Mr. Kimball

Development & Construction

The Impact of the California Environmental Quality Act on Hotel Development

By Larry K. Kimball, Director of Hotel Development, C. W. Clark, Inc.

If you are not developing a project in California and think this article is irrelevant, keep reading because the California Environmental Quality Act (“CEQA”) is the model for future regulations in your jurisdiction. We will highlight how CEQA shapes development projects but more importantly how politicians, organized labor, and environmentalists often leverage the CEQA approval process to further their self-interests at the expense of developers and communities.

CEQA Rules the Approval Roost

While the applicability of CEQA to a proposed project is not always automatic, if discretionary approvals from state and local public agencies are needed then prudent developers should increase their development budgets for higher costs from legal fees, consultants, focused community outreach programs, and hard construction costs. Likewise, operating pro-forma should include ongoing compliance costs which will reduce operating margins and subsequent project valuations.

An environmental review under CEQA guidelines includes science but the interpretation is an art. “The fundamental purpose of the Guidelines is to make the CEQA process comprehensible to those who administer it, to those subject to it, and to those for whose benefit it exists. To that end, the Guidelines are more than mere regulations which implement CEQA as they incorporate and interpret both the statutory mandates of CEQA and the principles advanced by judicial decisions. (1)” For all math-inclined readers, (Regulations + case law) * interpretation = CEQA.

It is beyond the scope of this article to present and discuss the Guidelines. Rest assured, it is a growing body of work. The latest amendment, effective March 18, 2010, addresses the new CEQA step of determining the significance of impacts from greenhouse gas emissions (2) from a project. As you close your eyes and imagine, an evolving art form will be future interpretations of this by agencies leading a CEQA review aided, of course, by a cottage industry of consultants.

A more interesting issue is how is the CEQA approval process used by stakeholders to advance their agenda. A couple of examples will follow to illustrate this mix.

Jobs vs. Environment

As a federal taxpayer, did you miss the big news on April 13, 2010? That was the date federal regulations were revised to implement President Obama’s Executive Order of February 2009 where all federal agencies require project labor agreements (“PLA”) for all construction projects over $25 million (3). The anticipated date when PLA are required is May. A recent Wall Street Journal (4) article noted that while only 15% of construction workers nationwide are unionized, project labor agreements increase costs by 10% to 20%.

Did you know the CEQA approval process is a tool used by union leaders to attempt to increase their membership? Since hotels are generally built by private developers, there is no federal law to mandate union agreements so the entitlement process and CEQA approval in California is a logical and proven target for unions.

Building and construction trades councils use the threat of CEQA lawsuits to try to get a project labor agreement that requires the hotel project to be built with union labor. In most markets, a developer’s general contractor would already be using union labor for concrete, steel, and other major trades but that is not the same as having a PLA. If direct public funding to the developer or other developer financial incentives like transient occupancy tax rebates are available, then the building and construction trades unions often leverage the prevailing wage requirement for publicly subsidized projects into a project labor agreement using the threat of a CEQA lawsuit.

The same strategy is used by hotel employee unions. In some markets, the building trade council works in concert with the hotel employee union to increase the odds one or both adds members. An alternative strategy is where the unions fund and utilize an environmental watchdog group to sue the lead agency and developer over a CEQA approval. Of course, when a lawsuit is filed this adds time, increases costs, and adds new risk to the development project.

Layered Approval Process

A recent hotel development project was killed in the City of Long Beach, California and it is one of several examples where unions and environmental groups teamed up to oppose new hotel developments (5). A union and community funded environmental group with a website that has a concerned-citizen feel, “Long Beach Coalition for Good Jobs and Healthy Community” sued everyone involved over the CEQA approval for a 125-key boutique hotel to be developed by Wichita, Kansas-based LodgeWorks. The story of this case gets more interesting and is representative of the CEQA approval process, but first we must digress into California bureaucracy for a moment.

