Half-Built Buildings: Preserving Entitlements
By Bill Curran and Maren Parry

During the Las Vegas construction boom, far more development projects were proposed than could realistically be sustained, particularly in the face of the economic downturn. Now, owners of as many as two dozen multi-million dollar projects are faced with the grim reality that restarting a suspended or abandoned project can present greater legal challenges than starting a project from scratch. Although the cost of maintaining and investing in a non-performing asset will seem daunting, attention to the maintenance of the project’s entitlements, to safety, and to its relationship to the community will prove invaluable when it comes time to move forward with restarting the project.

Entitlements
Constructing a major new project typically requires the developer to go through an entitlement process in which a variety of government agencies review the proposed project according to applicable codes and policies, including master plan and zoning issues, utility commitments, and compliance with building and fire codes. Since entitlements are typically valid for a certain period of time, they will expire unless the project either reaches certain benchmarks or are granted extensions. When financial circumstances put a project on hold, great care must be taken to prevent the entitlements from lapsing.

The preservation of necessary entitlements can often be more difficult than the initial approval, but ensuring their continuity is almost always more favorable than allowing them to expire. When applications for approvals are initially made, the required development reviews are based upon the codes and regulations in place at the time of application. If the approvals expire, the applicant may need to comply with new codes and regulations, and a change in the applicable codes may require changes to the project itself.

It is also important to recognize that many of the key approvals required for the construction of the project are discretionary. A project that had the support of the community leaders and the surrounding neighborhood when it was first proposed may not have that support years later when the project requires an extension or re-entitlement. For example, a project involving the construction of a casino in an undeveloped area may initially receive no community opposition and get a unanimous vote of approval for its land use applications. But, years later when the surrounding neighborhood has been developed with homes, schools, and churches, the project may attract widespread opposition. This can be true even though hundreds of millions of dollars have been spent prior to the suspension of the project. If approvals lapse, or if any special conditions of approval are not completed prior to the applicable deadlines, the government may be under no obligation to reinstate discretionary approvals, and leaders may be less inclined to support the project at all, or without substantial revisions that can greatly reduce the viability and profitability of the project.

Public perception and community support may be particularly difficult to address when approvals contain special conditions requiring off-site improvements or other amenities benefiting the surrounding neighborhood that have not been completed. Agreeing to such amenities may have seemed a small price to pay for community support when the economy was good, but when money becomes scarce it is difficult to allocate funding to non-revenue-generating improvements. If the cost of these amenities appears to be a deal breaker, special negotiations may need to take place to determine whether entitlements can be changed to keep the project viable.

Building permits
Government agencies may also be subject to impediments that can limit their ability to reinstate (or extend significantly) approvals under the terms previously granted, especially in the case of building permits and utility commitments. Building permits carry separate expiration dates from zoning entitlements and typically require that certain construction and inspection thresholds be met in order to remain active. Failure to satisfy these progress thresholds can lead to a cancellation of the permits and create a need to go through the entire process of submitting plans and paying permitting fees.
In addition, building codes are regularly updated in order to keep pace with new developments in safety and efficiency. If the version of the International Building Code used by the issuing building department has changed since the project was originally designed, plans may need to be updated to bring the development into compliance with the new code. Potentially more problematic, certain portions of the project that have already been constructed may require remediation to satisfy the updated requirements. While a certain amount of leeway may be available under waiver or hardship provisions, circumstances may exist where life safety requires that the updates be made, or state or federal standards may make some waivers difficult or impossible to obtain.

Utility connections
Utility connection approvals obtained at the commencement of the project normally provide a guarantee that service will be available for a certain period of time. If that time runs out, service commitments can be withdrawn and may require significant effort and cost to re-establish. Changed conditions may also create significant burdens to replacing utility connections if the originally anticipated construction date passes and the project can no longer follow its construction plan. Capacity in the original connection points may have been exceeded by other development, or cost sharing for mutual improvements in public rights of way may no longer be available. A project without utilities is worthless, and selling the project or obtaining financing for completing construction will be difficult to promote if there is any risk that utilities may not be available.

