible renters. Let’s assume that the affordable rental rate is set at 70 percent of the presumed market rate for such apartment units. The rent differential tied to the reserved affordable units must be reallocated to the remaining 90 market units, pricing them at a higher rental rate than previously planned. There are several problems that arise: first, will the more expensive market rental units be competitive in the targeted market area; how will a lender underwrite that added risk? Closely related what if, for some reason, the new “affordable” units are not affordable enough to meet the need? There is a risk that some of these rent-restricted units will not be fully utilized even if the broader market for apartments remains strong. It is too early to know for sure how developers and builders will react to these policies especially if surrounding jurisdictions do not impose similar “affordability” policies. The most recent contribution to this discussion is Minneapolis’ proposal to restrict the screening process used by landlords in determining suitable tenants for their buildings. Under its most recent proposal landlords will be burdened with new restrictions on considering the criminal background, financial capacity or rental history of a prospective tenant. Let’s agree that there is a valid public policy behind an effort to promote the availability of housing of all types. But the target of this latest policy proposal is the owner of a private apartment building of no particular size, whose private capital (likely with financing) is at risk; for some it’s their sole source of income or future retirement. Minnesota is already a very expensive state in which to do business; policies like that being proposed in Minneapolis will make it more so. The unvarnished objective of this new policy is to compel landlords to assume more financial risk when renting their units to a new tenant with an uncertain background. Large ownership groups may be able to establish the systems to manage the highly intrusive requirements of the city’s tenant screening restrictions (and pass along that added cost to renters), but smaller landlords will be stepping into bureaucratic quicksand, leaving them exposed to expensive claims that the new screening policies are being improperly applied. To add insult to injury, a related ordinance proposal would compel landlords who require payment of the last month’s rent as a form of security deposit at the outset of the lease term, to accept payment of that deposit for up to three months after the commencement of the lease. Many landlords use the “last month’s rent deposit” as a simple test of a tenant’s financial capacity to make regular rent payments. Unfortunately, under this policy change, the tenant will legally be in possession of the apartment by the time the landlord learns that the tenant is not able to pay the required security deposit. This puts the landlord in the position of accepting the financial risk based on demonstrated non-performance or initiate an action to evict the tenant. Neither prospect is appealing. Those with capital invested in existing multi-family properties in Minneapolis may be stuck with complying with these new tenant screening policies absent a successful challenge to their adoption. But others considering where to invest their capital will have plenty of other, less restrictive jurisdictions to choose from rather than investing in Minneapolis.

August 7, 2019

Legislative and Judicial Updates

US Supreme Court Reinstatement of Constitutional Takings Claim May Not Benefit Landowners

One of the most consequential decisions of the recently concluded term of the U.S. Supreme Court involves the reversal of a 30-year precedent and reinstatement of a landowner’s right to seek redress in federal court for an alleged taking of property without just compensation. The 5-4 majority decision in Knick v. Township of Scott, PA, authored by Chief Justice John Roberts, reflects the decidedly conservative bent of the current court. The decision in Knick affirms that an aggrieved landowner may initiate a 5th Amendment takings claim in federal court without first seeking redress in state court. The ruling overturns Williamson County Regional Planning Commission v. Hamilton Bank of Johnson City, which was decided in 1985. Private property advocates have long sought to overturn Williamson and are celebrating the reinstatement of a direct federal claim without first resorting to state court. The thought is that federal courts are better qualified to address constitutional questions and arguably are staffed by judges more accustomed to reviewing constitutional challenges. The question, though, is whether Knick will matter in any but the most extreme cases? Here’s why it may not: (1) any litigation (state or federal) is very expensive and few can afford to pursue it (even contingent fee arrangements may not reimburse or absolve the plaintiff landowner from traditional costs of litigation, such as deposition fees, expert witness fees, etc. which can be substantial by themselves); (2) litigation in federal court traditionally can be much more expensive than that conducted in state court due to more stringent judicial procedure requirements; (3) litigation in federal court traditionally takes much longer to resolve contributing to the high costs; (4) a private party challenging the government in court (state or federal) has to overcome several significant obstacles, starting with the cost of the litigation (government attorneys are already on the taxpayer payroll) along with the inherent presumption that the government has acted correctly; and (5) engaging in any sort of litigation is not for the faint of heart, but once you engage, the rules compel that the case follow certain procedures to a resolution which can wear down the parties. One clear advantage of pursuing a claim in state court is the opportunity to get other pertinent non-federal issues addressed that may resolve the litigation on a faster, less expensive basis. In fact, federal court review may well be limited to federal jurisdictional matters only leaving valid state claims unaddressed. Admittedly this procedural dichotomy poses a difficult trade-off; landowners will need advice on the relative merits of alternate federal and state law claims to assess merit and potential for success. I try very hard to give my clients clear-eyed advice when it comes to pursuing any sort of litigation, for all the reasons noted above. But the most practical piece of advice may, in the right circumstance, be that of simply moving on without pursuing a claim regardless of the merits. I want my clients to firmly own the decision to pursue litigation; I challenge them to consider all the variables and to set aside their emotions in making their decision. More often than not, practicality prevails and the aggrieved party will decide to avoid the stress and financial burden of bringing an uncertain claim against the government.

