Many residential and commercial developers who traditionally take big risks are mothballing projects until the economy recovers. Financing is difficult to obtain and speculative construction is out of the question. Real estate “experts” and economists, who predicted the bottom was near in late 2008 and again in September 2009, now wonder if expected waves of foreclosures could add 5 to 7 million homes to the market over the next two to three years. Liquid developer clients are purchasing fully-and-partially-approved projects from troubled builders and banks. Projects are available at fire sale prices. 

There are at least three lessons learned from the recessions of the 1980s and 1990s for developers who put projects on the shelf awaiting recovery of the real estate market: (1) Complete the permitting of partially-approved projects, (2) modify permits to change housing types to current market needs and (3) preserve the permits already obtained. 


Lessons From Prior Recessions

Why complete permitting? We encourage our developer clients with partially-permitted projects to apply now for the remaining permits and approvals. We believe communities will be more receptive to projects because they are desperate for tax revenues, construction jobs and related local spending, and the hope for economic recovery that development represents. NIMBY opposition may be weaker because neighbors have less disposable income to fight projects. They feel the real recession devaluation of their homes, rather than fearing amorphous concerns about any devaluation from proposed projects.

Why modify permits? The housing market has shifted considerably over the last several years. Demand has weakened for million-dollar McMansions and grown for small or affordable homes. Condominiums are in disfavor and apartments are in vogue. Affordable housing has shifted from condos to over-55 rentals. Nimble developers are seeking modifications of permits to tailor the housing product to the evolving marketplace, and municipalities are embracing such shifts to avoid vacant lots, white elephants and a soft tax base.

Why preserve permits? Surprisingly, during the last market downturns, even seasoned developers failed to preserve hard-won permits. They took their eye off the ball and did not seek timely extensions of permits and approvals, or commence enough work to protect permits. Many developers were in survival mode and not attentive to details like the expiration date of a permit (which may not be obvious on its face), often because they did not have a “tickler system” in place. Some developers believed the recession would automatically extend permits, like lawsuits which can operate to stay the running of the permit. Others did not envision potential changes in land use and environmental laws and regulations which resulted in new applications and hearings, significantly downsized projects and lengthy and expensive appeals. 

While projects are in a holding pattern, laws evolve. Towns may revise home rule wetland bylaws to add new resource areas, expanded buffer zone protections and expensive proponent-funded technical reviews. New FEMA flood maps may be adopted. Boards of Health may require more onerous design requirements. Shelved projects may be forced to undergo new MEPA review for lapse of time. Special permits under zoning are valid for up to two years before they lapse, if a substantial use has not commenced or construction has not begun, unless good cause for the delay exists. Variances, valid for one year with an extension available for up to six months, will lapse if the authorized rights are not exercised. Failure to timely extend and use these zoning approvals will require new hearings and new findings, and invites potential appeals.


What You Can Do

Deferred projects should undergo “preventive inspection and maintenance” – a tune-up and oil change now instead of rebuilding the engine later. Developers or prospective purchasers should inventory all required permits and approvals for the project. They should also determine the expiration dates and the criteria and procedures for seeking and obtaining extensions, and apply timely for extensions, mustering the appropriate facts and arguments in support. Additionally, they should undertake sufficient work to prevent lapse of prior approvals and apply for additional or lapsed permits before the laws and the politics change.

The investment in preserving existing and obtaining new permits now will pay dividends later. Be ready to commence construction when the recession lifts and new construction starts in 2011.
