North Carolina Coastal Land Use Spring 2012 Newsletter Practice - - PDF document

North Carolina Coastal Land Use Newsletter

Court Of Appeals Limits Local Control Over Beaches

By William J. Brian, Jr.

In an important decision for coastal property owners, Town of Nags Head v. Cherry, Inc., No. COA11-931, the North Carolina Court of Appeals held that the Town of Nags Head does not have standing to enforce the State’s rights in the area of the beach known as the Public Trust. In that case,

• ne in a series being pursued by the Town against the owners of beachfront property, the Town took

the position that it could enact and enforce an ordinance which makes all houses and other structures located on the dry sand area of the beach (i.e., that located between the first line of stable vegetation and the mean high water mark) nuisances per se, and compel them to be demolished without paying any just compensation to their owners. The Town takes a broad view of the concept of the public trust, the basis of which is that the State owns the land from the mean high water mark to the open ocean and administers that land in trust for the benefit of the public. Although this doctrine is well-settled, the Town and certain academic commentators have put forth the proposition that in addition to this area seaward of the mean high water mark (i.e., the public trust area, or the wet sand beach), the dry sand beach also is burdened with certain “public trust rights” of general public access, and that any structure located in this area by definition interferes with those rights of access and therefore is a public nuisance. Although (astonishingly) a trial court judge agreed with the Town, the Court of Appeals unanimously disagreed and made it clear that whatever public trust rights may exist on the dry sand area of the beach, those rights belong to the State of North Carolina and only can be enforced by the State. Therefore, the Town lacks standing to enact or enforce the ordinance in question, and the trial court cannot enforce an order to remove a structure solely due to its location on the dry sand beach. Importantly, the Court of Appeals did not elaborate on the existence or scope of the “public trust rights” the State may have on the dry sand beach, but noted only that whatever they may be, they are not an issue for the Town to be concerned with. In doing so, the Court once again put the issue of what – if anything – that is to be done with beachfront structures that have migrated onto the dry sand beach due to erosion, clearly into the lap of the State. Although the substance of the decision is not surprising given the prior existing law, it likely will bring no pleasure to the State Department of Environment and Natural Resources (“DENR”) and the Division of Coastal Management (“DCM”) , both of which have so far been unable to decide what to do about coastal erosion issues, including sandbags and other similar erosion control devices. Cherry Inc., makes it abundantly clear that those issues belong exclusively to DENR and DCM, and therefore that they will have the shoulder the burden of a solution on their own.

Spring 2012

Practice Group: Real Estate Land Use, Planning and Zoning

North Carolina Coastal Land Use Newsletter

2

Update on the Use of Sandbags along North Carolina’s Coast

By Mack Paul

Permits for approximately 370 sandbag structures in North Carolina expired in May 2008. Since that time, the Division of Coastal Management (DCM) and Coastal Resources Commission (CRC) have struggled with how best to respond. After sending out notices notifying property owners of the impending deadline, state officials realized enforcement would pose a significant challenge to

• resources. Consequently, DCM spent many months evaluating properties with sandbags and

prioritizing those most deserving of removal. Property owners responded by introducing rulemaking and gaining passage of a moratorium on removal during 2009-2010. The CRC adopted rules providing some relief for sandbags in inlet areas -

• extending the timeframe from 2 years to 8 years. However, the CRC directed staff to commence

enforcement according to the priority list once the moratorium expired in 2010. At the same time, the CRC initiated a stakeholder process, engaging property owners, coastal scientists, local officials and DCM staff to study different approaches on sandbags. The stakeholder process revealed that sandbags are reflective of much larger policy challenges at the

• coast. In particular, sandbags exist to protect structures that represent significant investment and tax
• base. Only when these structures are under imminent threat of erosion do sandbags get installed.

When structures remain under threat of erosion for prolonged periods, sandbags become a focal point

• f public frustration. There are many reasons -- some complex -- why these structures remain in place

for such long periods of time. The primary reasons are twofold: first, national flood insurance policy encourages property owners to fortify their structure against loss even if imminently threatened. Instead of moving the structure away from the erosion, property owners invest in sandbags, "sister piles" and other techniques until the structure is lost in a storm -- the only way the owner can recover fully under the program. Second, it takes most communities many years to implement projects to address erosion. The Town

• f Nags Head's nourishment project implemented in 2011 offers an example. Many properties in

