Top Ten Stories in California Construction for 2015

by Haight Brown & Bonesteel LLP
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Construction Continues To Improve, But Are We In A Boom?

Story #1 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015.

Cranes, cement trucks, and street closures seem to be everywhere these days, especially in city centers such as San Francisco and Los Angeles. After the meltdown of 2006, real estate development went into hibernation for almost six years. It took a while to awaken from its slumber – and by some measures construction activity is still well below pre-2006 levels – but by 2013 it was obvious that a turnaround was underway. The industry continues to rebound and improve every year.

The construction industry’s resurgence is helping both commercial and residential projects as confirmed by David LeVelle, President and CEO of BKF Engineering who writes in Engineering News-Record California: “2016 is shaping up as a great year for the South Bay/San Jose construction and development economy . . . Residential development is in full swing, and commercial office and corporate campus construction is also strong. We have designed many tech campus projects that are coming on line including Netflix, Facebook and Google facilities. These projects also increase the demand for housing. We believe mixed-use projects represent the future trend toward higher density, walkable communities and less reliance on the car.” (ENR California, November 24, 2015).

On December 1, 2015, the following headline appeared on the AGC of America website: “CONSTRUCTION SPENDING LOGS ROBUST MONTHLY AND YEAR-OVER-YEAR GROWTH IN OCTOBER WITH GAINS IN RESIDENTIAL, NONRESIDENTIAL AND PUBLIC CATEGORIES” with the caveat “[t]otal is Highest since 2007; Latest Increases Suggest Contractors Will Have Plenty of Work in 2016 But Concerns Escalate Regarding Availability of Sufficient Skilled Workers for Existing and Future Projects.”

This headline from Reuters on December 16th: “U.S. housing starts surge, permits hit 5-month high.”

New Single-Family Home Sales – Better But Still A Far Cry From 2006

In a piece appearing on July 17, 2015 in HOUSINGWIRE, Trulia’s Chief Economist Selma Hepp noted “this will be the best year for the housing market since the recovery began.” Sales of new single-family homes remain well below historical averages and pale in comparison to 2005 when according to the U.S. Census Bureau around 1.3M new homes were sold. It looks like around 600,000 new homes will sell this year compared to the low point in 2011 of only 270,000 new home sales.

According to an October 22, 2015 press release from the National Association of Home Builders: “Steady employment and economic growth, pent-up demand, affordable home prices [Ed. Note: not in California] and attractive mortgage rates will keep the housing market on a gradual upward trend in 2016. However, persistent headwinds related to shortages and availability of lots and labor, along with rising materials prices are impeding a more robust recovery…”

The takeaway is that things continue to improve but are still far short of where they were many years ago.

Multi-Family - Better But Fighting Claims of Gentrification

Condo construction on the West Coast continues to grow, especially in urban areas with infill. At least one developer believes multi-family is the wave of the future, at least in San Diego. In an article appearing October 4, 2015 in the San Diego Union Tribune, Cornerstone Communities Chairman Ure Kretowicz said: “I think … large suburban single-family-home communities are going to be a dinosaur," and "I think the future for San Diego is going to be in attached product in one form or another."

The San Diego Association of Governments has projected that most of the half-million homes built over the next 30 years will be in multi-family arrangements.

It’s not all wine and roses in San Francisco, however, where condo construction has led to a revolt in places such as the Mission District, which in turn lead to a city-wide discussion about a moratorium on new construction. According to an ABC7News piece from June, one local resident summed up the situation with these words: "They're building condos, not for the people of the Mission, but for the techies, the hipsters...” Another piece from USA Today in June: “Fancy high-rises are planned to take over dilapidated street corners, including one that tenant activists have dubbed the ‘Monster in the Mission,’ a 345-unit building with rents projected to start at $3,500.”

Despite some bumps in the road and political grandstanding, builders remain optimistic overall – despite a recent drop sentiment. On November 19, 2015 the Multifamily Production Index (MPI) by the National Association of Home Builders increased one point to a level of 56 for the third quarter of 2015. This is the 15th consecutive quarter with a reading of 50 or above. The MPI measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100. Any number over 50 indicates that more respondents report conditions are improving than report conditions are getting worse.

Commercial/Health Care - Stunning, World Class Projects

On August 3, 2015, the AGC of American website had this headline:

“CONSTRUCTION SPENDING IN JUNE GROWS AT FASTEST RATE SINCE 2006 AS ALL MAJOR SEGMENTS POST YEAR-OVER-YEAR GAINS; WORKER SHORTAGES MAY DERAIL GROWTH”

By all appearances, the headline is absolutely correct. On October 29, 2015, the San Francisco Business Times published a list of the 75 largest Bay Area construction projects in 2015. A more impressive list would be difficult to conceive. The published contract values of these projects total around $13 billion dollars. This is in the Bay Area alone.

Ironically, the Apple Campus, which is estimated to be $5 billion dollars, is not even on the list because of Apple’s notorious secrecy. This campus is built in a ring with a nature refuge in the middle. The project is said to have 3.7 miles of curved glass that will wrap around the building and museum-grade stone-infused flooring. The project received some bad press earlier this year when Apple surprisingly decided to terminate the JV responsible for the building core and shell. Confidentiality agreements prevented the disclosure of information relating to any design or construction problems at the project and even prevent the JV from acknowledging it had a contract with Apple.

On June 9, 2015, the Silicon Valley Business Journal took a stab at what may have triggered the development:

“Apple's multibillion-dollar project — which is said to employ first-ever construction methods — is among the most ambitious and expensive private office developments ever attempted by a corporation. While drone flights over the site have shown rapid progress, the Foster + Partners-designed project — dubbed Apple Campus 2 — hasn't been without difficulties. I reported last month on rumors that the schedule may have slipped; Bloomberg reported in 2013 that costs had ballooned, thanks partly to Apple's exacting demands.”

A few other projects deserve mention. Stanford is building a new $2 billion dollar 812,000 square foot hospital with 368 beds using a McCarthy and Clark Construction JV. This is just one element of Stanford’s “Renewal Project” for its health and science facilities. When adding these additional projects, the total improvements will cost a staggering $5 billion dollars.

