The Town of Tiburon has lost another round in its ongoing litigation with property owners over assessments to fund the undergrounding of utility lines. Under Proposition 218 (California Constitution article XIII D), special assessments shall not "exceed the reasonable cost of the proportional special benefit conferred on a parcel." The courts have divided this into two general inquiries: (1) Is a special benefit conferred by the improvement to be built through the assessment? (2) Is the assessment proportional? In Town of Tiburon v. Bonander , the First District Court of Appeal answered yes to the first question, but found that Tiburon's division of costs for the undergrounding project was not proportional under Proposition 218. This case involved the imposition of a supplemental special assessment for undergrounding utility lines. The saga began when the original special assessment was imposed, and certain landowners sued. That case is still pending before the court after the state Supreme Court issued a procedural ruling permitting the property owners to challenge the original assessment ( Bonander v. Town of Tiburon , (2009) 46 Cal.4th 646; see CP&DR Legal Digest, July 1, 2009 ). After imposing the original assessment, the Town of Tiburon discovered that the costs of undergrounding utilities were higher than anticipated and a supplemental special assessment was necessary. The voters within the district approved the supplemental assessment, and the town brought a validation action requesting that the court declare the assessment valid. Jimmie Bonander and other landowners within the district ("appellants") filed an answer to the validation action, thereby opposing it. The trial court found in favor of the town and declared the supplement assessment valid. The landowners appealed. The appellate court addressed three questions: (1) Should the record regarding the original assessment be included in the judicial record before the court on the supplemental assessment? (2) Did the town properly identify special benefits that would be conferred by undergrounding the utilities? (3) Did the supplemental assessment satisfy the proportionality requirement under Proposition 218? In the end, the court invalidated the supplemental assessment because the costs were not divided proportionally based upon the relative benefit the properties received as required by Proposition 218. The methodology used to determine the supplemental assessment was the exact methodology used to determine the original assessment. The same calculations and benefit apportionment applied. Therefore, the court held that information regarding the original assessment was properly before the court in evaluating the validity of the supplemental assessment. The court next addressed the special benefits conferred. The town identified three special benefits conferred on the properties within the district: improved aesthetics, safety and reliability. Appellants argued that these benefits either had no connection to undergrounding the utilities or these were general and not special benefits because they were conferred on everyone within the district. The court disagreed. The court found that each benefit was "tied to individual properties based on proximity to existing overhead utility lines." The court also emphasized that the mere fact that the majority of properties within the district received a special benefit did "not compel the conclusion the benefit is not tied to particular properties." Therefore, the town properly identified special benefits that would be conferred on the properties within the district. The town evaluated each property within the district and assigned points under each special benefit category. For example, if the property would only benefit aesthetically, it would receive one point. The points would then determine the assessment amount. In addition to the special benefit points, there was one other factor that determined the assessment amount. The town divided the district into three "benefit zones" based on the construction costs for undergrounding utilities in each of the zones. For example, a property in the Hacienda Drive area that received three benefit points would pay $20,331.24, whereas a property in the West Hawthorne Drive area that received three benefit points would pay $7,740. Appellants argued that this methodology violated the proportionality requirement of Proposition 218. The appellate court agreed. The court stated: "The benefit zones have nothing to do with differential benefits among the three zones but instead are better characterized as ‘cost zones'…" When evaluating proportionality, an assessment should reflect "costs allocated according to relative benefit received." It cannot be based strictly on the construction costs associated with undergrounding the utilities on a particular property. The town had to take the total construction costs across the entire district and apportion them based on the number of benefits assigned. One property that received three benefit points should pay the same as another property receiving the same three benefit points, the court determined. The court did point out that, as in Dahms v. Downtown Pomona Property & Business Improvement District , (2009) 174 Cal.App.4th 708 (see CP&DR Legal Digest , July 1, 2009 ), the town could have assigned benefit points based on "building size, street frontage, and lot size."  However, in this case, the town chose aesthetics, safety and reliability as the three special benefits and did not factor in the size of the lots. The court also found that the town excluded from the assessment district certain properties that also received the special benefits. If properties are located outside the district benefit, the cost cannot be imposed on properties within the district. This violates Proposition 218's requirement of not exceeding the reasonable cost of the proportional special benefit. Therefore, the town violated the proportionality requirement by dividing the district into "cost zones" and excluding certain properties that would receive a benefit. This case clarifies that the construction costs must be viewed as a whole and divided equally by the relative benefit conferred on the properties. This case also illustrates the importance of identifying special benefits. Tiburon could have avoided this outcome had it determined the amount of special benefits conferred based on lot size or some other relevant factor. The Case: Town of Tiburon v. Bonander , No. A119918, 2010 DJDAR 43. Filed December 31, 2009. The Lawyers: For the town: Ann Danforth, town attorney, (415) 435-7370. For Bonander: Frank Mulberg, (415) 388-0605.

