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September 10, 2009

Bellevue can help developers by giving lenders less to fret about

  • Short-term rules changes could extend the life of entitlements and knock down barriers to construction.
    Schwabe, Williamson & Wyatt



    The economic downturn continues to devastate local developers, and the credit crunch has exacerbated the decline, making short-term recovery all but impossible.

    The city of Bellevue is uniquely positioned to help bridge the gap. Bellevue can follow the lead of other nearby jurisdictions in amending its development regulations to extend permits. Even better, Bellevue can be a leader by changing the criteria for vesting projects and requesting permit extensions to take into consideration the challenge of moving forward with a project with limited or no capital.

    Stalled projects

    Bellevue’s landscape is dotted with projects in various stages of commencement and completion. Some are half-completed high-rises, others are graded lots, and others are only visible by the public notice of application posted adjacent to a decaying site.

    Most projects have three key things in common: an entitlement, an acquisition and development loan, and ticking timelines for the loan’s maturity and the expiration of the entitlement.

    The interplay between these three project elements within the context of the credit crisis creates a conundrum: It takes money to move a project forward, but lenders are loath to extend credit with declining property values and entitlement uncertainties. Consequently, projects are halted, entitlements lapse and the property indeed declines to its dirt value, confirming the lenders’ fears.

    In many instances, lenders have helped by extending loans or renegotiating terms in exchange for developers’ promises to perfect entitlements and complete projects.

    However, this scenario only addresses two of the three key project elements. It does not address the regulatory timeline, which may be the very reason a lender is unwilling to extend or modify the loan. Put simply: Why lend money for another year when the entitlement will lapse next month?

    Nowhere to go

    The current lack of liquidity presents a clear problem for developers with entitled but incomplete projects.

    For subdivisions, preliminary plat approval is a tenuous entitlement if the developer lacks the resources to go through detailed final design and construction of the plat. The timing of the payment of impact fees is an added burden.

    For commercial and mixed-use projects, the design costs to submit for a building permit can be prohibitive, even assuming there is a vested land-use entitlement.

    In all instances, taking any step — substantial or otherwise — toward construction may be impossible. This issue can and should be addressed by Bellevue through two regulatory changes.

    Extend entitlements

    First, Bellevue can follow the steps taken by other jurisdictions such as King County and the city of Seattle and propose legislation to extend existing entitlements.

    Under Bellevue’s existing code, preliminary subdivision approvals last five years. Other land-use approvals expire in two years unless a completed building permit application is submitted, which vests and preserves the entitlement during the life of the building permit.

    Building permits expire if work is not commenced within a year from issuance or if work halts for six months. For projects requiring a critical areas permit — many, if not most, these days — the critical areas permit expires in one year unless a building permit is sought. Up to two one-year extensions for building permits may be available at the city’s discretion.

    To assist developers in both completing projects and obtaining and maintaining financing, Bellevue should pass a two-year blanket extension of all entitlements.

    By passing a blanket extension, Bellevue will avoid significant demands on its staff that would arise if entitlements had to be reviewed on a case-by-case basis. It also alleviates the time and financial pressure placed on developers in preparing extension applications.

    Finally, two years is sufficient time, based on current market forecasts, for the economy to recover but not so far in the future that the city and the general public will be deprived of the value of other regulatory changes.

    Keeping projects alive

    Second, for the next two years Bellevue should drop the requirement to file a building permit application to vest a land-use approval, as well as the requirement to commence and maintain construction to keep the building permit alive.

    By allowing underlying land-use approvals to remain vested without a building permit, Bellevue will provide certainty not only for developers but for lenders, who in turn will be likelier to forbear on loans and extend limited funds to preserve and complete projects.

    The same is true for allowing building permits to remain active without actual construction, especially given that construction halts due to lack of financing. This second step would make Bellevue a leader in the Puget Sound region for taking steps to protect not only the investments that developers have made in the community but also the significant investments that the city and the public have made in the land-use process that led to the entitlements.

    Attracting investment

    A final note is that, by making these short-term regulatory changes, Bellevue will increase the probability that developers will be able to attract equity investors to complete projects.

    Under current lending and regulatory conditions, developers are largely unable to attract equity investment due to the associated uncertainties. Developers face losing projects if loans mature prior to completion, especially if they cannot preserve entitlements.

    Regulatory changes are needed to provide both certainty for lenders and potential investors. Making the suggested changes provides a win-win-win for Bellevue, its developers and lenders.

    Aaron Laing and Dennis Ostgard are attorneys in the Seattle office of Northwest regional law firm Schwabe, Williamson & Wyatt, focusing their practices in the areas of land use, real estate and litigation.

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