According to Stanford’s website the “Renewal Project is building larger, more modern facilities to advance medical research, train the next generation of physicians and scholars, and meet growing demands on the hospitals that apply the highest standards of comfort and safety.” The project commenced in 2013 and is scheduled to be completed in 2017.

The Brooklyn Basin project on the Oakland waterfront is an East Bay game-changer. According to the San Francisco Business Times: “Infrastructure work has begun on Oakland's largest active real estate project, the $1.5 billion Brooklyn Basin development that will transform the city's southern waterfront into 3,100 housing units and 200,000 square feet of retail.” Signature Development Group and its Chinese financial partner Zarsion Holdings are developing the project. The first building of roughly 300 units will break ground by the second quarter of 2016, and occupancy is scheduled for 2017.

Finally, and thanks to the efforts of the Webcor/Obayashi JV, the Transbay Terminal rose out of the ground in downtown San Francisco in 2015 after several years of excavation, shoring, pile driving, foundation work, and insufferable street and lane closures. This $4.5 billion project will have one million square feet of space and a four acre roof garden and replaces the old concrete monolith from the 1930’s that looked like it was designed in the Soviet Union.

The project is envisioned to be the “Grand Central Station of the West” in the heart of a new transit-friendly neighborhood and will connect 11 transit systems and future High Speed Rail from San Francisco to Los Angeles/Anaheim. The project will also have a 61-floor tower – known as the Sales Force Tower – that will eventually be the tallest building in San Francisco. The general contractor on the tower is a joint venture between Clark Construction and Hathaway Dinwiddie Construction.

On September 7, 2015, the Los Angeles Business Journal published a list of the 50 largest construction projects in Los Angeles. Just like in Northern California, the list is staggering in scope and cost, coming in around $10 billion dollars.

The Los Angeles projects are diverse and world-class. The most significant project is the $979M Wilshire Grand Center being built by Turner. The Wilshire Grand Center is designed to be a 73-story skyscraper in the heart of Downtown Los Angeles. The project will be completed in 2017 and will boast a 900-room InterContinental hotel. It will be the tallest structure in the Los Angeles skyline.

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The Historic Drought Has Killed Your Lawn, Will It Do The Same To The Construction Industry?

Story #2 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015

After three years of a historic drought, Californians are now subject to mandatory water rationing, bans on washing cars, and water “only on request” at restaurants. In 2015, California saw a number of new laws, regulations and executive orders to further cut back on the State’s water use.

The first, and most important, was Governor Brown’s Executive Order B-29-15, signed on April 1, 2015. The Executive Order called for a 25% reduction in urban water consumption. The Order also required the replacement of 50 million square feet of lawns throughout the state with drought tolerant landscaping in partnership with local governments, directed the creation of a temporary, statewide consumer rebate program to replace old appliances with more water and energy efficient models, required campuses, golf courses, cemeteries and other large landscapes to make significant cuts in water use, prohibited new homes and developments from irrigating with potable water unless water-efficient drip irrigation systems are used, and banned the watering of ornamental grass on public street medians. According to the Governor’s office, the new restrictions will result in “[savings of] approximately 1.5 million acre-feet of water over the next nine months, or nearly as much as is currently in Lake Oroville.”

Governor Brown’s Executive Order was followed up by Assembly Bill 1, which amended California Government Code section 8627.7. Assembly Bill 1 was signed into law by the Governor on July 13, 2015, and prohibits cities and counties from imposing a fine under any local maintenance ordinance or other relevant ordinance on homeowners who choose to stop watering their lawns. The bill was intended to address, and outlaw, local government regulations, such as those in the City of Glendora which threatened homeowners with fines of up to $500 if they failed to “keep landscaping looking healthy and green.” Section 8627.7 voids and supersedes such regulations.

While Assembly Bill 1 was intended to void government regulations on watering lawns, Assembly Bill 349 was aimed at homeowner’s associations and neighborhood groups which enact landscaping regulations. AB 349 amended California Civil Code section 4735 and expanded existing regulations prohibiting homeowner’s associations from requiring homeowners to maintain high water use landscaping, such as lawns. The amendment now expressly allows a homeowner to replace lawns with drought-resistant plants and, for the first time, even synthetic turf.

Both Assembly bills have significant impacts on housing developers. Master planned communities can no longer mandate “green lawns” nor can they prohibit a homeowner from swapping out high water use landscaping with drought tolerant plants or synthetic turf. In addition, fines or assessments against homeowners for failure to employ a ‘high water use’ landscape design, as found in many current master development plans, are no longer enforceable, unless the landscape plan uses recycled water.

While the Governor and the Legislature have been extremely proactive in proposing new water restriction measures, neither have proposed limiting construction of new homes. In part this can be attributed to findings, including a recent research report commissioned by the California Building Industry Association, that new homes in California can save 46,500 gallons of water a year – nearly 50% – compared with those built before 1980. The report also noted that building 100,000 new homes in California creates 209,000 jobs, and pumps $38 billion into the state’s economy.

Even with the likely El Nino winter, it is likely the drought’s affects will continue for some time. Additional measures will need to be implemented to address both the short term and long term water needs of the State. California’s two senators have submitted an omnibus piece of legislation in the U.S. Senate to help small communities hit the hardest by the drought. It is aimed at ensuring water continues to flow to these communities while still protecting agro business. The bill is advancing through the U.S. Senate, though its passage is not assured. If the bill does become law, it would likely be effective in mid to late 2016.

A more localized effort is being suggested by the building industry. The CBIA on behalf of its members, is suggesting that new homes be built with low flow faucets, dual-flush toilets, shower heads with a maximum flow rate of 2 gallons per minute, drought-resistant landscaping, and the increased use of artificial turf. These proposals along with new building regulations will substantially reduce the amount of water used by homeowners. The CBIA has also published a number of measures for retrofitting existing homes.

The concerted effort by the Governor, the Legislature and the homebuilding industry in responding to the most severe drought in recorded history have resulted in a substantial reduction in the State’s water usage, while, at least at this point, not significantly affecting the State’s economy. While El Nino holds promise of easing the immediate concerns, it will be the long term impact of recently passed legislation and voluntary measures that will assure the State’s future as one of the largest economies in the world.

