As discussed in our last update on the November 2022 Proposition M, Empty Homes Tax Ordinance (the “Empty Homes Tax”), the San Francisco Apartment Association, the Small Property Owners of San Francisco Institute, the San Francisco Association of Realtors, and four individual landlords (“Challengers”) filed a lawsuit in San Francisco Superior Court challenging the constitutionality of the Empty Homes Tax. On October 31, 2024, the Superior Court ruled in favor of the Challengers’ Motion for Summary Judgment, finding that the Empty Homes Tax is unenforceable. Accordingly, the Empty Homes Tax is not currently effective, although the City of San Francisco may appeal the decision.

In May of 2024, the Challengers filed a Motion for Summary Judgment, seeking summary judgment, and asking that the Court enter a permanent injunction prohibiting the enforcement of the Empty Homes Tax. The Challengers argued that the Empty Homes Tax violates the Takings and Due Process Clauses of the Constitution, reasoning that a property owner’s right to keep their property vacant—to exclude others—is an essential element of the property rights protected by the Takings Clause. The Challengers also argued that the Empty Homes Tax violates the Ellis Act, which provides that the government may not compel the owner of any residential real property to offer or continue to offer accommodations in the property for rent or lease, with certain exceptions. The Court’s ruling provided that the Challengers shifted their burden as to all causes of action in their lawsuit, and that the City of San Francisco failed to create any triable issues of fact with competent admissible evidence. The Court tasked the Challengers with preparing an order, which order has not yet been published in the Court’s register of actions.

We will continue to provide further updates on the Empty Homes Tax, the status of the Court’s decision, and a published Court order as such updates become available.

With support from nearly 70% of voters in the November 2024 election, Proposition M will substantially modify the San Francisco Business and Tax Regulations Code (the “SF Tax Code”), which imposes a number of taxes on entities engaging in business in the City.

The following is a summary of key existing provisions in the SF Tax Code and the changes outlined in Proposition M:

Gross Receipts Tax

Existing Law: The Gross Receipts Tax is a tax on the gross receipts of a business for all taxable business activities attributable to the City. The rates vary, depending on the category of business activity and amount of gross receipts. There are 14 categories of business activities, and the rates range from 0.053% to 1.008%. Most small businesses with gross receipts of up to $2.2 million are exempt from paying the Gross Receipts Tax.

Proposition M: Proposition M reduces the number of business activity classifications from 14 to 7. The rates of tax on gross receipts are modified for each category, with a new range of 0.1% to 3.716%. For tax years beginning on or after January 1, 2025, the small business gross receipts exemption threshold is increased to $5 million.

The changes to the Gross Receipts Tax will likely have the greatest impact on small businesses that will fall under the new $5 million threshold to qualify for the small business exemption. On the other hand, businesses that do not qualify for any exemption will face slightly higher rates of tax, with scheduled increases to rates through 2028.

Homelessness Gross Receipts Tax

Existing Law: The Homelessness Gross Receipts Tax imposes an annual tax on each person engaged in business in the City that receives or is a member of a combined group that receives more than $50 million in total taxable gross receipts. The tax is imposed at varying rates, based on seven different business categories, and ranging from 0.175% to 0.69%.

Proposition M: Proposition M lowers the threshold for a person or combined group’s taxable gross receipts to $25 million, with rates of tax ranging from 0.164% to 0.492%.

The changes to the Homelessness Gross Receipts Tax will primarily impact businesses with gross receipts in the City in excess of $25 million that were not previously subject to the tax. For businesses already subject to the Homelessness Gross Receipts Tax, the changes result in slightly lower rates of tax across business categories.

Overpaid Executive Gross Receipts Tax

Existing Law: The Overpaid Executive Gross Receipts Tax (“OEGRT”) imposes an additional gross receipts tax on a person or combined group’s taxable gross receipts in which the highest-paid managerial employee, within or outside of the City, earns more than 100 times the median compensation of employees based in the City, with rates ranging from 0.1% to 0.6%.

Proposition M: Proposition M modifies the method of calculating the OEGRT for tax years beginning on or after January 1, 2025, with rates ranging from 0.02% to 0.129%.

The changes to the OEGRT will impact the small number of businesses subject to the tax under the existing rules. The changes to the method of calculating the OEGRT make it less likely that the tax will apply. For those businesses to which it does apply, the rates will be lower.

Relationship to Proposition L

The November 2024 ballot included two propositions relating to business taxes: Proposition M, which modifies a number of provisions among various existing business tax ordinances in the City; and Proposition L, which would have created a new gross receipts tax on transportation network companies and autonomous vehicle businesses. Both measures required a simple majority to pass. While both measures achieved the required votes to pass, Proposition M contained a provision that would essentially negate Proposition L if both measures passed. Therefore, Proposition M is the only one of the two City business tax measures that will become effective.

UPDATE: As of September 30, 2024, Governor Newsom signed all but one of the bills we wrote about in our original post of September 16, 2024. We have updated that post to identify the bills that have been signed into law and to reflect the veto of AB 3068.

