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Fifteen New Housing Bills! The Quick Take for Cities and Developers (updated)

December 4, 2017 | Andrew L. Faber, Michael C. Branson
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This is an updated version of this article, which was first published on October 19, 2017. 

At a ceremony held at San Francisco’s Hunters Point, Governor Jerry Brown signed into law all fifteen bills encompassing the California legislature’s package aimed at addressing the State’s severe housing crisis. Whether the legislature would have the votes to pass the bills, in whole or in part, was uncertain up until the very last days of the legislative session. While the bills alone will not solve the housing crisis—California needs to construct 180,000 new homes a year and is currently producing around 100,000—housing experts and legislators alike agree that their enactment is a significant first step in what is hoped to be a series of busy legislative sessions to further remedy California’s housing production shortfall.

The new legislation addresses the housing crisis from several angles, from providing additional funding for affordable housing to incentivizing planning and increasing the enforcement authority of the State Department of Housing and Community Development (HCD) to ensure local agencies properly implement their local housing elements. The general thrust of these bills is to bolster State laws that require localities to plan for housing and then to restrict their ability to turn down projects that comply with their plans and zoning. Cities tend to see such efforts as the State’s meddling in local affairs and reducing local control of planning. There is some truth to this viewpoint; however, the bills are aimed less at regulating the planning process and more at streamlining the implementation of adopted plans.

This article provides a summary of these bills and some comment on their likely impact and usefulness.  We also offer our own “Fearless Predictions” as to the impact and effect of these changes.

New Planning Mechanisms (including the demise of Palmer)

While many of the bills in the housing package impose onerous new requirements on cities, three bills provide additional flexibility to those localities, if they choose to take advantage of them. SB 540 was pushed through the legislature in large part by the California League of Cities. According to the League, the bill provides the option for cities to take advantage of an up-front planning process by establishing Workforce Housing Opportunity Zones (WHOZ). Planning, environmental review, and public engagement would be conducted ahead of a specific project proposal. Once a WHOZ is created, the locality must approve developments that meet the conditions within the WHOZ. Those conditions include requiring the project pay prevailing wages. In creating a WHOZ, a city cannot assign more than fifty percent of its Regional Housing Needs Allocation within the zone and housing within the WHOZ must meet specified affordable housing needs. The impact of this bill is likely to be limited, given that the creation of a WHOZ is voluntary.

Similar to SB 540 is AB 73, which creates Housing Sustainability Districts. Once again, through the creation of a new overlay zone, cities could undertake planning and environmental review up front. The overlay zones would need to be at higher densities, be located near public transit, and propose twenty percent of the units to be at affordable levels. As with SB 540, qualifying projects would need to pay prevailing wages. Unlike the WHOZ, creation of Housing Sustainability Districts would provide a city with an incentive payment from HCD first when it creates the zone, and a second incentive payment upon project approval. However, the bill does not specify the amount of the zoning incentive payment and the zoning incentive payment is subject to appropriation at a later date.

Fearless Prediction:  These approaches will have very limited applicability.  The prevailing wage requirement greatly lessens their attraction for developers.  A progressive city committed to housing production and prevailing wages may want to use one of these processes, but could probably achieve the same results through a more traditional specific plan process.

After many years and several vetoed bills, AB 1505 finally overrules the aberrant decision of Palmer/Sixth Street Properties L.P. v. City of Los Angeles (2009) 175 Cal.App.4th 1396, which restricted the ability of cities to require the inclusion of low income units as part of the approval of rental housing. Although some cities had adopted impact fees for rental housing based on nexus studies to get around the Palmer decision, they will now be able to apply to rental housing the same inclusionary requirements that the Supreme Court approved for for-sale housing in California Building Industry Association v. City of San Jose (2015) 61 Cal.4th 435.

Fearless Prediction:  This is good news for advocates for inclusionary housing requirements.  Overruling Palmer was overdue, and will allow cities to extend inclusionary housing ordinances to cover rental properties as well.

