Real EstateUpdate. in this issue... Green Building Update. This publication may contain attorney advertising.

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1 Real EstateUpdate Berwyn Boston Detroit Harrisburg New York Orange County Philadelphia Pittsburgh Princeton Washington, D.C. Wilmington January 2011 Green Building Update Stefanie L. Brennan Several new LEED programs were recently announced by the U.S. Green Building Council (USGBC) and the Green Building Certification Institute (GBCI), including a new professional accreditation and a new LEED rating system. GBCI An n o u n c e s LEED Fellow Pr o g r a m On December 7, 2010 the GBCI launched the LEED Fellow accreditation. LEED Fellows will constitute an elite class of the world s most distinguished green building professionals, said GBCI Vice President of Credentialing Beth Holst. Individuals eligible for the LEED Fellow designation are required to be nominated by a qualified peer. Nominees must have been accredited LEED APs for at least eight years, have a specialty designation, and have at least ten years of green building experience. The nomination period for the 2011 class of LEED Fellows closed on January 7, Nominees will be assessed on four of the following five elements: (1) technical proficiency, (2) education and mentoring, (3) leadership, (4) commitment and service and (5) advocacy. The 2011 class of LEED Fellows will be announced in October at the USGBC s Greenbuild International Conference & Expo. LEED f o r Re t a i l a n d t h e LEED Vo l u m e Pr o g r a m Announced at Greenbuild 2010 On November 18, 2010 at the Greenbuild International Conference & Expo in Chicago, Illinois, the USGBC announced the launch of LEED for Retail and the LEED Volume Program. The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Please send address corrections to phinfo@ pepperlaw.com Pepper Hamilton LLP. All Rights Reserved. LEED for Retail is the newest green building rating system. Its credit system takes into account the retail sector s unique building and design requirements. Nearly 100 retailers and franchisees participated in the pilot program for LEED for Retail, including McDonald s, Target, Bank of America and Kohl s. More information on the LEED for Retail rating system can be found at The LEED Volume Program is designed to streamline the LEED certification process and is specifically targeted to property developers who are pursuing LEED certification on multiple, comparable projects. Under the LEED Volume Program, organizational builders and developers use a prototype-based approach to pursue LEED credits on several projects. This simplifies the submission and review process and allows applicants to earn LEED certification quicker and more cost effectively. For more information on the LEED Volume Program, visit USGBC Announces the LEED Automation Program On November 17, 2010 the USGBC announced LEED Automation, a new program created to integrate and streamline the technology used in the LEED building certification process. LEED Automation works in conjunction with LEED Online, the USGBC s online tool for documentation submissions and certification. This is the first time the USGBC has allowed the app market and other third-party software developers to access LEED Online technology. LEED Automation allows LEED Online to interact with third-party technology platforms. LEED Automation s three main roles are to (1) automate various LEED documentation submissions, (2) provide customers with a comprehensive view of multiple LEED projects, and (3) standardize and deliver LEED content over a variety of technology platforms. This publication may contain attorney advertising. in this issue... 1 Green Building Update 2 New Jersey s Legal and Political Battles over Affordable Housing Continue into New Year 5 LEASING CORNER - SNDAs: An Important Aspect in Commercial Leases 8 Pepper Partners to Present on International Green Construction Code

2 New Jersey s Legal and Political Battles over Affordable Housing Continue into New Year Th o m a s M. Letizia letiziat@p e p p e r l a w.c o m, Ma r k A. So l o m o n s o l o m o n m e p p e r l a w.c o m Cynthia De Lisi Smith Since the New Jersey Supreme Court s landmark Mt. Laurel decisions 1 in which the court found that each municipality has a state constitutional obligation through its land use regulations to provide a realistic opportunity for the construction of housing affordable for lower-income households, New Jersey lawmakers, municipal officials, developers and citizens have struggled to find the appropriate legal framework to fulfill (or in many cases, curtail) this responsibility. The New Jersey Fair Housing Act, 2 enacted in 1985, established the Council on Affordable Housing (COAH) to promulgate rules, oversee implementation of the municipal constitutional duty and create protections for complying municipalities from builder s lawsuits. However, after years marked by legal battles and court decisions invalidating COAH s latest regulations, today