West Coast Real Estate Update: October 2016 #2

by Holland & Knight LLP
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[co-author: Daniel Dow]

California Legislature Revises De Minimis Exemption of Finance Lenders Law

Real estate projects that utilize federal New Markets Tax Credit (NMTC) financing recently received a reprieve from a state licensing requirement when the California Legislature passed Senate Bill 777. The bill provides that the California Finance Lenders Law (CFLL) does not apply to any person or business that makes only one commercial loan in a 12-month period.

When the CFLL was enacted in 1997, it required any person or business engaged in the business of making consumer or commercial loans to first obtain a license from the commissioner of business oversight. However, those that made only one loan in a 12-month period fell into a de minimis exemption and were not subject to the licensure requirement. In 2013, the legislature attempted to expand the de minimis exemption by increasing the number of allowable loans made in a 12-month period to five. But the 2013 amendment included an important caveat: To qualify for the de minimis exemption, the making of the loans had to be incidental to the business of the entity making the loans.

This new caveat created headaches for certain lenders, particularly those utilizing NMTC financing. In a typical NMTC financing scenario, a community development entity (CDE) applies to the U.S. Department of the Treasury Community Development Financial Institutions Fund for an allocation of NMTC tax credits. When a project is ready to be funded, the CDE creates a single-purpose entity to receive money from investors, allocate tax credits and disburse the proceeds of the investment. The creation of a specific entity to facilitate the flow of funds on NMTC projects not only is demanded by investors, but also is required by law when the CDE is a nonprofit, which is common. However, because the entity's sole purpose is to disburse loan proceeds, its lending activities are not incidental to its business. Accordingly, under the 2013 amendment to the CFLL, such single-purpose entities were not eligible for the de minimis exemption.

SB 777 retains the language of the 2013 amendment, but adds back the original exemption for those that make only one commercial loan in a 12-month period, regardless of whether it is incidental to their business. Therefore, the bill ensures that single-purpose entities created to make a single loan, such as those used in the context of NMTC projects, do not have to be licensed under the CFLL. The new exemption takes effect on Jan. 1, 2017, and will remain in effect until Jan. 1, 2022.

Congress Extends EB-5 Program

Congress has extended the U.S. Immigrant Investor Program, or the EB-5 program as it is commonly known. The program had been set to expire on Sept. 30, 2016, but will now run through Dec. 9, 2016.

The EB-5 program grants green cards to foreign individuals who invest at least $1 million in ventures that produce permanent jobs in the U.S. The required investment amount is lowered to $500,000 in certain targeted employment areas. The program has proven extremely popular among foreign investors seeking a fast-tracked process to U.S. citizenship and U.S. developers seeking funding for real estate projects. In 2014, EB-5 investment totaled $2.6 billion nationally, and California led all states in EB-5 activity.

However, an extension of a few months is not the victory for which some had hoped. Sen. Patrick Leahy (D-Vt.) proposed a bill last June that would have extended the EB-5 program for five years. However, Leahy's bill has languished in the Senate Judiciary Committee as Congress and stakeholders discuss substantial reforms to the EB-5 program. Some investors will stay on the sidelines until the long-term fate of the program is known.

"We believe the current extension has been a positive, but the market will still be waiting to see what happens," said Ronnie Fieldstone, an attorney who represents developers and EB-5 regional centers.

While Congress is unlikely to pass a comprehensive bill that provides both major reforms to and a lengthy extension of the program before Dec. 9, 2016, many believe that a smaller bill that provides another minor extension and increases the minimum investment levels to $800,000 and $1.2 million is forthcoming.

Cities Use Inclusionary Zoning Policies to Address Urban Housing Needs

As cities across the U.S. experience economic growth in the wake of the Great Recession, a lack of affordable housing is pricing workers out of urban areas, lengthening their commutes and diminishing livability. In response, local officials in cities such as New York, Los Angeles, San Francisco, Atlanta and Seattle are turning to inclusionary zoning policies.

Under inclusionary zoning policies, cities require or encourage developers to create below-market housing as a condition to obtaining zoning approval of a proposed market-rate development. While each city's inclusionary zoning policy follows the same general principle, no two are exactly alike. Some policies include inflexible mandatory requirements that require a greater number of affordable units, impose longer rent restrictions and apply community-wide with no opt-outs. Other policies are more voluntary, require fewer affordable units, impose shorter rent restrictions, and apply only to specific housing types and locations with available opt-outs.

"Local zoning policies can effectively encourage development of workforce housing, mostly in strong real estate market environments where communities provide the optimal mix of incentives," says Stockton Williams, author of a recent Urban Land Institute report on the effectiveness of inclusionary zoning policies.

However, the Urban Land Institute report noted that inclusionary zoning policies tend to be ineffective in areas not experiencing significant market-rate development. According to the report, inclusionary zoning policies must have the ability to adapt in response to changing market conditions. Appropriately balancing consistency and flexibility is perhaps the central challenge for cities seeking to make the best use of this particular policy tool.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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