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- The Rights of Land Owners Impacted by Easements
In this episode of Digging Into Land Use Law, Nossaman Real Estate partners Simon Adams and Karla MacCary get down and dirty and into the weeds of the rights of land owners that are impacted by easements. It can be important to know how these rights can be established given their effect upon property values. Simon and Karla examine the risk of easement creation and the correct precautions to be taken by owners. They also debate the benefits and burdens of easements by land owners and developers that use these legal rights to enhance the value of their land.
Transcript: The Rights of Land Owners Impacted by Easements
0:00:00.0 Simon Adams: In this episode of digging into land use law, we get down and dirty and into the weeds of the rights of land owners that are impacted by easements. It can be important to know how these rights can be established given their effect upon property values. We take a look at the risk of easement creation and the correct precautions to be taken by owners. We will debate the benefits and burdens of easements by landowners and developers that use these legal rights to enhance the value of their land.
0:00:31.4 Speaker 2: Welcome to Digging Into Land Use Law, Nossaman's podcast covering the development of all things in, on, or above the ground.
0:00:47.7 SA: Good morning, good day, or good evening, depending on what time you're tuning in. My name is Simon Adams, and I'll be your moderator for this episode. I'm a partner in the Nossaman's Real Estate Group, working out of our San Francisco office. Today, it's my privilege to interview my fellow Nossaman partner, Karla MacCary. Karla has more than 25 years of experience advising on real estate financing and transactions. She serves as the co-chair of our Firm's Real Estate Group, and she works out of our downtown Los Angeles office where she enjoys some of the best views of the city. Karla, welcome to this episode. Please, can you explain to the listeners the essence of an easement so that we can all recognize it when we see it?
0:01:29.5 Karla MacCary: Well, thank you, Simon, for that nice introduction. Well, I'll start by defining what an easement is, and it's an interest in the land of another that gives the owner of that easement the right to use the land or to prevent another owner from using the land. Now, an easement is distinguished from a license, which is the personal privilege, and a license is usually something that can terminate while an easement is permanent. An easement can be insured by a policy of title insurance while a license cannot because it's not an interest in the land.
0:02:12.6 SA: If having an easement is preferable to a license, how does one go about setting up an easement?
0:02:19.5 KM: Easements are created by many methods, and the first, and I'll say it the best, most preferable is by an express grant in an easement deed. For example, an owner of Parcel A as grantor grants to the owner of Parcel B as grantee an easement for pedestrian and vehicular purposes, say, 15 feet wide measured from the center line, for ingress and egress from a public street known as Main Street to parcel B.
0:02:52.9 SA: Since we have a podcast here and people cannot see the documentation, could you explain to our listeners what it may look like?
0:03:02.5 KM: Exhibit B is going to be a legal description, and they'll also have a map attached to it that shows it drawn out, and the legal description in this instance would probably be a legal description of that center line, and then the map would show 15 feet on either side of it.
0:03:24.1 SA: Karla, are there other ways to create an easement?
0:03:26.9 KM: Yes, similar to an express grant, you can have an express reservation in a grantee. For example, in a grant of Parcel B by the owner of Parcels A and B, the grantor accepts and reserves over Parcel A an easement for pedestrian and vehicular access 15 feet wide measured from the center line for ingress and egress from the public street known as Main Street to Parcel B.
0:03:57.2 SA: Karla, would I be correct in my understanding in that scenario, the owner of Parcel B, having reserved their route to Main Street of Parcel A then sells the land, and we have two different parties, the easement here would remain in place to ensure the road connecting Parcel B to the Main Street is preserved?
0:04:20.4 KM: Exactly. The other ways to create an easement are a bit messier. The first one of these methods is by implication. And easements can arise by implication under circumstances where the court concludes that the parties intended to create an easement even though they failed to do it in writing and put in a record, and that usually arises where the property used to be held in common ownership, and then part of it was transferred. And an easement by implication can also arise when a landowner subdivides the land, and then the subdivision map shows streets and alleyways that are within the property and provide access to different lots, and then when a lot is conveyed, the deed in their description generally refer to that same map, and that map which has the streets and alleyways becomes part of the deed.
0:05:17.7 SA: Okay, so if I have a map noting the easements, will that hold up in a court of law?
0:05:24.7 KM: Yes, it should hold up in court. Another way you can get an easement is by necessity, and again, involving the court. The court will create an easement by necessity based on public policy, in that public policy here, it favors the productive use of land and discourages waste of assets just because there is a lack of access. The court should do this only when the easement is absolutely essential, such as when the land is landlocked.
0:05:58.6 SA: Again, this is an easement established through the courts?
0:06:02.8 KM: Yes, yes. And another way courts create easement or are involved with the creation of easements is through the condemnation process. The governmental agency can condemn an easement through the eminent domain process, and at the end of the process, the easement appears of record in the form of a document from the court, the order of condemnation.
0:06:27.5 SA: If the government seizes my property through eminent domain, and then by filing paperwork as part of that process, an easement can be established. Karla, would the easement be mentioned in the paperwork?
0:06:41.3 KM: Yes, yes, it would. Now, the last method to create an easement is by prescription. And this... It's a notorious method of creating an easement. It's very similar to adverse possession. The elements of creating an easement by prescription are very similar to adverse possession, but they do not include the payment of taxes unless the easement parcel is separately assessed.
0:07:08.5 SA: Karla, it seems to me very appropriate that this type of easement is considered notorious. You've just described an easement established on my land without my consent and essentially by way of trespass.
0:07:21.5 KM: Yeah, that's basically right. So, Simon, do you know, the elements of prescriptive easement that you could explain for our audience?
0:07:31.7 SA: There's two elements that should be looked for. Firstly, the land must have been used and used continually for a period of five years. And secondly, the land must have been possessed in a manner that's open, notorious and clearly visible to the owner of the burdened land, and hostile and adverse to that owner. Now, whether the criteria have been met is a question of fact. And the person claiming the interest has the burden of proof, and in fact, they're entitled to a jury trial. The claimant doesn't need to show any necessity, but they do need to show the use unlawfully infringed on the rights of the owner of the burdened property. So that's to say our claimant will need to show the use was a trespass. However, there doesn't need to be an intent to violate the rights of another. The person can acquire a prescriptive easement through the mistaken idea that the use that they're making was their right in the first place. Karla, what elements must we be aware of in our review if a project is going to rely upon a prescriptive easement or an easement by implication?
0:08:44.0 KM: Well, if you're developing a project as a practical matter, you would need to go to court to get the interest recognized and recorded, and a lot of this is for title insurance reasons that... To get financing, you need title insurance, and title insurance companies have underwriting requirements, and they don't like to buy into lawsuits. They want to have it resolved and have the court recognized, and have it put of record, and then they will insure it.
0:09:18.5 SA: A property owner generally cannot acquire an exclusive prescriptive easement that's the equivalent of a fee title. For example, a prescriptive easement may not be used to resolve a backyard fence dispute. However, courts have recognized an exception to this prohibition for cases involving public health safety and utility services. Karla, are there cases that would help in further understanding the nuances of the general position?
0:09:47.1 KM: Yeah, a good case on this came out in 1991, and it's called Otay Water District vs Beckwith, and in that case, a water district acquired land, but it turned out almost 1.7 acres of that land wasn't owned by the grantor, but the district was not aware of that when they acquired the land. They thought they had the right to it. They fenced it, they built a reservoir, used the reservoir, and it was readily apparent that use. And about 20 years later, the district, for whatever reason, they discovered this mistake, and they felt that they had to correct it. They brought a court action that successfully gave them a prescriptive easement for that 1.7 acres. The court held that the easement must be exclusive despite the general rule, to protect the public water supply from contamination. They couldn't risk having the true owner of the underlying property come try to use it or the general public. The court also noticed that the easement would terminate when the water district stopped using that 1.7 acres for a reservoir. While they found an exclusive easement, they did not grant them a permanent easement.
0:11:18.5 SA: Let us imagine for a moment, I'm a property developer and my big concern is whether my main property project is going to be subject to any easements either by prescription or necessity, which could impact upon my planned use of the property. Prescriptive easement can be acquired obviously both by specific persons or by the general public, and whether an easement has been created for the benefit of the general public or the private individual will obviously depend upon whether it's been continuously used in a required manner. Karla, what are the protections might I be considering and looking for regarding my development?
0:12:00.0 KM: Well, here in California, we have two statutory methods to protect owners from losing property through prescriptions, but those methods cannot undo a prescriptive right that has already been earned before the statutes were passed. So, under Civil Code Section 817, an owner can record with the county recorder a notice with the legal description of the land. And when the use is by specific persons such as neighbors rather than just the general public, that notice, that 817, Civil Code Section 817 notice must be given to the particular user by registered mail or certified mail return [0:12:43.5] ____ requested.
0:12:47.0 KM: It's worth noting that the consent that the property owner grants can also be revoked by recording a notice of revocation or delivering a notice of revocation to the particular users, but under Civil Code Section 817, after recording the notice and before the revocation, the owner is not supposed to prevent or obstruct appropriate public use. The next statutory method to prevent the acquisition of easement rights through prescription is by posting, and you post a sign at the entrance to the property or intervals of 200 feet along the boundary. The notice should read, "Right to pass by permission and subject to control of owners, Section 1008 Civil Code." So plaques with these notices are often seen on sidewalks and in urban areas. We see them in Downtown Los Angeles and a few places, and the owners have installed these plaques because in the event that their building is destroyed or taken down, they want to reserve the right that maybe they want to build on that area that they're letting the public use at the present time for a sidewalk.
0:14:02.8 SA: I'd like to turn our attention now to the scenario that is encountered where there's a trail and it's been used over the years for, say, hiking, horseback riding or vehicles, and in this regard, it's important to highlight California Civil Code 1009. This is the law that was passed in '71 in order to encourage private owners of land to permit entry by the public for recreational purposes. Prior to this code becoming law, owners of the undeveloped land were forced to close their trails [0:14:35.1] ____ to keep the public from acquiring a permanent easement. Karla, can you provide some further observations on the effect of this code?
0:14:44.3 KM: Section 1009 provides that except for land lying within 1000 feet of the mean high tide line of the Pacific Ocean, or between that line and a public road, whichever is less, the public cannot acquire any rights in private property by prescription, unless public funds are being used to improve and maintain that property. So today, in order to prove a prescriptive easement, the claimant would have to show that the easement was acquired before 1971, which is when Section 1009 was passed. And they do try. Just two years ago, there was a case on the issue of trails, and there were witnesses providing testimony about how when they were children, they hiked these trails with their families in the 1950s and the 1960s. And it goes without saying that as time goes on, it's going to be harder and harder to bring these cases because it's going to be harder to have witnesses that have memories of five years of use pre-1971.