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Affordable Housing: An Unsolvable Riddle in California?

Story #3 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015

Californians have had no concrete relief in the cost of housing throughout 2015. The state’s Legislative Analyst reported in March that the average California home costs $440,000, which was about two-and-a-half times greater than the national average price of $180,000. According to the report, California would have to build as many as 100,000 additional units annually, on top of the 100,000 to 140,000 it is expected to build each year, in order to seriously mitigate its affordable housing problems.

Given these high housing costs and recent demographic trends, the affordable housing movement gained considerable momentum in California this year. Most significantly, the California Supreme Court ruled in June that municipalities have “broad discretion to regulate the use of their real property to serve the legitimate interests of the general public and the community at large.” (California Building Industry Association v. City of San Jose (2015) 61 Cal.4th 435). The case arose from a challenge to the City of San Jose’s ordinance requiring that developers building 20 or more units to either offer 15% of the units at below-market rates or pay into a city fund. The Court found that a city’s broad discretion could entail imposing restrictions on new residential developments, and that there was no reason a city could not attempt to increase affordable housing in the community by requiring new developments to set aside a percentage of units for sale at a below-market price. This decision was a crucial development for the affordable housing movement.

In October, Los Angeles Mayor Eric Garcetti echoed the Court’s sentiment by proposing that city officials look into requiring developers to pay a fee to assist with the funding of lower-cost residences throughout Los Angeles. He also suggested that the city set aside $10 million annually for affordable housing from its general funds. In further support of his position, Mayor Garcetti signed an executive directive instructing city building officials to expedite projects including more than 20 percent affordable units. Shortly thereafter, Los Angeles County supervisors unanimously voted to set aside $20 million in 2016 for the construction and maintenance of affordable housing, with the idea that the county’s annual contribution would increase to $100 million over the next five years. The supervisors did not indicate where the funds would come from, but directed the county chief executive to initiate a plan for the 2016 budget process.

San Francisco Mayor Ed Lee recently followed suit by voicing his support for an increase in the city’s current policy of requiring projects to build 12 percent of their units as affordable units. Although Mayor Lee did not specify the increased percentage he would support, the city is set to hold meetings in December in order to craft a proposal. Such a change in San Francisco’s affordable housing policy would require a ballot measure, and Mayor Lee intimated that he would seek a proposition for the November 2016 election accordingly.

Another Bay area player, Uber Technologies Inc., brought momentum to the affordable housing movement in 2015 with its purchase of the former Sears Building in Oakland for $123.5 million. The biggest tech tenant to ever move to Oakland, Uber will pay the city around $1 million for affordable housing pursuant to its housing/jobs impact fee. The city charges $5.46 per square foot for all office space in excess of 25,000 square feet to those developing new office and warehouse properties, including those making changes to building uses requiring permits. These fees are then earmarked for the city’s Affordable Housing Trust Fund. Notably, San Francisco has a similar fee that is nearly five times as high at $24.03 per square foot. Prior to Uber’s recent purchase, there had not been significant office development to feed Oakland’s affordable housing fund since 2008.

Overall, because California’s housing prices remained significantly disproportionate to the rest of the country in 2015, it is unsurprising that several cities across the state have seen a push for the future development of more affordable housing. Further, given the aforementioned actions taken this year, developers should expect to see the trend towards increasing affordable housing continue throughout 2016.

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Labor Shortage: Has Uber Poached All Our Construction Workers?

Story #4 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015

California’s economy has for the most part rebounded from the Great Recession. The demand for new housing is steadily climbing, and builders are once again buying land and planning new communities. While not to pre-recession levels, the number of new housing shows is nonetheless impressive. According to the North State Building Industry Association, in 2011, at the depth of the Great Recession, only 1,386 homes were sold in the Greater Sacramento area. This year, the number will exceed 3,087. Statewide, more than 40,000 single family houses will be built. An additional 50,000 multi-family units are expected to be constructed.

However, this new building boom is facing substantial headwinds. While the drought is on everyone’s minds, an almost equal impediment is the State’s shortage of qualified construction workers. According to U.S.A. Today, Housing starts have increased 11.3% so far this year compared to the same period in 2014 to a post-recession high, government figures show. Commercial construction spending rose 9.7% during the first half of 2015. This figure is borne out by the National Association of Homebuilders (“Association”), which reported the national rate for housing growth has increased 26% nationally. The Association reports these figures would be even higher if builders had could find more skilled laborers. Another study by the Associated General Contractors of American found national unemployment in the construction industry at mid-year 2015 fell to the lowest level since 2001. Simply put, demand for workers far exceeds supply.

Economists and building experts believe a myriad of factors caused the labor shortage. Primarily, they point to the massive industry slowdown which resulted in layoffs of hundreds of thousands of workers. The laid off workers found work in other industries, where the salaries were greater and the physical work demands were fewer. Others simply “aged out” and stopped working all together. Additionally, housing construction also has become more complex since the Great Recession, with new energy efficiency and water conservation requirements, stricter environmental standards and construction technologies. These new requirements make it harder for untrained workers to be immediately integrated into the construction workforce.

A fourth, and somewhat controversial rationale for the labor shortage is tied to immigration. As immigration policies become more restrictive, and better opportunities in South America there is a documented decrease in Mexican immigration to the United States. According to Home building analyst John Burns Real Estate Consulting, Inc., Commerce Department data shows that there are 570,000 fewer Mexican born construction workers in the U.S. than at the construction industry’s peak in 2007. According to the same study, Mexican-born construction workers in the U.S. numbered 1.332 million last year compared with 1.89 million in 2007. Commerce Department figures show a 67% decline in immigration to the U.S. from Mexico from 2006 to 2013. This combined with the increasing requirement to use E-Verify has unquestionably limited the number of immigrants working in the construction trades.

What is the net effect of this shortage? The most obvious is an increase in labor costs. The U.S. Department of Labor reports that hourly earnings for construction workers are substantially outpacing raises for workers in non-construction fields. This has created a domino effect which has resulted in higher prices for new homes. A secondary impact of the labor shortage is the delays in completing new homes.