July 16, 2019

Planning and Development

Who Pays for Regulation of Housing?

When policymakers debate new regulatory policies, including those relating to housing, invariably someone will identify that such regulations come at a price, oftentimes a high price. This usually triggers the response that complying with the regulations will be the “greedy” developer/builder’s problem and they can simply take it out of their profits. It’s a nice, emotional sound-bite; unfortunately it’s wrong. In a market-based economy like ours, those who produce goods and services price their product to reflect their costs and a desired profit margin. The marketplace dictates whether the stated price is acceptable or not. But in the end, the consumer, whether a business or individual, always pays because the cost of regulation is, of necessity, built into the price. If the regulatory costs become too expensive to sustain the product, the producer will either shift to a different, less expensive product, if possible or close down their business—both options result in a reduction of supply and tend to inflate the price of the remaining inventory over time. While harsh sounding, the consequences are pretty simple and straightforward. In the realm of housing, we have seen government address affordability in several ways: imposing controls or mandates, such as rent controls, or requiring that developers/builders include some quantity of “affordable” housing units in any new housing project. A new study completed by MIT documents, once again, that rent controls, while beneficial to those renters living in rent-control-buildings (regardless of ability to pay), actually cause rents to rise overall and tend to reduce the supply of “rent controlled” properties over time. Markets are dynamic and not static. The cost of regulation has to shift to somebody; housing developers will need to charge more rent to their market-based tenants to cover the cost of regulation for the protected class of renters and/or the owners of rent-controlled properties will seek to alter their financial exposure by selling such units at a discount, convert apartments to condominiums or, potentially, demolish the restricted buildings and construct a new market-based property. Attempts to mandate that housing developers set aside a fixed number of “affordable” housing units in a new building (both rental and ownership) will have the same effect on affordability over time. Several communities have recently adopted ordinances that purport to address housing affordability. The trend of such ordinances requires that approximately 10 percent of such units be preserved as affordable. The cost of complying with these restrictions will be shifted to the remaining “market” units, making them incrementally more expensive for the consumer. It will be interesting to observe how market-based housing developers/builders respond, especially if they can pursue their projects in another, reasonably adjacent community that has not imposed such a restriction. The City of Minneapolis has taken this approach to new multi-family projects; but it has also attempted to adopt an ordinance which, if fully implemented, will compel owners of multi-family rental housing to accept tenants who rely on public rental subsidies, ie. Section 8 vouchers, for some portion of their rent. Many landlords voluntarily accept tenants who rely on rental subsidies, but many do not. Those that do not point to the added cost and regulatory burdens associated with public subsidy programs, such as Section 8. A judge in Hennepin County invalidated the City’s rental housing ordinance as unconstitutional; rather than work with landlords to increase the supply of affordable rental housing, which will cause rents to moderate, the City has chosen to appeal the ruling, which is pending at this time. The affordable housing task force convened last year at the direction of former governor Mark Dayton reached several conclusions: one conclusion is to dramatically increase the supply of housing of all types to support the growth that is anticipated (or hoped for) in Minnesota. Another recommendation is to closely scrutinize new state and local regulations for their impact on housing affordability. These recommendations go together. Hopefully, policymakers will take notice and do their part to address this chronic problem.