0:15:54.7 KM: It also should be noted that to prove an easement by prescription is highly specific. If you will be investing money in reliance on an easement by prescription, you should confirm that right again through judicial action and record the judgement. Don't rely on your facts maybe similar to another case. And if the land you will be using for your project shows any evidence of adverse use such as trails or roadways, investigate further and see if there's a risk that there's a user who could claim a prescriptive use of the land. And prescription requires continuous use, so in one-off, someone using it in one-off is not going to show prescription, but you should observe over time and see if this use is something that is happening with some frequency. Finally, it's worth noting that you cannot get a prescriptive right against a governmental entity, and the government cannot lose its property through adverse possession.
0:16:57.0 SA: Well, another issue I'd like your comments on Karla, concerned changed use. Let's consider easements that have been expressly granted or reserved and through prescription. However, in this scenario, a dispute arises because of party changes or intensifies the use of the easements they have. For example, let's say this may happen in a neighboring property being developed and the regular use of access is now being used for construction traffic or a road that was previously only used by hikers is now used by vehicles. Karla, what issues do you want us to consider regarding increased or expanded use?
0:17:40.2 KM: Yeah, this is an issue where you do see a lot of disputes and litigation on this very issue. And the first place to look is the easement grant, assuming there is one that you have, that this is an easement that was created through an express grant or an express reservation. How specific were they? Was it just an easement for driveway purposes? Or did the language include driving purposes, including the ability and the right to park cars, store trash cans? Is landscaping mentioned? What about irrigation? Does it mention incidental purposes? Easements that are created nowadays, the custom with lawyers who represent a lot and work with real estate developers is to have a pretty detailed document that goes into a lot of detail about everything that can be done through that easement. But often you have what you have with property and the easement may be very simple, and it will require some analysis to determine what sort of rights you can do with the document that's drafted without finding yourself in a dispute with neighbors or the underlying owners. Now, because easements used to be fairly simple documents, general rules have developed about easements and their use. Simon, can you explain to our audience what some of these general rules are?
0:19:19.7 SA: Yes, so once an easement has been created, both parties have the right to insist that so long as the easement is enjoyed, it shall remain substantially the same at the time it was accrued as a right, regardless of the relative benefit or damage to the parties by reason of a change in the mode and the manner of its enjoyment. The strict application of this rule has been relaxed to permit minor alterations in the sense of the use, as long as the change is one of degree and not a change of character. [0:19:49.7] ____ the easement can make minor changes in the use as long as there is no material or substantial increase in the burden on the servient tenement. So, an increase in use is contemplated, the creation of the easement is permitted, whether you've got increased use success, the success if it's a question of fact, and that depends on either the terms of the document that established the easement or the circumstances of its creation and the intent of those parties. The extent of the easement is inferred from the circumstances that existed at the time the easement was created. Now Karla, there are circumstances where a change of use may be permitted for technological developments if that new use is similar to the former use and the new use results from the change to technological conditions. Can you provide comments to us regarding this?
0:20:43.1 KM: Yes, consideration is certainly given for technological advances, and we have a case example of that. That is in Salvaty vs Falcon Cable Television from 1985. And in that case, the owner of an easement for telephone poles and lines, the court found that that owner was allowed to use the easement and poles for cable lines because the additional lines did not increase the burden on the underlying property, and the use was consistent with the primary purpose of the grant and was within the natural evolution of communications technology. The extent to which use of an easement can be altered and the question of whether the use is excessive, and amounts to a surcharge of the easement on the burdened property, these are issues of fact that are specific in each case. But as a general rule, the owner of the dominant tenement must use the easement in a manner that imposes the least burden on the owner of the servient tenement, and every incident of ownership that is not inconsistent with the use and enjoyment of the easement is reserved to the owner of the land.
0:22:01.9 SA: Well, thank you Karla, for joining me today and allowing me to pick through your extensive knowledge on this subject matter, and providing a good explanation of how easements work.
0:22:13.3 KM: Well, thank you for having me, it was a pleasure.
0:22:15.6 SA: And I'd like to thank our listeners for joining us in our podcast Digging Into Land Use Law. For additional information on this topic or other environmental land use issues, please do visit our website at nossaman.com. And finally, don't forget to subscribe to our Digging Into Land Use Law podcasts, so that you don't miss any of the new episodes. Until next time.
0:22:44.1 S2: Digging Into Land Use Law is presented by Nossaman LLP and cannot be copied or re-broadcast without consent. Content reflects the personal views and opinions of the participants. The information provided in this podcast is for informational purposes only, is not intended as legal advice and does not create an attorney-client relationship. Listeners should not act solely upon this information without seeking professional legal counsel.
- Digging Out of the 2020 Elections
Following a historic 2020 election, with record voter turnout and multiple controversies amid a global pandemic, Nossaman Government Relations & Regulation (GRR) Chair Fred Dombo spoke from Washington, DC with Nossaman GRR Partner Amber Maltbie in Los Angeles about the likely policy consequences of the new Congress and the new Administration. Their conversation covers the potential for introduction of a large infrastructure package, as well as trends that they noted in the election outcome and how the results might impact policy decisions going forward.
Transcript: Digging Out of the 2020 Elections
0:00:00.2 Amber Maltbie: Today we are going to “dig out” from the 2020 election and examine the likely policy consequences of the new Congress and the new administration, including the potential introduction of a large infrastructure package. We will also discuss some trends that we noted in the election outcome and how the results might impact policy decisions going forward.
0:00:25.2 Speaker 2: Welcome to Digging Into Land Use Law, Nossaman's podcast covering the development of all things in, on, or above the ground.
0:00:42.2 AM: Thank you for joining us on this new episode of Digging Into Land Use Law. Today we will be discussing the 2020 election. My name is Amber Maltbie, and I'm a partner in Nossaman's Government Relations & Regulation Group. My practice focuses on campaign finance and election law. And I provide strategic counsel to individuals, nonprofits, agencies, and organizations engaged in political and lobbying activity. Joining me today is Fred Dombo, who serves as chair of Nossaman's Government Relations & Regulation Group which combines experience as an aide to members of the US House of Representatives, committees on appropriations, and energy and commerce. With more than 20 years of private practice to provide clients with cost-effective advice on the legal and political implications of their government relations activities. It's great to be here with you today, Fred.
0:01:37.3 Fred Dombo: Thanks very much, Amber. I'm glad to join you today to discuss the implications for infrastructure land use and environmental matters.
0:01:44.8 AM: Before we jump into the big picture of what happened at the federal level, we thought it would be fun to take a look at what happened beyond the presidential and those senate races. There was a lot of activity that happened at the state level. And there were also some trends that we noticed in terms of the election outcomes.
0:02:08.6 FD: Yeah, at this point, I think in California, there's a few House seats that still haven't been determined. But more importantly, we saw a lot of changes, an increase in diversity of the new Congress. And as people may know, or may not know, we have a bipartisan practice. For example, you're a Democrat, I'm a Republican, I was proud to see that we're going to have at least 31 Republican Women make their way into Congress come January, surpassing a record set in 2006, according to CNN and the Washington Post.
0:02:40.3 AM: So that was one of the big landmark things that happened in this election is that there was such abuse and Republican women who ran and won at the congressional level that was complimented in 2018 when Democratic women ran and won in unprecedented numbers. And so now Republican women have double the numbers of representation that they had previously. And so overall, we're seeing this trend towards getting women to run and to get elected. And we'll talk a little bit more about why that representation matters when we're talking about the policy implementation later on in our podcast here.
0:03:23.2 FD: The other thing that happened with so much change on the one hand, and I think you're going to go into some details regarding other ways, diversity increased in the congressional level. But interestingly, on the state level, there was some turnover expected in a legislative chambers that just didn't materialize. In fact, only one state had turnover in their legislature. In New Hampshire, Senate and House both moved from Democrat to Republican, which seems counter to the trend across the country. It seems that the trend that was expected didn't actually materialize. Both had gone the other way in 2018. And now they're flipped back according to the National Conference of State legislators.
0:04:02.1 AM: Well, that may be true, but new, New Mexico had something historic happen. It now has a majority of women in its state legislature, making the Mexico only the second state in the country that to be majority women represented. Nevada actually stole that claim in 2018 to become the first but I think too, the other thing to take into consideration is that we are at the tail end of the decade, set the Census count has ended and so redistricting is going to start in earnest in the next year. And so we'll see a lot of jockeying at state... At the state legislative level where the legislatures control the redistricting, or before the redistricting commissions that a number of states have set up to serve as independent bodies to redraw those lines.
0:05:00.8 FD: Yeah, that was kind of an untold storyline in a lot of the media, we saw around the 2020 elections. For example, in the Arizona House, a lot of money was dumped into there to try to change it. It's been Republican since 1966. It appears as though it's going to have that same partisan makeup as it has had. In the last session, 31 Republicans and 29 Democrats, despite speculation that it might change and despite a lot of effort to flip it, and despite the whole state, really going from red to blue. So it's just a lot of interesting different facts and stats, we need to unpack from the selection and see what that means. But right now, we can tell you some high-level definitely impacts that's going to have on the policy agenda.
0:05:45.7 AM: One thing that you mentioned there, Fred, that is interesting is that the difference between how voters are voting at one level but then voting differently at another level. So for example, you mentioned Arizona, the legislature did not flip. However, it appears Arizona turned blue for the presidential election. And so there's some disconnect there. One of the mechanisms for influencing policy change that a lot of our clients actually utilize is the ballot measure process. And this is a way when the legislature is not going the way perhaps people really wanted to go in terms of policy, individuals, special interest groups, they can go directly to the voters with the policy proposal through the initiative process. And this is...
0:06:38.3 AM: Not allowed in every state, it's a process allowed in about 25 states. Another trend that we saw this year was the voters adopting policies when the legislature refused to act, and this is something we saw earlier in the year in red states like Missouri and Oklahoma, passing Medicaid expansion at the ballot, when the legislatures have refused to adopt those proposals. And then on the general election, you had red states like South Dakota and Montana, voters adopted cannabis legalization recreational use for adults, 21 and older, when the legislatures had not been friendly to those policies.
0:07:26.0 AM: I think that may be akin, and Fred, this something where I'd really like to dig in with you, is we're looking at potentially having a Democratic administration, but a Republican-controlled senate. And you mentioned there's a number of big policy proposals being pushed through the federal government, and I just talked about how at the state level we see different competing legislative policies being dealt with. How do we anticipate that occurring at the federal level?
0:08:03.0 FD: Yeah, I think you're going to see that definitely in the form of an infrastructure package. The big piece of legislation that everyone's been waiting on and now very much expecting at the outset of a Biden administration is going to be a large infrastructure package that's also going to serve as a vehicle for stimulating jobs and helping the recovery from the pandemic.