New Jersey s affordable housing policy remains in a state of disarray and confusion. Calls to abolish COAH abound and legislation designed to do just that and address the latest judicial decisions passed the New Jersey General Assembly on December 13, 2010 and the Senate on January 10, Gov. Christie, a proponent of abolishing COAH, is likely to conditionally veto this legislation, because of its establishment of affordable housing quotas for most New Jersey municipalities. This article summarizes the most recent State Appellate Division decision overturning key portions of the COAH rules and the proposed legislation offered in response to reform New Jersey s affordable housing law. Legal Ch a l l e n g e s to t h e Cu r re n t Affordable Housing Regime The latest legal blow to the current COAH regulatory scheme came in October 2010, when the Appellate Division, for the second time in three years, struck down the third-round rules adopted by COAH to prescribe municipal affordable housing requirements for the period from 1999 until Most critically, the court found that COAH s growth share methodology for determining a municipality s affordable housing requirement was flawed. Under the growth share method, a municipality was A legislative remedy to the affordable housing crisis in New Jersey remains doubtful in the short term. required to ensure that for every four market-rate housing units constructed, one affordable housing unit would be constructed (i.e., 20 percent of all new housing had to be set aside for affordable housing). The Appellate Division found this method invalid for two reasons. First, COAH did not establish that each region had enough vacant land to fulfill this requirement. Second, this approach allowed municipalities to avoid their affordable housing obligations by simply halting future growth altogether a municipality could simply decide to significantly reduce the growth of market-rate housing within its borders and consequently end up with no affordable housing obligation. The court instructed COAH to use a methodology similar to court-approved methods from the prior rounds. In addition to striking down growth share, the court also invalidated two other significant provisions of COAH s third-round rules. It found that that the presumptive minimum densities and maximum set-asides in the regulations intended to incentivize the construction of affordable housing were insufficient to realistically encourage private developers to produce affordable housing. In addition, with regard to projects sponsored by municipalities, the court struck down the rule that allowed a municipality to obtain from COAH substantive certification of vague compliance plans that relied on municipally sponsored, 100 percent-affordable-housing projects without specifying the location of such projects, sources of funding or evidence that the municipality controlled the site. 2

3 Real EstateUpdate The Appellate Division ordered COAH to adopt new regulations within five months. However, since the decision was rendered, several parties have filed applications for certification with the New Jersey Supreme Court. As of this writing, the Supreme Court had not yet decided whether to hear these appeals. Proposed Legislation Legislation to revamp the affordable housing system has been debated for more than a year. A bill known as S-1 was first introduced in January 2010 and passed the Senate in June of On December 13, 2010, a modified version of S-1 was enacted by the Assembly (A-3447). This modified bill was passed by the Senate on January 10, Because the latest version of the bill includes minimum affordable housing quotas or set-asides, the votes in each house were largely along partisan lines, with Democrats in favor of the bill and Republicans against it. Citing the burden the legislation places on municipalities through its quota system, Gov. Christie has indicated he plans to conditionally veto it. 4 Thus, a legislative remedy to the affordable housing crisis in New Jersey remains doubtful in the short term. Below is an overview of the major provisions of the A-3447/S-1 affordable housing legislation that has been sent to the governor. Abolition of COAH and Creation of Licensed Housing Compliance Professionals The bill would abolish COAH and transfer the responsibility for administering municipal compliance with the FHA to the New Jersey Department of Community Affairs (DCA). The role of approving municipal housing plans would be assigned to a new private-sector position called a licensed housing compliance professional who would certify municipal housing elements prior to submission to the DCA. Licensed housing compliance professionals would be regulated by the State Board of Professional Planners, and municipalities desiring to be certified will have a professional appointed for them at random by the state board. Upon certification from a planner, DCA would then accept the municipality s plan and post the information on its Web site. Housing Requirements The legislation follows an approach similar to the growth share model, but attempts to avoid the constitutional pitfalls of the former COAH methodology. It would require the majority of municipalities in the state to set aside 10 percent 5 of their total current housing stock for qualified housing units for low- and moderate-income families. 