Is there a solution to the labor shortage? While there is not a “one size fits all” approach, most in the industry believe that creating training programs should be a primary goal. The California Homebuilding Foundation (founded in 1978 through the CBIA) is focusing on supporting and expanding industry funded trade schools such as the Building Industry Technology Academy provide a way to ensure a steady supply of skilled labor for California’s construction industry. It will be a few years before training and vocational schools can turn out skilled construction workers. In the meantime, it appears the construction industry will continue to face a labor hurdle with unknown consequences.

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Berkeley Balcony Collapse Leads To Calls For More Scrutiny of The Construction Industry

Story #5 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015

On June 16, 2015 six students died and seven others were seriously injured when the balcony on which they were standing collapsed.

The group was celebrating a 21st birthday party at an apartment located in the “Library Gardens Complex” in Berkeley, California. The cause of the collapse is under investigation. Initial analysis pointed to dry rot caused by rainwater that had penetrated the balcony’s wood structure. A lawsuit filed by the families on November 12, 2015 alleged that wood rot was caused by a “multitude of mistakes” and construction shortcuts that were ignored by builders and owners. The lawsuits said the builders “failed to waterproof” the deck and that the landlord ignored the “presence of mushrooms growing on the deck (that were an) unambiguous red flag” of dangerous wood rot. According to the lawsuit, a year before the collapse, the owners also ignored signs that the balcony had begun to tilt dangerously away from the side of the building.

While the first news reports concentrated on the human side of the tragedy, the focus of the media, the public, and elected officials turned to Segue Construction, the building’s general contractor, when it was revealed that Segue had been named as a defendant in a number of lawsuits involving other buildings it had built. Segue had paid over $26 million in legal settlements between 2012 and 2015.

Although none of the other lawsuits involved building failures or personal injuries, the fact that Segue’s settlements were confidential and not disclosed to consumers or the California’s Contractor’s State License Board (“CSLB”), prompted State Senator Jerry Hill (13th District) to revive a previously submitted bill (SB 465) which would require any licensed contractor to report to the CSLB when it settled any lawsuit for $50,000 or more, or was responsible for any arbitration or administrative judgment of $25,000 or more.

The bill’s reporting requirements covered lawsuits and claims alleging fraud, deceit, misrepresentation, incompetence and recklessness. The bill also required the reporting of lawsuits and claims alleging “negligence” and “breach of violation of contract.”

SB 465 was initially introduced by Senators Hill and Loni Hancock (9th District) in February 2015, and did not make it out of committee. Senator Hill reintroduced the legislation following the Library Gardens Complex accident. Senators Hill and Hancock sought passage of the bill saying it would provide protection to the public by providing them with more information about building contractors with a history of constructing substandard buildings. The senators pointed out that under existing laws, the public would have no ability to research a builder’s lawsuit history, since settlements, no matter the amount, could be hidden from the public by the inclusion of a confidentiality clause in the parties’ settlement agreement.

The major California building trade groups opposed the bill, arguing that it was vastly over-inclusive, and would not accomplish its purpose of alerting the public to the “bad actors” in the construction industry. The California Building Industry Association (CBIA) argued that many contested lawsuits are settled for economic reasons. The CBIA pointed out that contractors and their insurers choose to settle lawsuits even though there is no evidence of wrongdoing, in order to avoid uncertainty and to avoid costly litigation. The bill did not provide any exception for these types of settlements. According to the CBIA, the flood of reporting that would be required would both harm the construction industry, and would provide a misleading record to the public about a contractor’s building history.

The bill again failed to advance out of committee in mid-July. It is not clear whether Senators Hill and Hancock intend to try and revive the bill in 2016 but Senator Hill asked the CSLB to hold a series of workshops to find a consensus solution. The first meeting was on September 30th. The CSLB has not provided any further information on its website about another meeting or any other action.

While SB465 was a well-intentioned piece of legislation, its inclusion of language requiring contractors to report virtually every settlement over $50,000 to the CSLB, including settlements made for purely economic reasons, appeared to doom the legislation. It also highlighted an industry-wide issue regarding the large number of construction defect lawsuits filed every year. The vast majority of these lawsuits do not include fraud or deceit allegations, and involve structures that either have very few problems or problems that could be easily addressed on a warranty basis. Of the small percentage of lawsuits involving actual – rather than technical – defects, an even smaller number involve defects that have life-safety concerns.

Often the settlement payouts come from insurance companies, with or without the consent of the general contractor, and contain non-admission of liability clauses. Other settlements are made by general contractors, who are paying either out of their own pockets to avoid the further costs of litigation, or to forward funds paid by subcontractors who have worked on the project. Under the bill as written, these settlements, would have to be reported to the CSLB and would be made public. The bill makes no exceptions for multi-plaintiff claims, for settlements paid by carriers, or settlements made solely to avoid further costs of litigation.

If the goal of SB 465 is to publicly identify and root out “bad actors” in the construction industry, requiring all civil settlements to be reported may ironically be counterproductive. A potential unintended consequence of requiring blanket reporting, would be to overshadow settlements that the public should be aware of, namely claims involving fraud or settlements driven by serious construction defects that have life-safety concerns.

While all sides agree there needs to be accountability in the construction industry, the common goal should be to identify and discipline wrongdoers without punishing the entire construction industry.

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Public Projects in Turmoil: The Saga Of The Bay Bridge, Delta Tunnels, and High Speed Rail Would Make A Compelling Reality TV Show

Story #6 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015

The Bay Bridge – The Hits Just Keep On Coming

It took nearly twenty-five years for the Bay Bridge to become a reality and before the paint was even dry on the self-anchored suspension span questions had already been raised about the design and seismic safety of the bridge. The problems have been so severe that the Senate committee responsible for transportation held hearings in 2014 and commissioned a report, both of which blasted Caltrans for its poor handling of the construction project.

Californians spent $6.4 billion to replace the old Bay Bridge eastern span because it was unlikely to survive a major earthquake, but the questions continue to mount on the seismic safety of the new bridge. In March 2013, before the bridge was open, construction crews tightening rods to secure seismic stability structures beneath the bridge deck discovered that 32 of the steel fasteners had cracked. This ultimately delayed the opening because a repair had to be implemented.

