July 26, 2012 Article

Permit Extension Legislation Provides Potential Relief to Developers

The time and money invested in permits impacted by the recession may not have been wasted

by Marc J. Goldstein and Nadia H. Dahab

Beginning in 2008, several states enacted laws designed to automatically extend land-use permits for one or more years in an effort to provide a lifeline to a real-estate-development industry hobbled by the recent economic recession. With the explicit purpose of addressing the problems created by the impending lapse of development permits during the years when projects sat fallow due to the economic conditions, these state laws provide developers with some assurance that the time and money invested in the permitting process may not have been wasted.

Although the story of the Great Recession’s impact on the housing, construction, and real-estate-development industry is all too familiar, the lingering effect on land-use permits has received relatively little discussion outside the development industry. The recession was largely spurred by a disintegration of the housing market that included a downward spiral of poor lending practices, sliding home values, increased foreclosures, and dramatic losses by investors in securities backed by residential mortgages. The resulting overabundance of housing supply, falling prices, lack of available credit, and general skittishness about the prospects for the future derailed developers’ plans and real-estate projects around the country.

Developers with the economic fortitude to wait for better days soon found that weeks turned to months, and months to years. Without the financing to proceed or the market to rent or sell new product, development projects stalled. Consequently, the permits secured for these projects began to expire. These land-use permits, generally issued by state and local governments, are often time-consuming and expensive to obtain and usually contain restricted timetables during which to avoid expiration, building permits must be pulled, utilities and site work must commence, or foundations must be poured. Even if developers had the desire to move forward with their projects, without financing many developers simply could not proceed. Although some permits may be extended, this involves the additional expense of returning to the permit-granting authority for approval and often opens the project to renewed scrutiny or appeals. This is particularly true for contentious projects and may result in opponents viewing the extension request as an opportunity to lodge objections in a renewed effort to kill the project.

In response to these conditions, eight states have enacted some form of permit-extension legislation: Florida, Massachusetts, New Jersey, North Carolina, Pennsylvania, Rhode Island, South Carolina, and California. Much of this legislation is modeled after a 1992 New Jersey law enacted to respond to the recession of the late 1980s and the early 1990s. The declarations that accompanied New Jersey’s original statute stated that its purpose was to “prevent the wholesale abandonment of approvals due to the present unfavorable economic conditions, by tolling the expiration of these approvals until such time as the economy improves.” This purpose and these findings are stated almost verbatim in New Jersey’s Permit Extension Act of 2008 as well as in most of the statutes that have enacted such legislation.

The specifics of the laws vary among the states, with some being more favorable to developers than others and some containing exceptions for environmental permits, floodplain-development permits, and the like. But the general structure is relatively consistent: For development permits in existence during a certain identified period of time, the state agrees (and thus the local governments are compelled to agree) to either extend the approval period by a specific amount of time, or toll the running of the effectiveness period for those permits. The intended effect, presumably, is to allow developers to weather the economic downturn and emerge with valid development permits still intact, ready to proceed with their previously planned projects. A summary table examines and compares key provisions of the law from each state, which are discussed more generally below.

General Structure of the Legislation and Common Provisions

What Permits Are Extended?
The scope of land-use and development permits extended by these laws is generally quite broad and, with the exception of California, applies to permits issued at the state and local levels. For example, the Massachusetts Permit Extension Act covers, with certain exceptions:

any permit, certificate, order, excluding enforcement orders, license, certification, determination, exemption, variance, waiver, building permit, or other approval or determination of rights from any municipal, regional or state governmental entity, including any agency, department, commission, or other instrumentality of the municipal, regional or state governmental entity, concerning the use or development of real property. . . .

In some ways, the broad applicability of this language is better defined by what is not included. Although each statute is slightly different, generally the extensions do not apply to:

Permits issued under federal law. Many of the state laws exclude permits issued under federal law, an explicit acknowledgment of preemption issues. Where permits were granted under federal law or where the duration of the permit approval period is determined by federal law, the state extension does not apply. Some states are silent on this issue, and although federal preemption may be presumed, it is noteworthy that those states simply decline to address the issue. For developers not actively consulting counsel, the preemption issue could come as an unfortunate surprise.

Permits issued in environmentally sensitive areas. Some statutes have carved out specific areas of particular environmental concern. For example, New Jersey’s statute excludes permits in designated environmentally sensitive areas, although recent amendments have limited those areas. The Pennsylvania Permit Extension Law excludes permits or approvals related to certain wetlands and surface waters. These provisions could very well have resulted from concerns identified in the legislative process or from environmental groups, local governments, or perhaps others. Permits for development in environmentally sensitive areas are often among the most difficult permits to obtain and are top priorities for environmental protection groups seeking to curb development.

Permits contingent upon the availability of adequate utility capacity. Some forward-looking states, anticipating potential decreased future capacity of sanitary sewer systems and the effect that this might have on development, include provisions that condition development on the availability of adequate capacity of these infrastructures. Where that capacity does not exist, permit holders are generally granted priority, as opposed to immediate, access to those utilities.

Extension v. Suspension
Each state statute seeks to provide developers more time to use their permits by one of two methods: extension or suspension. For example, the Massachusetts Permit Extension Act adds two years onto the expiration date of the covered permit if the permit was in existence from August 15, 2008, through August 15, 2010. In contrast, Pennsylvania’s law tolls the running of the approval period for a permit between December 31, 2008, and July 2, 2013. Whether an extension or suspension will result in a longer total effective period for a particular permit depends on when the permit was issued and how long into the tolling period the permit would have expired. Generally, extension periods are easier to calculate, while tolling periods are more specifically tailored to address the time periods in which economic forces prevent developers from acting on their permits.