Stiffened Requirements for Housing Elements

Under the Housing Element law, local cities and counties must designate in their housing elements appropriate sites for the development of housing at all income levels as assigned to them through their Regional Housing Needs Allocation (RHNA). Although localities’ housing elements must comply with very detailed requirements, they oftentimes are not very realistic in terms of providing a blueprint for how, and where, the locality’s allotment of housing can really be built. In response, part of the housing package seeks to increase the level of realism by imposing new requirements for the criteria of sites localities can rely upon in their housing elements. However, the newly-prescribed means of so doing may be problematic. Municipalities will need to become intimately familiar with these new requirements, which are designed to make housing elements more realistic.

First, AB 1397 makes several changes to the “inventory of land suitable for residential development” analysis included in the Housing Element Law to limit the reliance of local governments on sites that do not have a realistic capacity for the development of housing. In particular, identified sites must not only have a “potential for redevelopment” but must also have a “realistic and demonstrated potential for redevelopment during the planning period to meet the locality’s housing need for a designated income level.” The bill limits the ability of cities to identify a site to meet its housing need allocation if the site has been listed during several housing element cycles without being developed—unless the city commits to zoning the site at 20 units per acre with by-right development subject to non-discretionary review.

If a city identifies sites zoned for nonresidential use that it has determined can be redeveloped for residential use, then the city’s housing element must include a program to rezone the site. Further, the bill limits the ability of cities to pile all of its housing need allocations on one site by requiring the housing element inventory to specify for each site the number of units that can realistically be accommodated on the site and specify whether the site is adequate to accommodate different income levels of housing. Finally, if the local agency identified nonvacant sites to fulfill its housing needs allocation, the local agency must take into consideration the local agency’s past experience with converting existing uses to higher density residential development.

On top of all of the requirements in AB 1397, SB 166 requires a local agency to identify new sites for housing development if a project proposed on a previously identified site is approved for development but only produces a portion of the housing units designated for the site in the local agency’s housing element. (Note, however, that it is generally believed that this requirement does not apply to charter cities.)  The bill modifies the existing “No Net Loss” rule such that a locality that approves development with fewer units by income category than identified for that parcel in its housing element must either make findings supported by substantial evidence that remaining identified sites can absorb the additional needs, or it must “identify and make available” (undefined terms in the bill) within 180 days additional adequate sites. Given the difficulty that many cities have finding sites that can be developed at suitable density to be affordable, the new requirement to identify even more sites may be challenging to implement. Such difficulty of finding new sites cannot be used as a basis to deny the proposed housing project.

Finally, AB 879 would make more explicit what a city or county must analyze when assessing governmental and nongovernmental constraints on the development of housing at all income levels within their jurisdiction. Current law already requires local agencies to analyze these constraints, including land use controls, building codes, fees and exactions, and local processing and permit procedures. AB 879 would further require local agencies to analyze any locally adopted ordinances that directly impact the cost of housing development, along with other nongovernmental constraints not previously specified. In addition, it would extend the annual housing production reporting requirements to charter cities. The bill also requires HCD to complete a study of these constraints by June 30, 2019 and make recommendations for potential amendments to the Mitigation Fee Act to help reduce these constraints.

Fearless Prediction:  These changes should have the salutary effect of making housing elements more realistic.  They also should help to remedy one of the glaring weaknesses in housing element law as it has existed for years: that once HCD certifies a city’s housing element, the city has been pretty much free to ignore the document until the next update cycle forces a re-evaluation of its effectiveness.

Tougher Implementation Laws, Including the Housing Accountability Act

Although the legal requirements for housing elements are very detailed and many cities have been sued by housing advocates for failure to meet them, rarely have developers been able to sue a city to overturn a denial of their housing project.