A state appellate court has upheld the adoption of design guidelines that are intended to implement a City of Los Angeles redevelopment plan. PR/JSM Rivara LLC v. Community Redevelopment Agency of the City of Los Angeles involves adoption by the Community Redevelopment Agency of the City of Los Angeles, and the city (collectively, the "city") of design guidelines for the North Hollywood redevelopment project area in September 2007. A developer in the project area, PR/JSM Rivara challenged the guidelines on the grounds the guidelines illegally reduced the maximum allowable densities in the commercial portion of the project area. In other words, the developers claimed their property was down zoned. The developers also argued the city improperly rezoned the properties without complying with the Planning and Zoning Law. Clearly, the developers' interest in this case was preserving their right to build at densities contained in the city's zoning ordinance. The trial court denied the developers relief, finding that the densities within the project area were set years ago when the redevelopment plan was amended in 1997. Thus, the time to challenge those densities had long expired. The lower court also rejected the argument that the design guidelines acted as a de facto amendment to the zoning code. The Second District Court of Appeal upheld the lower court's ruling. In doing so, the Second District first gave an overview of redevelopment law. The court explained why the adopted guidelines are not a zoning ordinance within the Planning and Zoning Law, and emphasized the difference between adopting a redevelopment plan (a legislative act) and implementing one (an administrative act). If the guidelines were found to be a zoning ordinance, then the Planning and Zoning Law requires public notice and a hearing prior to adoption. While redevelopment law also requires certain procedures for adopting or amending a redevelopment plan, the court found that there were no provisions in either redevelopment law or the Planning and Zoning Law that required public notice and a hearing prior to the administrative act of implementing a redevelopment plan. Because the guidelines were merely implementing the plan, public notice and a hearing were not required prior to adoption. The court further determined the developers had not provided any evidence as to how the guidelines were inconsistent with the city's general plan – despite the court's admission that developer had demonstrated that provisions of the guidelines and general plan were different with respect to certain land uses. In rejecting the developers' contention that the guidelines conflicted with the state's density bonus law, the court paid particular attention to the declaration of the city's regional administrator. She averred that the discretionary density bonus plan in the guidelines would not interfere with the state law. In addition, the court said that developers could not point to contrary evidence. The court further noted that because the city's municipal code allows a redevelopment plan to contain a base density lower than the maximum allowable residential density under the zoning code, the developers failed to prove they were entitled to the density set by the zoning code. Finally, the court hammered the proverbial nail in the coffin on this issue when it found that the decision to impose the density regulations was completed in 1997, when the redevelopment plan was amended. Thus, the statute of limitations to challenge density expired a decade earlier. Lastly, the court held the developer's California Environmental Quality Act (CEQA) claims were time-barred. In doing so, the court held that, contrary to developers' contentions, the notice of determination filed by the city on October 26, 2007, was sufficient. The statute of limitations for filing a CEQA claim expired on November 25, 2007. The developers did not file their lawsuit until the following month. The Case: PR/JSM Rivara, LLC v. Community Redevelopment Agency of the City of Los Angeles , No. B213051, 2010 DJDAR 622. Filed December 17, 2009. Ordered published January 13, 2010. The Lawyers: For PR/JSM Rivara: Matthew Hinks, Jeffer, Mangels, Butler & Marmaro, (310) 203-8080. For the city: Deborah Fox, Meyers, Nave, Riback, Silver & Wilson, (213) 626-2906.