0:08:24.4 FD: Before we get there though, the Congress has some unfinished business to attend to, the current Congress, and that includes the fiscal year 2021 appropriations, the most passed spending bills the senate released, 12 of them. And at the time of this recording, the vice chairman there, the Democrat Patrick Leahy from Vermont, said negotiations between the Democrats and Republicans are going well, and that they're probably going to be able to have a product out to cover the rest of fiscal year 2021 before too long.
0:08:57.4 FD: A little more complicated is the coronavirus stimulus package, the next version of that that everyone's been talking about. Not a lot has changed there since before the election. Some speculated that after the election, it would be easier to get that done, there would be less pressure on Majority Leader McConnell to hold a lot on spending. Well, recently he came out with a statement, once again, advocating for a smaller bill, a lower dollar amount spent in the bill because unemployment is down once again, and Eli Lilly has an antibody therapy that's been touted and granted emergency use authorization by the Food and Drug Administration.
0:09:42.2 FD: And of course, big recent news is Pfizer's COVID-19 vaccine, 90% effective. So his point is, this thing might be ending sooner than expected, and therefore, we shouldn't spend as much money. I think a lot of policymakers are going to disagree on the House side with that, so that could be a more approach of battle in the current Congress.
0:10:04.9 FD: Also of interest to our listeners is the Water Resources Development Act, WRDA. That conference report is in the House after it passed the House in July and was reported to the Senate, which back in May, Ian had handled it. The product that will be forthcoming and that's a very significant piece of legislation as listeners know. Another one is the National Defense Authorization Act.
0:10:32.5 FD: The situation with the infrastructure packages that Highway Trust Fund, which actually provides the funding for the programs, is headed for insolvency. It's derived from fuel taxes, they haven't been increased since 1993, and the authorization for these programs is up as well. So that's due in September 2021, we have less than a year to get that taken care of.
0:10:58.8 FD: House Ways and Means Committee will provide the funding mechanisms for that. They definitely want to put forth a bill... Their portion of the bill and help upgrade the country's roads and bridges and waterways, but they're also positioning it as an opportunity to create good jobs for folks who were out of work and that'll re-energize the economy.
0:11:21.8 FD: The House Transportation and Infrastructure Committee has the structure of that bill, it's a $500 billion authorized bill that doesn't actually have the funding mechanism in it, and that's... Had already passed Congress earlier, this current Congress, and would establish, potentially, a national vehicle-miles traveled pilot program, to see if that's a viable way to fund our infrastructure around the country.
0:11:49.7 FD: That has set the stage for Mr. Biden's proposal, that that is a full... In the campaign, has available, publicly available plan that would cost about $2.6 trillion. It would include not just highways, roads and bridges, rail, transit, but also housing, schools, electric vehicles, trains, water resources, and broadband.
0:12:20.5 FD: The scope of it, very broad, very aspirational. The goal is to create a modern sustainable infrastructure that will actually foster job creation and improve the equity in our infrastructure system and deliver a clean energy future. So there's going to be... The Republican Senate's going to have a lot to say about that. We might see that funded through a temporary gas tax increase that's been phased out as we phase in a vehicle miles travel tax. As part of that, you may have a carbon tax that would also include a dividend or a tax credit hooked into carbon equity. The concept of...
0:13:06.6 FD: Having these systems paid for in a progressive fashion that's going to put... Shift the burden off of people that's able to pay. So Biden has been a supporter of bonds for infrastructure, so we expect to see that. In 2009, he supported the Build America Bonds program, as well as public-private partnerships, which I know are of interest to a lot of our listeners. There's been bipartisan supporting Congress for Private Activity Bonds and the TIFIA program. Not only will Biden emphasize them, but also maybe use them or TIFIA in particular, as a model to help fund airports and also to help develop broadband programs. The infrastructure package is going to be the subject of a lot of debate and there's a lot of work to do on it, even though in the last Congress, they were thoroughly developed proposals. That's the biggest, perhaps, aspect of the Biden Administration of interest to our listeners, but also there's... In the environmental land use area generally, there are going to be some changes.
0:14:14.0 FD: One of the more noteworthy ones that came up in the election is he's going to rejoin... Have the United States rejoin the Paris Accords. And the other thing that may be of more practical everyday concern for our listeners is that a Biden Justice Department is going to be emphasizing enforcement in the environment area. So as listeners probably know, the US, as part of the Paris Accord, we voluntarily commit to cutting its carbon dioxide emissions by 26% or 28% by the year 2025. And also, the US would contribute funding heavily to Green Climate Fund that helps poor nations invest in renewable energy. As I mentioned though, the DOJ's Environment and Natural Resources division will quickly undo some of the Trump directives that constrained settlements in environmental enforcement cases, and also are going to increase enforcement activity and emphasize environmental and climate justice in the process.
0:15:21.0 FD: There's going to be an increasing willingness to litigate regarding pollution and wildlife, particularly with respect to public lands and tribes and any federal property. That's something that I know listeners would be interested in just generally. Biden had pledged to reverse the Trump tax cuts. The Senate may have something to say about that, the Republican-controlled Senate. House Ways and Means Chairman, who'll be very involved in the infrastructure package, also wants to make some changes to the 2017 Republican tax cuts, including removing the $10,000 cap on state and local tax deductions, the ability to deduct the taxes you pay to the state and local governments from your federal taxes. Increasing the corporate income tax to 28% from 21%, and then increasing taxes on those making more than $400,000 a year. So those are some of the big ticket items on the agenda.
0:16:22.3 AM: So, Fred, for our listeners that may not know, when you're talking about this infrastructure package, it sounds like it has a lot in it that could really benefit local economies. You mentioned jobs, I think you mentioned housing, roads, that is a lot. So from the... Two questions, one, How do states go about partaking in the projects? How do they get in on that, for a lack of a better phrase. Again, this is your arena, not mine... The second part of my question... Well, I guess it's a three-part question. The second part of my question is, Does the new composition of the Congress, the House and the Senate, and the fact that we really do have a more diverse Congress than we've had before, is that going to shape what the application processes look like? And then my... And we'll get to my third question. I'll let you answer my first two. [laughter]
0:17:26.8 FD: Sure. So the funding is going to come down through existing programs. We mentioned the TIFIA and Private Activity Bonds, and we... It's also going to come potentially through projects that get written directly into the bill. This alludes to a separate debate that's been going on mostly among appropriators, which is whether or not to return to congressionally directed spending, otherwise known as earmarks, that these bills, these large infrastructure spending bills that come by every five years or so, often have both a funding mechanism as well as an authorization mechanism. So that is not the ways Federal spending usually gets approved by Congress. Appropriations are separate from the authorization, typically, and when you authorize on appropriations, then we're starting to get what you call earmarks. And how much the Democrats have been talking about doing that more if the Biden Administration wants to put particular spending lines into the package at some point, and the House agrees to that, you may not get resistance from the Senate.
0:18:40.4 FD: So we could see that. Funding could come that way, but most likely, and I think probably the best way to stimulate job growth is going to be through the existing programs that the Department of Transportation and others have for this funding to find its way to worthy projects and into worthy rail and transit systems. Whether or not the diversity of the Congress is going to help change the way those programs work, I don't know that it's going to have an impact that quickly. I think this bill is going to happen pretty fast. I tend to believe that one of the benefits of diversity is that you had different perspectives to a process that may have been going on for some time, and I think there's potential for that to happen here. I just don't see it right off the bat.
0:19:34.0 AM: My final question, my third question, again is a process of state versus federal process question. And to give you... The framework that I'm thinking of as an example, is Medicaid expansion. As you know, it is a product of ObamaCare and state legislatures can opt into Medicaid expansion through the federal government, and if they don't, the voters can go to the ballot box themselves to pass Medicaid expansion. And I'm just wondering if there is any scenario, with the infrastructure project or anything else that you've been talking about, where we would need the voters or interest groups to have to circumvent the legislature to take advantage of what the federal government is doing.
0:20:28.9 FD: That's a very interesting question, and interestingly, to the ballot process. Some of these infrastructure programs require a local spend, a certain amount of local and state investment in the projects. If the legislature doesn't approve that on the state level, then it would be possible, I suppose, for voters to create a project, especially in California, by a valid initiative to improve funding for a project that would provide the local match or the state match for accessing and unlocking a large amount of federal infrastructure dollars.
0:21:12.9 AM: We've covered a lot of topics today, but why don't we close out with you telling us what you think will be most top of mind for our listeners.
0:21:22.1 FD: ESG's rule-making on increasing disclosure, environmental, social and governance issues, publicly traded companies need to do, so. That could... The Biden administration will probably support redoing rule-makings or new SEC rule-makings that allow for greater disclosure of ESG risks, and then also ease up the thresholds for a shareholder to just submit proposals for a vote by board shareholder proximates. A lot of times those are aimed at lobbying and campaign finance disclosures, making the companies disclose on their websites their association spending as well as their peer corporate political contributions. And then, of course, as we've been talking to our clients, it's not first on everyone's list, it's not first on most people's list, but it's on everyone's list, privacy. Determining on a federal level what personal information is, quote-unquote, personal information.
0:22:21.7 FD: That's something that businesses and other entities are increasingly calling congress. They need some federal standard for it. California leads the way on that for the United States with regimen pretty tough on par with in Europe, and for... Outside of the healthcare context, HIPAA, we don't really have a federal definition other than out of what personal information is, and so it would be helpful to businesses, the federal government to actually make a determination regarding that. So those are just some of the other smaller issues that are big to some of our clients like for our listeners, I wanted to touch on those too.
0:23:03.8 AM: Well, thank you very much, Fred. I really enjoyed our discussion today, and thank you to our listeners for joining us for Digging Into Land Use Law. For additional information on this topic or other environment and land use issues, please visit our website at nossaman.com. And don't forget to subscribe to Digging Into Land Use Lawwherever you're listening to podcasts, so that you don't miss any of our upcoming episodes. Until next time.
0:23:34.5 S2: Digging Into Land Use Law is presented by Nossaman LLP, and cannot be copied or re-broadcast without consent. Content reflects the personal views and opinions of the participants. The information provided in this podcast is for informational purposes only. It's not intended as legal advice and does not create an attorney-client relationship. Listeners should not act solely upon this information without seeking professional legal counsel.
- What Happens When the Fish Move? A Look at the Practical and Legal Impacts of Climate Change on American Fisheries
In this episode of Digging Into Land Use Law, Nossaman Environment & Land Use Group Partner Linda Larson and Associate Brian Ferrasci-O'Malley dive into the issues surrounding the effects of climate change on American fisheries and fishery management. The conversation covers how changing ocean conditions are impacting fish species that have been traditionally caught and enjoyed by Americans, what legal tools are available now for fishery managers to manage fisheries sustainably in the face of impacts from climate change and whether legal changes are needed to ensure sustainable U.S. fishing in the face of these daunting transformations.