Then, in October 2014, Caltrans officials announced that nearly every one of the 423 steel rods that anchor the tower of the new Bay Bridge eastern span to its base were sitting in potentially corrosive water. According to the San Francisco Chronicle, “[s]everal of the high-strength, 25-foot-long rods inspected after the first signs of trouble appeared last month were found to be submerged in several feet of water, in part because not enough grout had been pumped into protective sleeves to keep them dry, officials told members of a bridge project oversight committee in Oakland.”

In April, Caltrans announced that it had discovered one of those anchor rods had failed. Caltrans tested all the anchor rods and a second one failed strength tests; however, all of the other rods passed. In May, Caltrans admitted that one of the rods had not only failed, but that it had fractured. Saltwater intrusion into the bridge tower’s foundation and damage to its anchor rods could be the most serious seismic issues for the project.

In July, Caltrans issued a press release that said: “World Renowned Experts Confer, Focus on Corrosion Protection for Tower Anchor Rods.” Caltrans has yet to announce any findings.

The Delta Tunnels - Like Politics, Do Not Discuss In Mixed Company

Legend has it that Mark Twain once said: “Whiskey is for drinking and water is for fighting over.” He could have been talking about the Delta.

Since the mid-1800’s, the Delta has been altered in innumerable ways. The Delta we see today has little resemblance to the one that existed when the ‘49ers came. The Delta is now a system of manmade levees, reservoirs, and dredged waterways. These improvements are largely designed to support farming, urban development and to provide flood protection. The natural flows in the Delta also can be altered by operation of the State Water Project and Central Valley Project.

The Delta has been stretched to the breaking point and is in decline because of the tremendous growth in California’s population, industry, and destructive droughts. As one of California’s most invaluable natural resources, there is little debate that something must be done to protect our water supply and to protect vital wildlife habitats. But we are as far away today from a solution as we have ever been.

In November 2009, the California Legislature enacted the Delta Reform Act creating the Delta Stewardship Council to address issues affecting the Delta. The Act was one of several bills that addressed water supply reliability, ecosystem health, and the Delta.

According to the Delta Stewardship Council, its mission is to achieve the coequal goals “of providing a more reliable water supply for California and protecting, restoring, and enhancing the Delta ecosystem.” The Act requires these coequal goals “be achieved in a manner that protects and enhances the unique cultural, recreational, natural resource, and agricultural values of the Delta as an evolving place.” (CA Water Code SS 85054) From this came the Bay Delta Conservation Plan (“Delta Plan”).

Many state and local agencies worked to create the Delta Plan, and it went through many drafts, hundreds of hours of public meetings and thousands of public comments addressing the Delta's ecosystem and water management challenges. One of the most controversial recommendations in the 34,000-page document concerned water diversion tunnels 40 feet in diameter. These tunnels would draw water out of the Sacramento River and route it 30 miles away to existing state and federal diversion canals near Tracy. The intent of the tunnels is to restore the natural water flow of the Delta that has been altered because of massive fish killing pumps that send water down to Southern California.

The Delta Plan was adopted by the Delta Stewardship Council on May 16, 2013, and became effective with legally enforceable regulations on September 1, 2013. Seven lawsuits followed challenging nearly every aspect of the plan, but mainly the tunnels.

The ferocity of the opposition was evident from the breathy news stories.

One from Californians for Fair Water Policy: “Governor Brown and California’s largest corporate agribusinesses have proposed building two underground 35-mile and 40-foot wide tunnels to divert the Sacramento River and maximize water exports from the San Francisco Bay Delta to the southwest San Joaquin Valley. The project is similar to the previously proposed Peripheral Canal, which was rejected by voters in a statewide referendum in 1982.”

Another one from an organization called Restore the Delta: “Gov. Brown has proposed massive underground water export tunnels now called the “California Water Fix” though it is essentially the same project as the peripheral canal, which California voters rejected in 1982 by a 62.7% majority…[]…Big Ag on the southwest side of the San Joaquin Valley get about 70 percent of Delta water, which mostly goes to grow water intensive almonds and pistachios on unsustainable desert soils for lucrative overseas exports.”

Out of the backlash – as well as to address concerns from federal regulators that the Plan violated the Clean Water Act and other federal laws – Governor Brown announced California WaterFix and California EcoRestore last April. According to a press release from the Governor’s Office: “The revised plan substantially improves the health of California’s fisheries, increases water reliability and addresses the uncertainty of climate change. Specifically, the plan will accelerate long-stalled Delta environmental projects, including critical habitat, wetlands and floodplain restoration, while fixing California’s aging and environmentally damaging water infrastructure system.”

Maven’s Notebook – a website that focuses on California Water – has said: “[t]he project is a trimmed-down version of its predecessor, the Bay Delta Conservation Plan (or BDCP), which has been in the planning stages since 2006. Administration officials assert that the project is needed to shore up the water supplies that are critical for the state’s economy, and that the new infrastructure will benefit the Delta’s ailing ecosystem and native species by utilizing state-of-the-art technology and allowing for more natural flow patterns. Delta advocates insist the Plan is too expensive and say that the new facilities will deprive the estuary of needed freshwater flows that will only hasten the collapse of the Delta’s ecosystem and native fish populations.”

But to many, this change of approach will only intensify the opposition as this plan reduces wetland and wildlife restoration from 100,000 acres to 30,000 acres according to the Sacramento Bee, and still includes the tunnels. The projected cost is about $300 million, a tiny fraction of the $8 billion originally planned.

The Sacramento Bee reported on April 30, 2015: “Brown said Thursday that the original restoration plan was only an “idea.” He said the state did not have the money to restore 100,000 acres, but that with money from a voter-approved water bond and other sources, restoring 30,000 acres can be done.”