The most important law that does allow such suits is the Housing Accountability Act, commonly called the “Anti-NIMBY Law.” This law seeks to remove discretion from the housing entitlement process by requiring that a locality that has general planned and zoned a piece of property for housing must allow development of a housing project that meets the objective requirements of the general plan and applicable zoning criteria. Such a project can only be turned down or approved at a lower density if the city makes very specific objective findings based on public health and safety criteria to justify the action. The law has been sparingly used, and there are few reported cases. For more on the requirements of the Housing Accountability Act, see the companion article by Andy Faber, “A Tale of Three Cities (and one State).”

Although the Housing Accountability Act has very specific requirements, there are a few gaps in its coverage that cities have tried to use to defend such suits. Closing these gaps and removing such defenses are the purposes of AB 678, AB 1515, and SB 167. Together, these three bills strengthen the Housing Accountability Act in a number of ways, including by heightening the standard of review such that cities must show a preponderance of the evidence to support their decision to deny a project, revising the standard for what makes a project “consistent” with objective standards, and clarifying that applications for subdivision and parcel maps under the Subdivision Map Act must also be decided based on objective criteria. Additionally, if a local agency believes a proposed project is inconsistent with objective criteria, it must provide the applicant written documentation to that effect prior to a public hearing.

The bills also provide broader remedies and harsher penalties. The bills clarify that attorneys’ fees would be available for all projects—market-rate and affordable—that were improperly denied, and localities can be fined $10,000 per proposed housing unit if they do not comply with a court’s judgment.

Another approach is taken by SB 35, the Housing Accountability & Affordability Act championed by State senator and former San Francisco supervisor Scott Wiener.  This bill is in part a revival of Governor Brown’s attempts last year to create a by-right approval process for housing developments. The bill creates an alternate streamlined housing approval process in jurisdictions that HCD has determined (based on detailed yearly reports that the agency must prepare) have fallen behind on their share of production of housing, known as Regional Housing Needs Allocation or RHNA. To qualify, the proposed housing project must be a multi-unit development on an infill site, must comply with zoning height and bulk requirements, must not exceed 200 feet in height, and must commit to providing prevailing wage to all construction labor and meeting minimum affordable housing requirements (at existing inclusionary requirements or 10% affordable).

In such a jurisdiction, if an applicant requests streamlined review, the project must be reviewed and approved based only on these objective qualifying criteria, with a time-limited design review that cannot impact building height or unit count. Any otherwise applicable parking requirements are waived for the project.  How, and whether, this approach will be successfully employed is an open question at this time.  Housing developers who regularly work in housing-challenged localities should become more familiar with SB 35 to determine whether the streamlined process could be used advantageously for their future proposals.

Fearless Prediction:  The amendments to the Housing Accountability Act close some loopholes that cities have used in court to try to defeat its application; for example, arguing that because a project also included a subdivision, the subdivision (and hence the project) could be denied based on subjective criteria of general plan consistency.  It also makes clear that attorneys’ fees should be awarded to a successful plaintiff, even if the project is not affordable (thus overruling case law to the contrary). 

SB 35 appears to give a hammer to developers in some jurisdictions, but its applicability will depend on cooperation from HCD in evaluating compliance with the applicable housing element – and the prevailing wage requirement may be a deterrent to its use. To avoid the negative consequences of the Housing Accountability Act and SB 35 while also meeting the new Housing Element Law requirements, cities must use more care in formulating the requirements in their housing elements and specific plans. The result should be a significant shift in decision-making to an earlier stage of the planning process.

More Enforcement Power to the Department of Housing and Community Development

The State Department of Housing and Community Development (HCD) has long had a role in certifying that local housing elements comply with State law. But once a housing element is certified, HCD has lacked power to enforce implementation of the element.