April 3, 2019

Planning and Development

While Rome Burns…

Earlier this year, Housing First MN, a Minnesota trade group that advocates for the interests of the housing industry and homeowners, issued a powerful report entitled Priced Out: The True Cost of Minnesota’s Broken Housing Market (full disclosure: the author represents this organization). The report confirms what others have speculated about in recent years and that is the dramatic difference in the cost of building an identical new home in Minnesota as compared to jurisdictions outside Minnesota. While you may quibble about sections of the report, the central thesis that Minnesota’s regulatory climate is making it virtually impossible to construct new housing that is affordable to entry-level homebuyers has not been seriously challenged. In fact, other objective organizations, including the Minneapolis branch of the Federal Reserve, have reached the same conclusion. One of the final acts of the Dayton administration was to issue a task force report stating that 300,000 new homes need to be constructed by 2030 to meet the exploding demand for affordable housing of all types, both market based and subsidized; under current conditions, this is an impossible task. Minnesota cannot come close to solving the problem through direct subsidy alone; market solutions are required to seriously address the problem. Housing First takes pains in its report to not single out any regulation or organization as the culprit, rather noting that housing construction is a complicated industry with many competing forces affecting cost, not only regulatory costs. Having said that, the report documents that approximately 25% of the cost of constructing a new home in Minnesota is attributable to state and local regulation. The central recommendation of the Housing First report is that the Minnesota Legislature should establish a bipartisan legislative oversight commission for the sole purpose of evaluating why housing costs so much to build in Minnesota versus surrounding states in the Upper Midwest and recommend potential responses. This recommendation originates with Governor Dayton’s housing task force report. Formation of a bipartisan oversight commission allows for the development of continuity and expertise amongst the panel members; it is an approach routinely used for disparate issues such as data privacy and public pensions. One would think that housing affordability, especially home ownership, which has widespread, documented benefits to our society, would rise to the level such that policymakers would eagerly embrace the idea of a concerted oversight process. Well, yes and no; the Minnesota Senate has advanced bipartisan oversight commission legislation authored by Republican Sen. Rich Draheim. The House companion, authored by Democrat Andrew Carlson, which also enjoys bipartisan support, has thus far been denied a hearing. Instead, the House seems intent on advancing only Governor Tim Walz’s budget initiative to funnel hundreds of millions toward subsidized housing (the irony is that the same regulatory costs noted above will consume a quarter of whatever amount is approved by the legislature). Ignoring the burden of regulatory cost on housing affordability will not make it go away. The response of city representatives has been to attack the integrity of the Housing First report. Several proposals introduced into the 2019 legislative session would, in fact, take us in the wrong direction by enabling cities to enact broad new, expensive transportation impact fees. Last year a modest legislative oversight bill targeting state agency regulatory costs was attacked and defeated by state agency representatives and their stakeholders. So far, the regulators are winning and proponents of housing affordability are losing. The fullPriced Out: The True Cost of Minnesota’s Broken Housing Market report can be downloaded here: https://www.housingaffordabilityinstitute.org

March 15, 2019

Legislative and Judicial Updates

Inclusionary Zoning Expands its Footprint in Minnesota

Last week the City of Bloomington adopted an expansive “inclusionary zoning” ordinance for the purpose of compelling developers of single and multifamily housing to include a portion of their new housing as affordable based on prescribed income standards. “Inclusionary zoning” refers to a policy that compels developers to include some land use component desired by a given city as part of a development project being proposed in that city. It is justified in the affordable housing context to address the need in Minnesota and nationally to supply more affordable housing to a greater number of people, either through subsidy or otherwise. Under Bloomington’s ordinance, any developer proposing 20 units or more of single or multifamily housing must commit at least 9 percent of such units to be affordable based on specified income and affordability parameters (the city backed away from imposing the requirement on existing housing based on objections from multi-family from owners of such properties. The ordinance does outline a set of “credits” that are potentially available to the developers of new housing to offset, at least partially, the financial burden of the new ordinance requirements, such as increased density or other performance criteria. The city reserves to itself the question of whether any such credits would be awarded for a given project, leaving the developer on the hook until that determination is confirmed. A developer seeking to avoid entanglement in the city’s evaluation process can buy its way out through a substantial payment to the City. Bloomington’s ordinance adds to those ordinances previously enacted by the cities of Minneapolis and Edina. Undoubtedly other cities will follow the lead of these cities. In the author’s opinion, while laudable for their legitimate objective of addressing an important social policy, the approach of compelling private developers to contribute land or cash as a condition of securing an approval for new housing is quite plainly a regulatory taking. In no other segment of our development economy do we require private developers to commit their private funds to help solve a broad societal problem, such as housing affordability, absent clear legal authority from the legislature. For example, developers are routinely required to contribute land or cash to cities for the creation of new park systems as part of new developments based on an explicit grant of legislative authority; notably this policy applies to all forms of development, such as commercial and industrial, not solely housing. No such legislative grant of authority has been extended to so-called inclusionary housing ordinances. If challenged, it is most likely that Minnesota courts would render invalid such ordinances as lacking either constitutional or statutory support. Recently the Minnesota Supreme Court unanimously determined that a city’s general transportation fee policy was invalid and illegal because it lacked appropriate statutory authority, which authority cities have been seeking from the Minnesota legislature for many years. The transportation fee was imposed in addition to costs incurred by developers to construct all the necessary transportation improvements for given development projects. The policy enabled cities imposing such a fee to illegally secure millions of dollars from developers, willingly or unwillingly, as the price of receiving approvals to which the developers were otherwise entitled. Fortunately, virtually all cities who had been collecting a general transportation fee suspended this practice based on the unequivocal decision of the Supreme Court. The same argument applies to the spate of inclusionary housing ordinances. Credit Bloomington with constructing a thoughtful ordinance that seeks to balance its regulatory stick with the possibility of a bag of carrots to offset the financial burden imposed by its ordinance. But the ordinance is selectively applied to only a segment of new housing construction and there is no certainty of receiving an offsetting “credit” once the city completes its review. Make no mistake, Bloomington’s ordinance, as with those of Minneapolis and Edina, are sticks first, with no assurance of a sweet-tasting carrot in the end; developers will hesitate to pursue new housing projects in the city absent certainty of the financial trade-offs required under the new ordinance. Unfortunately, the real losers under the city’s ordinance may be those most in need of new housing.

