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Landmark Links April 14th – Shakedown Street

 

Lead Story… Important disclaimer: Landmark was involved on the capital raise for a project that I’m going to write about today.  However, neither I, nor my partners as individuals, nor Landmark have an ongoing economic interest in said project.  I want to be fully transparent up front even if certain other people involved in today’s Lead Story are trying to mask their actual motives.

The Grateful Dead released the song Shakedown Street (and the album by the same name) in the late 1970s at a time when US cities in general and the Bay Area in particular were mired in a period of urban decay.  The lyrics refer to a run down urban center and fans have long speculated that they (and the album cover which I’ve posted above) were intended to depict the area outside of the band’s recording studio in a rough area of San Rafael.  Strictly from a real estate standpoint, the song is a relic of a bygone era as urban areas along the coasts have been booming for years, especially the Bay Area.  Also, the median home value in San Rafael is now over $960k per Zillow.

Today, urban decay along the coasts has been reduced to little more than a bad memory.  However, the shakedown artists have arguably gotten worse.  Back when the song was written, they may have been drug dealers, street hustlers, gangs, or even crooked cops.  The difference is that today’s more refined shakedown artists are professional extortionists who hold up projects for no reason other than to extort developers under the provisions of CEQA or the California Environmental Quality Act.

CEQA is one of those statutes that may have been well intending, but created a loophole for professional extortionists and greenmailers looking for quick payoffs.  CEQA was enacted to institute a statewide policy of environmental protection back in 1970.  Per Wikipedia’s abstract of the statute:

CEQA does not directly regulate land uses, but instead requires state and local agencies within California to follow a protocol of analysis and public disclosure of environmental impacts of proposed projects and, in a departure from NEPA, adopt all feasible measures to mitigate those impacts. CEQA makes environmental protection a mandatory part of every California state and local (public) agency’s decision making process.

The goals of environmental protection and mediation are worthy for sure.  The problem is that the law opened up a loophole for NIMBYs, extortionist attorneys and other special interests such as labor unions and competitors to challenge any project that they don’t like under the cover of environmentalism.  A study by law firm Holland and Knight in 2015 came to this depressing conclusion about abuse of the statute (emphasis mine):

The report’s authors say their findings debunk the common wisdom that CEQA litigation is advanced primarily by environmentalists, or even that it serves primarily environmental purposes. In fact, the opposite may be true.

Some of the discoveries supporting this conclusion may be surprising:

  • Among infrastructure projects, transit—not highways or roads—is most frequently challenged.
  • Renewable energy projects are the most often challenged utility/industrial projects.
  • And in the private sector, higher-density housing is most contested. Infill projects in general appear to attract challenges far more often than “greenfield” development, or sprawl.

Report co-author Jennifer Hernandez summarizes the takeaway in The Planning Report:

“CEQA litigation is not a battle between ‘business’ and ‘enviros’ … [It] is primarily the domain of Not In My Backyard (NIMBY) opponents and special interests such as competitors and labor unions seeking non-environmental outcomes.”

If CEQA is generally regarded as the province of environmentalism, then calls for CEQA reform are sometimes seen as threatening progressive goals. But Hernandez argues that moderate reforms aimed at transparency and consistency would advance sustainability and equity in the state by curbing abuse of the well-intentioned statute.

We are currently in the midst of a massive housing affordability crisis and CEQA challenges are driving up cost and reducing supply where it is desperately needed most: urban areas.  In addition, study after study has shown that density is GOOD not bad for the environment.  This makes it incredibly difficult to believe that CEQA challenges against urban infill projects have any sort of actual environmental objectives in mind when they are filed.

For some CEQA suits, the motivation is easy to decipher: labor unions typically challenge projects under CEQA that aren’t using union labor, competitors want to limit competition and NIMBY’s just don’t want anything built anywhere near their property.  However, today I want to focus on perhaps the most insidious CEQA challenger: the greenmail extortionist.  Here’s how the scheme works:  A supposed “activist” sets up a shell organization with a name that sounds environmentalist in nature and teams up with a law firm.  They then seek out projects with developers whom they believe to have deep pockets and then challenge those projects under CEQA grounds.  The CEQA suits are typically groundless and the extortionist usually loses if/when they go to trial.  However, going to trial costs a developer money and, perhaps more importantly time.  But going to trial isn’t the goal here – rather the objective is to get a payoff from the developer to make their legal problem go away and let them continue with their project.  Unfortunately, this is typically far less expensive for a developer than months or more of costly litigation so they frequently don’t go all of the way to trial.  Instead, they pay off the extortionist who then uses the funds to capitalize their shell organization to go after their next target and achieve an even larger payday.  The aim of a skilled CEQA greenmailer is to try to get paid a lucrative amount to go away but not so much that the developer opts to defend the lawsuit.