Another bill, AB 72, seeks to provide just such a role for HCD. The bill requires HCD to review any action by a locality that it determines is inconsistent with an adopted housing element and its housing inventory and programs. If HCD finds that a locality is not acting in compliance with its adopted housing element, HCD must provide written findings to the locality, and if the locality continues to improperly implement its housing element, then HCD must notify the locality of its violation of the Housing Accountability Act or other applicable law such as the Density Bonus Law or laws prohibiting discrimination against affordable housing and may also choose to notify the attorney general that the locality is in violation of State law. Of course, these violations may include violations of any of the newly enacted or amended laws described in this article.

Fearless Prediction:  This expansion of HCD’s powers (assuming HCD receives adequate staffing to implement its new authority), coupled with the additional housing element reporting requirements, could be very helpful in encouraging cities actually to implement their housing obligations instead of just putting the housing element on the shelf until the next update cycle.

Funds for Affordable Housing

The housing package does not replace the loss of Redevelopment funds, nor does it provide additional funds from the State for affordable housing.  In fact, cities can be forgiven for regarding these bills as providing primarily negative, rather than positive (in the form of money), reinforcement for their efforts to be responsible players in this effort. However, there is the possibility of some money going to localities, though not directly from the State.  Thus, SB 2 and SB 3, perhaps the two most heavily discussed bills, may help a bit.

SB 2, the Building Homes and Jobs Act, imposes a new $75 fee on mortgage refinances and other recordable real estate transaction documents (with the exception of residential and commercial property sales). The bill is expected to raise $250 million per year to help finance affordable housing development. In its first year, half of the funding will be allocated to local jurisdictions to update planning documents and zoning ordinances in order to streamline housing production. This includes updates to general plans, specific plans, and coastal programs as well as for new environmental analyses that eliminate project-specific review. The other half of the funds will be used by HCD for homelessness reduction programs, including rehousing and rental assistance, as well as for the new construction and preservation of permanent and transitional rental housing. In following years, twenty percent of the funds will be allocated for affordable owner-occupied workforce housing and eighty percent to local jurisdictions to provide funding for a variety of housing programs. Funds are available only to jurisdictions that have compliant housing elements. The fee goes into effect on January 1, 2018.

Of far greater potential impact, SB 3, the Veterans and Affordable Housing Bond Act sponsored by local State senator Jim Beall, will place a $4 billion bond measure on the November 2018 ballot. Approximately $3 billion would be used to subsidize construction of low-income housing while the remainder would be used to provide home loans to veterans. Because the funds would be directed toward existing programs, the funds should be available quickly after passage of the measure.

Fearless Prediction:  Let’s hope the bond measure passes!  Otherwise, all of this legislation is likely to be seen as “all stick and no carrot” by cities, which are offended by the State’s increasing diminishment of local control without offering any financial help or incentives. Cities may think they are on the receiving end of the simplistic management strategy: “Until morale improves, the beatings will continue.” While the additional funding is welcome news, financing for affordable housing remains extremely complicated. And if federal tax reform in fact does make significant cuts to the low-income housing tax credit (LIHTC) program, then financing could actually become more difficult even if the bond measure passes.

Miscellaneous Bills

Two bills—AB 571 and AB 1521—seek to strengthen existing policies and programs to ensure their successful implementation.

AB 571 makes changes to the Farmworker Housing Assistance Tax Credit Program. Generally, the Low Income Housing Tax (LIHTC) program works by allowing affordable housing developers to raise capital by providing tax benefits to investors in affordable housing projects. The State established its LIHTC program in 1987 and consolidated the Farmworker Housing Assistance Tax Credit Program into the LIHTC program in 2008. The bill makes several changes to the existing program to encourage greater production of farmworker housing, including by lowering the requirement for farmworker developments to be occupied 100% by farmworkers and their families to 50% and increasing the amounts of credits that farmworker tax credit projects can receive.

AB 1521 strengthens the State’s Affordable Housing Preservation Notice Law regarding the preservation of assisted housing developments by requiring an owner of an expiring affordable housing developments to accept a bona fide fair-market-value offer to purchase from a qualified preservation entity that intends to maintain the development’s affordability restrictions. The bill further provides HCD with enforcement authority to ensure compliance with AB 1521.