South Nags Head have had sandbags for 10 or more years. Local officials have actively sought to pass ordinances and take other steps to remove the structures. The media often focused on South Nags Head to show why sandbags are a problem in North Carolina. Finally, relief came in the form of a nourishment project completed this year. Many of these properties now have expansive beaches and are contributing again to the local tax base. Despite the earlier complaints, the sandbags performed well and saved a number of structures from loss. The stakeholder process produced a range of recommendations for the CRC. However, the CRC did not discuss them extensively. Ultimately, the CRC supported a staff recommendation to extend the time limit for sandbags to 8 years whether in an inlet area or not. Further, the proposed rules would afford 8 years for sandbags protecting properties in a community pursuing a terminal groin. Finally, the rules would allow multiple sandbag permits. Therefore, a property that receives nourishment can install sandbags again in the future if the erosion returns prior to another nourishment project. It will take a number of months for the rulemaking process to unfold. One can question whether it makes sense to have fixed timeframes given the history of sandbag enforcement in North Carolina. However, to date, the CRC has been unwilling to eliminate timeframes altogether or to allow

North Carolina Coastal Land Use Newsletter

3

communities to establish a timeframe based on the status of their project to address erosion. For a state that has viewed hardened structures as anathema, sandbags have played an important role and will likely remain a focal point of policy discussion.

New Terminal Groins Allowed

By James L. Joyce

In a development years in the making, the North Carolina General Assembly has decided to allow new terminal groins to be constructed as an exception to the State’s long-standing ban on permanent erosion-control structures. Senate Bill 110, which became law as Session Law 2011-387 without Governor Perdue’s signature on June 28, 2011, amends North Carolina General Statute 113A-115.1 to permit the construction of new terminal groins on the side of inlets. Existing groins at Oregon Inlet and Fort Macon were built before the Coastal Area Management Act (“CAMA”) and its ban on permanent erosion control structures went into effect. Session Law 2011-387 allows for up to four new terminal groins, but also includes additional permit requirements and funding restrictions. Any permit application for a new terminal groin would have to meet existing CAMA development permit requirements, as well as several new standards. First, the permittee must show, to the satisfaction of the Coastal Resources Commission (“CRC”) that there are structures or infrastructure imminently threatened by erosion, and that alternatives such as relocation of threatened structures are impractical. Next, the permittee must provide each of the following: (1) an environmental impact statement that meets the requirements of the State’s Environmental Protection Act; (2) proof that property owners and local governments potentially affected have been notified of the project; and (3) proof of financial assurance for long-term maintenance, monitoring, mitigation of impacts, and even removal of the

• groin. A permit application can be denied if any of this documentation is missing.

In addition, the bill requires that the applicant develop a plan for construction and maintenance of the project and a plan for monitoring and managing adjacent shorelines, including mitigation of adverse

• impacts. The CRC must find that the plan is adequate to provide ongoing monitoring and mitigation
• f impacts in order to issue the permit. The permit also may not be issued unless the CRC finds that

construction or maintenance of the groin would not result in significant adverse impacts to private property or the public recreational beach Finally, funding sources for construction of a terminal groin and its accompanying beach nourishment project are limited. Funds cannot come from special obligation bonds, non-voted general obligation bonds, or certain local government financing contracts, and no state funds may be used unless the General Assembly enacts legislation specifically appropriating the funds. The new groin law also requires that the CRC report to the Environmental Review Commission annually on each proposed and permitted groin and its accompanying beach fill project. This law could represent a significant shift in management of North Carolina inlet areas, depending on how it is implemented and how many new groins are ultimately built. However, the result will likely not be evident for some time, as it will likely take applicants many months to assemble applications, and it is difficult to foresee how strictly the CRC will interpret the statutory requirements.

North Carolina Coastal Land Use Newsletter

4

Caveat Emptor: The Importance of Land Use Due Diligence and Understanding Non-conformity Issues

By Collin W. Brown and Patrick L. Byker

As the commercial real estate market continues to gain strength, investors and lenders should bear in mind the importance of proper land use due diligence. In a commercial real estate transaction, it often is surprising to see how little attention is paid to a property’s (or portfolio’s) land use entitlement