6 If a municipality cannot demonstrate compliance with the 10 percent threshold, it must adopt a housing element with implementing ordinances, certified by a licensed housing professional, within eight months of adoption of the bill, showing how it will bring itself into compliance. The housing element must include: an analysis of the number of existing qualified housing units and the number of units required to satisfy its housing requirement demonstrate a realistic opportunity through zoning ordinances to supply at least 50 percent of the difference between its existing qualified housing stock and its 10 percent requirement during the ten-year compliance period, to a maximum of 1,000 units, and the number of substandard units occupied by low- and moderate-income families and a plan for the rehabilitation of those units within the ten-year compliance period. Density bonuses for developers may provide the realistic opportunity for up to half of the qualified housing requirement. The legislation lays out presumptive minimum densities and criteria for evaluating density bonuses that would be an adequate incentive for a developer to set-aside between 15 percent and 20 percent of the total number of units in a development for qualified housing. Municipalities may also include municipally sponsored projects as part of their housing elements. Unlike the invalidated COAH rules, municipalities would have to demonstrate control of a site, and that it is developable land, and would be required to commence construction of at least one-third of the units within three years, two-thirds of the units within six years, and to complete the project within nine years. Such projects may be paid for by use of monies in a municipal affordable housing trust fund. Development Fees To the delight of nonresidential developers, the proposed law would eliminate the 2.5 percent Statewide Non-Residential Development fee. The law would also require municipalities to refund any nonresidential fees collected since it was reactivated in July Prior to issuing a certificate of occupancy, each municipality would be required to charge developers of new residential projects that do not include affordable housing a fee of 1.5 percent of the equalized assessed value of the development for deposit into the municipal affordable housing trust fund. 3

4 The fee would become effective one year after enactment of the legislation. This fee would not apply to developers of inclusionary housing projects that provide qualified housing units. All current municipal residential development fees may still be charged during the one-year period. Impacts on Litigation Housing elements that are certified by a licensed housing compliance professional and registered with DCA will have a presumption of validity in builder s remedy actions. Developers will have to prove by clear and convincing evidence that the plans do not provide a realistic opportunity for the development of affordable housing. In non-complying municipalities, developments that set aside a minimum of 20 percent of the units as qualified affordable housing would be considered inherently beneficial uses for purpose of meeting the positive criteria of a d or use variance application. In this manner, a project would only need to satisfy the negative criteria no substantial impairment to the zone plan and no substantial detriment to the public good. In theory, under this legislation, an inclusionary development would be more likely to qualify for a d variance approval. Other Matters In addition to the above requirements, municipalities would need to show they meet the following percentage standards: at least 50 percent of the units must be qualified low-income units and at least 13 percent of the units must be very-lowincome units a maximum of 25 percent of the qualified low-income and moderate-income units may be age-restricted at least 50 percent of the very-low-, low- and moderateincome housing must be family housing no more than 25 percent of the total qualified housing units may be reserved for people living or working in the municipality. The bill also has incentives for the construction of affordable housing near transit areas and for housing that meets the requirements of individuals with special needs. Whether this legislation in its present form becomes law is not certain. It is clear, however, that the legal and political debate over affordable housing in New Jersey will continue well into Pepper Hamilton LLP is monitoring the situation and will advise of any important developments. En d n o t e s 1 Southern Burlington County NAACP v. Township of Mount Laurel, 67 N.J. 151 (1975); Southern Burlington County NAACP v. Township of Mount Laurel, 92 N.J. 158 (1983). 