Transcript: What Happens When the Fish Move? A Look at the Practical and Legal Impacts of Climate Change on American Fisheries
0:00:00.0 Brian: What happens when the fish move? Today, we dive into the issues surrounding the effects of climate change on American fisheries and fishery management. Changing ocean conditions are impacting fish species that have been traditionally caught and enjoyed by many Americans. We'll consider what legal tools are available now for fishery managers to manage fisheries sustainably in the face of impacts from climate change and whether additional legal changes are needed to ensure sustainable US fishing in the face of these daunting transformations.
0:00:37.2 Speaker 2: Welcome to Digging Into Land Use Law, Nossaman's podcast covering the development of all things in, on, or above the ground.
0:00:53.7 Brian: Thank you for joining us on this new episode of Digging Into Land Use Law. Today we'll be discussing the practical and legal impacts of climate change on American fisheries. My name is Brian Ferrasci-O'Malley, and I'm an associate in Nossaman's Environment & Land Use Group. My practice spans both transactional work and litigation, and I regularly advise clients across the US on energy development, site clean-up and federal wildlife law issues. Joining me today is Linda Larson, a partner in the Environment & Land Use Group here at Nossaman. Linda has led numerous complex litigation matters in trial and appellate courts, and she has particular expertise in fisheries, endangered species, sediments, water and hazardous waste issues. Linda was recognized as the 2020 Lawyer of the Year for natural resources law in Seattle by Best Lawyers in America. And has also been named an energy and environmental trailblazer by the National Law Journal. It's great to be here with you today, Linda.
0:01:48.6 Linda: Nice to be with you, Brian.
0:01:51.3 Brian: So, help set the stage. Why should we be worried about climate change impacting American fisheries?
0:01:57.0 Linda: Well, I think as consumers, we should be very interested in climate change and impacts on American fisheries, because we like to eat fish. Americans consume about 16 pounds of seafood each year, that's about half of what people eat in Asia and Europe, but nonetheless, we like our fish, and we rely on American fishermen to supply us with wild-caught fish and shellfish. And we should also care because we're citizens of planet Earth and our oceans make up over 70% of the earth's surface, and they are really taking the hit on climate change. Climate change is drastically changing the oceans. They are the world's largest carbon sink. They're currently absorbing about a third of the carbon dioxide humans emit into the atmosphere, and that absorption of carbon is literally changing the ocean's chemistry, and it's causing it to acidify at an alarming rate.
0:02:57.0 Linda: And this has not good impacts for the growth and reproduction of many marine species, including the fish that we like to eat. Climate change has drastically warmed the world's oceans, which have absorbed over 90% of the heat trapped by greenhouse gases, and this is transforming entire ecosystems like, coral reefs and seriously destabilizing fishing, endangering coastal communities all around the globe, and certainly all across our country. There's a lot at risk too from an economic standpoint. In 2017, Marine and Coastal fishery supported $244 billions in economic activity, and we're responsible for 1.7 million jobs in the United States. So, we have an economic impact and we have environmental impacts. The climate change and the associated problem of ocean acidification are increasing the vulnerability of fish stocks and protected species, and this has impacts from critters like seals and whales, to sea lions, to salmon, to shrimp.
0:04:07.7 Linda: And these dual-stressors are impacting habitats in ways that may not be mitigatable. And nowhere is there a better illustration of both using and protecting marine ecosystems that are so dramatically impacted by climate change as the Arctic ecosystems off of Alaska. And from a regulatory standpoint, the oceans are dynamic systems, and so, it's always been difficult to strike the right balance between use and protection, and it's always been a complicated and controversial process, whether it's setting fishing levels or reducing bycatch, thinking about how best to recover endangered species, and considering whether we should issue more permits for oil and gas exploration? And so, when you have to try to incorporate the unpredictability of climate change into decision-making, those decisions are even more challenging than they've been before.
0:05:07.5 Brian: Thanks, Linda, that's a really informative background to help lay the ground work for our discussion today. You mentioned both economic impacts and ecological impacts, can you give a couple examples of discrete ways that climate change is affecting fisheries in either an ecological or an economic way?
0:05:29.5 Linda: Sure. You know, the major impacts are really stemming from the increase in ocean temperatures. We'll talk, I think a little bit later about that in more detail, but in general, ocean ecosystems are being disrupted by increasing temperatures and that results in changing the species composition in a particular ocean area, results in habitat loss, and there then the whole food web structure changes. We've seen this coming for decades, and now I think what we're seeing in the last few years is that we're probably seeing an acceleration in these trends. And second, from a socio-economic standpoint, Marine Fisheries and fishing communities are at risk of significant impacts from increasingly common extreme events, not just the gradual warming of the ocean, but also these episodic events, like very high temperatures in the ocean, in particular areas, or very low oxygen levels or very acidified conditions.
0:06:37.7 Linda: And then we have some examples where we just really don't know what happened, but they were pretty drastic. And the example that comes to mind is the die out of sea stars or starfish all along the West Coast of America, from Oregon, through British Columbia and up into Alaska. And that had catastrophic effects in terms of how it changed the composition of the species that we saw in areas where Starfish used to be, because they were literally gone. And scientists still to my knowledge have not figured out why that happened, nor have they figured out why it's slowly coming back.
0:07:21.4 Brian: You mentioned changes in species composition, the example of the sea stars, what are some other ways that these increasing global temperatures, these more extreme weather events might impact fisheries, what other implications could it have?
0:07:39.9 Linda: Well, I think from a regulatory standpoint, it can really topple some of the things that have been put in place in the decades since the Magnuson Act was enacted about four years ago. The key thing that I see is that the location and timing of very long-established fisheries may shift, and this is critical from a regulatory standpoint, because commercial fisheries are very highly regulated in time and place, in terms of where they can take place. I think sometimes people have a romantic and outdated image of what fishermen do, you know, it's the lonely rugged guy in the rubber hat out on the oceans all by himself battling the elements. But really in the federal fisheries, people are very highly regulated, and particularly with respect to what's known as catch shares, which are licenses that are issued to fishermen that incorporate authorizations to fish only for certain fish and only in certain locations.
0:08:46.7 Linda: And granted these are big locations, these can be hundreds of square miles, but we're also seeing changes in commercial species in terms of where they want to locate, and they could very well vacate some of the fishing grounds that have been very highly successful for many, many years. And so therefore, those people that have invested in these licenses, which are extremely valuable and can be bought and sold, could be left with an investment in equipment, in gear, in vessels, that needs to shift, and it's not clear how the regulatory regime is prepared to accommodate those people or not accommodate those people. All of the... You know, you can imagine that when a catch share program is established and there's an allocation of these valuable species between different fisherman, that's controversial, there's often litigation, and there's going to be a lot of discussion about fairness and equity, if all of that has to be literally moved geographically.
0:09:53.7 Linda: The other thing that is being predicted is that catch levels may decline, and that also will have implications about what's fair and equitable and sustainable. And the declining catch levels will probably lead to volatility in the availability and prices of key commercial species. So that's going to have impacts for consumers, as well as fishermen. It also poses challenges for effective fisheries and protected species management. Commercial fishing is regulated under what's known as the Magnuson-Stevens Fishery Conservation and Management Act. It has as its purpose, both preventing overfishing and ensuring that there's a sustainable American fishery. It's implemented through Regional Fishery Management Councils, which develop fishery management plans and policies and propose legislation to the National Oceanic and Atmospheric Administration, which turns those plans into regulations and then implements and enforces them. And what we're seeing is that the councils are already grappling with how to manage their catch levels in these volatile economic conditions.
0:11:07.8 Brian: There are a lot of good points in what you just had to say, Linda, and I want to unpack a couple of them if we can. First, you talked about the importance of how the location and timing of established fisheries may shift and why that's important given restrictions on when and where you can fish, but can you give me an example of a fishery or of a resource where that's happening?
0:11:31.4 Linda: Sure, and I think it's a good one, because it also illustrates how these shifts and timing can affect consumers. So, Dungeness Crab is a perfect example of that. In recent years, we have seen the fishing season open much later in the year than it had on average in the past, and that has had significant impacts on the ability of commercial fishermen to get this product to consumers in time for the winter holidays, when a lot of people like to celebrate by eating crab.
0:12:07.2 Brian: That's a great example, Linda, thank you. One of the other elements you talked about was declining catch levels, and how that might be a predicted implication of climate change. Can you talk through what that looks like? What will catch levels... Will those effects be felt across the United States, will they be felt differently in different areas, what can we expect as far as declining catch levels?
0:12:34.5 Linda: Well, I'm afraid, the bad news is that all US large marine ecosystems, with the exception of the Alaska Arctic, are expected to see declining fishery catches. And the modeling that I looked at, tried to project changes within large marine ecosystems for the period 2041 through 2060 relative to what we were seeing in 1991 to 2010. And although these are just projections, they suggest that there's going to be significant shifts in the maximum catch potential essentially within two generations. The modeling does project significant increases in maximum fish potential off of the North Slope of Alaska and around Greenland, but all of the other large US marine ecosystems are expected to see declining fishery catches. And this is an issue of both quantity and type, obviously decreased maximum fish catch potential suggests there's going to be resource scarcity and more price volatility, but there's also the consideration of geographic shifts of fisheries as northern areas see more potential.
0:13:48.8 Linda: And this may seem random, and I may be totally speculating, but one of the more interesting things that happened in the North Pacific in the summer of 2020, is that you as fishermen fishing for pollock and other ground fish within the US economic zone, which is 200 miles off of the coast of America, were harassed and threatened by Russian military ships. And it's totally unclear why they were doing that. We don't know if they were just flexing their muscle, if they were just testing the Trump administration, we don't know what they were up to, but it's not unreasonable to think that they were trying to stake their claim, or at least announce their presence in these Arctic areas off of the North Slope, where these fish, these very valuable fish which also have parallel Russian fisheries are expected to become more and more, that's where you're going to have to go to fish.
0:15:09.7 Brian: Wow, I did not know about those incidents. That brings an entire different level of international intrigue to the topic. But stepping back, you've alluded to these changes that we're seeing in the North Pacific fishery, and I'm in particularly interested about the arrival of this shift north, this geographic shift north of species with, as you identified the very specific time and place restrictions on fisheries, especially in Alaska and the North Pacific. So could you give some examples of what shifts we have seen already? What shifts are potentially on the horizon for specific stocks?
0:15:54.6 Linda: Sure, I'd be happy to talk about that more, and first, let me set the stage a little bit and put Alaskan fisheries in context. I think it's fair to say that you can't overstate the value of Alaskan fisheries to US fisheries. Over half of the fish caught in the United States are caught in Alaska, and it's an extremely valuable fishery. It has an average wholesale value of nearly $4.5 billion a year, but we've seen pretty dramatic impacts of climate change already in Alaska and on Alaska fisheries. As I said before, climate change is causing the ocean to become more acidic and that has led to outbreaks of harmful algal blooms and those have affected the distribution, abundance, and behaviors of commercially valuable species, and put this entire world-class fishery at risk. The other factor that fishermen are reporting is that the ice edge, so the edge of the Arctic ice that comes down into Alaska, is retreating farther and farther north, and that's also causing behavioral changes in species such as pollock, and that is making... Again, that has implications for the folks who have licenses that are limited in where they can fish for certain species.