During the 2024 California Legislative Session, which closed on August 31, the State Legislature again passed many bills seeking to ease the state’s housing crisis. This post focuses on key housing-related bills that are, at the time of this publication, either signed or awaiting the Governor’s signature. He has until September 30 to either sign or veto the remaining bills on his desk. This summary addresses legislation in the following categories: Housing Accountability Act compliance, entitlement streamlining and extensions, development impact fees, infrastructure finance, and Housing Element compliance.

Housing Accountability Act Compliance

AB 1893 (Wicks) [Modernizing the Builder’s Remedy] – SIGNED

The so-called builder’s remedy has sometimes been referred to by supporters as a “zoning holiday” for developers or, by opponents, as a “nuclear option” to avoid compliance with land use controls. It refers to a provision of the Housing Accountability Act (HAA) that generally prohibits a local government from denying a housing project that meets certain affordability standards if the jurisdiction has not adopted a Housing Element that substantially complies with law, even if the project is not consistent with the general plan or zoning. While it has been part of the HAA for decades, the builder’s remedy has gained recent attention as local governments throughout the state have tried, and in many cases struggled, to adopt 6^th Cycle Housing Elements that pass muster with the state Department of Housing and Community Development (HCD).

AB 1893 is intended, according to its author, to “moderniz[e] the builder’s remedy to make it clear, objective, and easily usable.” It does this primarily by:

• Specifying that a local government can impose objective, quantifiable, written development standards and policies on a project only to the extent that they would have applied to the project if it had been proposed on a site with general plan and zoning designations that would allow the project at its proposed density (or if no such designation exists, the applicant may identify any other standards that “facilitate” the project), and that would not render the project infeasible or preclude it from being constructed as proposed.
• Clarifying that the builder’s remedy is available if the local jurisdiction does not have a substantially compliant Housing Element on the date the development application is deemed complete.
• Updating the thresholds of affordability that qualify a project for the builder’s remedy (shown in the table below), and making more mixed-use developments eligible.
• Expanding the types of actions that constitute “disapproval” of a housing development project, to include final administrative actions and pursuing a “course of conduct undertaken for an improper purpose … that effectively disapproves” the project.

Minimum Percentage of Units Required to Qualify for Builder’s Remedy, by Income Level

	Existing Law	AB 1893
Moderate Income	100%	100%
Lower Income	20%	13% *
Very Low Income	N/A	10% *
Extremely Low Income	N/A	7% *
Below-market rate units for projects 10 units or fewer, on site smaller than 1 acre, with density at least 10 units/acre	N/A	0%

*Mixed-income housing developments may be required to dedicate more units, or at a deeper level of affordability, to comply with a local agency’s affordable housing requirement that was in effect as of January 1, 2024. However, the local agency may not require more than 20% of the units to be affordable, may not require dedication of those units at a level of affordability below lower income, and must make written findings that compliance with local requirements will not make the project infeasible.

Entitlement Streamlining and Extensions

AB 2243 (Wicks) [Affordable Housing and High Road Jobs Act of 2022 (AB 2011) – Clarification and Expansion] – SIGNED

The Affordable Housing and High Road Jobs Act (AB 2011, or the Act), also authored by Assemblymember Wicks, went into effect on July 1, 2023. AB 2011 provides for streamlined ministerial approval of qualifying affordable housing projects, and mixed-income projects located along commercial corridors, on land zoned for office, retail, and/or parking uses. AB 2243 is intended to clarify some of the Act’s provisions as follows.

Applicability and Requirements:

• AB 2243 amends the definition of a “use by right” to clarify that a project meeting the provisions of the Act is ministerial and streamlined, regardless of whether a local government’s zoning ordinance would otherwise require a project to obtain discretionary approvals or permits, such as a conditional use permit, or any review under CEQA.
• The Act does not apply to a housing development if it is located on a site or adjacent to a site where more than one third of the square footage is “dedicated to industrial use,” which includes vacant sites if the most recent use of the square footage was industrial. AB 2243 clarifies that the most recent use must have been within the last three years, and that a site designated as industrial in a pre-2022 general plan must prohibit residential uses for that site to be “dedicated to industrial use.”
• The Act requires qualifying projects to meet specified affordability criteria. AB 2243 clarifies that the affordability requirements apply only to the base units of the housing development project and not to units added by a density bonus and that a request for waivers or incentives pursuant to the State Density Bonus Law does not subject a qualifying project to discretionary review or to CEQA.
• The Act prohibits a housing development from being subject to the Act’s streamlined, ministerial approval process if it is located within 500 feet of a freeway. AB 2243 loosens this restriction by allowing such developments to be subject to the Act’s review process if the building meets specified criteria, including that it will have a centralized heating, ventilation, and air conditioning system.

• The Act also limits a mixed-income housing development subject to the streamlined, ministerial review process to sites of 20 acres or less, or 100 acres or less for regional mall sites.

Processing and Approval Timeframes:

• AB 2243 specifies that when a development proposal is resubmitted to address inconsistencies identified by the local agency, the local government must provide any additional feedback in writing within 30 days and it may not require the applicant to provide any new information that was not included in the initial list of items that were determined to be in conflict. Once a development proposal is determined to be consistent with the Act’s standards, a local government must approve the proposed development within 60 days for projects consisting of 150 units or fewer, or within 90 days for projects with more than 150 units.