For a second time, the Bay Area Air Quality Management District (BAAQMD) has postponed adoption of California Environmental Quality Act (CEQA) thresholds of significance for greenhouse gas emissions. The district board delayed a decision until April in the face of ongoing opposition to the thresholds from local governments and some environmentalists, who argue the standards could have unintended consequences. The thresholds of significance are intended to guide cities and counties as they review the potential impact of land use projects, stationary sources of pollution and general plans under CEQA. The air district has intentionally proposed quite strict project thresholds. For example, the typical 55-house subdivision or 77-unit condominium project would generate enough greenhouse gas (GHG) emissions for GHG to be considered a potentially significant impact; therefore, the project would need an environmental impact report. Planners in Berkeley, Oakland, San Francisco and other cities argue that the thresholds are not adequately location-sensitive and could require that desirable infill and redevelopment projects undergo an EIR, rather than a faster and cheaper level of environmental review. The planners also question whether the thresholds would apply to infill projects that otherwise qualify for exemption from CEQA. The planners as well as development representatives and some environmentalists say the air district should ensure streamlined review of infill proposals. Other environmentalists and the attorney general's office, meanwhile, have endorsed the thresholds. Air district staff members argue the thresholds are location-sensitive because infill projects close to transit and a mix of land uses would generate fewer GHG emissions than automobile-dependent subdivisions on the fringe. They also say that a project that complies with a city or county climate action plan (many of which are being prepared) could be afforded a "presumption of insignificance" and, therefore, proceed without an EIR. The BAAQMD would be the first air district in the state to adopt thresholds of significance for greenhouse gas emissions. The proposed thresholds and background documents are available on the district website .

The California High-Speed Rail Authority business plan released at year's end is inconsistent, unrealistic and potentially illegal, according to a Legislative Analyst's Office (LAO) report to the Assembly Transportation Committee. The plan lacks a complete discussion of various risks, contains no risk management strategy and has an overly general and inconsistent timeline, according to the LAO. "For example, regulatory approvals are expected by 2018 but procurement is scheduled to be complete by 2014," the LAO reported. "This could mean the train technology and rolling stock will be procured before regulatory agencies approve their use." The LAO called the plan's expectations of federal funding "highly uncertain." The plan is based on the federal government providing about $3 billion a year through 2016 for the project, even though the state now receives only about $3 billion annually for the entire transportation system, including gas-tax funded highways. The plan also appears to assume the public sector will fund insurance and provide a revenue guarantee to private investors, even though the high-speed bond measure approved by voters in 2008 explicitly prohibits a public operating subsidy, the LAO concluded. Still, the new business plan is an improvement from a 2008 version, according to the LAO. At a mid-January hearing, Transportation Committee members offered tepid support of the new business plan and asked hard questions of rail authority representatives. The new plan pegs construction cost at $42 billion based on year-of-expenditure estimates. The earlier plan estimated construction at $33 billion in 2008 dollars. The new plan decreased the 2008 version's annual ridership estimate from 55 million trips in 2030 to 41 million trips in 2035. The new plan also pegs ticket prices at 83% of a comparable airline ticket, rather than the earlier forecast of 50% of a plan ride. The new plan assumes local governments will prove less money for the project, and private investors much more. The business plan is available on the High-Speed Rail Authority's website .  The Legislative Analyst's Office report is available at www.lao.ca.gov .

The Merriam Mountains housing project in North San Diego County lives – at least until the Board of Supervisors has another chance to consider the proposed development. In December, county supervisors closed a hearing with a 2-2 vote, which equaled rejection of the proposed 2,600-unit project just west of Interstate 15 and north of Escondido (see CP&DR In Brief , December 15, 2009 ; Local Watch , August 2006 ). Supervisor Ron Roberts missed the meeting, and in early January he asked his fellow supervisors to rehear the matter. "Because of the size of the Merriam Mountains project and its significance in terms of regional population growth, I believe it is important for this project to be considered by the full Board of Supervisors," Roberts wrote. Supervisors voted 3-2, with Roberts in the majority, to schedule a new hearing for March 24. In the meantime, project opponents have demanded that the district attorney's office investigate Supervisor Bill Horn for allegedly violating a county ordinance prohibiting supervisors from having contact with a project proponent outside of the public process. A Merriam Mountains supporter, Horn admitted last month that he had advised Stonegate Development Group to request a hearing delay until all five supervisors could be present. Opponents want Horn to recuse himself.