March 4, 2019

Planning and Development

City Response to Affordable Housing Problem: Tax Housing Developers

News publications across the country have affirmed the existence of a near-crisis in providing affordable housing options for first-time homebuyers and low-income housing consumers. Mayoral elections in Minneapolis and St. Paul emphasized the need to address this problem. There are numerous private for-profit and nonprofit housing developers who would love to serve this market; indeed it is the largest segment of the housing market that is not being served adequately by anyone. If asked, builders will tell you they cannot afford to construct housing that is affordable at the low end of the market. We know that the cost of land, labor and materials has risen substantially since the recession; that is a function of the market that can’t easily be addressed through public policy. One other well-documented factor is the cost of regulation, both by state and local entities. When it costs a builder $20,000 more to build the identical home in one state vs. another state, that is compelling evidence that regulatory costs are unbalanced in the high-cost state. Regulatory cost can be addressed by public policy, if there is the will to do so. States and cities across the country have thrown hundreds of millions of dollars at the problem and barely moved the needle. What has been lacking thus far is a constructive discussion with housing developers about what it will take for them to serve this market. What have state and local governments been doing to address this problem? Well, not much, actually. The governor of Minnesota recently convened a housing task force to come up with ideas to address housing affordability; curiously the trade organization representing the largest concentration of Minnesota homebuilders was not invited to serve on the committee. To the contrary, what a growing number of cities are contemplating is a new illegal tax on housing that would compel housing developers to pay a fee as a condition of being approved for a new development, unless the developer agrees to construct a certain number of housing units that will be held for sale or use by consumers at a certain income scale. Some refer to this as inclusionary zoning. The theory is that a housing developer ought to have to fund a public housing initiative as the price of securing government approval of a new private, unsubsidized housing project. Aside from having no statutory basis, at least in Minnesota, it’s a nice little maneuver that shifts responsibility for addressing a serious public policy problem from the responsible governmental body to developers of new multi-family and single family housing – thus, it’s now the housing industry’s problem. Theoretically, a housing developer could bury the added cost of meeting this new tax by inflating the cost of its remaining housing stock (that is what occurs with other government fees). In this instance, not only is this approach arguably illegal, but in a tight housing market, it will also be very difficult for the for-profit housing sector to absorb this new tax. And the only way the nonprofit sector can satisfy such a requirement is for the government to subsidize it. How ironic. It’s time for government entities concerned about housing affordability to sit down with those folks who would like to build more affordable housing. Simply adding a new tax on housing may feel good to public policymakers, but it only makes housing that much more expensive for housing consumers.

