August 30, 1992 - From the August, 1992 issue

The Case for EER’s: Entitlement Evaluation Reports

Although federal legislation during the Nixon years created the Environmental Impact Report (the EIR), bitter experience and good business judgment have finally led to the EER, the Entitlement Evaluation Report.

What is an EER? An EER identifies the planning considerations which prescribe, allow, restrain, direct or affect the land use of a particular property, and evaluates those factors for both risk and cost.

By Nelson E. (Nick) Brestoff. Brestoff holds an M.S. in environmental engineering from Caltech and a law degree from U.S.C., and currently practices real estate and environmental law in Woodland Hills. He is a member of the Ventura Blvd. Plan Review Board by appointment of Councilwoman Joy Picus.

The Need for EERs

Land use is a conditional right, not an absolute right. Things that were taken for granted yesterday may be questionable today and prohibited tomorrow. By the stroke of a pen, an investment can be wiped out. Far more frequently, however, new planning devices — Community Plans, Specific Plans, trip fees, arts fees, housing linkage fees, school fees, and the like — augur changes that make a once promising project economically infeasible.

EERs evaluate these planning considerations, and they are unlike the more familiar documents involved in a real estate acquisition or loan file. For example, title reports indicate the vesting and encumbrances “of record” at a particular point in time. But a title/report will not show that a property on Ventura Boulevard is subject to a three-story height limit or that there is a “covenant” concerning the property on file with the Department of Building & Safety.

EERs are also different from appraisals and market studies. Appraisals give opinions of fair market value at a particular point in the past, while market studies delve into general economic conditions in the future. Unlike an appraisal, an EER looks forward in time to the countless interim Control Ordinances and what might happen after they expire. Unlike a market study, they are focused on the specific property in question.

An EER is different from a Financial Pro Forma and actually should be completed as part of one. Pro Formas are designed to crunch numbers. EERs are designed to show the potential impact, for any given project size, of the fees for housing, art, schools, transportation and other purposes.

The Contents of an EER

Thus, an EER will, depending on the project, identify the jurisdiction and spheres of influence for a property; explain how the general, specific, and community plans affect it; identify the underlying and overlaying zoning; show whether there are “covenants” or easements with Planning, Building & Safety or some other agency or utility; detail the property’s history concerning permits; explore the requirements of LADOT, Caltrans, the Fire Department, and other agencies; delineate the applicable fees; and, last but not least, explain the political considerations involved.

EERs thus have a real value. When making major financial decisions about a property — buying, selling, financing or developing — an EER is an idea whose time has come. An EER is planning “intelligence,” and, like other kinds of intelligence information, designed to avoid risk.

EERs as Risk Avoidance

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There are only two means to deal with risk: avoidance and shifting. Risk shifting involves transactional clauses like representations, warranties, idemnification agreements, agreements to remediate, and their opposite, release clauses.

The EER is an example of risk avoidance. Risk avoidance is an aspect of due diligence — the notion that it is better to investigate a property thoroughly before buying or lending in order to minimize the risk of an unpleasant surprise.

This sort of risk avoidance is vital. In environmental contexts, buyers and lenders often insist on what are called Phase I and Phase II surveys to determine whether a property might have a history of contamination. Phase I and Phase Il surveys focus on the past, and look only for instances of pollution which could turn a viable investment into a disaster.

An EER has a similar motivation, but a different perspective. Projects can be wiped out by planning interpretations, decisions or fees that make them economically infeasible. Thus, buyers and lenders should be just as concerned about these considerations as they are about the unanticipated costs of remediation.

Take the City of Los Angeles’ Ventura Boulevard Specific Plan, for example. Suppose one buys or lends on a building in which a flower shop is doing business. If the flower shop fails, the owner would naturally seek another tenant. But a different tenant would create a different use of the property, and different uses generate different levels of traffic. Certain uses might generate too much traffic and not be allowed.

Unless a prospective buyer or lender understands that this Specific Plan limits development primarily by the traffic each property generates, (which in tum is a function of the use to which it is put), intelligent investment and lending decisions cannot be made.

So what are EERs? They are early warning reports by experts who closely follow land use issues. If your business has a significant real estate portfolio, or if you are buying or lending on a property, you should seriously consider an EER. (GLM Associates, in Woodland Hills, with a Fortune 500 company as an initial client, has begun doing them.)

An EER may be a new idea now, but it may be as ubiquitous as the EIR in years to come.

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