After years of study and negotiations, the San Jose City Council has adopted a citywide inclusionary housing ordinance. The measure, which takes effect in 2013 (unless certain market conditions improve), requires market-rate developers to make 15% of new units available to households with incomes of no more than the median. If developers choose to meet the mandate off-site, the affordable housing requirement rises to 20%. The city has had similar requirements for the downtown area for years. The City Council's decision on citywide inclusionary regulation came only three months after the council suspended a rule requiring 45-year restrictions on 20% of new units in redevelopment project areas to ensure their availability to low- and moderate-income households. Because prices for market-rate and affordable units are so close these days, there is no incentive for buyers to buy an income-restricted unit, city officials concluded. Developers asked for the relief, which city officials say they will revisit when the market changes.

For quite some time now, we've heard about the credit crisis, the foreclosure crisis, the health care crisis, the state budget crisis, the climate change crisis. Add one more crisis to your worry list: the transit crisis. Transit providers in California appear to be sliding down a wickedly slippery slope. With their operations funding reduced by the state and local governments, transit agencies have responded by reducing services and raising fares. Naturally, higher prices for less service equates to fewer customers. This causes revenue to decrease even more, which results in more service cuts, which causes additional revenue decreases and on and on. On top of this is the fact that more and more transit agencies are failing to meet the state's 20% fare box recovery requirement in order to qualify for a distribution of gasoline sales tax money, which is intended to fund transit operations. The situation also makes measuring demand a tricky business. Are people driving instead of riding transit? Are they walking or bicycling more? Are they forgoing trips altogether? The San Jose Mercury News recently ran a five-part series on the Bay Area's transit crisis. I have some nits to pick with the stories � such as the appallingly erroneous assumption that the only cost to driving a car is buying gasoline. Still, the point of the series is valid: The overall transit system is in failure mode. A story in the San Francisco Chronicle last week made clear that Muni � the workhorse in California's most transit-dependent city � faces a huge budget problem, along with the aforementioned service cuts and higher fares. The Bay Area is hardly alone. Transit operators all over California are in a similarly sinking boat. I cannot overemphasize how bad the transit crisis is for planners, so many of whom are focused on creating compact, mixed-use neighborhoods close to transit. The opponents to such development, especially in infill zones, always cite traffic and parking congestion from a proposed project as one of their biggest complaints. Planners are often quick to dismiss such complaints. The whole point is that the new residents and workers will walk, ride a bike or hop on a skateboard to take make short trips, while many longer trips to work, school or social outings will be made on transit. Heck, a household could get by easily with only one car, say the planners. I'm here to tell you that no one with a choice � read: car � is going to ride a transit system with 20-minute headways. Three dollars each way for a bus ride to the nearest mall or cinema? Forget it, we're driving. I fully recognize we're still in the grips of the big recession. (Anyone who tells you otherwise is an economist.) Money for public services is very tight. The Schwarzenegger administration is simply trying to keep the lights on four days a week in Sacramento. But the forecast for transit operations funding is bad for many years to come. There is no evidence the recent service reductions and fare hikes are temporary. Rather, they mark the start of a trend. Those people complaining that your infill project with stacked flats over commercial space, two blocks from the multi-modal station, will clog narrow streets and consume all the parking? They might be proven right. If they are, good luck getting the second project approved. - Paul Shigley

The Los Angeles City Council voted today to limit the number of medical marijuana dispensaries in the city (described by one councilmember as the "the capital of medical marijuana") to a total of 70 storefront locations. With an estimated 900 dispensaries currently operating within city limits, there are currently more medical marijuana outlets in L.A. than Starbucks. That is a sobering figure. How on earth did we end up with this many Starbucks? Do we really want our children walking around irritable and talking too fast, with the sunken eyes of first-year medical students? True, there are some genuinely sleepy people who may need the stuff; most java users, however, are making a mockery of the Compassionate Coffee Act. To the annoyance of everyone around them, "grounds hounds" can easily be identified, jabbering excitedly about their experiences in writing