October 11, 2018

Legislative and Judicial Updates

Minnesota Supreme Court Invalidates Transportation Fee

Recently the Minnesota Supreme Court invalidated a municipality’s use of an unauthorized transportation fee to fund projects that are not directly tied to a specific project. It also invalidated a city’s use of a development contract to “negotiate” such an illegal fee into the contract. Minnesota cities have long contended that development contracts are bona fide arms-length agreements which reflect true give-and-take between the parties. The Supreme Court rejected this argument on the basis that a city’s police power authority created an overarching pressure on a developer to concede the transportation fee or risk project denial. You would think this settles, finally, once and for all, this vexing issue. You would be wrong. Work-arounds The association for Minnesota cities has communicated to its members that there are still several work-arounds available to cities that are determined to collect these fees. For example, a city could deny projects that are deemed premature owing to a lack of necessary infrastructure. The irony is that the court decision involved a developer who already had committed to pay for the necessary transportation improvements, inside and outside his development; this in fact is quite routine. What cities are objecting to now is their inability to collect such fees and save them for future roadway projects some other place at some other time, rather than relying on taxpayers to fund such improvements (assuming another developer doesn’t agree to construct them). One city, and there may be more, has tentatively decided to impose a city-wide development moratorium so it can evaluate how to continue collecting the fees. This will adversely affect multiple development projects that are queued up for approval, putting their long-term viability at risk depending on the duration both of the moratorium and the current real estate cycle. The battle between developers and cities seems never-ending as cities continue to perceive developers as ripe for fee extraction. And, frankly, too many developers have accommodated cities in their thinking. It might be time for the development community and city representatives to sit down and negotiate a truce.

September 13, 2018

Local Government

New Local Leaders Emphasize Importance of Housing Affordability Problem

In cities and towns across Minnesota, newly elected mayors and city council members assumed their positions Jan. 1. While each official typically has a list of policy objectives to be pursued during his or her term, an increase of affordable housing to meet growing demand is frequently on the top of the list. This year is no different: The new mayors of St. Paul and Minneapolis have stressed the need for their respective cities to address this problem. When the average person thinks about “affordable housing” they may think about subsidized housing, such as Section 8 housing. While this is an important category of housing, it represents a very small percentage of the greater market. Instead, the focus should be on “housing affordability,” which connotes a broader market perspective. In this scenario, there is enormous demand that the private housing market could and would serve if the challenge of building an affordable home is addressed. For example, 10 years ago 72 percent of new homes built in the Twin Cities sold for less than $325,000. Today only 38 percent of new homes sold for less than $325,000. Meanwhile, incomes for potential homebuyers, especially at the lower income thresholds, have increased only modestly in that span of time. Contributing Factors The cost of land, materials and labor are all significant contributors to the cost of housing and each has increased substantially following the recession. However, of equal or greater importance, is the impact of local government policies that regulate land use in a way that arbitrarily drives up the cost of land and the house constructed on that land. The St. Paul Pioneer Press has documented that an identical home costs $20,000 more to construct in Minnesota as opposed to being constructed in Wisconsin. National data indicate that regulatory costs comprise 25 percent of the cost of new housing. For local government officials who are serious about addressing housing affordability in their community, taking a hard look at the impact their regulations have on housing would be good place to start. For example, city policies that require new housing to be constructed on over-sized lots or meet minimum dimensional standards directly affect housing affordability. The core cities and first-ring suburbs are full of desirable housing (undersized by today’s standards) on very small lots; these homes and neighborhoods are highly valued and frequently draw above-market offers when put on the market. Why such housing can’t be constructed in all cities in Minnesota is a question for local government leaders to answer. Another example relates to local government fees. Few would question the need for cities to cover the costs associated with constructing and operating sewer, street and park systems. Housing contractors accept their responsibility to pay their fair share of these costs as part of the permitting process. Unfortunately, cities have determined that developers and contractors of all sorts, but especially housing contractors, are an easy source of revenue to avoid taxing their residents. Consequently, we see local park fees as high as $6,000 per housing unit and street fees of $20,000 per acre depending on the city. These are on top of what the developer or contractor is required to build and pay for within their new development area. Cities pocket millions from these practices and won’t give up on them easily; yet, if they are truly serious about addressing housing affordability for their local work force and for their children, these policies must be examined and be repealed or substantially pared back. The new year is always a time for optimism about the year ahead. Let’s hope this optimism translates into policy changes that allow more housing to be constructed that is affordable to more Minnesotans.

January 17, 2018

Planning and Development

Can You Avoid the Development Contract Trap?

