Monday, Aug. 7, 2006 | Developer Rick Richards was bleeding about $20,000 a month by his estimation because of environmentalists’ challenge to City Hall’s handling of condo conversion developments.
As the San Diego City Council contemplated the activists’ appeal for a citywide study of condo conversions’ impacts on the environment, those like Richards who invested in the popular real estate projects – which turn apartment buildings into complexes of for-sale condos – say they were being stung by the months of delays.
In May, Richards had enough. He contacted Cory Briggs, the attorney representing the two nonprofits appealing the city’s review process, and asked for mercy.
“Can you accept $500 for your client’s cause to permanently remove us?” Richards wrote in an e-mail. He continued, “The holding time is killing us.”
The May 15 e-mail, obtained by voiceofsandiego.org, began an exchange that ultimately led to a settlement between Richards and Briggs’ clients.
After Briggs made a counteroffer, an agreement was reached. Richards’ seven-unit University Heights conversion project would be dropped from the list of developments held up by the appeal. It also would be exempted from another potential delay – Briggs had filed suit against condo conversions already approved by the Planning Commission. For the activists, they were provided assurances that Richards would improve the property and “the parking situation,” as well as $5,000, according to an e-mail.
While Richards’ building improvements and the increase in parking spots could have accommodated to some degree the demands laid out in the environmentalists’ legal challenge, some in the industry are critical of the payments in Richards’ deal and six more settlements like it.
“This is nothing short of extortion,” said real estate advisor Gary London.
Briggs’ clients – Citizens for Responsible Equitable Environmental Development and the Affordable Housing Coalition of San Diego County – argue that a state law mandates that an environmental review be conducted to measure the impacts of condo conversions on the city, where more than 30,000 rental units have been converted or proposed for conversion since 2004.
They claim the change of ownership results in a socioeconomic shift in the neighborhood that affects commute times, demands for parking and energy consumption – all of which impact the environment. Not assessing those affects is a violation of the California Environmental Quality Act, the groups claim.
They’ve pursued their strategy by both appealing to the City Council on pending developments and challenging already-approved projects in court. This has caused a logjam in the development process.
A condo conversion project that has its environmental review appealed by the groups cannot move through the pipeline of approvals developers seek from the city until the City Council denies the appeal. Also, developers have chosen not to proceed with construction on a city-approved project while the lawsuit is pending, just in case Briggs’ clients succeed in litigation and the project has to be reviewed all over again.
Briggs said that the city, and developers, could have been spared from the delays if they had followed his advice last summer, when his clients first appealed the pending projects, and completed the environmental reviews. The lawsuit challenging condo conversions that the city already approved was filed in December.
While most developers involved in the legal challenge are frustrated with the delays caused by the appeals and the uncertainty associated with potential litigation, many have refused to try to settle with Briggs’ clients. They say the complaint is frivolous.
Richards and the developers of the six other projects who have been excused from the complaint represent just a tiny fraction of the impacted developers. For the majority who are holding a hard line against the environmentalists, the settlements by their fellow developers are almost akin to crossing a picket line.
“We think lawsuit has no merit and we’re not going to pay [Briggs] to go away,” said attorney Evelyn Heidelberg, who represents the developers of 25 projects affected by the appeals and lawsuit. “You don’t want to feed somebody that’s trying to hurt you.”
Richards, who declined to be interviewed for this story, panned his own deal in an e-mail he sent to staff members in the city’s Development Services Department reporting his negotiations with Briggs.
“Anyone could earn a living by filing appeals to delay projects causing developers or individuals to loose [sic] money if they don’t pay thousands of dollars,” Richards wrote on May 17. “Their cause is so noble that they can be bought off. This has to be illegal!”
Briggs dismissed critics’ claims of a shakedown.
“There are a small handful of developers who wanted to be part of solution, rather than part of the problem,” he said. “They demonstrated to our satisfaction that they weren’t contributing to the problems that my clients worry about. We have worked with folks who are willing to meet us in the middle.”
None of the attorneys involved in the complaint have actually claimed that the terms of the settlement are illegal, as Richards opined, but some city officials said that news of the monetary parts of the settlements raised their eyebrows.