Developer and capital partner clients of ours have run into this problem before and I recently learned that one was facing a challenge on a project in Long Beach that had been written up in the Long Beach Business Journal under the foreboding title Developers Beware: Activists May Sue (Emphasis mine).

With more than 50 projects underway, approved or under review, the City of Long Beach is going gangbusters with regard to development. Housing, retail, restaurants, industrial – developers are building it all. With so much activity, it is natural to see pushback from residents and local organizations.

Long Beach resident Warren Blesofsky and his group – Long Beach Citizens for Fair Development – have been exceedingly vocal about city practices when it comes to development. The group has vocalized its opposition for about 40 development proposals, according to Blesofsky, and has taken legal action on three.

“We’re pursuing a strategy of appeals and litigation citywide to change the way the city does business with regards to development. We really feel that the city government in Long Beach is by and for developers,” Blesofsky said. “The loss of the environmental, cultural, historic and fiscal resources in Long Beach is generally for the benefit of a few people and not for the many residents of Long Beach.”

The first formal appeal and lawsuit made by Blesofsky was against the second phase of the Shoreline Gateway project at 777 E. Ocean Blvd., adjacent to phase one, now called The Current. According to Ryan Altoon, executive vice president of Anderson Pacific LLC, the developer of the project, the suit was settled out of court. The settlement included a confidentiality agreement, so neither Anderson Pacific nor Blesofsky can disclose the terms of the settlement.

Currently, Blesofsky and his legal representation, Jamie Hall of Beverly Hills-based Channel Law Group LLP, are negotiating settlement terms for appeals at 100 E. Ocean Blvd. and 3655 N. Norwalk Blvd.

Hall has been involved in several other development lawsuits in Long Beach, including one against The Current and three on behalf of Debora Dobias and the group Long Beach Transportation and Parking Solutions (TAPS).

“I want to make sure that people understand that when people bring these lawsuits, it’s not because they just want to be gadflies and they hate developers and they want no buildings,” Hall said. “They’re not absolute NIMBYs. It’s about the details. It’s about whether or not there is adequate mitigation.”

The TAPS lawsuits were against downtown proposals by Ensemble Investment LLC, Raintree-Evergreen LLC and Broadway Block LLC. These lawsuits were settled together in November of last year and resulted in parking studies to be conducted in the Alamitos Beach and downtown areas.

Blesofsky said his appeal at 100 E. Ocean Blvd., the former site of the historic Jergins Trust Building, focuses on taxpayer abuse issues. He claims the site was sold under value, while other offers were millions of dollars higher. Blesofsky also claims the current zoning is for high-density housing but that, in a case of spot zoning, the city approved the land sale to a developer proposing a luxury hotel.

Blesofsky and Hall said negotiations are proceeding with developer American Life Inc., but that they could not share any details.

Clearly, Blesofsky and his attorney have an agenda in going after projects.  But is this actually doing anything good for the city or the environment?  Or is it just lining the pockets of an “activist” and his attorney when the developers settle?  Now we get to the part about the project that Landmark worked on located on Norwalk Blvd (emphasis mine):

The Norwalk Boulevard property has been home to the El Dorado Park Community Church for the last 55 years. Developer Preface has proposed a 40-home gated community to complement the adjacent El Dorado Park Estates neighborhood.

“I look at that building as a beautiful, historic building. I see a town hall. I see a community meeting space,” Blesofsky said. “Those are all uses that are allowed under the current zoning, and that’s why I object to the zoning change for high-density, single-family, million-dollar houses.”

Blesofsky said the proposed zoning change to residential is another case of spot zoning by city staff to appease developers, despite the site being surrounded by residential neighborhoods. He said the zoning change is meant to allow developers to minimize lot sizes to maximize the number of homes on the land, which doesn’t provide the best quality of life for residents.

Project data, however, tells a different story. Current zoning allows for up to 42 homes with 7.2 units per acre and 6,000 square feet of gross land per home. The Preface project only consists of 40 homes with 6.9 units per acre and 6,316 square feet of gross land area per home – less units per acre and more square footage per lot, including an average of 7% more open space per lot.

Additionally, Blesofsky claimed the zoning change would allow for smaller setbacks on the properties, including rear, side yard and garage. However, the only change to setbacks according to the site plan is a two-foot increase to the rear setbacks from the property lines.