Virtually all local government jurisdictions in the United States follow a development code when evaluating a proposed development application (Houston, Texas is a notable exception, along with rural townships dominated by traditional agricultural uses). Rather than follow the dictates of their respective development codes, however, a growing number of jurisdictions compel that some types of land use applications follow a planned development approach, backed up by a development contract. This planned development approach may offer helpful flexibility to the project applicant. It can also be a time-consuming and expensive process that yields no better outcome than would be realized by traditional zoning and subdivision regulations. Moreover, many of these jurisdictions use the development contract to extract concessions from the applicant that would not otherwise be permissible under a straightforward application of their rules. I often see development contracts used to compel dedication of oversized rights-of-way, payment of questionable fees and even to impose conditions unrelated to the actual project being proposed. Inasmuch as the development contract typically is provided to the applicant toward the end of the review process, the applicant is left with little time to review or seek the advice of counsel and often has no choice but to accept the document as-is or risk losing their project. This, of course, is exactly the outcome that these jurisdictions expect. I often get calls from clients who are upset about the process cities use with development contracts. Unfortunately, once the contract is signed and recorded, it is too late to do anything to remedy it. I strongly encourage my clients to seek a clear understanding at the earliest opportunity of the anticipated conditions of approval likely to be recommended by the planning staff, including the terms of any development contract and any extraneous fees or other impacts. Some cities cooperate and some don’t. The unfortunate outcome of this approach by cities is to generate more distrust and animosity from project proponents, who otherwise are held to very strict standards as a condition of project approval. That’s fine when the conditions are known in advance and the applicant can make an informed decision about whether to pursue a project or to abandon it as too expensive or burdensome. But to use the planned development process, coupled with a development contract to trap the unwary is simply unfair.

October 26, 2017

Local Government

Participating in a City’s Comprehensive Plan

Cities throughout Minnesota are busy updating their comprehensive plans, a process that typically occurs every 10 years or so. As a reminder, comprehensive plans serve as the visionary roadmap for a city’s intended long-term growth; the implementing tools are the zoning ordinance, subdivision ordinance and similar policies. Of course, cities have the discretion to amend their comp plans any time they choose to, provided they follow proper procedures in doing so, but most elect not to do so because of the burden it imposes on staff. I imagine one of the hardest tasks confronting a city official when considering a comp plan update relates to a proposed land use change that radically departs from the existing plan, possibly catching affected residents totally unaware or worse. This dilemma occurs especially in growing cities in which large sections of historically agriculture land is being considered for inclusion under an active development designation, such as commercial or residential. It also occurs when cities are seeking to redevelop a blighted area, perhaps by moving from commercial to residential or vice versa. We’ve all attended the meeting at which a land use change is being debated and residents object to the change on the basis of its impact on their neighborhood and lifestyle. Inevitably the resident will note that when they bought their home they checked the city land use maps to confirm they were buying adjacent to property guided for a low or no-impact development; the proposed change, if adopted, will have an impact. It’s a fair point and yet we all know (well, maybe we don’t know) that owning one’s own property does not guarantee any sort of long-term use of another’s property. Were it any other way we would never see another new development occur anywhere. Of course, we’d all love to preserve natural vistas, tree stands and marshy meadows that give us personal enjoyment. One way to do this is to buy the desirable property containing such features! Absent that step, possibly the city could be convinced to buy it; not usually viable either. In the end, the city is legally entitled to consider and act on land use changes that support future growth desired by the city (actually the underlying landowner’s consent is not even required – the city can do it unilaterally over the landowner’s objection). Some cities embrace change and see value in growth and redevelopment. It funds infrastructure, schools, parks and makes for a more vibrant community. Growth begets growth. Others object to growth and prefer to preserve the existing character of their respective cities in order to protect small-town charm, rural character, large-lot development pattern, etc. For this latter group of cities, the worry is not about a land use change that triggers expansive growth, but rather a change that impedes growth that was formerly contemplated by landowners based on an existing plan. Plenty of speculative investment in real estate occurs based on one comp plan, only to see that investment quashed, based on a change in direction. We’ve seen this “growth-no growth” whipsaw play out in several semi-rural cities in our metropolitan region. As others have noted in this blog, one way to get ahead of the surprise element of a planning change is to participate in a city’s comp plan review process, either as an appointed committee member or as an observer. This, of course, becomes troublesome because it often involves frequent daytime and nighttime meetings that are not easy to attend as a volunteer. Short of that, paying attention to a city website and registering for notices of future meetings or actions is a good fall-back option.