television comedy, blogging or other weird pursuits. You definitely do not want to see any of these folks behind the wheel. And coffee houses do not affect only people; they also malign surrounding businesses. The pernicious coffee house effect can be detected even at the most innocent dispensaries. Neighborhood storefronts that formerly spent little on tenant improvements are festooned with images of hemp leaves, unnervingly similar to the images of roasting coffee beans found on the walls of semi-legal coffee bars. And there, displayed in the glass case, like so much candy, are canisters of dark, oily beans, with names like "Arabica," "Columbia" and "Guatemala" as if they were run-of-the-mill brands like Chem Dawg, Mango Trainwreck and Hindu Kush Old Gangsta. To old-timers who remember traveling as far as Seattle to get "a cup," these exotic inventories must look like dreams come true. I guess the next thing we can expect is to see the beloved Cheech & Chong routines slowly supplanted by the menacing image of Juan Valdez, the serape-draped coffee grower from Colombia. Even ordinary language is being corrupted by the global Kaffeklatch . A word to the wise: "Fair trade" does not mean what it sounds like. (Hint: It has nothing to do with sex.) So much for innocence…. – Morris Newman

Like nearly everybody, I awoke last Wednesday morning to ghastly images and video of the Haitian earthquake. Anybody who lives along the California coast – and that's about 80% of the state population – is likely to have respond to this event with a combination of pity, fear, sadness and possibly a bit of what psychologists call "the guilt of the survivor." Even in earthquake-reinforced California, a temblor measuring 7 on the Richter scale, God forbid, could result in many failed structures and many casualties. Haiti was hardly built to California standards. The City of Port-au-Prince, like Los Angeles and San Francisco, bestrides two continental plates, which have been building up tension for the past 250 years. Virtually the entire city and many others have been leveled.  At times like this, my head fills with happy fantasies about how planners, architects, engineers and home builders could swoop in and assist the surviving Haitians. In my fantasy, volunteers with Habitat for Humanity could rebuild entire neighborhoods in the island nation with low-cost, low-maintenance, high-durability housing designs. Plus, we could create make-work programs to build new infrastructure, particularly up-to-date water mains, sewer trunk lines and power grids. Hell, we could throw in a couple of sea walls to protect coastal cities against increasingly severe hurricanes. We can put our city-building talents to the service of people in adversity, rather than greasing the path of speculative development. Sobriety soon follows. I remember having similar thoughts about New Orleans in the wake of Hurricane Katrina. Yet we have barely made a dent in rebuilding the neighborhoods destroyed by flood in a major American city, as Harry Shearer, the political satirist who lives in the Big Easy, would readily tell you. The average human being is good-hearted and wants to help when he or she hears about a catastrophe. Months down the road, however, when the news has grown cold, the need remains. While my fix-it fantasy may be Pollyanna-ish, one aspect might be taken seriously: Compassion needs to take the long view.    So let's talk about something more pleasant … like real estate development. It's not the fault of Phil Anschutz, developer of the $2.5 billion LA Live entertainment and hotel complex in downtown Los Angeles, that he scheduled a promotional event for his hotel tower the day after a disaster. Our renewed awareness of the basic necessities of human life, however, do not make the most flattering backdrop for the developer's plans to spend $100,000 to celebrate the completion of the absurdly tall hotel tower. At 54 stories, the Ritz-Carlton and JW Marriott tower hovers like a circus clown on stilts above everything else on the south end of the business district. Anschutz's big show called for the lights on the top 27 levels of the structure, according to the Times , "to flick on floor by floor in a rising wave to celebrate completion of the hotel, the last piece of the massive …entertainment complex." (I can feel a rising wave right now.) The "flame-on" was part of a City of Hope charity gala honoring AEG President Tim Leiweke, who was joined by a host of celebrities. City of Hope is a very worthy charity that does extraordinary work. My gripe is with the real estate developer's afflatus, which felt especially ghastly in the wake of the Haiti disaster. There's nothing restrained about Anschutz's project, but a little restraint was in order last week.  – Morris Newman