Site security
Keeping the site safe and secure will improve the prospects of the project’s ultimate success. It is important to prevent conditions that could constitute an attractive nuisance or create liability for injury and to keep the property clean and free from disrepair or vandalism that could result in nuisance citations or liens. Dangerous or unsightly site conditions are also likely to create a disincentive among neighborhood and government officials charged with reviewing and approving entitlements. It is also important to confirm that appropriate maintenance to the existing improvements is performed regularly. Records of this maintenance will be invaluable when it comes time to re-commission the project and prove to the building department that the portion of the project that has already been constructed remains safe. If any machinery or equipment is left on the property, care must be given to its safekeeping.

Communication
Periodic communication with project partners and regulatory entities is critical to maintaining control during times of uncertainty. According to Ron Lynn, Building Official and Director of the Building Department in Clark County, regular consultation with the various departments charged with the oversight of construction projects can help prevent unpleasant surprises: “With a little notice and forethought, we can usually develop a joint course of action rather than having either party feel as though the other just threw a wrench in what seemed to be a good plan,” Lynn said.

What happens next?
Maintaining close contact with regulators is important in preventing surprises and keeping project owners informed about creative solutions that could make or break a project. In 2009, the Nevada Legislature extended the approval periods for tentative and final maps to four and two years, respectively, as a way of helping developers weather the down economy. Just recently Pennsylvania enacted legislation known as the Permit Extension Act to provide relief to owners and developers whose projects are currently stalled. The Act extends development approvals and permits that would have otherwise expired to July 1, 2013. Whether the Nevada Legislature would be receptive to taking similar action will depend on the degree of support expressed by developers and regulating authorities throughout the state. Maintaining good relations with governmental authorities is particularly important to preserving entitlements on troubled projects.

Suspending construction can create wide-ranging problems. The most obvious and immediate relate to contractual issues with lenders, contractors and suppliers, but the long-term problems associated with preserving entitlements cannot be overlooked. Owners, developers, lenders, and lien-holders all have an interest in avoiding the waste that can occur if the project entitlements are not carefully tended to and preserved.
Attorneys must be vigilant to protect their clients’ interests during a time when many are content to simply wait for the economy to improve with the hope that abandoned projects can be restarted without consequence. The cost of inattention to such issues can range from total extinguishment of development rights to expensive and difficult modifications of existing construction to comply with new building codes.

Bill Curran is the managing partner of Ballard Spahr’s Las Vegas office and practices primarily in real estate development, land use/zoning, and gaming law. Maren Parry is an associate in Ballard Spahr’s Las Vegas office and concentrates her practice in all types of real estate, land use/zoning, gaming, and other areas of state and local government law.

In Nevada, the market value of condemned land is determined as of an appropriate date of valuation according to that price that would be agreed to between a seller who is willing to sell on the open market and has reasonable time to find a purchaser, and a buyer who is ready, willing, and able to buy, both having full knowledge of all the uses and purposes for which the property is reasonably adaptable and available. The property sought to be condemned must be valued at its highest and best use. NRS 37.009(6). The market, however, typically reacts to a public work or public improvement before the condemnor initiates acquisition of a particular property. Nichols on Eminent Domain § G16.04(2] (Rev. 3d ed. 2009). Project influence (sometimes referred to as “project enhancement” or “scope-of-project”) in an eminent domain case refers to any change in the market value of property as a result of the public work or public improvement (i.e., the “project”) for which the property is being taken. In Nevada, if the property is subject to condemnation, any decrease or increase in the fair market value of the property before the date of valuation that is caused by the public project for which the property is acquired—or by the likelihood that the property would be acquired for such a purpose—must be disregarded when assessing just compensation. NRS 37.112(1).