0:17:23.0 Linda: But another example I want to talk about is the Pacific cod fishery. The cod fishery is the second most valuable fishery in Alaska right behind pollock, which is the most valuable fishery in the world. And in 2018, the Pacific cod fishery experienced a 58% reduction in annual catch limits, and that was followed by a complete closure of the fishery in 2019. This is the first time the fishery had ever been closed due to concerns over low stock. And you might think, "Well, then they shouldn't have fished it so hard," but it wasn't actually a problem of harvest being too high, it turns out. The National Oceanic and Atmospheric Administration, NOAA, did a study to try to figure out what was going on, and they found that the lack of cod could be traced to egg hatching problems that were caused by a marine heatwave that lasted in the North Pacific from 2013 to 2016. So, the fish that you would have expected to have been of a catchable size three years later or five years later after they were laid in that time period, just simply didn't survive and therefore, were not there to be fished.
0:18:47.7 Brian: Those are some excellent examples. Thanks, Linda. I'm curious if you can also talk about how extreme weather events are affecting fisheries? So not just the things that are happening because of the slow increase of temperatures over time, but what about the episodic instances that you referred to earlier, how are they affecting fisheries?
0:19:11.1 Linda: Well, we do have, unfortunately, almost annual examples of how extreme weather events can affect fisheries, and I'm going to start in 2012 when there was a North Atlantic heatwave. It was concentrated in the Gulf of Maine, however, there were shorter periods with very warm temperatures that extended all the way from Cape Hatteras over to Iceland during the summer of 2012. American lobster and longfin squid and people who fish on them were impacted by this North Atlantic heatwave. And with respect to lobsters, they moved north to try to stay within their preferred temperature range, and they did that by starting their summer migration a month early, and therefore, they grew the market size faster than usual, and the result was a saturated market, and the price collapsed for Maine lobster men.
0:20:08.6 Linda: And we've seen that northern migration trend continue, which has resulted in tensions between Canada and the US, where the US... Some of the US fishermen think that Canada is benefiting at their expense, and I think it's worth mentioning that we do have fisheries that we call manage with Canada, lobster on the East Coast and halibut on the West Coast, and there's also plenty of controversy over the management of halibut on the West Coast, but we'll leave that for another day.
0:20:42.9 Brian: Those are a lot of very illustrative examples. I don't want to say they're good examples, because it's a little scary, all these changes, but I think they do help identify what potential implications are out there from the resource perspective. I want to ask, how have you seen the regulators respond to these changes over the past decade or more? What have they been doing to respond to the changes of climate change, and do they have the tools that they need?
0:21:17.2 Linda: A strong argument could be made that you don't really need to drastically amend the Magnuson-Stevens Act to give fishery managers the tools that they need to consider the effects of climate change or to react to extreme events. And some fishery management councils are explicitly incorporating climate change considerations into ecosystem management right now, they're not waiting for legislation, they are required to do annual recalculations of what catch level should be, and they do that. The problem is that in many instances, the science and the data is really lagging the timeframe that they need to make the decision about the upcoming fishing years, and the data really isn't there to make everybody comfortable as they'd like it to be about predictions in the North Pacific for many of these valuable species, they do biannual or every three years, they literally go out and try to do surveys of available catches, and those have been shut down because of COVID this year.
0:22:20.0 Linda: So then we're going to have that data gap, and then there are other fisheries where the money is just not there to do the surveys, and so, managers have to rely on really, really old data and hope that they're right. And that's a pretty concerning practice for everybody, as they're not doing it beacuse they want to, but they're doing it because they're required legally to use the best available science, and the best available science is really old. We need to think about as a society, how much do we want to invest in letting the science be better for fisheries. And Congress is not totally ignoring the problem, just this month, the chair of the House Committee on Natural Resources introduced this 324-page behemoth piece of proposed legislation called the Ocean-Based Climate Solutions Act of 2020 that has a very wide range of proposals and ideas about how to address climate change, some of which would end up amending the Magnuson-Stevens Act.
0:23:32.0 Linda: There are continual efforts to amend the Magnuson-Stevens Act, but I, for one, I'm pretty cynical about them because there have been an annual amount and then nothing ever gets passed. So, more to come in terms of whether there'll be legislation that explicitly gives some direction on how to deal with climate change, and then in the meantime, I think managers, because they have a responsibility to just consider the state of the ecosystem as they set catch levels, they're just going out and doing it.
0:24:08.7 Brian: You mentioned best available science, Linda, and I know that that has a particular meaning, I'm thinking of something you mentioned earlier in our conversation, you used a different term overfishing, and I know that has a colloquial meaning, but I know it also has a very specific meaning within the statutory context, and I'm curious if you can talk about how all of these variables, be it catch limits, what's being taken out of the resource, the impacts of climate change, how do those affect something like the term overfishing?
0:24:43.8 Linda: Well, I think for me, it makes me wonder whether we need to update that term and maybe do away with it all together or replace it with something else, because the term overfishing sort of implies that human action is the thing that's driving... Or the primary driver of the state of a fishery stock, and maybe we need to switch that up a little bit and call it something like depleted stocks or threatened stocks, instead of using this, what's become to be a very charged term to describe stocks that are in trouble, because it may inaccurately imply that fishermen are to blame for a poor state of a particular species. And maybe as we're seeing in those examples that I saw, that I said about Pacific cod, maybe stressed stocks or stressed because of nothing that has anything to do with fishing activity, and it could be that really, it's the effects of climate change, it's pollution, it's changes in migration patterns, it's other naturally occurring reasons, not just fishing.
0:26:02.5 Linda: Now obviously, fishing levels have to be tailored to make those stocks sustainable, but I think fishermen feel that sometimes they're unfairly blamed when a stock is in trouble. And the prime example of that is salmon in California, where I think that fishermen say labeling the salmon fishery as being over-fished is disparaging to them, when really, I think everybody could agree that drought impacts and diversions of water are the primary drivers of closing that salmon fishery.
0:26:39.5 Brian: Taking a step back and looking at things from a 30,000-foot level, we've talked a lot today about various impacts, economic impacts, ecological impacts, what do all of these potential impacts to the fisheries mean going forward? What are the implications of this combination of slow burn factors, increased extreme weather events and changes to the regulatory structure?
0:27:10.0 Linda: Well, I think the main implication is we're just facing a period of huge uncertainty. There's going to be uncertainty due to changes in fisheries abundance, that's going to have impacts on how and where and when you conduct the fisheries. It's going to have impacts on the value of the species and the prices for consumers, and it's going to have impacts on endangered species that rely on fish as their primary prey. It's a cascading effect, it's not just human predators, it's critter predators as well. I think as a society, we've decided that we want to have fisheries and we want those fisheries to be sustainable, but we need to invest in the science and see where that takes us. And we've have to be prepared to adjust the regulatory regime in a way that is both fair to the folks who have invested their livelihoods in fishing, fair to the communities that have grown up to support fishermen and also somehow guarantees that we're going to have fish in the ocean going forward, even if they move.
0:28:30.1 Brian: Well, I think that's a great place to stop our conversation for today, thank you, Linda. I really enjoyed this discussion and look forward to continued ones. And a big thank you as well to our listeners for joining us for another episode of Digging Into Land Use Law. For additional information on this topic or other environmental land use issues, please feel free to visit our website at nossaman.com, and don't forget to subscribe to Digging Into Land Use Law wherever you listen to podcasts, so you won't miss any of our upcoming episodes. Until next time.
0:29:08.3 S2: Digging Into Land Use Law is presented by Nossaman LLP, and cannot be copied or re-broadcast without consent. Content reflects the personal views and opinions of the participants. The information provided in this podcast is for informational purposes only, is not intended as legal advice and does not create an attorney-client relationship. Listeners should not act solely upon this information without seeking professional legal counsel.
- CEQA Streamlining for Transportation Projects
The California Environmental Quality Act (CEQA) requires state and local government agencies to identify potentially significant environmental impacts of proposed projects and to reduce those impacts wherever feasible. For large public infrastructure projects, the environmental review process can take years. Such projects can also be held up in the courts, even where the public agency has prepared a full Environmental Impact Report. In this episode of Digging Into Land Use Law, Nossaman Environment & Land Use Group Partners Rob Thornton and Liz Klebaner discuss recent legislative and regulatory developments relating to CEQA streamlining specifically as they relate to transportation projects.
Transcript: CEQA Streamlining for Transportation Projects
0:00:00.0 Liz Klebaner: The California Environmental Quality Act–or CEQA–requires state and local government agencies to identify potentially significant environmental impacts of proposed projects, and to reduce those impacts wherever feasible. For a large public infrastructure project the environmental review process can take years. Such projects can also be held up in the court, even where the public agency has prepared a full environmental impact report.
0:00:29.7 Speaker 2: Welcome to Digging Into Land Use Law, Nossaman's podcast covering the development of all things in, on, or above the ground.
0:00:46.1 LK: Thank you for joining us on this new episode of Digging Into Land Use Law. Today we will be discussing recent legislative and regulatory developments relating to CEQA streamlining and transportation. My name is Liz Klebaner, and I'm a partner in Nossaman's Environment and Land Use Group. With me today is Rob Thornton, who have founded the group and specializes in advising state and regional infrastructure authorities on environmental issues regarding large infrastructure projects.
0:01:14.8 LK: In the course of his career, he has defended somewhere around $12 billion in regional infrastructure improvements against federal and state environmental challenges. In addition to many other honors, Rob has been ranked as one of the nation's top 10 environmental lawyers by US lawyer rankings for the past 15 years. Rob, thank you very much for joining us today.
0:01:35.0 Robert Thornton: Liz, it's great to be here.
0:01:37.2 LK: 2020 has been a year of reckoning on many fronts. In just the first few weeks of the wildfire season, California has borne witness to 24 active wildfires. According to some news outlets, four million acres and burned through the start of the year, that's 4% of the entire state. There recent fires in Northern and in Southern California have caused air pollution in concentrations exceeding regulatory thresholds for hazardous air conditions, turned daytime skies dark and forced people to stay indoors for days or weeks at a time. For many, this wildfire season has made global warming a palpable reality.
0:02:12.4 LK: The transportation sector is the largest contributor to the state's carbon budget. Recent developments have emphasized the need for greater investment in transit infrastructure and additional housing located close to job centers and utility infrastructure. The fires are of course not to be overshadowed by the global COVID-19 pandemic, which has itself had a dramatic impact on transportation this year.