October 5, 2017

Local Government

What to Make of Expanded City Regulatory Role

Those of us who advise business clients, including real estate development clients, about state and local regulatory matters are pretty comfortable working under the long-standing division of authority between cities and state or federal regulators. We understand, for example, that local units of government are creatures of the state legislature, with powers limited to the specific grant of authority by the legislature (subject to some additional authority for charter cities). We accept that cities get to establish local zoning and development regulations governing development and construction activities, based on express authority conferred under state or federal law or regulations. There has been a long-standing tension, however, between state and local governments about what a given city is expressly or impliedly authorized to do under a city’s so-called police powers, absent a clear preemption. In some areas of regulation, like environmental protection, we rely on policies that are established at the state or federal level to ensure some level of uniformity and consistency. In recent years we have seen cities go in a whole new direction by enacting policies pertaining to areas historically reserved to state or even federal agencies. Refer to municipal actions regarding climate change, minimum wage and mandatory employee benefits as recent examples. Why should the real estate development community care about this trend? Our clients who are considering whether to invest in a particular city, such as Minneapolis or St. Paul, now not only need to be concerned with whether their project complies with local development regulations, but also whether their very business operations are uniquely regulated. They may be very concerned that such cities have taken it upon themselves to regulate aspects of their business in a way they have not experienced before. Many cities are pursuing expanded policies in response to social activism within their community or because of perceived inaction by state or federal officials. However, this trend may cause companies to invest their capital elsewhere to avoid the added burdens and cost of one-off local regulations that can be avoided simply by crossing the boundary line to another jurisdiction. For example, elected officials in Minneapolis have for several years been pushing to enact a substantially higher minimum wage than what is required under state or federal law, applicable to employers doing business in their city. For those employers who hire affected employees, the associated labor costs will be a new factor for them when deciding whether to site a new coffee shop or fast-casual restaurant in Minneapolis or in an adjacent city without such policies. Another example relates to climate change and the adoption by cities of sustainability policies. Historically, matters pertaining to environmental protection have centered on state and federal regulation. We understand that cities have authority to regulate stormwater discharge or wetland infiltration, but those policies emanate from state or federal law. Developers and their clients need to consider carefully what a given city may require of them to manage perceived adverse impacts of new or existing development. For some, this is not a concern as their employees or customers are already demanding more aggressive practices in this area. But not very many companies know how to confirm their “carbon footprint” let alone how to manage it or reduce it. For small manufacturers doing business in such cities, it might be the red flag that tells them it’s time to move on. Given the trend in expanded municipal activism, one has to wonder what are the practical limits to new local government policymaking? If the state environmental regulators have a rule that specifies what is required for environmental review and compliance can a city up the ante and enact its own policies for environmental review, including by establishing more aggressive requirements for environmental impact statements? One clear advantage of having such matters addressed at a higher level is to avoid inconsistent approaches within a state or region that may otherwise lead to confusion and mistakes. We are already seeing this play out as various business organizations have found it necessary to challenge local government actions in court. Thus far the results of such challenges have been mixed. Efforts to preempt local government authority on a broad range of topics have not made much progress – at least not yet. We have entered a new age of democracy, aided in large measure by the internet, in which one person’s pique can be the basis for forming a coalition and organizing behind a cause, electing local candidates to office and proceeding forthwith to enact new regulations. This is playing out before our eyes in Minneapolis and in other cities in Minnesota and elsewhere. Absent a clear indication of federal or state preemption in any given area, it would appear the tracks are laid down and the train is moving. Unfortunately we don’t yet know the train’s destination or the cost of the ticket.

September 27, 2017

Local Government

Are you Prepared for the Public Development Application Process?