The project influence rule evolved from numerous courts and legislatures that have attempted to define the term “just compensation.” The consensus followed in Nevada, is that just compensation is that sum of money necessary to place the property owner in the same position monetarily as if the property had never been taken. NRS 37.120. Early on, the United States Supreme Court noted that “the just compensation required by the Constitution to be made to the owner is to be measured by the loss caused to him by the appropriation. He is entitled to receive the value of what he has been deprived of, and no more. To award him less would be unjust to him; to award him more would be unjust to the public.” Bauman v. Ross, 167 U.S. 548, 574 (1897).

Rationale
Once a piece of property is identified for acquisition, its owner should not benefit from or suffer damages as a result of the public project necessitating that very acquisition. This is “just” to both the condemnee and condemnor. When a proposed project negatively influences market values, any decrease or anticipation of depreciation in market value is excluded when valuing the property. Therefore, the condemnee does not receive less than he would have but for the project. Similarly, when a proposed project enhances market values, any increase in market value is excluded. In so doing, the condemnor does not pay an inflated price for the property caused by the public’s investment in the project. The project influence rule thus places the condemnor on equal footing with a private purchaser buying the property for its “highest and best” use in an open market. NRS 37.009(6); Nev. Const. art. 1, § 22.

In each instance, the goal is met to value the property as of the date of valuation that would be agreed to between a seller who is willing to sell on the open market and has reasonable time to find a purchaser and a buyer who is ready, willing, and able to buy, both having full knowledge of all the uses and purposes for which the property is reasonably adaptable and available, without any regard to project influences in the market.

Not all effects of project influence are avoidable
By the time the eminent domain action is filed, transactions in the relevant market area may reflect positive or negative changes in market value. Nonetheless, the effects of project influence on value are generally allowed up to the time the condemnor manifests his intent to acquire a particular property. Nichols, supra. As the U.S. Supreme Court stated, “If a distinct tract is condemned in whole or in part, other lands in the neighborhood may increase in market value due to the proximity of the public improvement erected on the land taken. Should the Government, at a later date, determine to take these other lands, it must pay their market value as enhanced by this factor of proximity. If, however, the public project from the beginning included the taking of certain tracts but only one of them is taken in the first instance, the owner of the other tracts should not be allowed an increased value for his lands which are ultimately to be taken any more than the owner of the tract first condemned is entitled to be allowed an increased market value because adjacent lands not immediately taken increased in value due to the projected improvement.” United States v. Miller, 317 U.S. 369, 376 (1943). Thus, the two pertinent questions are: (1) when did the condemnor manifest the intent to acquire the property? And, (2) was the property within the scope of the project at the time the intent to acquire became evident?

Comparable sales
The market’s reaction to the project is especially important to keep in mind when valuation experts—appraisers, brokers, developers, etc.—consider comparable sales to form their opinion of value. A strict interpretation of the project influence rule would preclude both the condemnor and condemnee from relying on comparable sales in a market that has been influenced by the project or, at a minimum, would require them to adjust data to eliminate the influence. Nevada, unlike some states (see Cal. Evid. Code § 822(a)(1) as an example), does not impose a blanket prohibition on valuation experts using project-influenced sales, such as sales to a condemning entity, when determining the value of the property being condemned. There is also no specific rule in Nevada requiring adjustments to comparable sales to account for project influence. So, how does that affect the admissibility of expert opinions of value that are based on comparable sales whose values are project influenced? The answer is unclear and determined on a case-by-case basis.

The project influence rule limits the evidence that the parties in an eminent domain case may employ to establish just compensation. The underlying principle of the rule is to ensure that the condemnee is made whole while also guaranteeing that the condemnor does not pay for enhancements to property values as result of his own project. This ensures that compensation paid is “just” to both the condemnee and condemnor.

Michael G. Chapman founded Chapman Law Firm in 1994 and works in the firm’s Reno office. Agnes Nemeth Hanley is an associate at Chapman Law Firm in Las Vegas. Mr. Chapman and Ms. Hanley represent public entities and private landowners in all aspects of eminent domain, from pre-condemnation planning to trial and appeal.