0:02:35.1 LK: The recent economic downturn has reduced highway traffic and transit ridership. It has also reviewed sales and gas tax revenues, two important key sources of transportation funding. While these impacts are likely to be temporary, they remind us that a healthy environment and the economy are connected. Reductions in transit revenues are causing some transit agencies to tighten their belts, which means that certain public infrastructure projects may be delayed.
0:03:00.9 LK: Rob, CEQA reform is a perennial topic. How has the California Legislature responded to the challenges of the pandemic and the related economic impact?
0:03:10.5 RT: Well Liz, this year the legislature of course recessed in August, and this year that the legislature focused primarily on addressing the public health and economic crisis related to the pandemic. But as has been the case for really since enactment of CEQA, but certainly in recent years, there seems to be little evidence of legislative support for any major revisions to CEQA. The few bills that did pass were passed to encourage transit-oriented development and reduce litigation delays.
0:03:42.6 LK: While there has really not been a lot of CEQA legislation for the reason you stated this past year, and also in prior years, what sort of legislation has been put forward in your experience in order to facilitate transit improvement projects and development more generally?
0:03:58.6 RT: In the last decade CEQA reform was generally focused on reducing and eliminating duplicative environmental review, and on measures that could reduce litigation risks and delays. We've also seen a handful of exemptions from CEQA for narrowly defined projects, such as pipelines that are fewer than a mile in length.
0:04:17.5 LK: Regarding eliminating duplicative environmental review, CEQA in the court decision emphasized that the statute was primarily intended to inform the public and the decision maker. It wasn't just intended just to generate paper or duplicative or overly complicated and lengthy environmental documentation. Do you think that CEQA has been reformed to eliminate duplicative environmental review?
0:04:42.3 RT: Well of course it depends on what you mean by "reform". There's been many modifications to CEQA over the years to respond to various issues, but without really changing the major thrust of the legislation. As I've indicated, the focus in recent years has been to narrow or eliminate project-level environmental documents where a prior planning level environmental document had already been addressing impacts of the specific development project.
0:05:15.8 RT: We have seen this sort of streamlining treatment in the case of transit-oriented and infill development projects, and projects that are consistent with locally adopted land use plans. However, until this year, we have not seen a similar model used for transit and transportation facilities.
0:05:33.3 LK: When it comes to infill and transit-oriented development, do you think that measures that have done away with, or largely done away with project-level environmental review where there's a planning document on point have been successful in reducing cost and delay associated with CEQA compliance?
0:05:54.7 RT: In some respects, yes, the new procedures have reduced the complexity and processing time associated with environmental review. But delays are still a reality for controversial and large projects, but this is more a project of the complexity of the stated federal environmental process, than it is a function of CEQA alone.
0:06:15.3 LK: Alternative projects seem to be favored by most folks, particularly those folks living in metro areas. Do you think that permitting and litigation delays are a concern when it comes to transit and transportation project?
0:06:27.7 RT: Well, of course, permitting and litigation delays are always a concern for large projects. As the saying goes, "time is money". Delays increase construction costs, particularly where the construction cost index is rising. Most large projects these days have limited funding sources. The days are gone in fact, when federal and state gas tax revenue could make up funding shortfalls for large projects.
0:06:52.7 RT: For example, the federal gas tax has not been increased since 1994. Completing projects on time and on budget is more important than ever, and there is intense competition between projects for sales tax revenues in the state, dedicated to transportation.
0:07:09.2 LK: Well, litigation is obviously a huge concern because it can cause a project to linger in the courts for many years, in some cases, even decades, while public funding dries up or priorities shift. What sort of measures have been written into the law to reduce litigation risk and delay?
0:07:29.1 RT: In recent years, the state has pass legislation to speed up CEQA litigation for specific projects including the basketball arena in downtown Sacramento and certain transit projects. The legislation set a goal of completing CEQA litigation through the trial and the Court of Appeal in 270 days. If successful, this would reduce the typical CEQA litigation time by a year or more, but there does not appear to be much legislative appetite to apply these revisions to all projects.
0:08:02.4 RT: And of course, the courts are also suffering from insufficient funding and the impacts of the pandemic. Courts have many other important priorities mandated by state law and by the state and federal constitutions, but the most important recent change to CEQA is the replacement of traffic delay as the measure of transportation impact.
0:08:25.8 RT: With vehicle miles traveled or what's called VMT, the Office of Planning and Research in the governor's office argues that the shift to VMT as a measure of transportation impacts will simplify CEQA evaluations, particularly for infill and transit projects. But the shift to the VMT standard will likely complicate the CEQA process for the majority of land use projects that are not in urban centers, and for any highway project.
0:08:53.0 RT: For projects not subject to the streamlining legislation, experienced CEQA practitioners have developed strategies over the years to reduce CEQA and other litigation delays. These strategies include the highly coordinated state and federal environmental review and real-time preparation of the administrative record, and using these strategies, we've been able to reduce litigation delays quite materially.
0:09:15.6 LK: Well, I think it's worth noting that the few projects that have been identified by the legislature for CEQA streamlining are set out in two bills, as those bills relate to transportation projects specifically. That's AB2731 and as SB288. AB2731 applies that judicial streamlining model that Rob you were referring to, to a particular project, is a new transit station with a potential connection to the San Diego International Airport, where legislation actually defines the site on which the transit station would be built for the provision to apply.
0:09:56.1 LK: The site is currently under federal ownership and it's located in downtown San Diego, so it'll be interesting to see how that legislation is applied in that context. SB288 has broader coverage in some respects. It's not limited to a specific project. It is however limited to a set of transportation improvements that are intended by and large to increase the efficiency of existing assets and to facilitate multi-modal transportation.
0:10:30.6 LK: There's an express exemption in SB288 for new bus rapid transit or a light rail service, including new stations, as long as those stations are located on existing public rights of way. What sort of impact, Rob, do you think SB288 could have on transportation projects?
0:10:49.0 RT: Well, the exemption for new light rail and bus stations could expedite the environmental review and reduce CEQA compliance and litigation costs related to the construction of new stations. However, it should be emphasized that the exemption scope is limited to projects proposed on land already owned by public agency.
0:11:07.3 RT: This often proposes practical difficulty. The exemption does not authorize agencies to acquire land for purposes of transit facilities, and CEQA limits the ability of any agency to acquire land for a project prior to CEQA compliance.
0:11:23.4 LK: That's interesting, that's an interesting point about the land acquisition piece. Well, I know that you mentioned that the new VMT guideline poses some specific challenges for transit and transportation agencies, as well as CEQA lead agencies at large. What do you think will be the biggest CEQA compliance challenge for transit and transportation agencies specifically?
0:11:47.6 RT: I think without a doubt that the OP&R, Office of Planning and Research adoption of the new CEQA guideline adopting a new standard for transportation impacts, presents an important new challenge and an important new opportunity that will depend on OP&R's and the court's interpretation of this provision. But the standard is likely to impose additional mitigation burdens for certainly for traffic capacity-enhancing projects, and that will continue to be an important issue.
0:12:21.9 LK: There's been a lot of criticism of the new VMT guideline, so it's interesting to hear you say that it presents both challenges and potential opportunities. One way to look at the new guideline is that it can help facilitate new transit facilities. Under the old method for analyzing traffic impact, new transit facilities, particularly those proposed in already congested and built-up environments such as metro areas in, for instance in San Francisco or Los Angeles, would almost always result in traffic and transportation impact by causing congestion on the streets and intersections and highway on-ramps in the vicinity of the new translation station.
0:13:03.5 LK: Because those types of projects were proposed in an already built environment, transportation was really the only impact in many cases that required a significant mitigation program, other than the routine measures for mitigating short-term construction and air quality impact of such facilities. Do you think that the new guideline can operate as a streamlining measure or an assist for new transit facilities?
0:13:29.4 RT: Well, potentially. While traffic congestion is no longer an impact under the guideline, traffic hazards will still have to be studied as part of CEQA review and require a traditional level of service analysis. We will likely see greater certainty in several areas when the California Appellate Courts have interpreted the new guideline and the presumption that certain infill and transit projects will not have a significant transportation impact.
0:13:56.0 RT: Transit agencies will continue to have to address other impacts as part of the CEQA review, including greenhouse gas emissions associated with construction activities and operations.
0:14:07.5 LK: The new guideline has made single occupancy vehicle use an environmental impact, which was kind of a radical idea for many when the guideline was initially put forward at this point many years ago in its draft form. The Governor's Office of Planning and Research has recommended a handful of mitigation measures for agencies to use to reduce the impact of single occupancy vehicle use, which of course presents an enormous challenge, not just for transportation projects, but for any development project, particularly those proposed away from public transit infrastructure.
0:14:43.4 LK: The recommended measures include such approaches as tolling new lanes to encourage carpooling or funding transit improvements. The Governor's Office of Planning and Research also recommends using in-lieu fees to finance regional transit improvements as a form of VMT mitigation, although to date, I don't know if many mitigation banks have been set up for this purpose. How can transit and transportation agencies benefit from the new VMT regulatory scheme?
0:15:13.5 RT: Well first, development impact fees are already an important source of funding for infrastructure and have been for really for several decades in the state, but increased development impact fees can result in increases in housing costs and exacerbate the deficit of affordable housing. It will certainly be important to develop regional approaches that balance new funding sources against the need for affordable housing.
0:15:38.0 RT: The state's VMT and greenhouse gas goals are unlikely to be achieved unless we can develop efficient programmatic approaches to these challenges. Examples of similar successful regional programs include the Southern California Natural Community Conservation Plans, addressing conservation of land use and transportation impacts on the coastal sage scrub ecosystem.
0:16:00.5 LK: Thank you, Rob. Your insights on CEQA compliance and transit and transportation planning are always really enlightening. This has been a great conversation. And thank you to our listeners for joining us for Digging Into Land Use Law. For additional information on this topic or other environment and land use issues, please visit our website at Nossaman.com.
0:16:23.7 LK: And don't forget to subscribe to Digging Into Land Use Law wherever you listen to podcasts, so that you don't miss any of our upcoming episodes. Until next time.
0:16:33.5 S2: Digging Into Land Use Law is presented by Nossaman LLP, and cannot be copied or re-broadcast without consent. Content reflects the personal views and opinions of the participants. The information provided in this podcast is for informational purposes only, is not intended as legal advice, and does not create an attorney-client relationship. Listeners should not act solely upon this information without seeking professional legal counsel.
- Valuation and Damages: Assessing COVID-19’s Economic Impact
Changes in how businesses operate, restrictions on property use and reduced revenues brought on by mandated closures due to COVID-19 have had a major impact on the real estate market and legal proceedings related to it throughout the United States. In this episode of Digging Into Land Use Law, Nossaman’s Eminent Domain & Valuation Group Chair, Brad Kuhn, and Grobstein Teeple LLP Director, Will Thomsen, discuss the current state of the market and approaches to appropriately assess short-term versus long-term impacts.