2 The Fair Housing Act is codified at N.J.S.A. 52:27D-301 to In the Matter of the Adoption of N.J.A.C. 5:96 and 5:97 by the New Jersey Council of Affordable Housing, A (App. Div. October 8, 2010). The prior decision was in 2007 and is codified at In re Adoption of N.J.A.C. 5:94 and 5:95, 390 N.J. Super. 1 (App. Div. 2007). 4 A conditional veto is a veto in which the governor objects to parts of a bill and proposes amendments that would make it acceptable. If the legislature re-enacts the bill with the recommended amendments, it is presented again to the governor for signature. The governor has 45 days to take action on the bill. 5 In a municipality where 20 percent to 50 percent of the school children are eligible for free or reduced-priced meals under the federal School Lunch Program, only 8 percent of that municipality s housing stock need be qualified housing units. If 50 percent or more of a municipality s children are children, there is no additional qualified housing requirement. Approximately 71 municipalities would fall under this total exemption. 6 Qualified housing units means units subject to affordability controls, public housing, and supportive and special-needs units. Housing units shall be deemed qualified housing units only if affordability controls or applicable affordability restrictions expire no sooner than the end of the current compliance period, provided that any qualified units shall be adaptable, as required by N.J.S.A. 52:27D-311a. 7 The New Jersey Economic Stimulus Act of 2009 (P.L.2009, c. 90) had imposed a temporary moratorium on the imposition of the state nonresidential development fee. However, the moratorium expired on July 1,

5 Real EstateUpdate Leasing Corner SNDAs: An Important Aspect in Commercial Leases Matthew J. Swett In this issue of our Real Estate Update we are introducing the Leasing Corner a series of articles focusing on commercial real estate leasing. While the Pepper Hamilton Real Estate Practice Group handles all matter of real estate transactions, development, land use and litigation, one area in which we regularly provide legal services to our clients is commercial leasing. We have assisted many clients in connection with varied types of leases including, for example, ground leases, big-box and in-line retail leases, large headquarters-office leases, and laboratory, industrial and warehouse space leases. In this issue, we will discuss the importance of a subordination, non-disturbance and attornment agreement (SNDA). During our past representations, many of our clients have asked us to explain what an SNDA is and why it is important that they obtain an SNDA in connection with their lease. An SNDA is a three-party agreement between landlord, tenant and landlord s lender. In summary, a SNDA provides for: (1) the subordination of the tenant s leasehold rights to the lien of lender s mortgage (so that the lender can effectively foreclose its mortgage lien in the event of the landlord s default under its loan); (2) the agreement of the lender not to disturb the tenant s rights under the lease in the event the lender does in fact foreclose its mortgage lien following the default of the landlord under its loan (thus ensuring the tenant s leasehold rights will continue following the foreclosure) and (3) the tenant s agreement to recognize the lender or the successful purchaser at the foreclosure sale as its landlord. Generally, without an SNDA the tenant has no protection in the event its landlord s lender forecloses its mortgage lien. The lender s mortgage lien on a property that exists at the time the landlord enters into a lease with the tenant generally has priority over the tenant s leasehold interest. And in many instances, the landlord s standard form of lease may automatically provide that the tenant s leasehold interest is subordinate to existing (and sometimes even future) mortgage liens. In either case, if Tenants rarely will be fully satisfied with the terms of an SNDA, but a properly negotiated SNDA will provide a tenant additional protections in the event of a foreclosure. the landlord defaults under its mortgage loan and the mortgage lender forecloses its lien, the lender, or the successful purchaser at the foreclosure sale, (we will call the successful purchaser, whether it be lender or someone else, successor landlord ) will be able to terminate the tenant s lease if there is not an SNDA executed between the parties. Some people may argue that it is unlikely that a successor landlord would want to terminate existing leases, but there are instances in which it is a real risk. For example, a lease signed during the recent downturn in the real estate market might be at a rental rate that is significantly lower than the market rate will be in just a few years (we can only hope the economy has improved to such a degree). In that instance, a successor landlord who has the right to terminate a lease upon foreclosure may elect to terminate the lease in order to replace it with one that has a higher rental rate, or use that right of termination to leverage a higher rental rate from the existing tenant who signed its lease during the economic downturn at a bargain rental rate. In either case, the tenant will have virtually no leverage and will likely have to agree to the successor landlord s demands. It is imperative that the tenant seek to obtain an SNDA from the landlord s 5

