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.

It's an exaggeration to say that 2010 will be the year in which nobody builds anything. But it might not be much of a stretch. The consensus found in numerous prognostications from economists, academics and analysts is that a "normal" level of development activity is still two to four years away. In the meantime, as Chuck DiRocco, director of real estate research at PricewaterhouseCoopers summed up, "Now is not the time to develop." California is a very diverse state, and some areas are certain to see more development activity than other areas. Still, extremely tight credit markets, concerns over a new wave of residential foreclosures, potential commercial property foreclosures, the scheduled end of federal government programs, high retail and office vacancy rates, and the state's ugly unemployment rate all combine to paint a dismal picture of the year ahead. "In essence, there are 3 confluences," said Larry Kosmont, a normally optimistic real estate and economic development advisor based in Los Angeles. "There is still a huge overhang of existing product that is yet to hit the market that everyone is waiting for. That is reinforced by the underlying lender requirements – from the few people who are willing to lend – for new products. The required ratios of capital-to-debt are so much more onerous today that the likelihood is slim and none that developers will be willing to proceed with these loans. The third is that rents are way down." During last decade's real estate boom, the build-it-and-they-will-come approach prevailed. But that's no longer an effective recipe, said DiRocco. This appears to be especially true for nonresidential products. The annual "Emerging Trends" report prepared by PricewaterhouseCoopers and the Urban Land Institute, and which is based on industry surveys and interviews, said that commercial real estate vacancies will continue to rise and rents will decrease before the market bottoms out at some point this year. That certainly appears to be the case in ever-important Silicon Valley, where CB Richard Ellis Group identified 43 million square feet of vacant office and flex space at year's end – the most since the dot-com bust of early last decade. Asking rents are down approximately 20% and, unlike during the dot-com crash, companies are not hanging onto empty space in the hope that they will need it in the near future. Developers did put up about 4 million square feet of speculative office space in Silicon Valley during the last three years, but the speculative building appears to be over for the foreseeable future. Shortly after the first of the year, The Wall Street Journal reported, "The pain is just beginning for commercial property markets." The Journal quoted a Deutsche Bank analyst who said nearly two-thirds of $1.4 trillion in commercial mortgages due by 2013 will be difficult to refinance. Thus, the foreclosure wave that swept through residential markets during the last two years could move to the commercial property market. According to Kosmont, the commercial vacancy figures are artificially low because they do not reflect the fact that some leased space is underused. If you account for the underuse, commercial vacancy rates are in the 20% to 30% range, he said. Retail vacancy rates loom in the teens for many parts of the state, and analysts predict very little construction of new space – whether in lifestyle centers, power centers or enclosed malls – because retailers have their pick of inexpensive vacancies. As for residential development, which often drives other development in California, there is great uncertainty. Gov. Schwarzenegger has proposed allocating $200 million to provide buyers of new or existing homes a $10,000 tax credit. Unlike a 2009 program – which provided a similar tax credit to buyers of new, unoccupied homes – the proposed 2010 version would offer the tax break to buyers of either new or existing units. The California Building Industry Association (CBIA) credited last year's program with bringing buyers back to the market, and the association applauded the governor's latest proposal. However, it is not a done deal, as outgoing Assembly Speaker Karen Bass said the state, because of its $20 billion budget deficit, should not be creating additional tax breaks. The fate of federal programs that have helped prop up the residential market appears equally uncertain. The Federal Reserve, which helped keep mortgage rates at record low levels during 2009, is scheduled to stop buying mortgages at the end of March. If that occurs, mortgage rates are almost certainly going to increase, according to analysts. An $8,000 federal tax credit for certain homebuyers is scheduled to expire in July after getting extended once for eight months. A federal government program to help underwater borrowers modify mortgages had resulted in only 31,000 loan modifications nationwide by the end of last November. The program has had little impact in California because borrowers are too deeply underwater to qualify. Still, some trade organizations insist there is reason for mild optimism. The California Association of Realtors reported that existing home sales statewide increased in November 2009 by 4.7% compared with November 2008, and the median price jumped 5.8% – to more than $300,000 for the first time in a while. The organization also reported there is far less inventory on the market these days. New home sales increased a bit in October 2009, the last month for which figures are available, according to CBIA and Hanley Wood Market Intelligence. The numbers were still extremely low – about 2,300 new units sold in October 2009 – but there was reasonable growth in sales of condominiums, townhouses and "plexes," primarily