Public comment on California Water Fix ended on October 30, 2015. One commentator was Congressman John Garamendi (D-Fairfield, CA) who said the massive twin tunnels are falsely called the “California WaterFix,” and titled the comment “The ‘Little Sip, Big Gulp’ Proposal,” which reads in part:

“The new draft [of California WaterFix] does not consider the full range of alternatives available to meet the legally required coequal goals of water supply and ecosystem restoration in the Delta…The divorce of California Eco Restore from the conveyance facility only reinforces the fact that this project is not about protecting the environment, but rather about building a plumbing system that will harm the Delta and San Francisco Bay without creating a drop of new water.”

According to the California Water Fix website, “comments and responses will be published when the environmental analyses are finalized under the California Environmental Quality Act (CEQA) and the National Environmental Policy Act (NEPA), which is expected in spring 2016.”

California High-Speed Rail Or A Slow Train To Nowhere?

In 2008, California voters barely approved $9.95 billion in bond funding for an 800-mile high-speed train network under Proposition 1A. The Argument in Favor of Prop 1A on the ballot stated:

Proposition 1A will bring Californians a safe, convenient, affordable, and reliable alternative to soaring gasoline prices, freeway congestion, rising airfares, plummeting airline service, and fewer flights available.

It will reduce California's dependence on foreign oil and reduce greenhouse gases that cause global warming.

[It]…will relieve 70 million passenger trips a year that now clog California's highways and airports—WITHOUT RAISING TAXES.

Proposition 1A will save time and money. Travel from Los Angeles to San Francisco in about 2½ hours for about $50 a person. With gasoline prices today, a driver of a 20-miles-per-gallon car would spend about $87 and six hours on such a trip.

In retrospect, the time and cost arguments in favor of the high-speed train network are unrealistic. Take, for instance, the cost of about $50 a person. Amtrak fares from Oakland to Los Angeles currently range from $50 to $107 for a trip that takes about twelve hours on a system using old train technology. Moreover, according to the High Speed Rail Authority (HSRA) website, the system currently has 12 stations list but up to 24 possible.

The Los Angeles Times wrote an article on May 11, 2015 that stated: “Louis Thompson, chairman of a state-created review panel for the bullet train project, said California's projected fares are low by world standards. Thompson's panel is pressing the state to clarify how fares and other key business decisions will be made in the future.” The article reviewed “bullet” train prices in other areas of the country and overseas and found the HSRA’s projected fare of about 20 cents per mile are somewhere around 50% less than other operations, which are running up to 50 cents per mile.

The article continued to say: "The train will lose money and require a subsidy," said Joseph Vranich, former president of the national High-Speed Rail Association. "I have not seen a single number that has come out of the California high-speed rail organization that is credible. As a high-speed rail advocate, I am steamed."

In another article appearing March 27, 2014 in the Los Angeles Times: “Regularly scheduled service on California's bullet train system will not meet anticipated trip times of two hours and 40 minutes between Los Angeles and San Francisco, and are likely to take nearly a half-hour longer, a state Senate committee was told Thursday.”

On December 9, 2014, the Sacramento Business Times ran a story reviewing the obstacles faced by the High Speed Rail Authority, including land acquisition, train contracts, cap-and-trade funding, lawsuits, and the route through the Tehachapis to Palmdale, which has been described as a "difficult, complex engineering problem" by a peer review group.

The lawsuit could turn out badly for High Speed Rail Authority (HSRA). The HSRA has already beat back one challenge but this one remains. According to the lawsuit, the HSRA plan does not live up to Prop 1A’s billing because there is no way the train will be able to zip passengers from San Francisco to Los Angeles in just more than two and a half hours. According to a Fresno Bee article on August 3, 2015: “The Central Valley residents bringing suit say the advertised travel time is impossible given the mountainous terrain and the fact that the system includes up to 24 stations.” The case is set for trial on February 11, 2016.

The project was billed as affordable but the cost has more than doubled to $68 billion and it is inevitable that taxpayers will end up footing the bill. According to an article on November 22, 2015 in the Sacramento Bee, “outside experts estimate the final cost could be $93 billion.”

Despite the challenges, construction of Phase One of the project has already started and was widely mocked as the “train to nowhere.” “CP 1” as it is known is a 29-mile stretch between Madera County and Fresno County and is expected to wrap up 2017. The CP 1 design-build contract was awarded to Tutor-Perini/Zachry/Parsons (TPZP), a Joint Venture.

Nobody has a clear understanding when the system will be complete and fully operational between San Francisco and Los Angeles. The most optimistic estimate seems to be 2029.

* * *

SB 800 – Can Builders Enforce It, Or Not?

Story #7 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015

15 years ago, the California Supreme Court held in Aas v. Superior Court, 24 Cal.4th 627 (2000), that homeowners could not recover for construction defects unless the defects caused consequential damages to the building. In other words, a homeowner could not sue for windows that were installed incorrectly, unless the defect caused secondary problems such as water damage to the interior of the house.

In response to the Aas decision, the California legislature enacted California Senate Bill 800, known as “The Right to Repair Act” (“the Act”). SB 800 overturned Aas and provided homeowners who purchased homes after January 1, 2003, with a statutory cause of action to recover purely economic damages related to construction defects even if there was no consequential property damage. Under SB800, litigation was stayed while the parties worked on a potential fix to the claimed defects. The Act’s stated purpose was to limit the number of court cases by allowing a builder to resolve construction defect claims by agreeing to repair the homeowners’ residence. The hope was that by allowing builders to fix problems homeowners would be able to avoid suing. For almost a decade, the construction bar followed the Act’s statutory scheme.

In 2013, the Act was upended when the Court of Appeal for the Fourth Circuit ruled in Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 98, that homeowners did not have to follow SB800 if they only brought common law construction defect tort causes of action. Under the holding, homeowners could avoid the act’s prelitigation requirements, including the right to repair, and proceed straight to litigation, if they only brought tort causes of action. The decision was viewed by many in the builder community as gutting the statutory intent of the Act.

In August 2015, the Court of Appeal for the Fifth District repudiated the holding of Liberty Mutual, and held that plaintiffs in construction defect actions must comply with the statutory prelitigation inspection and repair procedures mandated by the Act regardless of whether they plead a cause of action for violation of the Act.