Many of us are familiar with the scenario of presenting a development application before a public body, such as a city council, that appears to be going well until the wheels come off for some unexpected reason. This happens most frequently when one or more residents who have “only just heard” about the project being considered show up to voice objections, raise questions and make allegations, some of which are untrue. What’s a project proponent to do? Well, if you are well-prepared and fortunate to have a strong recommendation of support from staff, maybe nothing. But, then again, when you are dealing with a public body in a public process, even that may not be enough. If there is one thing politicians strive to avoid it is controversy and they will avoid it whenever possible. In any case, what matters most is being more prepared than anyone else. If you are perceived as the expert in the room, as evidenced by strong preparation, you may get a measure of deference that helps you successfully complete the process. But if there is any doubt, especially in a chamber full of irate residents, you and your client are likely the least important people in the room. Part of being prepared requires understanding the development interest for which one is advocating and why the site in question is necessary for future operations. Local zoning regulations bear directly on this question, so you need to be confident about how those regulations help or potentially hurt your cause. It is imperative to evaluate the “risk factors” associated with an application on the front end to avoid, if possible, being surprised deeper into the process, such as at a pivotal public hearing. This means laying out the proposed project in the context of the applicable regulations, such as land use controls, design standards, environmental restrictions, etc., to ensure that any perceived risk exposure has a ready response. One must also understand the nature of the request: Does your application raise a legislative policy question, such as a zoning change, or something that is quasi-judicial, such as a permit? The former circumstance vests the public body with broad policy discretion provided that it acts fairly and reasonably to apply established standards designed to protect the public. In the latter circumstance, such as a conditional use permit, the rules are tighter and the public body can be held more strictly accountable both to its regulations and the state of the record supporting the application. Your “risk factor” analysis helps you anticipate where you have the greatest exposure so that your record has been properly created to address all applicable standards as well as likely questions. Are you better off doing the traffic study now or waiting to see whether it will be a source of concern down the road? Admittedly, judgments need to be made depending on the facts as you know them. In the modern age of the internet, it is possible to research all manner of things that may actually be helpful in preparing a development application and the supportive record. However, that same tool is available to everyone else, too, and thus you are always exposed to the prospect of a citizen who has conducted “research” and now purports to understand your project and your business and has an opinion about one or both. Understanding whether your industry is confronting public adversity elsewhere is a key factor in your preparation. If so, what is being used successfully to respond to that adversity? If you or your client has made mistakes, what has been done to remedy them, with assurance that they won’t happen again? For companies that are heavily regulated, such as in the mining sector, this is a constant source of concern. Any negative headline, whether true or not, may well be used to counter your project. Remember, your personal credibility, along with that of your client is being tested in the process; being prepared means knowing where the shots will come from. Putting a narrative together tied to the applicable regulatory standards, even as a cheat sheet, is an important tool for helping one respond to questions that were not previously the subject of discussion. Not being able to respond confidently in the heat of the hearing to predictable or even random questions may lead directly to a motion to table the pending application, allowing the public body to avoid the potential political conflict that is brewing. Being able to confidently march the public body through the application requirements and the supporting record often leads to the logical conclusion that your application can and should be approved in spite of the opposition. If your best effort is not working, you may need to make a decision about whether to request that your application be tabled to address specific questions. If you are dealing with a legislative policy question, this approach may be advisable given the breadth of discretion vested in the public body. If however, their discretion is more limited and you have a strong record, you may need to call their bluff and force the members of the body to express their opinions. Once you understand what you are up against, then you can make an informed decision about how to proceed. You might be successful; but then again, you might not. And if not, that’s why saloons exist.

September 13, 2017

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Peter J. Coyle

Fees, Fees, Fees!

Hollydale Golf Course: The Complex Road to Redevelopment Approval

Larkin Hoffman Ranked Highly for Real Estate and Construction by Chambers USA

Health Care Facility Development: Navigating Uncharted Waters

The State of Retail

Land Development: Not for the Faint of Heart

The Twin Cities Commercial Real Estate Market: What Does the Future Hold?

Who’s Paying the Price for Gov. Walz’s Eviction Moratorium?

How Far Can the Governor Go On His Own? Part 2

How Far Can the Governor Go On His Own?

Restaurants and Bars Allowed to Re-open—sort of

Shelter in Place: Take It or Leave It?

Navigating State and Local Governments During a Pandemic: How Continuing Government Action on Major Issues Can Impact Your Investments

Guidance on Managing PPP Proceeds to Maximize Loan Forgiveness

We May Soon Find Out What “Force Majeure” Means

Mediation Can Resolve More Than Monetary Matters

Mediation Can Pull Matters Out of the Litigation Rabbit Hole

A Sobering Reminder of Who is in Charge of Your Land

Cities Making it Harder to Supply Affordable Housing

US Supreme Court Reinstatement of Constitutional Takings Claim May Not Benefit Landowners

Who Pays for Regulation of Housing?

While Rome Burns…

Inclusionary Zoning Expands its Footprint in Minnesota

City Response to Affordable Housing Problem: Tax Housing Developers

Minnesota Supreme Court Invalidates Transportation Fee

New Local Leaders Emphasize Importance of Housing Affordability Problem

Can You Avoid the Development Contract Trap?

Participating in a City’s Comprehensive Plan

What to Make of Expanded City Regulatory Role

Are you Prepared for the Public Development Application Process?

Firm Highlights