in Los Angeles County, the Bay Area and San Diego. Jed Kolko, a research fellow at the Public Policy Institute of California, said the residential market may have hit bottom, as prices have leveled off and inventory is no longer increasing. He also pointed to the fact that although California has led the nation in residential foreclosures, those homes typically do not sit vacant for long spells. Even during times of economic crisis, he said, "California does not have an overabundance of housing. It's one reason why we might see a quicker rebound here than elsewhere." The CBIA's findings regarding shared-wall units may reflect the future as well as the past. The PricewaterhouseCoopers report identified San Francisco and San Jose as two of the 10 strongest real estate markets in the country. And the survey found, generally, apartments will provide the strongest market segment. "We think apartments are pretty good performers in a recessionary period," said DiRocco. In addition, survey respondents repeatedly cited the advantages of coastal urban areas over suburban inland regions. "San Francisco and Los Angeles stand out a little bit stronger than Sacramento or the Inland Empire. If you're on the water, people feel, you're likely going to bounce back quicker," DiRocco said. This is because the Bay Area and Los Angeles serve as important economic gateways, and because they have significant land constraints that prevent the cheap-and-easy development patterns reflected in inland areas. In addition, DiRocco said, people increasingly want to live where the opportunities and action are. "People want to be back in infill areas and away from the suburbs. People want that 24-hour feel," DiRocco said. Kolko agreed there is an east-west division. "Almost all of the housing indicators are better the closer you get to the coast," he observed. Kosmont, on the other hand, sees more of an across-the-state development stagnation, but he did say that some very selective opportunities will arise in a few markets. Mostly, though, he sees few individuals or companies willing to build when they can find so many good deals already on the market. "Right now, you can buy for less than replacement value," Kosmont said. "There really is not a lot of reason to build new product of any product type in any region." Still, Kolko said that construction employment numbers have stopped their decline from a peak of about 950,000 jobs to a little more than 600,000. It could be that some workers who had been building homes and offices are now building government-funded infrastructure, he said. No matter, he said, "it is a positive first sign." Contacts: Larry Kosmont, Kosmont Companies, (213) 507-9000. Jed Kolko, Public Policy Institute of California, (415) 291-4483. PricewaterhouseCoopers "Emerging Trends" report. California Building Industry Association: www.cbia.org . California Association of Realtors: www.car.org .

Can 12 million fish be wrong? Virtually no finned critters were to be found in the San Dieguito Lagoon as recently as 2007, when bulldozers began to push tons of earth to create berms along the banks of the coastal waterway. Seven months later, in January 2008, marine biologists were astonished to find millions of baby fish – far in excess of their expectations – squiggling in the newly irrigated lagoon in San Diego County. Birds also showed up. During a three-year period starting in 2006, when the first phase of the environmental restoration began, waterfowl species nearly doubled in number from 89 to 160. "Clearly, there was an unmet demand for habitat," said Kelly Sarber, a biology consultant who serves as spokesperson for the $90 million effort. On paper, the 150-acre San Dieguito wetlands restoration project, which is scheduled to reach completion this fall, seems fairly straightforward: Newly constructed river banks, or berms, along the lagoon and the San Dieguito River will channel ocean water into the wetlands. During severe floods, the new berms will prevent silt from overflowing the river banks and spoiling the habitat. Downstream from the lagoon, biologists have replanted the barren flats with native plants that now thrive on the edge of newly filled saltwater ponds. The lagoon  remains open to the ocean year-round, so the tidal action of the Pacific can recharge the water inland. Ms. Sarber singles out the work of Hany Elwany, the hydrologist who figured out the proper levels of tidal water needed to keep the wetlands alive, while controlling the flow.  Components of the $90 million project, adjacent to Del Mar Fairgrounds, are seen here. Coastal wetlands are also a suitable home for some famously endangered species, including the California least tern, the light footed clapper rail and the Belding savannah sparrow, and could stabilize the populations of the threatened birds over the long term. The same habitat, of course, is suitable for many other animals, including frogs, coyotes, raccoon, striped skunk, opossum, mice and rabbits, along with assorted reptiles and invertebrates that complete the bio-balance. Heading the project are two power companies – Southern California Edison and Sempra Energy, the corporate parent of San Diego Gas & Electric – who took on the restoration of the San Dieguito marshlands. The project fulfills the power companies'  obligation to mitigate the effects of hot water disgorged by the San Onofre nuclear power plant a few miles up the coast; water from the reactor kills many fish larvae. The power companies will maintain the wetlands until the year 2050, when responsibility for the marsh will go to a joint powers authority made up of surrounding cities. The speedy response of wildlife may have been particularly gratifying for the biologists, hydrologists and other experts who