Project D November 2000 Update

California Fair Political Practices Commission

MEMORANDUM

To: Chairman Getman, Commissioners Deaver, Makel, Scott, and Swanson

From: John W. Wallace, Senior Commission Counsel Luisa Menchaca, Assistant General Counsel Sue Ellen Wooldridge, General Counsel

Subject: Materiality Standards for Real Property Economic Interests--Regulations 18704.2 and 18705.2 (Conflicts Project, Phase 2, Project D).

Date: October 24, 2000

INTRODUCTION AND BACKGROUND

Under the Political Reform Act ("Act"), a public official has a conflict of interest in a governmental decision if it is reasonably foreseeable that the decision will have a material financial effect on one (or more) of his or her economic interests (absent an express exception). (Section 87103.) This project concerns step four (are the public official’s economic interests directly or indirectly involved in the governmental decision) and step five (under the applicable standard, will the financial effect on the official’s economic interest be material).

This project was last considered at the Commission’s October 2000 Commission meeting. The Commission made several tentative decisions concerning the language of the regulations. However, two issues were left to be resolved at this Commission meeting. First was the materiality standard that would apply where an official was a lessee of real property, rather than an owner. The second was the standard applicable to real property owned by an official that was located more than 500 feet from the property that was the subject of a governmental decision.

PROPOSED REGULATORY CHANGES

1. Leaseholds (Decision point 1).

At the October meeting we asked the Commission to review staff’s implementation of the Commission’s decision made in July 2000. The uncertainty arose based on the fact that in July the Commission determined that leaseholds should be treated in the same manner as real property owned by a public official. However, the literal implementation of that Commission decision revealed problems in matching the ownership-based language to situations where the real property is owned by a third party and the public official merely leases the property. In October, the Commission directed staff to retool the language to see if a better fit could be achieved. We have attempted to do so with the draft language provided herein.

The chart below illustrates the analysis under the proposed regulation. Underscore represents language under consideration in this memorandum.

CHART 1: Direct Financial Effects

The Governmental Decision

Official Owns

Official Leases

· The real property that is the subject of the governmental decision, or any part of that real property, is located within 500 feet of the boundaries (or proposed boundaries) of the subject property.

· The decision involves the zoning or rezoning, annexation or deannexation, sale, purchase, or lease, or inclusion in or exclusion from any city, county, district or other local governmental subdivision, of the real property in which the official has an interest.

· The decision involves the issuance, denial or revocation of a license, permit or other land use entitlement authorizing a specific use or uses of such property.

· The decision involves the imposition, repeal or modification of any taxes or fees assessed or imposed on such property.

· The governmental decision is to designate the survey area, to select the project area, to adopt the preliminary plan, to form a project area committee, to certify the environmental document, to adopt the redevelopment plan, to add territory to the redevelopment area, or to rescind or amend any of the above decisions, and the property in which the official has an interest is within the boundaries of the area.

Presumed material.

This presumption may be rebutted by a showing that there will be no foreseeable financial effect on the real property.

Presumed material.

This presumption may be rebutted by proof that it is not reasonably foreseeable that the governmental decision will have any effect on any of the following:

· The termination date of the lease;

· The amount of rent paid by the lessee for the leased property, either positively or negatively;

· The value of the lessee’s right to sublease the property, either positively or negatively;

· The legally allowable use or the current use of the property by the lessee; or

· The use or enjoyment of the leased real property by the lessee.

The proposed language has several advantages over the prior rule. First, it is consistent with the Commission’s wish to track the analysis used where an official owns real property. The draft language would presume materiality when the property that is the subject of a decision is within 500 feet and would presume no materiality beyond 500 feet. Second, the proposed language recognizes the legal and practical differences between an owner of property and a lessee. In many cases, effects on real property will have a financial effect only on the owner. And finally, the new language is adapted from language that has been used in the prior regulation for almost a decade. This is accomplished by adapting the existing indirect standards applicable to leaseholds, to a direct setting. Staff recommends these regulatory changes to regulation 18705.2(a)(2).