Transcript: Valuation and Damages: Assessing COVID-19’s Economic Impact
0:00:00.0 Brad Kuhn: Changes in how businesses operate, restrictions on property use, and reduced revenues brought on by mandated closures due to COVID-19 have had a major impact on the real estate market and on legal proceedings. Today, we'll discuss the current state of the market and approaches to appropriately assess short-term versus long-term impacts for purposes of real estate and business valuation issues.
0:00:26.7 S2: Welcome to Digging Into Land Use Law, Nossaman's podcast covering the development of all things in, on, or above the ground.
0:00:42.8 BK: Thanks so much for joining us today. I'm Brad Kuhn, Chair of Nossaman's Eminent Domain & Valuation Group, and I'm joined today by Will Thomsen, a Chartered Financial Analyst and accredited senior appraiser who serves as the Director at Grobstein Teeple, LLP. Today, we're going to be discussing COVID-19's impact on how businesses are valued and how this analysis has been impacted by the upheaval of a global pandemic. Well, thanks so much for joining me today. We're really happy to have you. I'm excited to talk about this challenging and really important topic as it's impacting our industry. As far as what we're going to be covering today, I think we'll start out with kind of a high-level overview of how you've seen COVID-19 impacted the economy, and then we can jump into some more specific business valuation methodologies and how to take COVID-19 into consideration, and then we'll wrap up with some litigation-related scenarios and how we're seeing this play out in the real world. So again, well, thanks so much for being here.
0:01:39.8 Will Thomsen: Thank you.
0:01:40.4 BK: You want to give us a little bit of an overview as to how you've seen COVID-19 impact the economy and the markets?
0:01:48.3 WT: Sure, I'd be glad to. Needless to say that it's had a pretty devastating impact economically, and just as a few statistics of interest, that the US officially went into a recession starting in February of this year, and the US gross domestic product had declined by 5% in the first quarter of 2020. That's through March. And then as of the second quarter, decline by an additional 31.7%, which, of course, is huge. And to you give you an idea of what happened to the unemployment rate, while it was at about 4.4% in March, just prior to the pandemic really hitting, it skyrocketed almost 15% in April, and then it started trending down, so it's about 13% in May, 11% in June, 10% in July, and it's about 8.4 right now as of August, which obviously is an improvement over the spike in April, but it's still the highest that we've had since the Great Recession. And of course, uncertainties continue.
0:03:00.1 BK: Yeah, interesting. We're seeing some improvement here, but it's going to be interesting to see what the future holds. You've touched a bit on some of the economic numbers. What about more from a market perspective, what are you seeing?
0:03:13.7 WT: Well, we had a huge negative impact early on in March, the Dow Jones and just the stock mark in general just plunged. They fell about 30% to 34% from the peak levels in December. So, right now, the stock market indices are pretty much recovered from that plunge, however, recently, in a recent week or so, they've started slipping again, and we think that's due both to fears about the virus in the colder weather that's coming, as well as the political climate and waning prospects for a stimulus bill to actually happen. All that uncertainty makes the markets quite tenuous. Another thing we're seeing is increased market volatility, and this is similar to what we had during the Great Recession. There's a volatility index that measure stock market swings, and in March, it was up just below 83%, and then it went down. It's been trending kind of up and down, but it's down to about 29 in September, but that is still 45% above the long-term average of 20. That means that the market's very nervous.
0:04:30.2 WT: Of course, we've seen decreases in mergers and acquisitions in terms of deal volume and in value, though it also depends on the area of the market, because some industries, as we'll discuss, are doing better than others. And there's been problems, of course, with the real estate. People just can't make payments, so, you're going to see increased vacancies, and we've seen rent concessions and real problems there.
0:04:52.9 BK: My focus has mostly been on the real estate side, and it's interesting that there's obviously some sectors that have been just completely hammered, especially on the retail side, but other areas seem to be completely booming and thriving, the industrial side and the need for warehouse and shipping, and those types of things, it's just... COVID's maybe even had an opposite effect on that, so, it's very interesting. And obviously, we've been through recessions before, this, to me, feels a bit different than what we've experienced in the past. It doesn't have the same sort of kind of historical what we've seen happen before, what are you thinking, and how does it compare to past recessions?
0:05:30.8 WT: Well, in general, it's very different, because this was all spurred on, as we know, not from an economic or financial problem, like a collapse of the sub-prime market or anything like that; it has to do with a health pandemic. So, the underlying economy was basically healthy prior to that striking. So, we've got... What we have is a self-induced downturn basically as a result of government-imposed shutdowns and people just being careful not wanting to get sick. You've had the fastest economic collapse on record, and the impact has been very widespread. It's affected virtually all the sectors, though as you allude to, not equally, and in fact, some sectors have benefited in some ways. Like for example, tech and online have done basically pretty good, but restaurants and travel, the opposite, and retails, had issues.
0:06:26.4 BK: We've seen some signs of life over the last few months, some improvements. If you look into your crystal ball and predicted the future, what are you seeing?
0:06:35.4 WT: Well, yeah, I wish I had polished my crystal ball a little more, but pretty murky. People discuss... The recovery will happen. The question is, when and how and what will it look like? And people discussed various shapes of a recovery, like an L shape, which means that it plunges down and it's a very slow recovery. Or a U, which is more that it's kind of a gradual, but then it comes back up. There's a W. We have a lot of the alphabet to discuss. We got the W, which is basically a double dip decline. And then a V, which is like, it goes down and shoots back up.
0:07:13.3 WT: Well, a recent survey of CEOs, most CEOs are thinking of a U shape. Like it's going to come back gradually. But the quarter of CEOs think it's going to be an L, it's going to take forever. Some believe it's going to be a W, and very few think it's a V, that we're going to shoot right back up. And as far as the duration of the impact of this thing, for some industries, it could be as long as five years before they fully return to the pre-pandemic levels. And of course, this depends on what the recovery looks like, what happens medically. The longer the pandemic affects our daily lives, and as long as the virus remains pretty much out of control, the more long-term damage is occurring to the US economy and the harder it is to climb back.
0:08:00.8 BK: So, we've talked a little bit about some of the businesses that we've seen struggling, particularly in the retail sector, restaurants. I've seen it with some of my clients' fitness companies, and then a lot of the mom-and-pop businesses, and some of them even going through bankruptcy proceedings. Obviously, it has an impact on how businesses are being sold right now and how valuations are determined. What are you seeing in that respect, and I guess even maybe to take a step back and help our listeners, can you briefly walk us through how a business is typically valued, and then we can turn to what we're seeing with the current pandemic?
0:08:39.0 WT: Sure. Sure, of course. Essentially, there are three approaches to value any business or asset. One is called the income approach, where we're looking at things like projected cashflow, or we're looking at earnings or cashflow at a point in time, and we're converting that to a value. Or we look at a market approach, which is where we look at comps. We'll look at either public companies, or we'll look at transactions of private companies, and we'll try to ascertain value by looking at these transactions and prices. And thirdly, there is an asset approach, where you would look at the balance sheet of the company and try to determine value that way, by basically tallying up the assets minus liabilities. And in the eminent domain world, we've got a hybrid approach that's often used called excess earnings. But the basic concept of all these is that we're looking at anticipated earnings. So, that is really the key to valuing most businesses, because they're valued on a going concern basis.
0:09:45.4 BK: Usually, when we're doing the business valuations in our real estate, eminent domain litigation, we're taking a hard look at the business's anticipated growth, some of the perceived risks that you'd see out there, where else can you put your money and get a rate of return, and obviously, the business's cashflow and profits are some of the big areas. So, how does COVID-19 impact some of the valuation figures that you're typically looking at?
0:10:13.0 WT: Well, first, the issue of earnings, as you mentioned. Of course, short-term and long-term, or at least mid to long-term earnings are impacted. We've had companies where they've either lost revenue altogether or they've deferred revenue, because people are just not making the purchases right now. And there's been also price reduction. You got a whole hit on revenues, you've got supply chain disruptions, where you could think of manufacturers that source from China or other places, those supply lines have been disrupted and the increase... There's either unavailability or just the toilet paper [chuckle] and just costs have gone up. And of course, on the employees' safety end, which is a huge issue now, you've had expenses and concern regarding employee and customer safety and cleaning measures.
0:11:17.3 WT: And then if we go into that area of employees and HR, certainly, you've got issues regarding absence, severance costs, re-hiring costs, IT expenses to accommodate working remotely and making sure it works. And of course, we've seen cybersecurity issues, with everyone working remotely. You've got more outsourced professional service costs for a lot of firms. And you've got expenses, as you are well aware, relating to the termination of leases and other operating contracts. And some of this stuff is short-term and some of this stuff will reflect a change in business model. So, not all of it's bad, but it's certainly disruptive.
0:12:05.0 BK: When we go about our business valuation disputes, usually, there's at least some level of certainty that's going into this analysis, we can rely a little bit heavier on path, performance, and results. Gosh, it's so hard right now, with the level of risk that's out there and the perceived uncertainty of what the future holds. How does that come into play, and how does it make your job harder when you're trying to predict anticipated earnings or profits?
0:12:33.5 WT: Well, it's very difficult now, because we know that the past certainly is not prologued right now. So, we've got an issue where the businesses are... Either they're not earning anything or they're just losing money, and the question is, for how long a time is this going to happen? We've got growth prospects that have been impaired, although for some businesses, maybe they'll catch up once the economy reopens sufficiently. We certainly have higher risk, which results in lower values, and how to quantify that is a good question. Appraisers differ how to do this. Do we increase our discount rate and lower our multiples, or do we simply forecast more conservatively because we're just not confident that the businesses are going to recover like they think they will or hope they will?
0:13:27.2 WT: And of course, you've got... A lot of this relates to both internal and external risks of the business. Internal, meaning, you could have a business that is positioned where they've got a high concentration of customers and maybe it's key supplier dependents, maybe key personal risk, all that stuff could be really impacted by COVID in certain circumstances. And then you got... Some businesses are just in an industry like hospitality or retail where it's really been rough. Not long ago, I looked at a business that basically manufactured exhibit booths for trade shows. You can imagine, that business has basically been shut down for the time being, and they're just slowly coming back depending on how the re-opening happens.
0:14:16.3 WT: In valuing, essentially, an income approach has become more relevant, a multiple-period income approach, because we can't just look at one period and say, "That's what's going to happen." We're looking at more of a forecast, we're looking at scenarios. Often, maybe we'll look at a base case or an optimistic scenario, and then when things don't quite open up as we anticipate, for example, if there is a big wave, we hope not, but if there's a wave of infection in fall/winter, what is that going to do? All these are things to consider. And then on the other end, there's... The marketability of business has been impaired because there's a lack of buyers, lack of... Everyone's under financial stress. And finally, as I mentioned before, it's very much industry and geographic-specific, and maybe time-specific, too. I think the northeast has gone through their thing. It all has to be taken into account.