AB 2729 (Patterson) [Extending Residential Development Entitlements by 18 Months] – SIGNED

AB 2729 addresses the concerns of many developers across the state that entitlements for housing projects will expire during a period of high interest rates and construction costs. It extends by 18 months the timeframe for a “housing entitlement” for a “residential development project” that was in effect on January 1, 2024 and that will expire before December 31, 2025. The 18-month extension is tolled during a legal challenge to a housing entitlement.

“Housing entitlements” include legislative, adjudicative, administrative approvals or permits for a housing development project, ministerial approvals or permits for a housing development project, and tentative maps, vesting tentative maps, and parcel maps, and do not include a development agreement, an approved or conditionally approved tentative map that has already been extended, or a preliminary application. A “housing development project” is a residential or mixed-use development in which at least two-thirds of the square footage of the development is designated for residential use.

AB 3068 (Haney, Quirk-Silva) [Office to Housing Conversion Act: Streamlining and Incentives for Adaptive Reuse Projects] – VETOED

Recognizing a potential opportunity provided by the rise in office vacancies, the Office to Housing Conversion Act creates a streamlined, ministerial approval process for adaptive reuse projects that would convert existing office buildings to housing and provides certain financial incentives.

Projects meeting the requirements of the bill are considered “by right” in all zones, regardless of the zoning of the site, and are subject to a streamlined, ministerial review process provided that any non-residential uses included in the project comply with local zoning.

To qualify, a project must:

• Be located on an infill site;
• Convert an existing building that either:
  • Is less than 50 years old;
  • Is 50 years old or more but has been determined not to be a historic resource; or
  • Is a historic resource but would comply with the Secretary of Interior’s Standards for the Treatment of a Historic Resource.
• Comply with specified affordability requirements, generally that the project provide:
  • For rental projects: at least 8% of the units for very low-income households and 5% of the units for extremely low-income households, or 15% for lower-income households; or
  • For ownership projects: at least 30% of the units for moderate-income households, or 15% for lower-income households.
• Comply with prevailing wage requirements for construction; and
• Provide at least 50% of the square footage as residential.

AB 3068 requires a city or county to approve an adaptive reuse project if the local planning director determines that the project is consistent with the bill’s objective standards. If the planning director determines that the project conflicts with any of the objective planning standards, they must provide the applicant with a written explanation of the reason(s) for the conflict. The local agency’s review must be completed—and the project must be approved, if it is consistent with objective standards—within specified timeframes, depending on project size.

To alleviate some of the costs associated with adaptive reuse projects, AB 3068 exempts an adaptive reuse project from all impact fees that are not reasonably related to the impacts resulting from the change of use of the site from nonresidential to residential or mixed use.

Development Impact Fees

SB 937 (Wiener) [Timing of Impact Fees for Residential Projects] – SIGNED

SB 937 reduces front loading of certain impact and mitigation fee costs for qualifying projects. For “designated residential development projects”—defined as either 100% affordable, subject to AB 2011, SB 35, SB 4, or State Density Bonus Law, or with 10 or fewer units—SB 937 would prohibit a local agency from imposing fees or charges for the construction of public improvements or facilities until the first Certificate of Occupancy (C of O), including a Temporary C of O, is issued. This prohibition excludes certain utility service fees related to connections, and does not apply if construction of the residential development does not begin within five years of building permit issuance.

The local agency can still require the payment of fees or charges at an earlier time if either of the following conditions is met:

• The fees or charges are to reimburse the local agency for expenditures previously made; or
• The local agency determines both of the following:
  • The fees or charges will be collected for public improvements related to providing water service, sewer or wastewater service, fire, public safety, emergency services, roads, sidewalks, construction and rehabilitation of school facilities, or other public improvements related to services to the residential development; and
  • An account has been established and funds appropriated for the public improvements or facilities.

SB 937 also restricts local agencies from charging interest or other fees on any deferred fees, which developers have cited as an additional impediment to making projects pencil. For developments with more than one dwelling, the local agency can decide whether fees should be paid on a pro rata basis (for each unit upon receipt of a C of O or when a certain percentage of units have received a C of O) or a lump-sum basis (when all units receive a C of O).

AB 1820 (Schiavo) [Increasing Fee Transparency] – SIGNED

AB 1820 attempts to provide more transparency regarding development fees, to allow developers to create more accurate budgets. While existing state law requires development fees to be posted online, many local agencies have not complied. In addition, many local agencies don’t disclose fees until projects are already under construction—which sometimes means developers take on huge financial risk when local agencies impose large, unexpected fees late in the development process. Further, even where fee schedules are disclosed, there is often ambiguity in how to calculate a particular fee as applied to a project.