Decision point 2: Decision point 2 creates new subdivision (a)(3) of regulation 18705.2. This new provision allows the Commission to require that long-term leases (as defined by the Commission) be subject to a stricter materiality standard than short term leases. If the Commission chooses to adopt this split approach to leaseholds, the Commission will need to decide the following:

What is considered a "long term" lease. The first set of brackets in Decision point 1 (page 1 of regulation 18705.2, line 29) establishes what is considered "long term." The Commission may choose leases with a term of two years, ten years, or twenty five years.

What standard applies to long term leases. The second set of bracketed language (starting on page 1, line 29 through page 2, line 1) allows the Commission to require that material financial effects on long term leasehold interests be analyzed either:

The same as ownership interests in real property as set forth in subdivision (a)(1) (presumed material unless there is no financial effect on the value of the real property); or

By use of both the real property standard in subdivision (a)(1) and the new fact-based standards for leasehold interests in subdivision (a)(2).

While long-term leases do present different characteristics than short-term leases, staff recommends against this provision. The new direct standards proposed in Decision point 1 would appear to be sufficient to deal with long-term and short-term leases. In addition, having alternate standards for leases based on duration appears to make the analysis more complicated.

2. Indirect effects on real property owned by the official (Decision point 3) and leased by the official (Decision point 4).

Attached to this memorandum is the language selected by the Commission dealing with indirect effects on real property (Decision point 3). The language has been modified to more accurately reflect the wishes of the Commission to capture only substantial conflict of interest situations where the real property owned by the public official is beyond 500 feet of the property that is the subject of the decision. With respect to the indirect effects standard applicable to real property that is leased by an official (Decision point 4), we have retained the old standards with modifications necessary to show that the indirect test applies only where the real property that the official leases is more than 500 feet from the property subject to the governmental decision. The following chart shows the proposed standard applicable to real property owned by the official (Decision point 3) and the proposed standard applicable to real property leased by the official (Decision point 4).

Chart 2: Indirect effects.

Governmental Decision

Official Owns

(Decision point 3)

Official Leases

(Decision point 4)

All other decisions affecting real property (e.g., an official’s real property interest located more than 500 feet from the property that is the subject of the decision)

Presumed not to be material.

· This presumption may be rebutted by proof that there are specific circumstances regarding the governmental decision, its financial effect, and the nature of the real property in which the public official has an economic interest, which make it reasonably foreseeable that the decision will have a material financial effect on the real property in which the public official has an interest. Specific circumstances that will be considered include, but are not limited to, circumstances where the decision effects:

· The development potential or income producing potential of the property;

· The use of the property, such as by resulting in a change in the use of the real property;

· The character of the neighborhood including, but not limited to, [substantial] effects on: traffic, view, privacy, intensity of use, noise levels, air emissions, or similar traits of the neighborhood.

Presumed not to be material.

This presumption may be rebutted by proof that there are specific circumstances regarding the governmental decision, its financial effect, and the nature of the real property in which the public official has an economic interest, which make it reasonably foreseeable that the governmental decision will:

· Change the legally allowable use of the leased real property, and the lessee has a right to sublease the property;

· Change the lessee’s actual use of the property;

· Substantially enhance or decrease the lessee’s use or enjoyment of the leased property;

· Increase or decrease the amount of rent for the leased property by $250 or 5+percent, whichever is greater, during any 12-month period following the decision; or

· Result in a change in the termination date of the lease.

Staff recommends the language proposed in Decision point 3 and Decision point 4 as discussed above.

3. Fact Patterns concerning the indirect effects on real property owned by an official.

At the last Commission meeting, the Commissioners asked for some fact patterns showing how the language would apply. However, the new language is far more fact-specific than the prior language. It is difficult to predict how the concepts may be applied to a given situation. We have included a chart showing the changes as Appendix A and some fact-patterns from prior Commission advice letters for the Commission’s consideration as Appendix B.