California Coastal Commission (“CCC”) was established by the California legislature to protect the tidelands of California. The lead agency to obtain a CEQA approval for a developer is typically the local municipality. Of the approximately 400+ legal municipalities in California, many have filed local coastal programs with the CCC and obtained CCC approval which guides development within the tidelands. As discussed above, the lead agency for a CEQA approval is the typically the municipality. When the project is in tidelands and therefore covered by the CCC (whether or not covered by an approved local coastal program), a coastal development permit from the CCC is required. Obtaining a coastal development permit from the CCC requires the municipal lead agency to apply for the permit, get a public hearing scheduled, and the lead agency and developer present their case before the CCC. If the municipality is successful, a coastal development permit is granted. If the CCC does not approve the permit, it can be appealed and the CCC schedules a “de novo” hearing. A CCC de novo hearing (new hearing) makes the CCC the lead agency and not the municipality. That’s right, after months if not years where the developer works with a municipality to advance a new project, the CCC becomes the lead agency. Because CCC Board Members are appointed by the Governor, the CCC CEQA approval process becomes more political and therefore subject to union influence.

Now back to the LodgeWorks project in Long Beach. The CCC approved the project 11-1 but added a condition that the developer must pay an in-lieu of fee of $937,500 for off-site affordable lodging. While the City of Long Beach wanted an up-scale hotel to maximize sales and transient occupancy taxes, the CCC determined because the average daily room rate would be over $100 per night that restricts public access to the tidelands. Therefore, the developer should pay a fee to develop alternative affordable lodging. After three years of effort, the additional cost imposed by the CCC made LodgeWorks kill the deal.

Gaylord and Chula Vista

It’s not easy getting a billion-dollar project approved in California; just ask publicly traded Gaylord about their three years of effort and expense. Here is the Reader’s Digest version. The City of Chula Vista and Port of San Diego selected Gaylord to develop a 1,500 to 2,000 room destination hotel and convention center project on about 32 acres on the San Diego Bay. Being the first developer on the waterfront, Gaylord would have been responsible for an estimated $308 million in mostly off-site infrastructure costs. The company was reportedly dealing with at least nine regulatory agencies including the CCC.

In mid-2007, Gaylord withdrew from the project because they had not reached an agreement with the building and construction trade council on a PLA or with UNITE-HERE on a card check agreement for hotel workers. The project was estimated to create over 10,000 jobs.

Shortly thereafter, talks resumed between the parties and Gaylord and continued for another year before Gaylord terminated negotiations for good.

Looking Ahead

California has been a model the rest of the nation has often imitated for good and bad. Analyzing a new development’s impact on the environment will be an increasing complex part of the entitlement and permitting process and CEQA is the tool California uses. Unions, environmentalists, government bureaucrats, developers, and other groups increasingly will leverage the entitlement process to further their self-interests at the expense of the greater good.

References:
(1) FAQ about CEQA; What Are the CEQA Guidelines http://ceres.ca.gov/ceqa/more/faq.html
(2) Ibid - http://ceres.ca.gov/ceqa/docs/Adopted_and_Transmitted_Text_of_SB97_CEQA_Guidelines_Amendments.pdf
(3) FederalTimes.com; http://www.federaltimes.com/article/20100413/ACQUISITION03/4130305/1001
(4) Wall Street Journal; April 14, 2010;
http://online.wsj.com/article/SB10001424052702303695604575182333308913608.html
(5) Press Telegram; http://www.presstelegram.com/search/ci_13287949?IADID=Search-www.presstelegram.com-www.presstelegram.com

Larry K. Kimball has over thirty years of hotel experience in development, finance, operations, and asset management at the corporate and operating unit levels. Mr. Kimball is currently Director of Hotel Development for C. W. Clark, Inc., a San Diego-based commercial real estate developer. In this capacity, he is responsible for the entitlement, design, financing, and asset management of several large public-private hotel and mixed-use projects totaling ~1,200 keys with combined development costs of $600+ million. Mr. Kimball can be contacted at 858-875-5146 or larryk@CWCLARKINC.com Extended Bio...

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