“A lot of people here would believe that the plaintiffs would be more genuine about the issues they’ve raised if they were not doing theses settlements,” said Jim Waring, the land use and development czar for Mayor Jerry Sanders.
The mayor’s staff and a majority of the City Council have rejected the environmentalists’ claims, while City Attorney Mike Aguirre agrees with them. Aguirre issued a legal opinion supporting their arguments in November.
Briggs said the developments his clients offered to settle with were carefully selected: “They are not part of the problem.” He said the seven excused projects were, by and large, smaller projects that were being developed by individuals, not big companies, and included features that his clients found favorable – onsite affordable housing, several parking lots and construction upgrades to the existing buildings.
Altogether, about 150 units have been excused from the estimated 15,000 he is challenging, or about 1 percent.
“If we were out for the money, we would just settle with anybody who came along,” said Briggs, who said his clients have refused two settlement offers so far. “The fact that we’ve only picked a few to settle with should tell you that it’s not about the money but about allowing projects that are OK to go forward.”
When asked about the money that was included settlement offers, Briggs said he could not divulge the terms of his agreements. But he said that the money his clients collected would go toward their cause, including the expense of this legal challenge.
That expense did not include his own attorney fees, Briggs said. He said he doesn’t get paid unless his clients receive a favorable decision in court.
“I’ve yet to be paid a penny for this,” he said
Presumably, the money recovered from the settlements could be spent on other legal expenses, such as court filing costs and expert witnesses.
Despite a Superior Court judge’s ruling to dismiss Briggs’ lawsuit on technical grounds that he failed to properly request a trial, Heidelberg, the developers attorney, believes the dispute could wind through the legal system for more than a year before a resolution is found.
But as developers claim the backlog is dealing a death blow to their investments, most refuse to settle with the environmentalists because they reject the activists’ arguments that their projects are subject to a comprehensive environmental review that could take several months to complete.
“It’s bankrupting them,” said Joseph Scarlatti, a condo conversion consultant who advises 30 of the projects that are affected by the activists’ challenge.
The bulk of the affected developers have taken the position that they prefer the delay of the lawsuit to the delay of the study. And they’d rather pay more in legal bills and, potentially, mortgage payments and lost sales profits, than to fork over a nickel to the environmentalists in a settlement offer.
Market conditions have worsened as condo and townhouse prices in San Diego County have dipped by more than 5 percent since the New Year, according to a California State University at San Marcos study. By the time the backlogged projects are judged, constructed and made available to potential buyers, those condos will be competing in a different type of housing market, experts said.
Analysts predict a number of condo conversion projects will be foreclosed because investors bought apartment buildings with the mindset that the profit they would reap would come from condo sales, not tenants’ rent. Because of this, speculators purchased the buildings at higher prices that have since fallen. When the affected developers go to put their newly converted units on the market, they will be competing against condos – including condo conversions – that were acquired by the seller for less in a softer market, giving them a competitive disadvantage.
In light of the recent downturn in the condo conversion market, where some developers are reconverting condos into apartments because of economic conditions, investors are now purchasing the apartment buildings for less because more emphasis is being put on the back-up plan – renting the housing units. This will put backlogged projects at a competitive disadvantage, experts said.
“A new wave of converters will come along soon and deliver the same project, but for $30,000 less,” Scarlatti said.
Also, condo conversion speculators often use a short-term mortgage to help finance their project, which can include the cost of acquiring the building as well as capital to make repairs and improvements. Developers take out these short-term construction loans with the expectation that the money they reap from the condo sales will be rolling in shortly after the units are converted. The timeline of that loan appears to move more rapidly for developers at a standstill.
“These guys are tied up in 21- or 25-month mortgages like we told them to,” Scarlatti said. “Now they get tied up in the lawsuits, it’s difficult to try to renegotiate the mortgages, to refinance, when equity is zero and the prices have fallen.”
Briggs said he understands the delays are costly, which is why his clients sought settlements with the “mom and pop” developers. However, the city and the other condo conversion developers need to just follow the law as his clients see it to avoid these conflicts.
“The only standards we’ve tried to get people to meet are only the standards we think city should hold them to,” he said.