West Coast Real Estate Update: March 8, 2016

FDIC Clarifies "Abandoned Foreclosures" Guidelines

The Federal Deposit Insurance Corporation (FDIC) clarified on March 2, 2016, its existing guidelines with respect to the decision by any FDIC-supervised institution to discontinue foreclosure proceedings after such proceedings have already begun ("abandoned foreclosures"). The clarification appears rooted in the FDIC's concern that when the initial notice of foreclosure is given to a borrower, the borrower may cease maintaining its property and/or abandon the property. Such actions detrimentally impact not just the subject property, but also the surrounding neighborhood. If a lender forecloses, it should, and typically does, mitigate many of the adverse actions of the prior property owner; however, if the lender abandons its foreclosure, then the property and the neighborhood may further deteriorate into crime and blight.

The FDIC requires each institution it supervises to maintain policies and procedures specific to that institution's decision to abandon a foreclosure. Among other things, these policies require that the institution:

• obtain current information regarding the value of the real estate and use that information to determine whether to initiate and whether to abandon a foreclosure
• after making a decision not to complete a foreclosure, it should determine when to release its lien to minimize potential liability as mortgagee
• notify state and local government authorities that it has elected not to move forward with the foreclosure and comply with any government requirements applicable to the abandoned foreclosure
• provide written notice to the borrower (using reasonable means of locating the borrower) that:
  • the foreclosure will not move forward
  • the mortgage lien has/has not been released
  • the borrower has the right to continue to occupy the property until title is transferred
  • the borrower remains financially obligated for the repayment of the loan (in California, the institution's ability to pursue the borrower would remain subject to California Code of Civil Procedure Section 726), real estate taxes, insurance premiums and homeowner association dues
  • the borrower is required to maintain the property in accordance with all applicable laws

New Affordable Housing Ballot Proposal Tests Alliance of Business and Labor Groups

In Holland & Knight's West Coast Real Estate Update dated Feb. 16, 2016, we reported on a ballot proposal called the Neighborhood Integrity Initiative that would impose a two-year moratorium on all real estate projects in the City of Los Angeles that require zoning or general plan changes. Now, a second ballot proposal has been submitted that would affect development projects in Los Angeles.

In a development that could strain a recently forged alliance of business and labor groups, the L.A. County Federation of Labor and other groups have submitted a new ballot proposal that would require real estate developers in Los Angeles to set aside a portion of new projects for affordable housing units, or alternatively build the required affordable housing in a different location or pay in-lieu fees to the city. The proposal would also require that a certain percentage of construction jobs be reserved for local or disadvantaged residents.

This new ballot proposal comes after labor and business groups have united in their opposition to the prior ballot measure. Business groups, unions, affordable housing organizations and others have formed a coalition to coordinate their fight against the Neighborhood Integrity Initiative. Now, with union groups supporting the new affordable housing measure, which business groups oppose, the coalition has come under serious strain.

Business organizations fear that the new affordable housing proposal would result in fewer small and mid-size apartment projects in Los Angeles, while unions and affordable housing advocates insist that it is needed to ensure that affordable units are included in the recent residential construction boom in Los Angeles. Business and labor groups are working to find a way to continue to cooperate in their opposition to the Neighborhood Integrity Initiative, while at the same time opposing each other on the new affordable housing proposal.

Studying Smaller, Infill Urban Developments

Urban Land Institute (ULI) has started studying the impact of smaller, infill urban developments. In addition to its focus on large-scale catalytic projects, ULI sees the benefit in the small projects that have an immediate impact on certain segments of the market. Based on its evaluation of several projects, ULI has the following findings:

• Small development is incremental. It is perhaps even surgical at times – helping infill the broken teeth of existing urban blocks or properties that have disappeared or become obsolete.
• Small development is often highly designed and "curated." Infill development of a distinctive site within the fabric of an existing neighborhood is almost always a unique endeavor and cannot be formulaic. A project that works anywhere will not work in such a location. It has to be carefully thought out – optimizing a Rubik's Cube of density, parking, life-safety requirements and appropriate contextual design, among many other elements.
• Small development often manifests the best thinking in sustainability and mixed use. This is because the intellectual capital that gets poured into solving the Rubik's Cube begets more focused thinking about what the project should do for its environment and community.
• "Small" can heal and transform. Incrementally adding to neighborhoods adds new energy and activity, helping reveal or "polish" the intrinsic value of the existing fabric. "Small" is often the seed that leads to the transformation of and reinvestment in neighborhoods at the edge.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.