Builders take advantage of pro-growth sentiment by securing project entitlements.

Even though Los Angeles for years has remained one of the most overbuilt commercial real estate markets in the country, a growing number of developers are moving to secure entitlements in anticipation of a market revival.

For example, a development partnership between Hillman Properties Inc. and Smit & Hricik last year obtained entitlements to build 4.8 million square feet of office and retail space just west of the Harbor Freeway in downtown Los Angeles 

In the San Fernando Valley, St. Louis-based CenterMark Properties, the develope of Topanga Plaza, last year obtained entitlements to build nearly 3 million square feet of office and retail space on 100 acres in Warner Center.

CenterMark and the Hillman/Smith & Hricik partnership, formally known as UC Finance Inc., illustrate a strategy being pursued by a number of developers in Los Angeles. Despite the area's protracted real estate slump, a growing number of developers are adopting the philosophy: "Get 'em while you can" when it come to entitlements.

The attitude of local governments and community activists toward new developments has warmed considerably in recent months, as evidenced by Santa Monica voters' recent approval of a major redevelopment and expansion of the city's civic center area. But that receptive atmosphere could change when the local economy begins perking up again, making entitlements tougher to get.

"This is the best time to get entitlements," said attorney Chris Funk, who head the land-use practice at the law firm of Paul, Hastings, Janofsky & Walker in downtown Los Angeles.

Funk, whose firm represents both CenterMark and Hillman, explained that conditions are ripe for obtaining entitlements because:

* Getting approvals for large projects is always a time-consuming process. So developers want to get entitlements now so they can be ready to build when the real estate market improves.

* Community resistance to proposed developments has waned since the mid-1980s when booming construction prompted a host of slow-growth and no-growth groups.

* Obtaining entitlements is less expensive today because cities and counties are generally less demanding of developers. Specifically, governments are lowering the fees and infrastructure improvements they require developers to pa for in exchange for project approvals. "There is more of a cooperative spirit now because they (local governments) want to stimulate growth," Funk said.

The entitlements a developer needs to build a project can range from something as simple as a building permit to a zoning change to a complex "development agreement" that provides a detailed description of what a developer is entitled to build, and when.

Securing entitlements can take as little as a few months for a small project to five years for a large, multi-phase deal. The long lead times required to get the required permissions make it nearly impossible for developers to wait until the market turns before applying for approvals, developers pointed out. Ultimately, this means developers must risk as much as several hundred thousand dollars up front in hopes of obtaining entitlements that will be in force when the market improves. That money goes to a wide variety of consultants, lawyers and other experts whose services are needed to secured the entitlements.

Kathleen Zimmerlin de Paz, division vice president for Summa Corp.'s Howard Hughes Center development near Los Angeles International Airport, said big developers in Los Angeles always have to keep working on entitlements during down times. In the construction downturn of the early 1980s, for example, Summa applied for entitlements for the Hughes Center's 70-acre site.

Three years later, the company secured entitlements allowing it to develop 2.7 million square feet of commercial office space and 600 hotel rooms on the site over 20 years. By the time the entitlements were granted in 1986, Los Angeles was in the thick of a building boom. Summa has since developed 430,000 square feet of that entitled office space at the Hughes Center.

Zimmerlin de Paz explained that the entitlements Summa obtained from the city are in the form of a 20-year "development agreement," a form of entitlement tha has become increasingly popular, especially for large projects to be built in phases. Such agreements guarantee the developer long-term entitlements and usually require the developer to submit yearly status reports on the project's progress.

Developers and land-use lawyers said such long-term deals are a necessity in light of the big investments developers must make in entitlements and infrastructure on the projects.

"It's expensive to prepare environmental impact studies and to hire planners, engineers, hydrologists and all of the other specialists involved in the entitlement process," said attorney Kenneth Bley, head of the land-use practice at the law firm Cox, Castle & Nicholson in Century City. "You can easily spend several hundred thousand dollars right up front."

According to Zimmerlin de Paz, the cost of obtaining entitlements came to $1 million on the Howard Hughes Center. Since then, Summa has spent $40 million on roads, sewer lines, freeway ramps and other infrastructure improvements related to that project.

"I've been before the board discussing this, and it's a tough position to be in to try to sell investment in infrastructure when the market is down," Zimmerlin de Paz said. However, she added, a down time is also a better time to build because construction is less expensive than in boom times, when construction companies are experiencing high demand.

According to Bley, smart builders today are negotiating the longest possible terms on entitlements because they know that even if the market turns, obtainin financing could be another time-consuming proposition.

"A smart builder today, if the builder is going to do a project that will last over a number of years and be built in phases, will try to negotiate a development agreement with the local government," Bley said.

Not all developers, however, are in a position to work on entitlements far in advance or to obtain development agreements, which are usually reserved for larger projects. Smaller builders and those who lack the funds to cover up-fron costs usually have to wait until the market picks up before they can begin the process.

"You can't get a loan just for entitlements; so developers without financing have to wait until they can get an acquisition-and-development loan," Bley explained. "That means the smaller builders usually have to wait until the market starts to turn and the banks start lending again. The banks seem to be coming back into the market a little more recently, but the developer still has to come up with a lot of equity."

Added Funk, "The smaller developers also can't usually afford to sit on properties the way the larger ones can. They need to get their entitlements, build their projects and move on."

But for those who can afford it, the push to get developments entitled will remain steady in today's market despite the lack of demand for new space right now, Funk said. Some of the developers obtaining entitlements today, he said, are the same ones who went after entitlements in the early-1980s downturn and were "very well positioned" when the market turned. Today, he said, developers are pursuing entitlements for construction that probably won't begin until at least the late 1990s.