What if the judges are getting it wrong? What if they don't understand the law? People don't usually pose such questions in public. But I'm willing to risk it and to ask out loud: Does the Sacramento-based Third District Court of Appeal issue the wackiest California Environmental Quality Act decisions? No CEQA lawyer is willing to raise such a question in public because, well, they don't know when they might end up arguing a case in front of three Third District robes. But I will tell you that more than one CEQA lawyer has muttered to me off the record about the Third District. I bring this up because the state Supreme Court recently overturned a Third District CEQA decision for the third time in slightly less than three years. In Sunset Skyranch Pilots Association v. County of Sacramento the state high court confirmed that a county does not have to study the potential impacts of a project it denies. And the state high court is scheduled later this month to hear oral arguments in yet another CEQA case from the Third District ( Citizens for Sensible Planning v. City of Stockton , No. S159690). Am I singling out the Third District? No, the state Supreme Court is. During the last 3 1/2 years, the California Supreme Court has issued six CEQA rulings. Half of those rulings were reversals of Third District decisions – even though the Third District is one of the smallest of the six appellate districts in California. The state high court's other CEQA rulings were a reversal of a San Jose-based Sixth District decision on mitigation of impacts ( City of Marina v. Board of Trustees of the California State University , (2006) 39 Cal.4th 341), reversal of a San Francisco-based First District decision regarding when an EIR is required ( Muzzy Ranch Co. v. Solano County Airport Land Use Commission , (2007) 41 Cal.4th 372), and affirmation of a Los Angeles-based Second District decision regarding the definition of a "project" ( Save Tara v. City of West Hollywood , (2008) 45 Cal.4th 116). Three CEQA cases are pending – one each from the First, Second and Third districts. It's not that the Third District leans hard toward the pro-environment or pro-development side. In Vineyard Area Citizens for Responsible Growth, Inc. v. City of Rancho Cordova , (2007) 40 Cal.4th 412, concerning the adequacy of a water analysis , the court ruled for the Sacramento region's biggest developer. In another case, the court ruled for agricultural interests and environmentalists opposed to the Cal-Fed plan for managing water and the Delta. In the most recent case, the court ruled for an airport owner locked in an ages-old fight with Sacramento County. In the case the State Supreme Court is scheduled to hear later this month, the Third District sided with opponents of a proposed Wal-Mart Supercenter. The Third District is not issuing ideologically driven CEQA decisions. Nor is this a matter of one rogue judge, as four different justices wrote the opinions in the four Third District decisions reviewed by the high court. Still, two of the Third District's reversed decisions were obviously, uh … how to put this gently … outside the mainstream school of thought on CEQA. • The court rejected the Cal-Fed programmatic EIR in part because Cal-Fed did not analyze a project alternative in which Southern California population growth would cease and, therefore, Southern California cities would not need additional water. Seriously. • In the most recent case, the court said Sacramento County could not deny a use permit renewal for a private airport that has been a thorn in the county's side since the 1970s unless the county first conducted an environmental review of potential impacts to the airport and its pilots. It took the state Supreme Court only a handful of paragraphs to reverse that faulty logic. In the news business, we half jokingly say that one event is simply one event, but two occurrences indicate the start of a trend and three occurrences prove the trend is undeniable. In other words, we journalists have a tendency to jump to conclusions. Still, if the state Supreme Court reverses a Third District CEQA decision for the fourth time in a little more than three years, I can only conclude that something is going on. That something may simply be differing legal interpretations by the Third District and the state Supreme Court. Or, more troubling, that something could be a fundamental misunderstanding of the state's cornerstone environmental law by judges in an appellate court district. – Paul Shigley

The weather report for commercial real estate is bad, according to The New York Times , which reports rapid falls in value in local office buildings . In California, the weatherman is predicting flurries of half-empty office buildings and shopping malls to fall on Golden State cities during the next two years. For local governments, which have already watched an exodus of local and national retailers from local shopping centers and office buildings, the prospect of further trouble in commercial real estate is not a cheerful one.   