AB 1820 will require cities, counties, and cities and counties, to provide an estimate of the impact fees housing developers will be required to pay within 30 business days of an SB 330 preliminary application, at a developer’s request. Cities, counties, and cities and counties, in addition to third-party agencies like school districts or special districts, are also required to provide a final impact fee estimate within 30 business days of housing development approval. By increasing the transparency of development fees, the bill is intended to allow developers to better understand their total costs before beginning construction.

AB 2553 (Friedman) [Enhancing the Scope of and Benefits for Transit-Adjacent Housing Development] – SIGNED

The authors of AB 2553 believe that there are too few locations that meet the current definition of “major transit stop” for purposes of impact fee collection and CEQA. This bill would revise that definition to expand the frequency of major bus route service intervals, to 20 minutes from 15 minutes or less, during the morning and afternoon peak commute periods. This change helps to counteract the reduction in transit ridership and reduced service frequencies resulting from the COVID-19 pandemic, and would allow more housing projects to qualify for lower traffic mitigation fees. AB 2553 also allows a major transit stop to be completed before or within one year from the scheduled completion and occupancy of the housing development. (Under existing law, a station must have been completed before the scheduled completion and occupancy of the housing development.) This bill would also allow more housing projects to qualify for CEQA exemptions available for infill sites and transit priority projects within one-half mile of a major transit stop.

Notably, AB 2553 would also extend the area within which AB 2097 applies. That law generally prohibits a local agency from imposing minimum parking requirements on any residential, commercial, or other development project located within half a mile of a “major transit stop.” The expanded service interval frequency would provide parking flexibility to more development projects near public transit.

Infrastructure Finance

AB 2488 (Ting) [San Francisco Downtown Revitalization and Economic Recovery Financing Districts] – SIGNED

Together with AB 3068, AB 2488 incentivizes conversion of qualifying downtown San Francisco commercial buildings to residential use. Until their dissolution in 2012, redevelopment agencies used tax increment financing (TIF) to finance infrastructure and other improvements, and the Legislature subsequently authorized several new local TIF tools to facilitate economic development.

To address the aftermath of the COVID-19 pandemic and associated extremely high commercial vacancy rates, and to reduce the impacts of the housing crisis, AB 2488 allows the City and County of San Francisco to create a new Downtown Revitalization and Economic Recovery Financing District (district) to finance commercial to residential conversion (reuse or replacement) projects with TIF. Unlike most other TIF tools, AB 2488 authorizes the use of TIF funds to finance residential development that is market rate or includes a relatively low percentage of affordable units. The Senate Committee on Housing report states that tax increment captured under AB 2488 will subsidize construction of projects that are at least 90% market rate units for as many as 30 years.

Key provisions of AB 2488 include:

• The San Francisco Board of Supervisors (Board) may form a district by resolution, and concurrently must create a district board consisting of three members of the Board, two members of the public chosen by the Board, plus an optional Board alternate.
• The district may use net available property tax increment (excluding tax increment that is allocated to other taxing entities) generated by qualifying, opt-in commercial-to-residential conversion projects to finance such projects. Projects must be of communitywide significance and provide significant benefits to the district or San Francisco.
• The district must also create and approve a financing plan, including specified information and requirements. Projects may opt in through December 21, 2032, and will be assigned a base assessed value by the district using the last assessment roll equalized prior to issuance of the first building permit for the project. The financing plan must also provide guidance on calculation of tax revenue to be distributed within the district.
• Eligible projects are considered public works for which prevailing wages must be paid, and are required to comply with labor standards adopted by the Board.
• The first 1.5 million square feet of qualifying projects are exempt from affordability requirements. Thereafter, projects must comply with one of the following affordability requirements (or the corresponding local inclusionary requirement, if higher): at least 5% of total rental units are affordable to very low-income households, at least 10% of the total units are affordable to lower-income households, or at least 10% of total units for sale are affordable to moderate-income households.

 Housing Element Compliance

 AB 2023 (Quirk-Silva, Alvarez) [Housing Element Compliance] – SIGNED

Consistent with trends in recent legislative sessions, AB 2023 is intended to give more teeth to the state’s Housing Element Law and HCD’s ability to enforce it. Generally, the Housing Element Law requires each local government to adopt a Housing Element every eight years that includes, among other things, an inventory of sites that are zoned, or will be rezoned, with adequate capacity to accommodate the local government’s share of the regional need for new housing, as determined by HCD.

Under existing law, once HCD has certified a Housing Element as substantially compliant with state law, there is a rebuttable presumption of validity if that Housing Element or actions related to it are challenged in court. AB 2023 creates a rebuttable presumption of invalidity for Housing Elements deemed noncompliant by HCD, raising the standard for jurisdictions to dispute or dismiss HCD’s determination of noncompliance.

In addition, AB 2023 imposes stricter deadlines on local governments for Housing Element submittal. Previously, a jurisdiction that completed and adopted its Housing Element within the statutory deadlines had three years from the earlier of (i) the date the Housing Element was adopted, or (ii) the date that was 90 days after receipt of comments from HCD, to complete any required rezoning to implement the Housing Element. Jurisdictions that failed to meet the deadlines had to complete the required rezoning no later than one year after the statutory deadline to adopt the Housing Element. To avoid the tighter one-year timeline for rezoning, some local governments rushed to adopt draft Housing Elements just before the statutory deadlines—before HCD has provided written findings on those drafts—with the hope that HCD would deem the drafts compliant after the fact.