pursued the project for 16 years before obtaining the necessary entitlements from a host of public agencies, including the California Coastal Commission, the state Department of Fish and Game, the State Lands Commission, Caltrans, the cities of Del Mar and San Diego, the San Diego Regional Water Quality Control Board, the Army Corps of Engineers, the Coast Guard, U.S. Fish and Wildlife Service and the 22nd District Agricultural Association. I have no problem with placing stumbling blocks in the path of developers and overweening homeowners who want to muck up the coastline. But why should wetlands restoration projects travel the same tortuous route? The degradation of the San Dieguito wetlands followed a familiar story line: Early in the 20th century, the area was drained for farming. During the Second World War, the military built an air strip on the former coastal marsh. Later, in the 1950s, Interstate 5 installed a concrete wall down the center of the wetlands. The rapid growth of San Diego County, meanwhile, hemmed in the wetlands on all sides, endangering the wetlands themselves. Local support for wetlands restoration has been strong and organized, however. After 75 acres of wetlands were restored during the mid-1980s, local residents pushed for further restoration of 150 acres. The San Dieguito wetlands project becomes part of a 440-acre wetlands, providing the scale and "critical mass" that biologists say is necessary for a viable habitat. An artist's renderings of the project once it is completed.  As it says in the Talmud, one good deed begets another. In this case, the wetlands are a centerpiece of a larger ambition to create a greenbelt that stretches from the ocean to Volcan Mountain, 55 miles away. In 1989, the joint powers authority—made up of the city and county of San Diego, plus the cities of Del Mar, Escondido, Poway and Solana Beach—acquired 20,000 acres of land in the area. Another 20,000 acres are already under public ownership. Currently, about eight miles of the "coast to crest" trail exist, and proponents say they hope to complete the corridor within 10 years.  The San Dieguito project has not been free of political hiccups (see CP&DR Environment Watch , September 2003 ). Last August, the City of Del Mar briefly went into a tizzy when a draft land use proposal for the wetlands suggested designating the entire city and its popular beachfront as a protected area. City officials feared such designation would prevent Del Mar from replenishing the sand on its beachfront. The proposal did not move forward, and Del Mar's beaches actually benefit from the wetlands, because the sand that accumulates in the lagoon can be used to replenish the city's beaches. Kerfuffles aside, the San Dieguito wetlands restoration has some historical ironies: Our forefathers were eager to drain the marshes in the 19th and 20th centuries, and California has lost 95% of its coastal wetlands. Today, we spend heavily to recreate those same wetlands, which have become prized open space amenities. By itself, the growing fish population vouches for the success of restored wetlands in San Diego County. Fish don't talk, of course, but they don't lie, either.

After two decades of false starts, public and private planning efforts, litigation and ballot measures, development in South Sutter County appears ready to commence – just as soon as the economy rebounds. In mid-2009, the Sutter County Board of Supervisors approved a specific plan, a land use and development code, design guidelines and an environmental impact report for a new town project known as Sutter Pointe. The specific plan calls for 17,500 housing units and nearly 50 million square feet of industrial and commercial space on what is now mostly farmland. Remarkably, no lawsuit was filed nor ballot measure circulated following the board's approval of the project. Essentially, the plan permits the Sutter Pointe development consortium to build houses in exchange for providing infrastructure that will enable the industrial job development desired by Sutter County. "I think this plan helps ensure we have a viable project there, and, ultimately, a community where people can live and work," said County Supervisor James Gallagher, who represents the area. "We're talking about basically creating a new community in South Sutter County, which was more than a little controversial the first time." Located in the southern Sacramento Valley, Sutter County has long been an agricultural county. During the 1990s and especially the early part of the last decade, the county seat, Yuba City, became a bedroom for commuters to Sacramento, located approximately 40 miles to the south. Sutter County's unemployment rate is always high. Its unemployment rate for November 2009 was 19.4% – far above the state's 12.2% rate, according to the California Employment Development Department. Thus, county leaders have long sought to boost employment opportunities. In 1991, voters rejected competing growth initiatives for South Sutter County. That stalemate led to the Board of Supervisors approving a huge project called Sutter Bay, just  north of the Sacramento County line, the following year. Lead developer Ahmanson Development Company envisioned 80,000 residential units in a 36-square-mile new town. But Sutter Bay became a campaign lightening rod, and a Board of Supervisors with three new members rescinded the Sutter Bay development agreements in early 1993. Months later, voters rejected the project in a referendum election. Ahmanson and its partners sued the county, but the county ultimately prevailed. Meanwhile, the county updated its general plan and designated a 10,500-acre "industrial/commercial reserve" along Highway 99 near the Sacramento County line, and in 2002 the county approved