The dire circumstances surrounding the California drought have resulted
in new regulations imposed upon a construction industry already burdened
by additional risks. A rebound in the housing market has created a surge
of new housing starts, but while a longer dry season provides more time
for construction, it also creates some unexpected restrictions.
The California Water Commission (the “CWC”) approved the Model
Water Efficient Landscape Ordinance. Some regulations contained within
the ordinance include limits on water usage, and landscaping restrictions
for spaces larger than 500 square feet. Under the new rules, residential
landscaping may only allocate 25% of garden space to lawns, while commercial
landscaping may not include any grass at all. The landscaping limitations,
which went into effect in December 2015, apply not only to new construction,
but also to remodeling jobs that require design review or permits.
Nevertheless, there are some exemptions that builders may be able to take
advantage of to best cope with the new regulations. When the landscaped
area is less than 2,500 square feet and is irrigated by recycled water,
that area is exempt from the rules. If the garden area is nonresidential,
it may be possible to classify it as a green space using parkway exemptions.
In some cases, drought-resistant plants are not only less expensive for
landscaping, but cut down on irrigation costs as well. These and other
exemptions can help reduce the harsh impact the new rules will have on
the industry. This is an important consideration for lenders making construction
loans, who should understand the cost and liability implications for not
complying with the new regulations. If landscaping is part of the construction
project, lenders should take care to note whether contractors have complied
with these new regulations, and whether there are sufficient funds in
place to complete potentially more expensive landscaping plans.
The Model Water Efficient Landscape Ordinance is but one new water regulation
that was released in 2015. As drought conditions continue into 2016, it
is sure to be followed by a plethora of additional mandatory restrictions.
Even with record rainfall being recorded in Northern California, reservoirs
are still below normal levels, prompting the government to continue with
additional water conservation legislation. For instance, the California
Energy Commission issued new standards for faucets, toilets, and other
water-using appliances that went into effect in January 2016. While many
counties have focused restrictions on residential water use, as the duration
of the drought lengthens, additional regulation in all areas of water
use is likely to occur.
There are other risk factors the construction industry must consider outside
of the new regulation. Drier weather means a greater risk of wildfires.
It is estimated that California may see twice as many fires in 2016 than
we have seen in previous years. Some of these predictions may not prove
true, but the California Department of Forestry and Fire recently stated
that vegetation remains "critically dry," and a continued lack
of moisture may change "fire-safe" areas into high-risk zones.
Also, many previously burned areas could face additional problems from
runoff and mudslides, reducing the amount of new housing in those areas.
Construction lenders should make sure to protect their investments with
sufficient hazard and liability insurance at the outset of the loan. While
the risk of wildfires may be greater, lenders should not fear making loans
in higher risk areas as long as they take precautions to protect themselves
in the event of a fire. It is recommended to obtain a hazard insurance
policy that begins from the date the loan is funded through the following
12 months, with proof of renewal a mandatory requirement for compliance
under the terms of the loan.
The elevated threat of wildfires means those working at construction sites
must be especially vigilant when it comes to fire safety, ensuring fire
hazards at the location are kept under tight control. Failure to do so
could result in liability for the company responsible for the work site,
and a lost investment for a lender who is not sufficiently insured. In
addition to the increased threat of wildfire, droughts are associated
with a number of other geological issues, including an increased risk
of loose soil and correlation with increased seismic activity. The reduced
water weight in traditional basins has caused the land to shift upward,
increasing activity across major earthquake fault lines. The dry conditions
have also changed the makeup of many types of soil, causing slippage,
sinking, and shrinking separation not previously recognized. New construction
could disturb these soils and cause damage to existing structures. In
especially risky locations, lenders are advised to inquire into their
insurance policies to ensure earthquake, flood, and other insurance add-ons
are included to protect their investment.
Even as El Nino conditions have intensified this year, water levels are
still expected to remain below what is considered normal. So as the drought
continues to cause concern, West Coast construction companies should take
measures to ensure the appropriate safeguards are included in new structures,
modify existing plans to accommodate new water regulation, and maintain
the proper amount of insurance coverage. While the conditions surrounding
the drought may eventually pass, it is likely that the new water rules
instituted will remain in place even after the drought has ended, and
lenders should take every precaution to protect their investments in the
For more information on this matter, please contact
Melissa Martorella, Esq.