To address this issue, AB 2023 now places all jurisdictions in a one-year rezoning cycle unless they meet certain benchmarks to qualify for a three-year rezoning cycle. These new benchmarks require a jurisdiction to (i) submit a draft element to HCD at least 90 days before the statutory deadline for adoption, (ii) receive written findings from HCD by the statutory deadline that the draft substantially complies with state law, and (iii) adopt the Housing Element no later than 120 days after the statutory deadline.

AB 1886 (Alvarez) [Defining When a Housing Element is in Substantial Compliance] – SIGNED

AB 1886 intends to stop local agencies from attempting to self-certify Housing Element compliance. The bill codifies a regulatory interpretation HCD issued on March 16, 2023, which stated: “where a jurisdiction submits an ‘adopted’ housing element before submitting an initial draft or before considering HCD’s findings on an initial draft, HCD will consider the ‘adopted’ to be an initial draft for purposes of both HCD’s review and the jurisdiction’s statutory compliance.” HCD took the position that “a jurisdiction is ‘in compliance’ as of the date of HCD’s letter finding the adopted element in substantial compliance.”

Accordingly, AB 1886 provides that Housing Element substantial compliance does not occur until a local agency has adopted a Housing Element and either HCD or a court determines that the adopted Housing Element substantially complies with state law. Some local governments have argued that self-certification of a Housing Element, without HCD’s determination, protects them from builder’s remedy projects, which developers can pursue when the jurisdiction lacks a compliant Housing Element. This bill eliminates those arguments.

The Coblentz Real Estate Team has extensive experience with the state’s latest housing laws and can help to navigate the laws’ complexities and opportunities. Please contact us for additional information and any questions related to the impact of these pending bills on land use and real estate development.

As expected, on June 28, the California Department of Housing and Community Development (HCD) determined that San Francisco has not made adequate progress toward its State-mandated housing production goal. The City’s Housing Element—which it adopted and HCD certified in January 2023, just in time to avoid triggering certain penalties under the State Housing Element Law (see earlier post here)—sets forth the City’s plan to approve 82,000 units over an eight-year period ending in January 2031. However, according to its most recent Housing Inventory, San Francisco approved only 3,039 new units in 2023, and the City has yet to adopt the zoning amendments required by State law to implement the Housing Element.

Senate Bill 423 requires San Francisco, specifically, to annually demonstrate that it is keeping pace with its housing production. HCD’s June 28th determination means that many mixed-income housing development projects in San Francisco will now be subject to a streamlined, ministerial approval process. Qualifying projects will be approved by Planning staff and will not require a public approval hearing by the Planning Commission or Board of Supervisors, although in many neighborhoods a pre-application informational hearing at the Planning Commission will be required.

To qualify, projects must be at least 2/3 housing, meet specified labor requirements, and meet certain site-specific criteria—including that the project be located on a residentially-zoned site, not demolish tenant-occupied or rent-controlled units, and not demolish historic structures listed on a historic register—among a few other requirements. Importantly, prior to HCD’s determination, projects also had to restrict 50% of units in the project as affordable to households at 80% area median income (AMI). Now, however, the affordability requirement has been drastically reduced to just 10% of the units in the project, which must be affordable to households at 50% AMI. While the percentage of affordable units required to qualify for streamlined review is now lower, SB 423 does not relieve projects from local inclusionary housing requirements if such requirements are higher.

If the criteria are met, the following projects must be approved ministerially:

• Code-compliant projects with 2-9 dwelling units.
• Code-compliant projects with 10 or more dwelling units that meet San Francisco’s inclusionary affordable housing requirements.

Notably, Code-compliant projects include projects that take advantage of State Density Bonus Law to increase their unit count above what would typically be permitted under existing zoning.  The City’s application for streamlined approval pursuant to SB 423 is available here.

Under SB 423, projects of 150 units or fewer must be approved within 90 days of submittal of an application, and projects with more than 150 units must be approved within 180 days. As stated in a press release by former San Francisco Supervisor and now State Senator, Scott Wiener, who authored SB 423, as of June 28 San Francisco is going “from the slowest approver of new homes in California to one of the fastest.”

Due to San Francisco’s specific annual housing production progress requirement and the City’s lack of progress to date, the City is likely to remain out of compliance. Accordingly, projects complying with San Francisco’s inclusionary affordable housing requirements and SB 423’s site criteria may qualify for streamlined, ministerial review for the foreseeable future. For the time being, we note that 18 other Bay Area jurisdictions do not have compliant Housing Elements and are therefore subject to the same reduced affordability requirement to qualify for SB 423 streamlining benefits. Those jurisdictions are currently Atherton, Belmont, Cupertino, Daly City, Hercules, Lafayette, Larkspur, Los Gatos, Napa County, Palo Alto, Pittsburg, Portola Valley, San Mateo, San Mateo County, Santa Clara County, Saratoga, Woodside, and Yountville. Unlike San Francisco, most or all of these Bay Area jurisdictions will return to the higher 50% affordable requirement when their Housing Elements become compliant, which for some of these jurisdictions could happen within days or weeks.