• status. In complex transactions, sophisticated parties will retain top-notch real estate counsel to

handle the financing and closing. Licensed surveyors, engineers and environmental consultants may be retained to analyze certain issues. But more often than not, when it comes to an analysis of applicable land use regulations, buyers and lenders simply outsource this task to a company that will provide them with a “form” zoning report. Increasingly, local government land use controls govern every aspect of the use and operation of a commercial real estate property. They may regulate: uses, hours of operation, signage, appearance, renovations, expansions, landscaping, tree pruning, parking, treatment of stormwater runoff, and a myriad of other issues. But the most mind-boggling aspect is not the scope of land use regulations, but their variety. Unlike financial or environmental regulations, which are usually standardized on a national or state level, as a general rule, land use regulations are adopted and enforced locally, meaning that they vary wildly from one local jurisdiction to another and are subject to change at the whim of local elected officials. Therefore, it is difficult for real estate investors to understand and appreciate the land use regulations affecting a property. With so much at stake, when performing land use due diligence, purchasers and lenders should turn to seasoned practitioners that understand land use issues and the nuance of their application. Unfortunately, too many investors rely on simple zoning verification letters obtained from local governments or cursory zoning reports provided by companies that do not fully appreciate how a property is impacted by land use controls. Most land use due diligence analyses focus on one question: “Is the current use of the property legal?” That question can be answered by a government staffer, and the person preparing the zoning report can check the box on his due diligence checklist. However, this level of analysis provides very little information about a property’s land use entitlements and may paint an inaccurate picture of a property’s value. Perhaps the most important single word that is overlooked in a typical zoning analysis is “non- conformity.” Sometimes referred to as “grandfathering,” non-conformities are instances where a project or structure was developed or built in compliance with the regulations in place at that time, but

• ver time, new regulations were adopted and the project or structure does not comply with current
• regulations. Almost all local ordinances include some type of provision related to grandfathering or

non-conformities. These provisions typically recognize that projects or structures that met local

• rdinances when they were built may continue to operate and are not considered to be in violation of

local ordinances, even though they do not comply with current regulations. However, most local regulations also put some limitations on the use of these non-conforming properties. For example a property may lose its non-conforming status if it is renovated or if certain changes are made, while

• ther jurisdictions may prohibit any changes to a non-conforming property.

Too often, purchasers obtain a zoning verification letter or a zoning report indicating that a property is not in violation of local ordinances and believe that a property is in compliance with local regulations,

• nly to find out later that the property is non-conforming. Thus, the purchaser can continue operating

the property as-is, but may not be able to renovate, retenant, change signage, or make any other

North Carolina Coastal Land Use Newsletter

5

significant changes to the buildings, infrastructure or uses. Similarly, a common provision in zoning

• rdinances across the country relates to the inability for the owner of non-conforming property to

rebuild the non-conforming building in the event that more than 50% of the building’s value is lost due to fire or hurricane or some other catastrophe. It gives pause to a prospective lender or purchaser when a zoning report proclaims that an income-producing property is deemed non-conforming, and, should more than 50% of its value be destroyed, the rest of the building needs to be removed as well and it cannot be rebuilt as it was. Such a conclusion may be a direct quotation from the ordinance, but the issue is does parroting a section of a city’s zoning ordinance really answer the question asked regarding the entitlement status of a specific real estate parcel? For example, in many cities, the renovation of older shopping centers has proven to be a successful investment, but shopping centers that are twenty to thirty years old or more almost certainly will contain some degree of non-conformity due to the inevitable amendments to zoning ordinances that happen over time. When the developer who successfully renovated and dramatically upgraded the tenant mix at an older shopping center went to refinance the property, his lender was informed that due to the nonconforming status of the shopping center, it was subject to a legislative rezoning process in the event more than 50% of the appraised value was destroyed. Having loan security subject to a political process is not popular with lending institutions at the present time. Luckily for the property

• wner, while the zoning ordinance says what it says, the zoning report did not account for the current

interpretation of the Planning Director which allows for nonconformities to be rebuilt through an administrative process as long as minimum current standards are met. This current practice made the lender comfortable with closing the loan, but such information cannot be obtained by a cut and paste

• ut of the ordinance or a teleconference with a front-line staffer.

In today’s difficult market with stringent underwriting standards, the due diligence for the land use entitlements ought to be given the in-depth analysis which experienced zoning attorneys that have key relationships with top zoning administrators can provide. In fact, it behooves prudent investors to pursue these lines of inquiry during the zoning evaluation that accompanies the rigorous due diligence needed for purchasing or financing real estate in these challenging times.

Editors:

William J. Brian, Jr. bill.brian@klgates.com +1.919.466.1261 Mack A. Paul IV mack.paul@klgates.com +1.919.743.7326

North Carolina Coastal Land Use Newsletter

6