According to various estimates, at least $500 billion of mortgages on commercial buildings – including office buildings, multi-family complexes and hotels – is due to be refinanced during the next two years. Most banks don't want to touch those mortgages, because the buildings have lost value. With a continuing credit crunch and growing vacancy rates in all major markets, investors who paid – and in many cases overpaid – for buildings during the most recent wave of magical thinking now find themselves unable to refinance buildings that are worth less than their mortgages. Sound familiar? Inability to refinance will force investors to default and give the buildings back to their lenders, who almost certainly do not want them. Banks almost always lose money on "real estate owned" properties. Everybody loses, because real estate values will tank across the board (actually, they already have) and lenders will act like you're speaking Swahili if you ask about refinancing. Securitization problems will also increase havoc in markets already melting down. Currently, about $800 billion in commercial real estate – office buildings, hotels, shopping centers and larger multi-family complexes – has been securitized. In essence, the mortgages have been pooled with billions of dollars worth of other mortgages, "sliced and diced," received ratings from credit agencies like Standard & Poor, and sold off primarily to institutional investors like pension funds and life insurance companies. In other words, it's the exact same story as that of securitized home mortgages. As with the mortgage-backed securities, the rating agencies gave thumbs up on ridiculously optimistic assurances of return without adequate acknowledgement of any potential downside. Sooner or later, a large number of those commercial real estate-backed securities will tank. The losses could stack up to $150 billion nationwide. Given that we have already damaged our financial system by absorbing the cost of failed mortgage-backed securities, is there a sensible public policy to cushion the coming crash? The prospect of the government shelling out $150 billion or so to save fat-cat institutional investors and their lenders would be political poison for the Obama administration. The now-infamous "bailout" of major financial institutions in the past year, although it may have prevented a global depression, was almost equally unpopular with both progressives and conservatives. A better idea, perhaps, is for investors to cut their losses by negotiating the sale of the mortgages and/or mortgage-based securities at some discount rate with new investors. If it were politically feasible, which it's not, it might be useful for the federal government to set up a "bad bank" to buy commercial real estate-backed securities at a discounted rate and resell them to investors, who will make a killing on them if they buy them cheaply enough. The "bad bank" might arguably have the advantage of stabilizing the commercial real estate market by creating an efficient "second market" for non-performing mortgages. Yet this model almost certainly entails a big investment of public money, so it's probably a non-starter, too. For the time being, as the bluesman Robert Johnson once sang, you'd better stay inside, "'cause it's gonna be rainin' outdoors."    – Morris Newman

Arnold Schwarzenegger has always been a Republican with a twist. As the governor enters his final year – attempting to deal both with economic woes and an ambitious environmental agenda – it appears that nothing has changed. He is going after the California Environmental Quality Act (CEQA) in his own way. It's legacy time for the governor. For better or worse, the Schwarzenegger approach to skinning CEQA may be part of his legacy. Given the gravity of the state's economic problems, especially the prolonged real estate slump, a conventional Republican governor would have called for CEQA's repeal long ago. CEQA didn't cause the worldwide economic slowdown, but orthodox Republican philosophy would dictate that streamlining, reforming, or eliminating the law should be part of the recovery. In his January 6 State of the State speech, Schwarzenegger laid out a five-point plan "create jobs and get California's economy back on track." One of the five points is, "Streamline Regulations To Get Shovels In The Ground." This is targeted at CEQA, and although it sounds sweeping, it really is not. Schwarzenegger is not proposing to reform CEQA or even change it in any way. Instead, he is going to propose a bill that would give the Business, Transportation, and Housing Agency (BTH) the power to identify 20 private projects around the state with completed environmental impact reports and declare them to be exempt from legal challenge under CEQA. Even though it's not a broadside against CEQA, it got a predictable response from the Democrats. Senate President Pro Tem Darrell Steinberg – who joined hands with Schwarzenegger on climate change legislation – called the CEQA proposal "an ideological battle" and said the administration should focus instead on spending $23 billion in unspent money from state bonds and the federal stimulus package. Schwarzenegger's CEQA proposal is similar to the CEQA reform he successfully wrestled from the Legislature last year as part of the budget deal (see CP&DR Insight , March 2009 ). That reform called out eight highway projects and specifically exempted them from CEQA, substituting a somewhat truncated alternate process. The governor's approach was the same as it is now: Keep CEQA, but attack it surgically in order to advance certain key projects and put people to work. Indeed, in announcing the CEQA proposal, Schwarzenegger went out of his way to make it clear he's leaving CEQA intact. "This proposal will not exempt projects from the California Environmental Quality Act and will expedite shovel-ready projects