Coblentz attorneys will continue to monitor Housing Element compliance and other developments as they relate to these and other jurisdictions.

The California Supreme Court recently upheld the Environmental Impact Report (“EIR”) for the Long Range Development Plan (“LRDP”) for the University of California Berkeley (“UC Berkeley”) and a controversial housing project at a site known as People’s Park. In so doing, it applied the principle that “no matter how important its original purpose, [CEQA] remains a legislative act, subject to legislative limitation and legislative amendment.”

The Court’s ruling in Make UC a Good Neighbor v. Regents of the University of California involved a challenge brought by project opponents against UC Berkeley’s EIR for its LRDP and a specific housing project at People’s Park. The LRDP is a broad plan for UC Berkeley’s long-term physical development, including land use designations, the location of buildings, and infrastructure systems. It plans for the addition of 11,730 new student beds to accommodate long-term enrollment projections. The People’s Park housing project would develop 1,113 student beds, 1.7 acres of open landscape, and 125 affordable and supportive housing beds for lower income or formerly homeless individuals not affiliated with UC Berkeley.

Project opponents argued that the EIR failed to consider environmental impacts from “social noise” (i.e., vocal noise generated by students at parties or walking late at night), and that the EIR failed to adequately consider alternative locations other than People’s Park for the housing project. Although the trial court ruled in favor of UC Berkeley, the Court of Appeal agreed with project opponents on those two issues.

After the California Supreme Court granted review, but before oral arguments in the case, the California Legislature passed Assembly Bill (“AB”) 1307, which amended CEQA by adding two sections to the Public Resources Code: (1) section 21085, which provides that noise generated by project occupants and their guests is not a significant effect on the environment under CEQA for “residential projects”; and (2) section 21085.2, which provides that institutes of public higher education, in an EIR for a residential or mixed-use housing project, are not required to consider alternatives to the location of a proposed project if certain requirements are met.[1]

Project opponents conceded that under AB 1307, the EIR was not required to analyze social noise from or potential alternative locations to development at People’s Park. The Court confirmed that in mandamus proceedings (such as CEQA actions), “a reviewing court applies the law that is current at the time of judgment in the reviewing court.” The project opponents, however, argued that their LRDP social noise claim remained viable because AB 1307 exempted only “residential projects,” and the LRDP is not a “residential project” within the statute’s meaning. The project opponents also asked the Court to consider their alternative locations argument with respect to potential future LRDP projects.

The Court rejected both of these arguments. The Court interpreted the undefined term “residential project” broadly in holding that the EIR was not required to analyze social noise impacts of either the People’s Park housing project or the broader LRDP. The Court considered the statute’s purpose, legislative history, and public policy to discern its meaning and concluded that it was “clear” that section 21085 “should be interpreted broadly enough” to apply to the aspects of the LRDP at issue.

The Court also declined to consider the project opponents’ alternative locations argument with respect to potential future housing projects that were not before the Court.

The California Supreme Court’s decision gives UC Berkeley the green light to finally move forward with the student housing project at People’s Park, and also reaffirms principles of statutory construction and that courts should apply the law in effect at the time of their ruling. In addition, its broad interpretation of “residential project” means that not only specific projects, but also residential components of long-term planning efforts, should not be required to analyze social noise as an environmental effect under CEQA.

 

[1] These requirements are that the project must: (1) be located on a site that is no more than five acres and be substantially surrounded by qualified urban uses; and (2) have already been evaluated in the EIR for the most recent LRDP for the applicable campus.

On April 12, 2024, the United States Supreme Court issued an opinion that may significantly affect how development impact fees are assessed in California. In Sheetz v. County of El Dorado,[1] the Court unanimously held that legislatively imposed permit conditions are subject to the same constitutional test – informally referred to as the “Nollan/Dolan” test – as administratively adopted permit conditions. Under this test, permit conditions must have “an essential nexus” to the government’s land use interest and a “rough proportionality” to the development’s impact on the land use interest.

Prior to Sheetz, when a local government imposed an exaction through legislative action (such as development impact fees adopted and imposed under the Mitigation Fee Act), it did not need to satisfy the tests established under Nollan v. California Coastal Commission[2] and Dolan v. City of Tigard.[3] As a practical matter, this meant that legislatively adopted fees received very little scrutiny when applicants challenged them in court. Although the Sheetz opinion is narrowly crafted, it provides new opportunities to challenge and to negotiate over impact fees and other legislatively adopted exactions.

Coblentz Patch Duffy & Bass LLP submitted an amicus brief on behalf of the Bay Area Council in support of the petitioner’s claims, explaining that the lack of a judicial check on impact fees has resulted in some excessively high fees and extreme variation in fees by jurisdiction, particularly in the Bay Area.

Case Background

The County of El Dorado’s Board of Supervisors enacted a traffic impact fee on new construction to finance new roads and the widening of existing roads. Under this program, the traffic impact fee was based on a rate schedule that took into account a project site’s location within the County and construction type. The fee was imposed regardless of a project’s actual impact on roads.