6 existing mortgage lenders in order to protect its leasehold interest in the event an existing lender forecloses its mortgage. Of course not all tenants will be able to get SNDAs from existing mortgage lenders in all instances. Many factors will come into play, including the relative bargaining strengths of the parties, the particular lender involved, the creditworthiness of the tenant and the landlord, the relationship between the landlord and the lender and the size and importance of the proposed lease transaction. If a lease does not automatically subordinate the leasehold rights to future mortgage liens, the tenant s leasehold interest will generally be superior to the lien of a future mortgage. In that event, a lender who seeks to make a mortgage lien in the future will likely require a landlord to obtain an SNDA from all existing tenants, which means that existing tenants will have marginally more leverage with respect to future lenders. In some instances, the landlord may not be able to obtain or be unwilling to obtain a SNDA from its current lender, but will agree that the lien of all future mortgage lenders will not be superior to that of the tenant s leasehold interests in the absence of an SNDA. A lender s standard form SNDA contains far more than the three simple provisions outlined above. For instance, a lender s form SNDA will also provide that the lender is not obligated to complete any construction obligation of the landlord and is likewise not obligated to fund any improvement allowances not paid by the landlord. A lender s form SNDA will also provide that the lender is not liable for the defaults of the landlord under the lease and that any rights that the tenant may have against the landlord on account of any landlord default cannot be asserted against the lender. In addition, a lender s form SNDA will provide that no amendment to the lease can be made without the lender s prior consent and that any amendment made without the lender s consent will not be enforceable against the lender. Obviously, these provisions could have drastic implications for a tenant if its landlord were to default under its loan and the lender forecloses on the property. Consider, for example, the following situation. A tenant signs a lease for a new office space in a multi-story building. The landlord agrees to perform certain building improvements, such as upgrades to the building lobby, and agrees to provide the tenant with a tenant improvement allowance so the tenant can improve its space for its intended use. The lease provides that the tenant will have a 90-day period to construct its improvements, following which the tenant has to commence payment of rent. If landlord defaults on its loan and the lender forecloses on the building before the landlord has paid the allowance to the tenant or completed its work on the lobby, then under a standard SNDA, the lender would not be obligated to pay to the tenant the allowance that the landlord owed to the tenant, nor would the lender be obligated to perform the lobby improvements, or even complete them if they were started but not completed. In addition, under the SNDA the tenant is obligated to recognize the lender as its landlord and continue to perform its lease obligations under the lease, such as the payment of rent. This leaves the tenant in an unenviable position of having to perform its obligations while the successor landlord does not have to perform the obligations that the tenant bargained for when it signed the lease. Thus, while a lender s standard form SNDA does provide the basic non-disturbance protection a tenant needs, it provides little additional protection. This is where the tenant s counsel can provide the tenant with some additional protections to address issues such as ongoing landlord defaults, the obligation to complete construction and to provide tenant improvement allowances. Tenants rarely will be fully satisfied with the terms of an SNDA, but a properly negotiated SNDA will provide a tenant additional protections in the event of a foreclosure. Lastly, the parties, and in particular the tenant, need to remember that almost every SNDA requires that the parties obtain lender s approval for any amendment to the lease. It is sometimes possible to negotiate the right for landlord and tenant to enter into a non-material lease amendment without the lender s prior approval, but where the lender s consent is required it is imperative that the tenant make sure that the consent is obtained. While the landlord should also want to obtain a needed consent, so as to avoid