Before 2005, North Carolina's laws on vested rights offered developers some protection, but not enough, for the large, multi-phased, multi-year, mixed use developments that are becoming the norm. Developers and their lenders were concerned about entering into a long-term agreement with a local government establishing fixed development regulations because there was uncertainty as to whether or not such an agreement could actually limit the ability of a future municipal or county governing board to amend its ordinances and restrict a future board's exercise of its police powers. Time limitations on vested rights and restrictions against contract zoning were also impediments.
Enactment of the Development Agreement Statutes
In 2005, the North Carolina General Assembly authorized municipalities and counties to enter into long-term agreements with developers. This legislation was enacted because the General Assembly recognized that developers and lenders were unwilling to risk private capital and financing on large-scale, multi-year real estate development projects without sufficient assurances that government-imposed development standards such as zoning classifications would remain materially unchanged during the extended development maturation process. The statutes—N.C. Gen. Stat. §§160A-400.20 to 160A-400.32 for municipalities and N.C. Gen. Stat. §§153A-349.1 to 153-349.13 for counties (collectively, the "Development Agreement Statutes")—allow municipalities and counties to enter into agreements with developers to address various land use and infrastructure issues, offering the developers and their lenders the stability necessary for long-term projects to mature, and also expand developers' vested rights protections.
The Development Agreement Statutes eliminated developer concerns about the possibility of changed or more stringent development standards during the life-span of a project. They also gave developers and their lenders some comfort that, despite the long-term nature of the relevant development and future changes in the make-up of local boards, the local laws applicable to the project, including zoning designations and restrictions, could not be changed during the agreed-upon period.
There were limits, of course, to the use of development agreements. Initially, they were available only for large projects—25 acres or more of developable property (exclusive of wetlands, mandatory buffers, unbuildable slopes, and other portions of property that could not be built upon at the time of the agreement). In 2013, the Development Agreement Statutes were revised to include smaller developments, but only if the property to be developed was the subject of a brownfields agreement. Development agreements were also limited in duration; they could not be for a term longer than 20 years.
Recent Revisions to the Development Agreement Statutes
In September of 2015, the General Assembly modified the Development Agreement Statutes to remove the minimum size and maximum term limitations. Developers may now enter into development agreements with local governments "for developable property of any size," and the only limitation on the length of the agreement is that it must be for a "reasonable term." These changes will open up myriad properties to this effective, if underused, development tool.
What Must Be Included In a Development Agreement?
The Development Agreement Statutes dictate what must be included in a formal development agreement:
- A legal description of the property subject to the agreement and the names of its owners;
- The duration of the agreement (which may later be extended);
- The development uses permitted on the property;
- A description of the public facilities that will serve the development and the date any new public facilities, if necessary, will be constructed;
- A description of any reservation or dedication of land for public purposes, if required, and any provisions needed to protect environmentally sensitive property;
- A description of all local development permits approved or needed to be approved for the development;
- A description of any conditions, terms, restrictions, or other requirements determined to be necessary by the local government for the public health, safety, or welfare of its citizens;
- A description of any provisions for the preservation and restoration of historic structures; and,
- A development schedule, including commencement dates and interim completion dates.
Local government review of development progress is required, on at least an annual basis, but the failure to meet the commencement dates and interim completion dates will not, without other factors being considered (the "totality of the circumstances"), constitute a material breach of the development agreement. Developers must be afforded a reasonable time after a periodic review to cure any purported material breach.
What Can Be Included In a Development Agreement?
A development agreement can also address additional matters provided the additional matters do not conflict with the required provisions. Developers and local governments may also arrange in a development agreement for the developer to be reimbursed for infrastructure expenses. For example, if a developer provides the financing, construction, and extension of public infrastructure services such as roads and water, sewer, and groundwater drainage facilities, the local government may offer expense reimbursement to the developer in the form of fee credits and property tax reimbursement. The result is a classic win-win: the local government will receive benefits it otherwise could not afford, and the developer will be able to ensure that the infrastructure necessary for the project will be built and that the developer will be reimbursed for the costs.
The developer and the local government can amend or cancel a development agreement by mutual consent.
What Can't Be Included In a Development Agreement?
There are some restrictions on what the local government may agree to in a development agreement. For example, a local government cannot exceed its authority as established by general or local act or impose any tax or fee it is not otherwise authorized to impose. Also, the development agreement itself cannot change the local government's zoning ordinance. Therefore, if the proposed use of the property is not allowed in any zoning district in which the property is located, a separate zoning amendment, adopted in compliance with all applicable laws and ordinances, will be required.
How Can a Development Agreement Be Adopted By A Local Government?
Procedurally, a development agreement must be approved by the adoption of an ordinance by the local board, with notice and hearing requirements similar to a zoning text amendment (but without the requirement of planning board involvement). The proposed development agreement must be available for review at the time the public hearing is noticed, and the public notice must indicate where a copy of the development agreement can be obtained for review. It is also important to note that the decision to approve a development agreement is a legislative decision, more akin to a rezoning decision than to a conditional use permit decision—the hearing is not quasi-judicial, and no finding of facts is required.
The Potential Effect of the Recent Changes on Future Development Agreements
At a recent event sponsored by the Real Estate & Building Industry Coalition in Charlotte, real estate experts suggested that most new development will likely focus on urban areas, and that walkable urban use is a trending market. With urban density being a concern, and the low likelihood of 25-plus acre building sites being available, the removal of the size requirement in the Development Agreement Statutes could open the door to developers with ambitious, mixed-use, multi-phase projects who want to tap into an emerging market.
Imagine that a developer is looking to build a mixed-use project on a 1-acre site in the heart of Downtown, NC. The developer has ambitious plans for a restaurant and retail on the first floor, offices immediately above the retail floor, and residences above the offices. The developer is concerned, however, about the length of time it will take to construct the project and that with upcoming municipal elections, a future board with a different "vision" for the downtown area could attempt to revoke or alter some of the developer's permits prior to completion of the project.
A development agreement with Downtown's current governing board could be just the thing the developer needs to ensure the project is attractive to prospective lenders and remains on course and profitable. The developer can nail down what uses can be made of the offices, how many residences can be included on the upper levels, what infrastructure will be available to the project, and what fees will be associated with that infrastructure, all without fear of a changing board, a changing development ordinance, or a changing fee schedule.
Prior to the recent changes to the Development Agreement Statutes, the developer could only have done this if the property to be developed was subject to a brownfields agreement. Now, the developer and its lender can rest assured that Downtown's development standards will not change during the extended build-out of the project.
With the recent statutory revisions, development agreements now provide promising possibilities for public-private partnerships of any size. A developer who understands the requirements of the Development Agreement Statutes and the interrelationship among infrastructure provisions, local permitting requirements, zoning, and other development issues can potentially negotiate and enter into a beneficial agreement with the local government having jurisdiction over the property where the project will be located. In doing so, the developer can maximize the outcomes of the development project without the risk of unexpected roadblocks or shifting requirements.
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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.