George Sheetz applied for a building permit from the County to construct a modest manufactured house on his property. The County issued a permit for the house on the condition that Mr. Sheetz pay the traffic impact fee in the amount of $23,420. Mr. Sheetz paid the fee under protest.

In 2017, Mr. Sheetz filed an action against the County, seeking a fee refund on the grounds that the traffic impact fee was an unconstitutional condition under the U.S. Supreme Court’s Nollan/Dolan precedent.

In rejecting Mr. Sheetz’s claims, the Court of Appeal held that, “[u]nder California law, only certain development fees are subject to the heightened scrutiny of the Nollan/Dolan test,” including “development fees imposed as a condition of permit approval where such fees are imposed . . . neither generally nor ministerially, but on an individual and discretionary basis.”[4] The Court reasoned that the requirements of Nollan/Dolan do not extend to development fees that broadly apply to property owners through legislative action, as opposed to fees imposed ad hoc on individual permit applications.

The California Supreme Court denied review, but the U.S. Supreme Court granted certiorari to answer the narrow question of whether legislatively adopted exactions are subject to the Nollan/Dolan test.

The Sheetz Decision and Key Takeaways

On the question presented, the unanimous Court was clear: the Takings Clause does not distinguish between legislative and administrative land use permit conditions, meaning that legislatively adopted exactions are subject to the Nollan/Dolan test. The Court stated that nothing in constitutional text, history, or precedent supports exempting legislatures from ordinary takings rules.

But the Court left open a number of issues and the three concurring opinions suggest that the Justices are not unanimous in their views of several ancillary, unanswered questions. For example, the Court explicitly did not address whether a permit condition imposed on a class of properties must be tailored with the same degree of specificity as a permit condition that targets a particular development. Justice Gorsuch’s concurring opinion took issue with the Court’s failure to reach this issue, stating that an “individualized determination” is required regardless of whether the fee impacts a class of properties or a particular development.[5] Justice Kavanaugh, joined by Justices Kagan and Jackson, disagreed in a concurring opinion emphasizing that the Court did not address the common government practice of imposing impact fees and other permit conditions through “reasonable formulas or schedules that assess the impact of classes of development rather than the impact of specific parcels or property.”[6] In a third concurring opinion, Justice Sotomayor, joined by Justice Jackson, stated that the trigger for Nolan/Dollan scrutiny is “whether the permit condition would be a compensable taking if imposed outside the permitting context.”[7] This may suggest that at least two Justices believe there might be an entirely different way to view impact fees, potentially outside of the takings jurisprudence.

Immediate and Long-Term Implications of Sheetz

Despite the open questions, Sheetz gives developers new options to challenge and negotiate over fees. Ever since the California Supreme Court in San Remo Hotel L.P. v. San Francisco[8] exempted legislatively adopted impact fees from the Nollan/Dolan test, local jurisdictions have had a powerful argument to rebuff fee challenges. With Sheetz, local jurisdictions have lost that tool. At the very least, we expect an uptick in impact fee litigation with greater success by developers. We also believe local jurisdictions will be more open to negotiation over impact fees as applied to individual projects.

California courts will now address some of the questions that the Justices left unanswered, and we expect this area will remain dynamic as new cases are decided. In fact, Sheetz itself lives on as the Court of Appeal is now considering how to apply the Supreme Court’s decision. We will be watching carefully as the courts confront the remaining open issues.

We do not expect that a large number of local jurisdictions will immediately revamp their existing fee programs. But as new fees are proposed or updated nexus studies are prepared, we anticipate that resulting fee programs will be tailored so that the fee imposed more closely matches the impact of the development. While Sheetz did not mark the end of impact fees (as some had predicted could happen with a more sweeping opinion), it likely will eventually result in fees that are more “proportional” to the impact.

For projects already struggling to pencil due to stubbornly high construction costs and interest rates, impact fees – sometimes reaching into six figures per unit – can pose additional barriers. As developers try to find ways to make projects viable, the Sheetz decision creates a stronger basis for revisiting impact fees that may be disproportionate to a project’s actual impacts.

 

[1] (2024) 601 U.S. 267.

[2] (1987) 483 U.S. 825.

[3] (1994) 512 U.S. 374.

[4] Sheetz v. County of El Dorado (2022) 84 Cal.App.5th 394, 406 (internal citations omitted), vacated and remanded by the U.S. Supreme Court.

[5] Sheetz v. County of El Dorado, supra, 601 U.S. at p. 283 (conc. opn. of Gorsuch, J.).

[6] Id. at p. 284 (conc. opn. of Kavanaugh, J.).

[7] Id. at p. 280–281 (conc. opn. of Sotomayor, J.).

[8] (2002) 27 Cal.4th 643.

 

The San Francisco Board of Supervisors recently amended the Planning Code’s controls to further regulate Fleet Charging and Parcel Delivery Service uses, primarily affecting Production, Distribution, and Repair (PDR) zoning districts. Below, we provide an overview of the legislative changes.