In McMillin, 37 homeowners filed a lawsuit against the builder of their homes, alleging eight causes of action, including strict products liability, negligence, and breach of express and implied warranty. Plaintiffs’ third cause of action alleged SB800 violations. The plaintiffs did not follow the Act’s notification procedures and filed their lawsuit without providing the builder with an opportunity to repair the alleged defects.

Plaintiffs and the builder attempted to negotiate a stay of the lawsuit to complete the Act’s prelitigation procedures. When talks broke down, plaintiffs dismissed their SB800 cause of action and contended they were no longer required to follow the Act’s prelitigation procedures. McMillin filed a motion to stay with the trial court.

The trial court denied McMillin’s motion concluding that under Liberty Mutual, “[plaintiffs] were entitled to plead common law causes of action in lieu of a cause of action for violation of the building standards set out in [the Act], and they were not required to submit to the prelitigation process of the Act when their complaint did not allege any cause of action for violation of the Act.”

McMillin filed a writ petition seeking to reverse the trial court’s holding. The Court of Appeal granted the writ, and held that all homeowners must comply with the Act’s prelitigation procedures even if their complaint only alleges common law causes of action. The Court writes:

“[W]e conclude the Legislature intended that all claims arising out of defects in residential construction, involving new residences sold on or after January 1, 2003 (§938)’, be subject to the standards and the requirements of the Act; the homeowner bringing such a claim must give notice to the builder and engage in the prelitigation procedures in accordance with the provisions of Chapter 4 of the Act prior to filing suit in court. Where the complaint alleges deficiencies in construction that constitute violations of the standards set out in Chapter 2 of the Act, the claims are subject to the Act, and the homeowner must comply with the prelitigation procedures, regardless of whether the complaint expressly alleges a cause of action under the Act.” (Emphasis added).

The Court’s conclusion was based on its finding that the holding of Liberty Mutual was contrary to the Legislature’s stated intent of reducing construction defect litigation, and encouraging builders to take responsibility for basic building functionality standards. The Court found that the Legislature did not intend to allow a plaintiff to “plead around” the Act, or avoid its mandatory prelitigation provisions by only pleading tort causes of action. The Court writes:

We doubt the Legislature would have viewed the legislation as ‘groundbreaking reform’ or a ‘major change[]’ in the law of construction defects if its provision were mandatory only when the defect had not yet caused damage, and the homeowner could still sue for damages under any common law theory once property damage occurred, without being subject to the [Act’s] statutory prelitigation procedures.

The McMillin decision is remarkable in that it unambiguously challenges and rejects the Second Appellate District’s holding in Liberty Mutual. Where the Liberty Mutual court found tort causes of action were separate from and not subject to the requirements of the Act, the court in McMillin focused squarely on the legislative intent of the Act and found that the Legislature intended the Act to cover all construction claims of any sort involving new residential construction.

McMillin’s holding that a plaintiff cannot evade the Act’s “right to repair” requirements by only pleading in tort, created a direct conflict with the holding in Liberty Mutual. On November 24, 2015, the California Supreme Court granted review of McMillin. The Supreme Court will now have to decide whether the Act was intended to cover all construction defect claims, or only claims brought pursuant to the Act. A decision by the Court is expected in 2016.

* * *

Technology – Building Information Modeling, Construction Apps, 3-D Printing

Story #8 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015

The construction industry, which has been historically slow to implement technological advances, made significant forays into the high-tech arena in 2015. From the increased use of Building Information Modeling (“BIM”) and 3D printing, to emerging construction apps for smartphones and tablets, the construction industry has continued to harness available technology to increase efficiency and thereby remain competitive in a steadily recovering market.

The utilization of BIM by architects, engineers and builders continued to expand in 2015, becoming the most widely adopted new technology in the construction industry. BIM allows for the development and use of computer-generated 3D models that simulate the design, construction and operation of construction projects. A new study released by Dodge Data & Analytics illustrates the benefits of BIM, reporting that 48% of companies using this technology see a 5% or more decrease in construction costs, 51% see a 5% or more reduction in their project schedules, and 31% see a 25% improvement in labor productivity. The recent construction of the Collaborative Life Sciences Building in Portland, Oregon, exemplified these benefits, as BIM use directly translated to $10 million in savings on the project. By 2020, the BIM market is expected to more than double in size to a total of $7,946,500,000.

Closely related to the growth in BIM use, the use of apps has become prevalent on construction sites. According to a 2015 report based on studies by Texas A&M, 72% of construction professionals use smartphones at work, and 50.1% use tablets. Many use BIM apps, such as Autodesk, but newly emerging apps are changing more than just the manner in which projects are modeled. For example, available apps allow contractors to view purchase orders, floor plans and site plans, schedule appointments, submit change orders, research building codes, and track the heat index for sites. Additionally, the Rhumbix app, designed to provide a medium for interaction between project managers and construction workers, made its debut this year. This app benefits workers by allowing them to accurately clock in and out of jobs, ensuring that they will be paid appropriately for their time. It also benefits project managers by providing them with the ability to geolocate workers and track their budget and cost codes on a real-time basis. Although it is already being used on several projects, Rhumbix is still developing, and has the potential to further increase efficiency and productivity on construction sites by reducing idle time.

In addition to the aforementioned technological advances, strides have also been made this year in the field of 3D printing. 3D printing is process of constructing solid objects from a digital file, which is accomplished by compiling successive layers of material. In theory, 3D printing could be used to build entire structures at a fraction of the time and cost currently spent on projects. In 2015, a Tennessee company reportedly used a large 3D printer to construct entire walls for new homes. Going forward, 3D printing may be taken to the next level of “contour crafting,” a phrase coined by one University of Southern California engineering professor who is developing a printer which he hopes will build an entire house at once, including plumbing and electrical components, rather than layer by layer. Although such a feat appears to be far from realization, advances in 2015 show that the development of this technology may be possible.

These advances demonstrate the construction industry’s ability to adapt to doing business in a world of rapidly evolving technology. If the construction industry continues to develop and welcome such technology, it should see a considerable increase in efficiency and, as a result, profitability over the coming years.