Fearless Prediction:  None.

What Wasn’t in the Housing Package?

Of course the main deficiency in the bills is the lack of State funding for housing.  Even the major fund-raising measure, SB3, will only be enacted if the voters so decide in November 2018.  In addition, the bills included in the 2017 housing package cover a broad range of housing issues, yet manage to steer clear of one of the “third rails” of California Housing Policy: the California Environmental Quality Act (CEQA). While a few of the planning bills allows for CEQA review to take place at the planning stage, the new laws do not provide for any additional categorical exemptions for housing projects, or changes to the current infill exemption, that would limit the application of CEQA to affordable or market-rate housing developments.

Thus, there remains plenty of opportunity for Sacramento to take on big issues in future legislative sessions, so long as political will remains.

Speaking of CEQA, when we first started defending CEQA challenges to housing projects in the late 1970s, they generally were brought by genuine environmental organizations, such as the Sierra Club or the Audubon Society.  These days, such suits against urban projects are rare.  Instead, CEQA is mostly used as leverage by project opponents, who fall into three categories: neighbors opposed to a nearby project (“NIMBYs”), unions seeking to bully a developer into a project labor agreement, and businesses trying to prevent competition.

The typical approach of such housing project opponents is as follows: (a) they hire a lawyer; (b) the lawyer hires some experts or pseudo-experts; (c) the lawyer send the city a letter with expert opinions stating that the project will have significant effects on, for example, air quality and traffic; (d) and if the project is approved based upon a negative declaration or an exemption  from CEQA (such as the single family house exemption, or the infill exemption), they file suit arguing that their opposition established a “fair argument” that a full environmental impact report (EIR) should have been done.  Of course, if an EIR was prepared, they argue that it is inadequate, but that claim is easier to defend.

The proliferation of such suits has been substantially aided by numerous court decisions that have extended the CEQA statute itself and made it easier for plaintiffs to sue, generally without any consequence to them if they lose.  A modest stab at CEQA reform could include at least the following three measures:

1) There is currently virtually no “standing” requirement for CEQA plaintiffs – anyone can sue.  Requiring an exposure to genuine environmental harm from the project would cut down on the kind of non-environmental suits mentioned above.

2) Get rid of the “fair argument” test for when a full EIR is required. This very low bar is not in the statute itself, but was added by case law.

3) Similarly, get rid of the doctrine that a “disagreement among experts” can only be resolved if a full EIR is prepared – another doctrine added by case law.

Fearless Prediction:  Don’t hold your breath.  The last serious attempt at CEQA reform, in 2014, started out well, but fizzled completely once organized labor and environmental organizations weighed in.

ABOUT BERLINER COHEN

Berliner Cohen has served the business and regulatory needs of private business and public agencies for close to 50 years.  Berliner Cohen continually meets the growing demands of both the Silicon Valley and San Joaquin Valley. The Firm has developed the special expertise required by a diverse client base consisting of nationally recognized business interests and a number of Northern California’s largest national and multinational corporations, new ventures, leading real estate developers and brokerages, cutting-edge technology companies, agribusiness, banking and financial institutions, employers, municipalities, public agencies, and individuals.

CONTACTS

Andrew Faber practices in the areas of Land Use and Municipal Law. Andrew has over forty years of experience in representing private and public clients in a wide range of land use, environmental and public law matters, and in real estate, environmental and eminent domain litigation. If you have any questions, please contact Andrew Faber at andrew.faber@berliner.com or (408) 286-5800.

Michael Branson’s practice at Berliner Cohen LLP is focused on Land Use and Municipal Law. He joined Berliner Cohen in 2015. If you have any questions, please contact Michael Branson at michael.branson@berliner.com or (408) 286-5800.

This article is for informational purposes only and not for the purpose of providing legal advice. Please contact your attorney to obtain advice with respect to any particular legal issue. The opinions expressed are the opinions of the authors.

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