Fleet Charging Background

Fleet Charging[i] describes facilities that exclusively serve commercial or institutional vehicular fleets, including autonomous vehicles. These are distinguished from Electric Vehicle Charging Locations, which are open to the public. Starting in 2022, the Planning Code has generally required a Conditional Use Authorization (CUA) in the zoning districts where Fleet Charging uses are allowed, and has prohibited Fleet Charging as an accessory use to any other principal use. In most PDR districts (PDR-1-D, PDR-1-G, and PDR-2), however, an exception was available to convert existing private parking lots or vehicle storage lots to Fleet Charging uses by right, without a CUA.

Updated Fleet Charging Legislation

In 2023, Supervisor Peskin introduced amendments to the Fleet Charging legislation, which were unanimously approved by the Board on March 5, 2024 and signed by the Mayor on March 15, 2024. The amendments do not change the zoning districts where Fleet Charging uses may be allowed, but require a CUA in all PDR districts, regardless of the existing or former use of the site. This change removed the by-right exception available in three PDR districts to convert existing private parking lots or vehicle storage lots to Fleet Charging uses. Development applications submitted before January 11, 2024 are grandfathered into the prior regime.

Parcel Delivery Service Background

Demand for Parcel Delivery Service[ii]—a use category that includes traditional package shipping providers as well as services for delivery of e-commerce goods, food orders, cannabis, and more—has grown in recent years, largely in response to online shopping and fast delivery guarantees. In San Francisco, Parcel Delivery Service was historically permitted in districts that allow PDR uses, generally clustered in the southeast sector of the City.

In 2022, District 10 Supervisor Walton introduced and the Board approved interim Parcel Delivery Service controls, initially effective for 18 months between April 1, 2022, and September 30, 2023, and later amended and extended to March 30, 2024. Although sometimes described as a “moratorium,” the interim controls did not prohibit new Parcel Delivery Services, but newly required a CUA for those uses in all zoning districts. (The interim controls included a CUA exemption for temporary Parcel Delivery Services for up to 60 days within a 12-month period). Subsequent legislation prohibited Parcel Delivery Service activity, including unloading, sorting, and/or reloading merchandise, as part of a Fleet Charging use.

The Planning Department’s post-passage report from March 30, 2023 noted that several cannabis delivery businesses were impacted by the interim controls because they were classified under the Parcel Delivery Service definition.

Updated Parcel Delivery Service Legislation

As the extended Parcel Delivery Service interim controls were set to expire, the Board amended the Planning Code on March 5, 2024 (signed by the Mayor on March 15, 2024) to establish permanent regulations for these uses. In general, the changes are focused in the following areas:

• In zoning districts where Parcel Delivery Services were generally permitted prior to the interim controls (PDR, M Industrial, and C-3 districts), those uses now require a CUA. This includes Parcel Delivery Service uses of 5,000 SF or less, which did not trigger a CUA under the amended interim controls.
• Except for Parcel Delivery Service for cannabis and cannabis products, Parcel Delivery Service uses are not allowed to be accessory to any other use and must be an established principal use.
• CUAs for Parcel Delivery Services greater than 5,000 SF are subject to additional criteria, including analyses regarding 1) impacts to traffic patterns, queuing times, and total vehicle miles traveled, 2) greenhouse gas emissions resulting from operation of the site, and 3) a study evaluating the potential economic impact of the proposed project, including an employment analysis (projecting construction and permanent employment generated and discussing the employer’s wages and benefits provided) and a fiscal impact analysis (itemizing public revenue created and public services needed).
• All Parcel Delivery Service uses, regardless of size, are also subject to “at least the following conditions of project approval”: on-site electrification (including battery storage requirements) and vehicle idling prohibitions.

The Board is currently considering additional amendments, introduced by Supervisor Chan, that would add a new CUA criterion regarding impacts to educational institutions located near a proposed Parcel Delivery Service site and refine the existing employment analysis criterion to study AI utilization and use of autonomous vehicles. We’ll continue to track these and other important legislative updates affecting Fleet Charging and Parcel Delivery Service uses in the City’s PDR districts.

 

 

[i] Defined in the Planning Code as “Automotive Use, Non-Retail that provides electricity to electric motor vehicles through one or more Electric Vehicle Charging Stations that are dedicated or reserved for private parties pursuant to contract or other agreement and are not available to the general public. Fleet Charging is not allowed as an accessory use to any other principal use. Parcel Delivery Service activity, including unloading, sorting, and/or reloading merchandise for deliveries, is prohibited as part of a Fleet Charging use.”

[ii] Defined in the Planning Code as “[a] Non-Retail Automotive Use limited to facilities for the unloading, sorting, and reloading of local retail merchandise for deliveries, including but not limited to cannabis and cannabis products, where the operation is conducted entirely within a completely enclosed building, including garage facilities for local delivery trucks, but excluding repair shop facilities. Within PDR Districts, this use is not required to be operated within a completely enclosed building. Parcel Delivery Service for merchandise or products other than cannabis and cannabis products is not allowed as an accessory use to any other principal use.”