NEWS FRONT
Florida’s Permit Extensions Caught in Legislative Crossfire
MIAMI—The financial meltdown of a couple
years ago stopped many projects in their
tracks, sometimes after years of planning
and effort by developers to get government
approvals. Last year, the Florida legislature,
in an effort to promote development,
included in Senate Bill 360 a provision that
allowed developers to extend some of their
permits—at least those granted by water-management districts and the state’s
Department of Environmental Protection—
for two years beyond their expiration dates.
But the constitutionality of the law is being
challenged because of some of its other
provisions.
A new law, SB 1752, which passed during the spring 2010 legislative session and
is known as a jobs bill because it includes
tax credits and other economic stimuli,
has an extension provision similar to the
one in SB 360. It will survive, say its advocates, even if SB 360 dies.
The problems with SB 360, say many
city planners and environmentalists, is
not its provision for permit extensions,
but that it weakens the Development of
Regional Impact process by defining
Dense Urban Land Areas too broadly,
and then exempting new developments
in these areas from the DRI process.
In the past, developments large enough
to impact more than one county went
through the DRI process, which requires
approval from various local authorities as
well as the state’s Department of
Community Affairs. Once the development is approved, developers are obligated to pick up some of the infrastructure costs associated with the project. But
under SB 360, a development planned
within a DULA, defined as an area with at
least 1,000 people per square mile and a
minimum total population of at least
5,000, is exempt from having to go
through the DRI process. Under this law,
the eight most populous counties in the
state are DULAs.
To protest this change, eight local
governments filed suit against the gover-
nor and other government officials
charging that the law is unconstitutional
and should be struck down. Their basis
for filing the lawsuit was not that it
allowed developers to extend their per-
mits or that it weakened the DRI process,
but that it created an unfunded man-
date, since it requires the state and
municipalities to spend money develop-
ing new comprehensive plans as well as,
in all likelihood, to pick up the tab for
infrastructure that would otherwise be
paid for by the developer.
The second allegation is that it violates
the single-subject rule for legislation in
Florida. The law, purportedly about
growth management, includes a provision related to commercial property owners having security cameras at their build-
Net Lease Assets Find New Investors
There was a long period before the net lease-development market peaked, when a tenant
could sign a build-to-suit lease with a developer who had an arsenal of drooling buyers
waiting to purchase a newly constructed, passive investment. This business model made
a lot of sense for developers since there was an almost immediate exit strategy for their
assets and, subsequently, their invested capital. Now that there are fewer new assets being
built, net lease investors are focused on existing properties for acquisition.
There are a variety of reasons why there are few new construction projects today. Most
companies have either cancelled or postponed their expansion plans
and are downsizing or maintaining their current size, eliminating the
need for new space. Second, there are already enough empty stores
and offices that can be put to a new use. The owner of a vacant corner
gas station signs up McDonald’s to a ground
lease with the help of a bulldozer and a
competent attorney, as an example.
The expense of identifying new sites for tenants and construction
costs associated with the asset as well as the time required for such
projects has motivated both tenants and developers to look for existing locations that can be razed or rebuilt to the tenants’ specifications. While this process can be expensive, it is usually less so than starting from scratch.
When developers are seeking properties in a proven or simply dense market, success is
more likely. For example, Boston Market locations around the country have been transformed into a plethora of alternative uses due to their sound real estate fundamentals.
But even with downsizing and adaptive re-use, there is still a small contingency of
credit tenants that are seeking new space, and competition for the best sites is fierce.
Because there is a dearth of new construction, there is also competition among investors
wanting to purchase these new developments.
Tenants with the best credit ratings are the only ones even considering new construction today. It is well known that JPMorgan Chase (S&P: AA-) is actively pursuing new
bank branch. Walgreens (S&P: A-) and CVS (S&P: BBB+) are expanding as well. These
companies have always been active, even through the downturn, but they aren’t the only
tenants doing well during the recession. Several dollar-store concepts have proliferated
recently. Dollar General (S&P: BB) has been vocal about its meteoric growth, even
though the company’s credit rating is under the investment-grade threshold.
In this market cycle, because there is a lack of viable investment options, investors
looking to purchase stable net-lease properties are no longer chasing properties with
new leases, but they are also considering buildings in which leases have less than the full
term left. Investors are also compromising on other criteria for a good investment as well,
such as sound real estate values, tenants with high credit ratings as well as long leases.
With savings accounts and money-market interest rates hovering around 1%, it is not
hard for investors to choose net lease investments. Even though they may not offer all of
what an investor wants, the returns on these investments still average between 6% and
8% for buildings with credit tenants. This is why net lease investments, otherwise known
as Plan B for some commercial real estate investors, have generated new interest today.
By David Sobelman
David Sobelman is executive vice president of Calkain Cos. in Tampa, FL. He may be
contacted at dsobelman@calkain.com. The views expressed here are the author’s own.