Extension and Suspension Periods
Each law contains a date range that determines which permits are covered by the statute. As expected, these periods usually start between early 2007 and late 2008, the generally accepted beginning of the economic recession. The extension/suspension periods generally range in length from one to five years. A longer suspension period, of course, allows for more permit holders to benefit from the law and, at the same time, creates a longer maximum approval period for each individual permit. It is worth noting that most of these laws also operate to revive expired permits.

Other Provisions
There are, of course, some anomalies. For example, in North Carolina, the statute allows cities and counties to opt out of the extension, which has the potential to dramatically reduce the applicability of the law in North Carolina. Opt-out provisions increase the burden on developers to verify applicability of the law, locality by locality, which undermines the simplicity of the approach in other states. California’s law applies only to state-level permits. This requires California developers holding local permits to expend time and funds seeking local extensions, even if they have received a reprieve from the state.

Finally, these statutes are clustered exclusively in states on the coasts, with all but California along the Eastern Seaboard. This is likely due to the increased complexity of the development processes in these states, which generally includes longer local government review and approval periods and an increased cost of the entitlement process. Because of these circumstances, developers have a significant monetary investment in their permits, which may have been the impetus for legislative relief. The investment value of these permits also may have increased the availability of lobbying dollars behind such legislation. The legislative response from the central states may be delayed or nonexistent as the developers in these secondary real-estate markets were not as immediately or deeply impacted by the economic downturn.

Short- and Long-Term Consequences

Although the ultimate success of these laws is difficult to measure, these statutory schemes have immediate and longer-term impacts. In cases where approval periods are long and a high volume of permits are subject to the state extension, management of these permits by local government bodies appears to be a bureaucratic headache. While a locality may appreciate avoiding paperwork in states where the statutes automatically extend permits without needing any action by the local government, administrative challenges may arise when permit holders later go to exercise permits that appear on their face to have expired. In addition, the longer a permit is extended, the more likely it is to frustrate the short- and long-term planning goals of county or municipal governments that may have evolved over the extension period.

Because none of the permit extension laws require the extension to be recorded in the property records (even though the original permits are often recorded), ambiguity in the chain of title about the expiration date of a permit could complicate future financing. Developers may need to factor in additional time for legal review and documentation necessary to give lenders the certainty they require when underwriting a loan. Similarly, the uncertainty created in the event the reach of these laws is unclear or extension periods are questioned, could create an additional hurdle to funding.

Do These Laws Work?

It is difficult to assess the success of these state permit extension laws, because metrics are not easily available. While a longer suspension period allows for more permit holders to benefit from the extension, the number of permits that are extended and ultimately used is nearly impossible to quantify. Perhaps tellingly, data measuring the success of New Jersey’s 1992 Permit Extension Act is not readily available. However, with many more states employing these approaches during this recession than in the past, an increasing number of states, localities, and trade groups may be looking to prove or disprove the effectiveness of these permit-extension statutes.

Conclusion

Permit-extension legislation is a huge benefit to real-estate developers, but it comes with some pitfalls. The port in the storm that these laws create allows developers, construction contractors, and local governments to buy time while the economy takes a much-hoped-for turn for the better, and timing is always the key element in any development project. The laws are similarly drafted between the various states but are diverse in their details, reflecting local politics, interest groups, and the complexity of underlying local government ordinances and regulations. Even with a number of environmental, transportation, and utility-related exclusions, the net gain appears to be substantial to developers who would otherwise forfeit their permits and/or expend additional time and money by seeking extensions or re-approvals. The actual magnitude of that gain, however, is much more uncertain. In short, because these laws extend developers’ ability to use their permits, but do not compel such use, whether and to what extent these laws produce completed future projects is extremely difficult to assess. Looking forward to the rest of 2012, some of the first extended permits will be nearing their expiration date. It will be an interesting comment on the state of the nation’s economic recovery to see if developers are ready to move forward on the stalled projects, if more states will pass extension acts, and whether states with existing acts will pass legislation to further extend those permits.

As for local governments, the benefits appear far less substantial. Although local governments are generally interested in economic development, statewide laws of this sort are often viewed as a threat to the autonomy enjoyed by counties, cities, and towns. Nondiscretionary extensions strip localities of their ability to evaluate whether the circumstances locally have impacted the desirability and viability of previously permitted projects. As the economy, and more specifically the housing and construction sector, continue to sputter, subsequent extensions could exacerbate these concerns.

Keywords: real estate litigation, recession, land-use permit

Marc J. Goldstein is a shareholder in the Wellesley, Massachusetts, office of Beveridge & Diamond, P.C., and is chair of the Zoning and Land Use Litigation Subcommittee of the Real Estate Litigation Committee in the ABA Section of Litigation. He is also the editor in chief of the Real Estate Litigation Committee newsletter. Nadia H. Dahab was a summer associate in Beveridge & Diamond's Washington, D.C., office in 2011 and is beginning a judicial clerkship in the fall of 2012. Abiola O. Fasehun, a summer associate in Beveridge & Diamond's Washington, D.C., office in 2012, completed her first year at Columbia Law School and updated the research for this article.


Copyright © 2012, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).