0:15:23.2 BK: So, when we're doing real estate and business valuation disputes in my eminent domain proceedings or other sorts of litigation, it's pretty common that they have a business or a piece of real estate that has a one-off situation with a non-recurring expense or a non-recurring income, and sometimes we'll just completely disregard that for purposes of valuation and say, "Look, that was a one-time expense," or "That was a one-time revenue, and we're not going to predict that going forward into the future." You could see something like that even now with a forgivable PPP loan or something where a business got a couple of million dollars that it wouldn't otherwise get. Is it something that you would say... Can you do that with the COVID situation right now and say, "I'm going to essentially disregard this last year of 2020 and pretend it essentially doesn't exist," for purposes of valuing a business going forward, or is that just... Is it going to be really situation-specific?
0:16:19.6 WT: So generally speaking, I would say no, it doesn't make sense to do that, but we would have to look at it from a case-by-case basis. Certainly, a fundamental exercise that we do in all our valuations is to look at the historical earnings, as you mentioned, and adjust them. And typically, we do adjust for non-recurring items that we think are not going to continue, for discretionary or non-business purpose expenses and that type of thing, and for accounting inconsistencies. Those are the big three we typically adjust for. Now, as far as COVID goes, if you think that the business is not going to be impacted in the future and it's all in the rear-view mirror, then yeah, I suppose you could do that, but I don't think anyone is thinking that right now.
0:17:05.8 WT: What's interesting is that there is a controversy about this as... A typical measure or earnings that we see is EBITDA, earnings before interest, taxes, depreciation, and amortization, and that's usually... It's very commonly used for deals and valuation. A new measure is coming up called EBITDAC, and what's the C? That's Coronavirus. So essentially, it's earnings before Coronavirus. Some companies are putting that forth as a measure, basically, "Hey, this is what we did in the prior years," and using that as a basis for loans and for financial reporting. And it's been met with a lot of skepticism, frankly, because first of all, it's not a real number; it's a speculative number. And the real question is, sure, we need to identify the impact of COVID-19, because those are likely to change over time. So we don't want to just look at the unadjusted numbers and not understand why the sales and profits are down right now, but to completely adjust them out and just pretend it didn't happen, in most cases, wouldn't make any sense.
0:18:18.8 BK: Got it. I think I mentioned my practice, and I know you do a lot, too, my practice primarily involves around real estate and business litigation, particularly disputes on valuation issues, like inverse condemnation, eminent domain, landlord-tenant disputes, and purchase agreements, other things like that, and I think factoring COVID-19 into these cases are going to present some real challenges, and we'll touch on that a little bit, but what other types of valuation litigation are you involved with, or where might you see COVID-19 have an impact?
0:18:51.5 WT: In addition to the areas you mentioned, we are seeing valuation and dispute issues in such areas as in the banking and finance world, certainly, you see loan defaults. There are also... There's litigation related to unfair or alleged unfair or biased PPP lending that's coming out. Of course, one of the big elephants in the room is business interruption. There's a lot of claims that have been made on that. The jury is still out as to how that's going to pan out. I think there's been some success by business owners in getting some relief, but generally speaking, right now, the insurers are succeeding in saying that this is not covered by their policies. But business interruption is obviously a big issue. There's breach of contract, we see that litigation coming up, and you feel your inability to fulfill an obligation, and that, of course, does relate to real estate, like in your area, the real estate, the landlord-tenant disputes, foreclosures, work outs, all that is a fallout of COVID-19.
0:20:03.7 WT: On the employment side, we're seeing litigation related to things like wage and hour disputes, where people... Maybe their time hasn't been tracked properly since working remotely. Or health and safety issues, folks that are going back to work and getting sick and suing the company. There are issues related to mergers and acquisitions for deals that just have either broken or impaired, and whether it's a result of COVID-19, or is it a result of the parties simply backing out? And there's also an interesting area of security fraud and auditor liability, where if a company has failed to disclose information, or they made misleading statements, or there's inadequate due diligence, there's a fallout for that, too, if that's not reported properly.
0:20:54.5 BK: Yeah. There's just a whole lot to take on there. I think I did recently see one of the first successful business interruption insurance coverage cases that came out recently, so, there might be some headway in that area. On the real estate side, too, it's been really interesting seeing how the landlord-tenant disputes are falling out, and the purchase agreements that people are trying to get out of due to financial difficulties and just changes in their projected forecasts and making the deal not as profitable or it doesn't make sense financially anymore, so...
0:21:23.7 WT: And maybe just to add one other item, is that overlaying this is that the courts have been closed generally. So, that must impact what remedies you seek.
0:21:38.1 BK: Yeah, absolutely. We're a lot of times dealing with a variety of different valuation issues. Are you working mostly on things that are dealing with damages or lost profits, lost business goodwill, or is it something else?
0:21:50.8 WT: It's a mix. I've been doing all of the above. There's some work that's non-related to litigation as well, such as estate and gift tax work, where now is a great time if you have the wherewithal to make gifts, because assets are depressed.
0:22:13.9 BK: I'm thinking of the issues that I'm seeing pop up in the valuation world, and obviously, a huge one for what I'm doing, in a domain or other sorts of business valuation issues, is what's the cause or the reason for the loss? Was it due to the public project, or was it due to the economy, or was it actually due to COVID-19 or something else, and being able to separate out those issues? What are you thinking are the biggest disputes as it pertains to COVID-19 as it pertains to business valuation experts?
0:22:47.4 WT: Well, a big issue down the line is going to be causation. The date of valuation is one big issue there. Certainly, if you're valuing a business as of say, December, or even maybe early February of this year, you probably can get away with attributing... At that point in time, not attributing COVID-19 in your valuation, because it was really not known and knowable to the extent that it subsequently became. So, certainly, after... This is why a timeline of COVID-19 and how it impacted the financial markets and people is so important. As of March of 2020, I think that's when the stock market basically crashed, and that's when the shutdowns occurred and people started really getting sick, then you've got an absolute issue as to the impact on value. As far as lost profits and diminution of value, the question, of course, will become, "Well, what part of it's caused by COVID, if it was, and what part was because of, say, the actions of a party that did a wrong thing?"
0:24:14.5 WT: You also see things like the... You expect discount rates to vary over time, because are we looking at a value... If you're looking at a value of a business versus a value, basically, a lost profit analysis, you're going to have a difference there. Really, there are a lot of things that I think are going to be in dispute. Causation is huge, I think, as it relates to COVID-19. How do we separate it, out if we can? And for how long is COVID going to have an impact on the business? And you go back to your... What we sometimes call it "but for." But for the actions of the... Whether it's an agency or whether it's an individual or whatever it is, what would have happened? And you've got COVID in the middle of all that. So, we've got to be very careful how we figure things out. There's always room for disagreement and different interpretations, but now we have to really be careful.
0:25:18.3 BK: Yeah, and we had a big enough spread between appraisers before COVID, and now, the spread just becomes even bigger. Like you said, figuring out causation and predicting what the future holds is just lots of big question marks. So, it's going to be interesting to see how this plays out. What about how COVID-19's impacting the real estate and business valuation industry generally? Are you going out and doing site inspections and meeting with businesses? How are you seeing business relocations being impacted? We talked about courts being closed, jury trials getting postponed, how it's taking just a lot longer to get to trials. Is this helpful for your valuation and analysis? Talk about the industry generally and what you're seeing.
0:26:01.4 WT: Well, it's... The shutdown itself has made it more difficult to physically access a business to the extent that we need to do that. As far as the damage analysis, in a sense, if there's a delay in the trial, it could actually afford more time to see what an after-condition performance might look like, which, the more you have, the better it is. So, in a sense, you could take that time and have a better understanding of how, for example, COVID or some wrongful action are really impacting a business. The only problem is that we don't know when stabilization is going to happen, so we're not quite in the shock we were in in March, April, May, but we're certainly not at a stable point, either.
0:26:58.2 BK: Yeah, it's interesting that with some of the trials that we've been having, usually, it's not typical to have a lot of after-condition data where you have... If a business has to relocate or lose a bunch of parking, whatever the case may be, what's the actual revenues and expenses of the businesses? And now, you might have some of that [0:27:17.9] ____ so it will be interesting to see how you use that, especially when that data is potentially impacted by COVID and whether it's actually something that's helpful or not. But otherwise, in our industry, generally, it's kind of a mixed bag of results. I've seen a number of public works projects that are being delayed or postponed, but then others that are being expedited, and they're taking advantage of less traffic or less businesses that might not otherwise be open.
0:27:47.8 BK: Another thing that we're handling a lot is business relocations and the criteria for what a relocation site may look like. It's completely changed due to the COVID. We talked about businesses just changing the way they operate. They may downsize, or restaurants may now be looking for more outdoor seating. If the businesses are completely changing the way they operate due to COVID-19, how does that play out in the business valuation scenario? You don't really have a true "apples-to-apples" scenario of a before-condition business and an after-condition business. In some respects, you almost have a completely different type of business in your after-condition due to COVID.
0:28:27.3 WT: Absolutely, and these are complex issues. And I think we do have to look at them pretty much on a case-by-case basis. And it will be interesting to see, as you mentioned, some of these operational changes may be short-term, but there may also be a permanent change, like the example of maybe the brick-and-mortar store that's leaning more toward online now, because that's going to be a permanent state of affairs, that they really want to do that. Other business, it may not be the case.
0:28:58.2 BK: Alright, some really interesting stuff, lots of issues there to unravel and think about. Man, it's going to be interesting to see how this plays out in our real estate and business valuation world. Lots things to strategize on before we're approaching these litigation matters. Will, I really appreciate your time today. It's been a pleasure speaking with you. I know you put together some handouts for this, and so if anyone's interested, feel free to reach out to either one of us. My email is firstname.lastname@example.org, and Will's is wthomsen, which is W-T-H-O-M-S-E-N@gtllp.com.
0:29:39.5 BK: Thanks to all our listeners for joining us for Digging Into Land Use Law. For additional information on this topic or other land use or eminent domain issues, please feel free to visit our website at nossaman.com, and don't forget to subscribe to Digging Into Land Use Law wherever you're listening to your podcast so you don't miss any of our upcoming episodes. Until next time, thank you.
0:30:03.9 S2: Digging Into Land Use Law is presented by Nossaman, LLP and cannot be copied or re-broadcast without consent. Content reflects the personal views and opinions of the participants. The information provided in this podcast is for informational purposes only. It's not intended as legal advice and does not create an attorney-client relationship. Listeners should not act solely upon this information without seeking professional legal counsel.