a 3,500-acre specific plan for a portion of the reserve (see CP&DR Economic Development , November 2002 ). That plan died amid litigation filed by the Sierra Club and the Environmental Council of Sacramento, who successfully challenged the county's lack of an infrastructure financing strategy. In 2004, county voters approved Measure M, an advisory measure that drew a broad outline for development of 7,500 acres in South Sutter County. The ballot measure called for no more than 2,900 acres of residential development and at least 3,600 acres of commercial and industrial uses, as well as at least 1,000 acres of parks, open space and community facilities. Measure M provided the starting point for the specific plan that was then prepared by the Sutter Pointe group, which includes Lennar Communities, Angelo Tsakopolous's AKT Development, Axel Karlshoej and Al Montna. In fact, county officials asked the developers to take the lead in preparing a new specific plan, explained George Carpenter, the project manager. "Sutter Pointe is based on Measure M. The whole point of Measure M was to bring jobs to the county," said Carpenter, a former Sutter County planner. "The problem is that there has been no way to finance infrastructure." The Sutter Pointe plan attempts to balance residential growth and industrial development. Developers have long been interested in building houses in South Sutter County because of its close proximity to jobs in both the capital city and in Roseville. But for just as long, Sutter County leaders and voters have insisted they did not want to see development of a new bedroom community. They want jobs. Like Measure M, the specific plan speaks of residential maximums and industrial minimums. The plan permits residential development in phases as industrial and commercial development proceeds. The residential development will raise the revenue for the infrastructure, including an expensive sewer collection system that developers intend to tie in with a regional wastewater treatment plant in south Sacramento, as well as major improvements to highways and roads. Supervisor Gallagher said he is comfortable that the plan ensures industrial infrastructure will come online at the same time that housing is developed. The conceptual plan for the job-rich Sutter Pointe development. The specific plan itself is not overly specific. That was intentional, because county officials and developers want to be able to make adjustments as the area builds out over the next 20 to 30 years. Also, there was a fear that preparing a more detailed plan would drag out the process for too long. As it was, the more general document prepared by EDAW and developers, and approved last year by the county, took four years to complete. Future development will require tract map approvals and subsequent environmental reviews, Carpenter said. The site is in an area in which the Sacramento Area Flood Control Agency (SAFCA) is undertaking extensive levee upgrades to provide at least a 100-year level of protection. The Sutter Pointe development will provide impact fees to help pay for some of those improvements, according to Gallagher, who sits on the SAFCA board. The site also sits in an area that provides habitat for the Swainson's hawk, the giant garter snake and other endangered or threatened species. However, a habitat conservation plan is in place, and that plan largely provides the boundaries for Sutter Pointe development, according to Carpenter. Sacramento and the Natomas Basin Conservancy, which manages the habitat conservation plan, have expressed concern that Sutter Pointe development could inch right up to protected lands. Sacramento planners would like to see significant buffers between Sutter Pointe development and habitat lands, as well as between Sutter Pointe and the City of Sacramento's potential sphere of influence north of the existing North Natomas growth area, according to Scot Mende, Sacramento's new growth manager. The exact location of development, however, will not be known until Sutter County processes tract maps. In part because of the flood control needs, but mostly because of the slow economy, developers do not foresee much on-the-ground activity before 2013, said Carpenter. But they do anticipate market demand for housing as well as industrial uses once the economy rebounds, he said. The close proximity to Interstates 80 and 5, and to Sacramento International Airport, as well as the immediate access to Highway 99 should entice industry, he said. "We've got large sites available for big users. We've been told by the broker community that there are not very large lots available like this. We'll be competing with Stockton and Reno," Carpenter said. The residential plan is based on the village concept. A traditional village with a grid pattern centered around a great park and civic facilities will provide the most homes. "The whole idea behind Sutter Pointe is that it's going to be a new city. It ultimately will incorporate," Carpenter said. Although environmentalists in the past have complained that South Sutter development would amount to leapfrog growth, the Sutter Pointe plan actually exceeds the housing density and jobs-housing ratio envisioned for the area by the Sacramento Area Council of Government's regional blueprint. Sutter Pointe would also be located very close to new growth areas of Placer County and Roseville that are endorsed by the regional blueprint. Contacts: George Carpenter, Sutter Pointe project manager, (916) 355-1450. Sutter County Supervisor James Gallagher, (530) 822-7106. Scot Mende, City of Sacramento new growth manager, (916) 808-4756. Sutter Pointe specific plan: www.co.sutter.ca.us/doc/government/depts/cs/ps/cs_sutterpointe . Natomas Basin Conservancy: www.natomasbasin.org .