any allegation that it has defaulted under its loan documents by entering into an amendment without prior approval, the real risk is to the tenant if the consent is not obtained. Pursuant to the typical terms of an SNDA, an amendment to a lease made without the lender s approval will not be binding on the lender. Of course, the only time that the tenant really cares if the lender is bound to a particular lease term (or amendment to a lease term) is if the lender has foreclosed on the property, when it is particularly important that a successor lender be bound. For example, during this economic downturn many landlords have sought to blend and extend their leases. The concept is that the tenant is given some rent relief (free rent, a lower rent or other concession) in exchange for which the tenant agrees to extend the term of the lease. This gives the landlord some 6

7 Real EstateUpdate stability for a longer term an important commodity during tough economic terms. However, if after the amendment there is a foreclosure and the parties had not obtained a required lender consent under an SNDA, then the tenant may not be able to enjoy the benefits of its new bargain and could find itself having to pay the old higher rent for a shorter term. Likewise, the tenant and landlord could have entered into a lease amendment to address the landlord s inability to fund tenant improvements that it was required to fund under the lease to the tenant. For example, the tenant may be granted a year of free rent in consideration for bearing the cost of the tenant improvements on the landlord s behalf. If there is a foreclosure (which may be likely in cases in which the landlord was having difficulties in funding the tenant improvement costs in the first place), the tenant will want to be sure that the lender approves the amendment granting it the period of free rent. While this is not intended to be an all-inclusive discussion of all the issues related to SNDAs and the potential resolutions of those issues, it should be clear that the issues surrounding SNDAs are complex. Unlike the lease between a landlord and tenant, an SNDA involves three parties and the three parties do not have the same interests. In fact, a lender negotiates an SNDA assuming it will succeed to the landlord s interest. Accordingly, it has and will have different interests and a different risk profile than the original landlord. The tenant s interest throughout the process is consistent; it only wants to enjoy the benefits of its bargain. The landlord generally does not care what the SNDA says, because the SNDA only comes into play when the landlord is no longer in control of the property. Five years ago when the real estate market and the economy in general was extremely strong, tenants may not have worried about getting an SNDA. In the vast majority of lease transactions the failure to obtain an SNDA or to fully negotiate an SNDA to protect the tenant s interests, at least to some degree, did not matter, as loan defaults were infrequent (and any loan defaults were easily cured or refinanced). However, over the last few years and even now, the commercial real estate market is not strong, lenders are very conservative and, in many cases, are aggressively enforcing their rights under their loan documents. It is for these reasons that it is so important that tenants consult the Pepper Hamilton Real Estate Practice Group to negotiate their leases and an SNDA to protect their interests under their lease following a foreclosure of the landlord s mortgage loan. RSS on Subscribe to the latest Pepper articles via RSS feeds. Visit today and click on the RSS button on the publications page to subscribe to our latest articles in your news reader. 7

8 Pepper Partners to Present on International Green Construction Code Wednesday, February 23, 2011 Pepper partners Vicki R. Harding and Joyce K. Hackenbrach will present on the Lorman Education Services Audioconference, International Green Construction Code: Making Green the Law. Many governmental entities are interested in mandating sustainable building practices. To date, the typical approach is to require LEED certification. However, there are inherent drawbacks in this approach since voluntary rating systems are not designed to impose minimum mandatory requirements, as contemplated by building codes. In contrast, the ICC International Green Construction Code and ASHRAE Standard were designed to establish minimum mandatory requirements for incorporation in a building code. Now that the IGCC and Standard are beginning to converge, it is likely that municipalities will give serious consideration to adopting the IGCC. This teleconference will give you the background you need to participate in discussion of whether the IGCC should be adopted in the jurisdictions in which you do business, and in what form, and to comply with the IGCC in jurisdictions where it is adopted. The audioconference will take place on February 23 from 1:00-2:30 p.m. ET. For more information, visit 8