Real Estate Development
By Real Estate and Land Use Practice Group
Saalfeld Griggs PC
In the mid-1970’s, Oregon legislators made the significant and lasting policy decision to protect Oregon’s agricultural and forest resources by limiting urban sprawl. The enactment of Senate Bill 100, the foundation for Oregon’s land use system, required Oregon cities to draw a box around the city referred to as an Urban Growth Boundary (“UGB”). Real property inside the box was designated for urban uses, such as commercial, industrial, and residential development. Outside the box, no such development is generally allowed, as these lands are preserved for farm and forest uses.
Thirty years later, the “boxes” of many cities are filling to capacity, and as the inventory of developable property becomes scarce, developers and real property investors are looking for alternatives to acquire more vacant property. Fortunately, by virtue of UGB expansions and Measure 37 claims, our office has been able to assist developers and investors to acquire developable properties “outside the box.” This article explains the considerations relevant to pursuing these two emerging alternatives for property development.
EXPANDING URBAN GROWTH BOUNDARIES
As a city’s needs for developable property exceed its supply within the UGB, the State has provided procedures for the expansion of the UGB to permit more urban development. Once a city demonstrates the need for additional urban land based on population projections, economic objectives, and current buildable land supply, a city will review all property surrounding the UGB to determine the location(s) at which to expand the UGB.
State statutes and Statewide Planning Goals dictate to cities what properties must first be considered for expansion of the UGB. Some factors are mandatory, while others provide guidelines. Currently cities are generally surrounded by agricultural or forest land. Before these lands can be brought in the UGB cities must bring in lands in the following order of priority: (1) urban reserve land (land outside the UGB previously reserved for urban use in an acknowledged comprehensive plan); (2) “exception” areas or non-resource lands (these are generally areas that are highly parcelized or have been previously used for urban uses making them unsuitable for productive agricultural purposes); and (3) “marginal lands” (rare farm and forest lands specially designated as containing less-productive soils). Cities generally have some of these types of acreage bordering their UGBs, however most cities will need to expand into agricultural and forest lands as well.
Even among farm and forest lands, certain properties have higher priority for inclusion than others. Most importantly, lower value farmland (e.g., Class 4 and 5 soils) must be included before higher value farmland (e.g., Class 1 and 2 soils). Since it is the State’s policy to preserve the economic viability of its agricultural industry, lower producing farm land is the first to be removed from the county’s agricultural inventory for inclusion in the city’s UGB.
Once it is determined which properties have the lowest value soils, cities must balance additional considerations in selecting the location(s) for UGB expansion. Preference will be given to properties that: (a) can develop efficiently (e.g., relatively large, flat parcels); (b) cost less to serve with public utilities as compared to other properties; (c) accomplish a city’s transportation system; (d) plan, provide, utilize or protect amenities valued by the community (e.g., wetlands protection, proximity to schools or other community and commercial centers); and (e) buffer the proposed urban use from neighboring agricultural activities (e.g., separated by streets).
Cities, counties, and the State will use the factors above to determine which properties must be included in a city’s UGB expansion. Accordingly, these factors should guide a developer’s or real estate investor’s acquisition of property outside, but near, the UGB.
The process by which cities expand their UGBs is lengthy and complex. The law requires cities to perform a myriad of studies, and provide many opportunities for public participation. Further, once the city decides where to expand its UGB, the county and the State must both concur at independent, successive stages of review. From start to finish, the process can take five to ten years. However, for patient developers and investors, the return can be immense. For example, property zoned for farm use purchased at $3,000 per acre may increase in value to $150,000 or more per acre. For that reason, owners and prospective purchasers of property near a city’s UGB should analyze the property’s potential for inclusion in the UGB and to meet with the city and other decision makers early in the UGB expansion process to establish the property’s satisfaction of the State’s requirements for UGB expansion.
DEVELOPING UNDER MEASURE 37
In March of this year, the Oregon Supreme Court upheld the constitutionality of Ballot Measure 37, the 2004 voter-initiated law intended to compensate property owners for loss in property value caused by land use regulations. Our firm continues to submit claims and obtain approvals for many individuals and families who, due to land use restrictions, cannot use their property as allowed when the property was acquired. The result is additional property available for development outside the UGB.
However, Measure 37 claim approval does not, in and of itself, allow the claimant to proceed with development. The property owner must still submit a land use application to receive approval of the proposed development. Furthermore, because the State and most local jurisdictions are currently taking the position that a Measure 37 claim approval is personal to the claimant, the right to develop the property cannot be transferred to heirs or subsequent purchasers. For example, claimants who desire to subdivide a property for residential lots must “vest” their Measure 37 rights. In other words, after obtaining approval of a subdivision application, the property owner must construct the public utilities, as well as the houses themselves, while the claimant still holds title to the property. Any intervening transfer of title, including death of the claimant, may terminate the claimant’s Measure 37 rights.
Many Measure 37 claimants do not have the energy, experience, or financial capacity to develop property. However, as long as the claimant holds title to the property, the claimant can enter into a joint venture with a developer who contributes the experience and financing for the development. As our clients have obtained Measure 37 approvals, our firm has been able to link successful Measure 37 claimants with trusted developers who our office works with on a regular basis.
Because strict timelines apply for not only obtaining Measure 37 rights, but also vesting those rights by completing development of the property, owners of property who may qualify for Measure 37 claims should file the claims soon. The time limit to file a claim in most cases will end on December 2, 2006. For claimants who have already obtained approval of their Measure 37 claims, you should proceed with development of the property, either on your own or in a joint venture.
The approval of many Measure 37 claims and the diminishing supply of developable property within the UGB “boxes” of many Oregon cities provide opportunities for developers and investors to pursue development “outside the box.” Please contact a member of our Real Estate and Land Use practice group if you wish to pursue or have questions regarding such opportunities.