that have followed environmental law, not provide a way for projects to circumvent California's strong environmental protection law," he said in a press release. This statement came immediately after he criticized the use of CEQA in the Industry stadium situation as "needless lawsuits brought by a tiny group of individuals." Together with last spring's exemptions and the recent legislation exempting a new football stadium in Industry from CEQA (see CP&DR Capitol Update , October 15, 2009 ) – Schwarzenegger's latest proposal may represent a new way to cut into CEQA's power that will transcend his term of office, especially during hard times. Instead of gutting CEQA, move along chosen projects – especially by end-running the litigation process. There's one big difference between the highway and stadium exemptions, however, and his latest proposal: The latest proposal doesn't specify which projects are going to be moved along. If Schwarzenegger's bill is passed, it would set up a highly competitive – and, presumably, highly political – process to decide on the exempt projects. As the bill is drafted, BTH will have the power to identify 20 projects statewide and exempt them from CEQA lawsuits. Seven of these projects would be in the Los Angeles area, three in the Bay Area, five in the San Joaquin Valley, and five in other parts of the state. (There is no explanation as to why the bill specifies 20 projects, rather than 5 or 100.) The bill calls upon BTH to work with "local economic agencies" and chambers of commerce to solicit applications for exempted projects.  As an urgency law, it would require a two-thirds vote, which presumably means Schwarzenegger intends to make it part of the budget package, as last year's reform was. Like last year's exemption, Schwarzenegger's idea is a big change from traditional CEQA practice. Last year's provisions provided exemptions to eight projects based on economic hardship, not the traditional concept of natural disaster. This year's idea is even more of a deviation. The idea of an executive branch agency giving certain projects a CEQA pass is not new.  The natural resources secretary has always had the power to declare certain categories of projects exempt from CEQA if they provide a net benefit to the environment. In this case, however: • The power goes to the business-oriented BTH secretary, not the environmentally oriented natural resources secretary. • The power is not tied to the idea of a net environmental benefit, as the categorical exemptions are. • The power is tied in the bill only to economic criteria – specifically, "the number and quality of jobs" and the amount of capital investment. Ordinarily, BTH would go through a lengthy process of devising criteria for selecting the projects. (The Strategic Growth Council has been working on criteria for doling out Proposition 84 planning money for several months.) But Schwarzenegger wants to move quickly. BTH has to pick the projects within five months and finalize the choices within nine months. There's no requirement for public discussion of the criteria, though there is a requirement for one public hearing on the projects selected before the list is finalized. So BTH will have to scan the state quickly for the biggest pending private projects that appear close to EIR certification and, in a short period of time, pick the 20 likely to have the most economic pop if construction begins immediately. Given the intense lobbying that went for the Industry stadium CEQA exemption, it's frightening to contemplate the amount of lobbying that will be devoted to leaning on BTH. For any large developer in California, throwing lots of money at a Republican administration is likely to be far more attractive than throwing money at CEQA lawsuits. Indeed, there's a good argument to be made that the worse your EIR is, the harder you should try to get the exemption.  Developers with environmentally "good" projects may choose to slap down plaintiffs in court quickly; developers with environmentally "bad" projects will be highly motivated to end-run the courts. The bill will hit resistance, of course. Even if it passes, some environmental group will figure out how to file a lawsuit over it. This is CEQA, after all. And if I were an environmentalist, I'd start adding non-CEQA claims to my CEQA lawsuits so that a project on BTH's exemption list could be hung up in court on other grounds. For decades, nobody ever even proposed this kind of thing. CEQA was considered more or less beyond the Legislature's purview, and most CEQA battles were hashed out in court. The legislative debate, when it occurred, took place at the "nuclear" level of repealing CEQA or gutting it beyond recognition – an approach that was guaranteed to have enviros laying down in front of the bulldozers, so to speak. Yet CEQA isn't a sacred text or a constitutional provision. It's only a law – a statute that could be changed at any time. And so Schwarzenegger's final legacy in the growth wars might be to show how you can use legislation to bypass CEQA processes selectively for your own purposes, while still being able to say you're an environmentalist. If he is successful, he will provide a lesson that will not be lost on future governors.