* * *

A School Facilities Bond For 2016: Good News For Everyone

Story #9 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015

Over the last 15 years, California’s population has grown by approximately 5 million people—the same number filling the entire state of Colorado. This influx has created a housing shortage that the California market has responded to with increased building of large subdivisions. Subdivisions attract families with children who are constitutionally entitled to a free public education. However, California Governor Jerry Brown’s recent lack of support for state funding of new school construction in these newly developed communities may mean that the entire cost of building them would fall on developers who pass the costs to home buyers.

The current state of school funding for new housing developments follows a nearly 20-year history between school districts and the building industry. In 1998, Senate Bill 50 (“SB 50”) established a three-level fee tier designed to spread the impact of financing new schools amongst the state, local communities and homebuilders. As a result of SB 50, school districts can levy a Level 1 fee on residential construction so long as sufficient justification exists, as shown by a Fee Justification Study. The statutory rate of Level 1 fees in 2014 was $3.36 per square foot of new construction.

In addition to Level 1 fees, SB 50 opened the door for the assessment of higher Level 2 fees on new residential development where the school district can show it meets two of the following four conditions: (1) substantial enrollment in multitrack year-round schedules; (2) placed at least one bond on the local ballot in the past four years; (3) reached a specific debt threshold; and (4) at least 20 percent of its classrooms are housed in portables. Level 2 fees represent 50 percent of the estimated cost of new schools.

Finally, SB 50 established that even greater Level 3 fees, intended to cover 100 percent of the cost of new schools, could be triggered where the state formally certifies that school facility construction bonds have been exhausted. In 2012, voters passed Senate Bill 1016 (“SB 1016”), which temporarily suspended school districts from collecting Level 3 fees until after December 31, 2014.

The recent expiration of SB 1016’s moratorium on Level 3 fees was closely watched by the California Building Industry Association (“CBIA”), an organization that is well aware no statewide education bond has been approved by voters since 2006. Moreover, Governor Brown presented a budget plan in January of this year that minimized the contribution of state funds for school facilities, taking the position that statewide school bonds were less efficient than local bonds. Shortly thereafter, faced with the real potential that new home developers may have to pay substantial Level 3 fees, CBIA commenced an initiative to qualify a $9 billion statewide school bond for the November 2016 ballot. A private poll taken in December 2014 found that 63 percent of voters likely support such a bond.

In September, the school facilities bond initiative successfully qualified for placement on the November 2016 ballot. If passed, this measure would authorize the issuance and sale of $9 billion in bonds, the proceeds of which would be allocated towards the construction of new school facilities and the modernization of existing school facilities.

The enactment of this initiative would have obvious benefits for the home building industry, as it would prolong the potential for the state to run out of money for new school construction, thereby triggering the assessment of Level 3 fees on developers. Voters planning to purchase new homes in the near future should also take note as increased costs to developers would inevitably be reflected on price tags.

* * *

Drones: Maximizing Efficiency And Productivity With a Dash Of Big Brother Thrown In

Story #10 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015.

The expanding use of drones, officially referred to as “unmanned aerial systems,” promises to revolutionize the construction industry. Drones have the potential to allow contractors to efficiently and economically inspect project conditions, monitor work quality, identify safety hazards, and provide real time feedback to project managers, architects and owners. Although commercial use of drones is still prohibited without a special exemption, developments in 2015 evidenced that legalization of such use is within reach.

The widespread use of drones in the construction industry is dependent on a determination by the Federal Aviation Administration (“FAA”) that drones are safe for commercial use. Pending its establishment of official rules governing the operation of drones in the commercial context, the FAA currently prohibits such use. Companies can apply for an exemption under Section 333 of the FAA Modernization and Reform Act of 2012, which over 2,500 companies have successfully obtained, but this application process can be long and involved. As a result, many hoping to operate drones for commercial use, including in construction, have been left waiting.

While the FAA recently enacted registration rules for recreational drone owners, these new rules do not apply to commercial drone use. The new drone rules, which went into effect on December 21, 2015, require owners of recreational drones to register with the FAA and pay a small registration fee.

Unfortunately, commercial operators of drones will not likely find the registration rules as simple or inexpensive as the recreational rules. The FAA published a set of proposed regulations regarding commercial drone use in February, which will likely be implemented in the near future. Under the proposed rules, commercial drones must weigh less than 55 pounds, and must be registered with the FAA. Commercial drone operators must pass an aeronautical knowledge test in order to be certified, and must keep drones “in plain sight,” meaning they cannot be flown over 500 feet above ground or in areas with obstructed views. In addition, commercial the flight path of commercial drones is limited to the area of the commercial project. This latter requirement is particularly important for the construction industry, as drone operators will have to ensure that the devices do not meander from work sites into adjacent sidewalks or streets. The FAA registration fee for commercial drone operation is not yet known though it is a safe bet it will be substantially more than the recreational drone fee.

In addition to regulations set by the FAA, state and local rules concerning drones will also likely impact on the use of commercial drones. Forty-five states considered drone-related legislation this year, with 20 states passing such legislation. In California, AB 856 was passed in response to the use of drones by paparazzi. The law prohibits drones from entering airspace over private property in order to photograph or record an individual engaging in “private, personal or familial activity.” The prevalence of these bills in 2015 shows a trend towards the regulation of drones across multiple jurisdictions.

Aside from applicable regulations, construction companies planning to operate drones should assess the risks involved in using them. For example, there are a variety of ways an operator could lose control of a drone, including a loss of power or wireless connection, cellular tower or electromagnetic interference, high winds, and even bird encounters. Additionally, drones can be hijacked, and most commercial drones are not equipped with the expensive cybersecurity necessary to protect against such attacks. The risk associated with any of these events is a drone could crash into an aircraft, structure or person. Damages and injuries caused by drones may not be covered by standard commercial general liability policies. While not widespread, some insurers have jumped into this new market by offering separate coverage for drone use.

Overall, although widespread drone use is an exciting prospect for the construction industry, and could be as revolutionary as the cell phone or laptop. However, before jumping onto the drone bandwagon, companies planning to operate drones should keep in mind there will be increased costs in participating in such a highly-regulated and inherently risk-filled activity, and weigh these factors against the clear potential for increased efficiency.

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Haight Brown & Bonesteel LLP
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