Read that last passage carefully.  At this point in the story it becomes apparent that Blesofsky is often just making things up when he goes after a developer.  The building is far significant from an architectural prospective, nor is it a historical structure.  From my recollection, it was built in stages beginning in the 1970s and was not designed by a notable architect.  His comments about zoning and setbacks, as highlighted above are just flat out wrong.  Kudos to Brandon Richardson, the author of the piece for astutely pointing this out.  The article continues (again, emphasis mine):

Blesofsky’s appeal to the housing development also claims inadequacies in the environmental impact report, most notably the section in which alternative projects are identified. He contends the report is lacking an alternative that includes a housing element.

Alternatives listed in the document include abandoning the project and allowing the current structures to remain and function as a church, daycare and associated parking lots or converting existing facilities to a private elementary school or special event venue.

Alternatives that were rejected for various reasons of feasibility and scope included moving the chapel structure to preserve it and converting the chapel itself into housing.

“We are extremely disappointed litigation related to the City’s Environmental Impact Report has been filed by Warren Blesofsky,” a Preface spokesperson said in an e-mail to the Business Journal. “Despite the obvious and overwhelming community support for this project, as well as the thousands of hours of collaborative efforts between the development team and city staff, one individual – who chose not to participate in the planning process and does not live anywhere near the property – is attempting to undermine the project. With apologies to our friends in the El Dorado neighborhood, we will continue to work with all stakeholders in the city and community to move the project forward while we try to reach a resolution with Warren Blesofsky.”

Current negotiations between Blesofsky and Preface are focusing on the historical importance of the church and ways to mitigate the impact of losing the structure. Aside from the architectural importance, Blesofsky said the church’s past as a drive-in church, where residents could listen to a sermon in their cars while parked on the property, marks a time in American history that should not be destroyed without consideration. He explained that this is uniquely American and part of the country’s cultural landscape.

Blesofsky and Hall admitted that under California Environmental Quality Act (CEQA) guidelines, the best they can hope to achieve is mitigation beyond the proposed photographs of the church.

“One thing that we are trying to work on with developers, rather than just having some video taken with no context, is to actually do a documentary about the history of this church,” Hall said. “The best way to preserve it is to do something like that and have it available for public view in perpetuity.”

So they are basically, admitting that they don’t have a leg to stand on even under a generous interpretation of CEQA.  Usually, when this sort of CEQA challenge is raised, local NIMBYs tend to jump on board and oppose the project.  However, that doesn’t appear to be happening here (again, emphasis mine):

Bari Harris, an El Dorado Park Estates resident and local realtor, said she thinks the church is an eyesore and hopes the project moves forward quickly, despite Blesofsky’s appeals.

“I think it’s a shame that they are challenging the project and are holding it up,” Harris said. “With the housing shortage that we have, I just think it’s such a shame that they are holding up 40 more homes that we could have for people.”

The city was presented with a petition signed by between 40 and 50 residents in support of the development project, according to Harris. Additionally, residents and even congregation members of the church that recently vacated the premises submitted numerous letters of support into public record.

Despite community support, Blesofsky maintains that the process and proceedings are not acceptable and said more mitigation is needed on the Norwalk project and reform needs to be made to the development process at the city council level.

Hall said that each project he has worked on has resulted in better projects. He explained that these lawsuits are a direct result of elected officials’ tendency to violate CEQA guidelines by approving inadequate environmental reviews or bypassing them altogether, their poor treatment of developers and not listening to residents.

“I don’t earn my living doing this. I have my own business. In fact, I’ve lost money doing these appeals. It’s more just a matter of conscience to me,” Blesofsky explained. “I’m not anti-development, I’m pro-development. I think Long Beach does need more housing, and I believe in private property. I also believe in playing by the rules.”

Blesofsky said he is the owner of Linden River Capital LLC, in Long Beach. His company’s website states: “We are a real estate investment firm that specializes in the acquisition, management and sale of distressed properties and mortgage loans.”

Long Beach Citizens for Fair Development is in its infancy, with few core members, according to Blesofsky. He said he wished he did not have to resort to litigation, but claimed that the city does not take public comment to heart and instead focuses solely on staff reports. Because of this, he said the group has plans to continue taking action against development projects until changes are made to city procedures with regard to development approval.

“We want development weighted toward local developers and community development projects. I’d like to use the fiscal resources of the city for the highest good,” Blesofsky said. “If the city wants to give the citizens a real voice when it comes to development, then we won’t need to litigate anymore.”

To recap this mess:

  1. There doesn’t appear to be any environmental issue here whatsoever yet it is being challenged under CEQA.
  2. There is nothing historically significant about the former church building and local community members think it’s an eyesore.
  3. The challenge is based on zoning and setback assumptions that are simply untrue.
  4. The community as well as congregants of the former church are on the public record supporting the project.  There doesn’t appear to be much opposition here besides Mr. Blesofsky who apparently doesn’t even live in the impacted neighborhood.

Blesofsky might claim that he’s pro development and doesn’t make money on this sort of thing.  If you believe that, I have some ocean front property in Arizona that I’d like to sell you.  The system is being gamed big time and the sad part is that this is far from a one-off issue.   It happens all of the time.  In fact, it’s a dirty little secret that developers often have contingency line items in their budgets to settle CEQA lawsuits should one be filed.  Guess who pays for that?  Whoever ultimately buys or leases the project.

Something has to be done to prevent frivolous lawsuits that have become a hallmark of the California Environmental Quality Act.  CEQA may be a valuable protector of the state’s resources but it’s wide ranging-provisions that allow people without standing to file lawsuits against development at will, often against public interest are contributing to the affordability crisis.  Reform needs to happen but it’s a 3rd rail in Sacramento that almost no one in power is willing to touch due to the powerful legal and environmentalist lobbies.  Unfortunately, no one wins in this game of greenmail except of course for the CEQA extortionists and their attorneys and it doesn’t appear as if that is about to change any time soon.  Shakedowns are still alive and well in California.

Economy

Unpredictable: A guide to how markets responded to geopolitical crises in the past.  Spoiler: it’s nearly impossible to predict how markets will react to a geopolitical crisis.

Caveat Emptor: The $7 trillion dollar hazard beneath the M&A boom is potential future goodwill writedowns.

Unpaid Bills: Credit card charge-offs are on the rise as more American consumers struggle to pay their bills.  Loss and delinquency rates are still relatively low but this is an indicator of consumer strength worth watching.

Commercial

Changing of the Guard: Last week was another brutal week for US retailers who are closing stores at a faster pace than ever before.  But See: The boom in online retailer fulfillment centers are providing a boost to local job markets.

Slim Pickins: It’s getting more challenging to find debt for multi-family construction projects as banks retrench thanks largely to new regulations, leaving more expensive debt funds to pick up the slack.

Residential

Staying Put: The latest Freddie Mac renter survey finds that apartment dwellers are largely optimistic about their financial position and don’t plan on moving, even if their rent increases.

Soaring: Seattle renters need a bigger raise than any other city in the US in order to maintain projected take-home pay next year.  See Also: How Amazon is eating Seattle and driving growth.  But See: Yes, Seattle real estate prices and rents are surging but it isn’t in danger of becoming the next San Francisco.

Profiles

FAIL: This week’s United Airlines PR debacle prompted a hysterical Bloomberg article detailing  the worst corporate gaffes in history.

What a Difference a (Rainy) Winter Makes: Pictures of California before and after the winter deluge of 2016-2017 are incredible.

Ouch: How a Chinese dairy billionaire got over-leveraged and lost his fortune in 90 minutes.

Rise of the Machines: Terrible fast food restaurant Burger King has a new add that is specifically designed to hijack home voice activated speakers in an incredibly annoying way, opening the door for more advertisers to take advantage of virtual assistants like Siri and Alexa.  Perhaps if Burger King put an equal amount of effort into making food that isn’t utter crap, they wouldn’t need to rely on such lame gimmicks.

I’m Totally Getting This: Summer is just around the corner and a company called Forty Ounce Wines is now selling 40s of Rosé.   It’s perfect for people who can’t decide whether they want to party in the Hamptons or go to one of those stereotypical college parties that the PC Police bust white frat boys for throwing.

Chart of the Day

More house on less lot

 Median Square Footage Land

Source: Corelogic

WTF

Hyper Inflation is Bad: The Zimbabwean Government recently passed a law to compel the nation’s banks to accept livestock as collateral for cash loans to informal businesses.  This tells you pretty much everything that you need to know about the economy there. (h/t Steve Sims)

Hardening Problem: A husband filled his soon-to-be-ex-wife’s car with cement after she changed her last name for a supermarket promotion because, Russia.  Fortunately, it was caught on video.

Bucket List Trip: There is a shit museum in Italy.  I’m not making this up.  There is actually a museum in Italy devoted to shit.

Hardcore Evidence: A condom-clogged drainage pipe tipped off Austin, Texas, police to a prostitution ring that was operating under the guise of a massage parlor.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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