San Francisco wasted no time implementing AB 1505, which authorizes localities to adopt ordinances requiring developers to provide on-site inclusionary affordable housing units in rental projects, provided that there is an alternative means of compliance such as in-lieu fees or off-site inclusionary rental units.  As explained in our prior post on 2017’s 15-bill housing package, AB 1505 supersedes case law that deemed on-site inclusionary rental unit requirements an impermissible form of rent control under the state Costa-Hawkins Act.

Previously, project sponsors proposing on-site inclusionary units in rental projects were required to enter into Costa-Hawkins Agreements.  Those agreements state that the inclusionary rental units are being provided in exchange for a development bonus, modification of zoning standards, or direct financial contribution from the City.  Last month, the Board of Supervisors passed an ordinance sponsored by Supervisors Peskin and Kim to implement AB 1505, effectively eliminating Costa-Hawkins Agreements and simplifying the process for providing on-site inclusionary rental units in new development projects.  Mayor Farrell signed the ordinance on February 23, and it becomes effective March 25.

According to the Planning Department’s January staff report to the Planning Commission, some code-compliant projects have been unable to provide on-site inclusionary rental units because they could not demonstrate the prerequisites for a Costa-Hawkins Agreement.  Most large-scale development projects need one or more exceptions from Planning Code development standards and so meeting the prerequisites has not been an issue, but Costa-Hawkins Agreements added an extra step to the entitlement process.  That step has been eliminated.  As mandated by AB 1505, the legislation would still permit developers to elect the fee or off-site options for rental projects, and it would not require on-site rental units.

As of January 1, 2018, California’s cities, counties, and charter cities are required to either adopt an Environmental Justice Element in their General Plan or integrate Environmental Justice policies and goals into the elements of their General Plan “upon the adoption or next revision of two or more elements concurrently.” Gov. Code Sec. 65302(h)(2).

The new Environmental Justice element differs from other General Plan elements because it applies to jurisdictions with “disadvantaged communities” (defined below) and requires those jurisdictions to “[i]dentify objectives and policies to reduce the unique or compounded health risks in disadvantaged communities by means that include, but are not limited to, the reduction of pollution exposure, including the improvement of air quality, and the promotion of public facilities, food access, safe and sanitary homes, and physical activity.” The element also requires jurisdictions to develop policies that promote participation in public decision-making and to prioritize programs that address the needs of disadvantaged communities. Gov. Code Sec. 65302(h)(1)(A), (B), (C).

Many of the Environmental Justice element’s requirements include topics that are already found in other General Plan elements. For example, the Office of Planning and Research 2017 General Plan Guidelines state that promoting transit-oriented development, locating residential zones away from industrial sites and pollution emitters, and promoting bike and pedestrian connectivity in disadvantaged communities are all policies that satisfy various statutory requirements.

The statute defines a “disadvantaged community” as (1) an area designated by the California Environmental Protection Agency under Health & Safety Code Sec. 39711 (mapped here) or (2) a low-income area “that is disproportionately affected by environmental pollution and other hazards that can lead to negative health effects, exposure, or environmental degradation.” Gov. Code 65302(h)(4)(A). A “low-income area” has “household incomes at or below 80 percent of the statewide median income . . . ” or is an area designated by the Department of Housing and Community Development. Gov. Code 65302(h)(4)(C); Health & Safety Code 50093.

California currently has two municipalities that have adopted Environmental Justice Elements: Jurupa Valley and National City. Even though both elements predate the Environmental Justice element statute, and therefore do not clearly meet all its requirements, the Office of Planning and Research General Plan Guidelines cite the policies in both elements extensively and hold them up as models.

 

The San Francisco Board of Supervisors is considering minor modifications to the Planning Code definition of Gross Floor Area. The Planning Department characterizes these changes as “good government” measures to clarify the Code and further the City’s sustainable transportation goals.

The proposed changes count floor area dedicated to accessory or non-accessory parking as Gross Floor Area, except for: (1) required car-share parking, (2) required off-street loading, and (3) accessory parking within the amount principally permitted as accessory and located in a “Basement Story” (detailed below). Other exemptions from Gross Floor Area’s definition, such as uninhabitable attic space, fire escapes, and mechanical areas, remain unaffected.

The most noteworthy change is incentivizing car-share spaces in new developments by excluding them from Gross Floor Area that would count toward the FAR calculation. This is in keeping with the City’s Transportation Sustainability Program and Transportation Demand Management (TDM) Program (examined in an earlier post), which aim to, among other things, reduce car traffic and promote higher transit ridership. Indeed, this change tracks closely with prior legislation from earlier this year that excluded car-share spaces provided as part of a development project’s TDM Program from the definition of Gross Floor Area. Together, the prior legislation and this recent change expand the types of car-share spaces that are excluded from the definition of Gross Floor Area.

Additional minor, mostly clarifying changes include:

• Inclusion of floor space in accessory buildings in C-3 districts in the definition of Gross Floor Area;
• Exclusion of required off-street loading spaces from the definition of Gross Floor Area for all districts, not just C-3 districts;
• Removal of extraneous references to C-3 districts where distinguishing C-3 districts from all other zoning districts is unnecessary;
• Replacement of “underground,” with “Basement Story,” a defined term, to clarify that floor space dedicated to accessory parking that does not exceed the amount principally permitted as accessory and that is located in a Basement Story is not included in the definition of Gross Floor Area.

The ordinance was unanimously recommended for adoption by the Planning Commission and was assigned to the Board’s Land Use and Transportation Committee under the 30-day rule on October 20th.

On September 29, 2017, Governor Brown signed into law a 15-bill housing package.  A few of the key components, including approval streamlining, are summarized below.  The housing package did not include AB 915, which would have authorized the City and County of San Francisco to impose local inclusionary requirements on bonus units created under the State Density Bonus Law. San Francisco adopted legislation in August that imposes inclusionary housing requirements on bonus units in the form of a fee, and the Legislature’s failure to pass AB 915 creates uncertainty about its enforceability.

Multi-Family Housing Approval Streamlining

SB 35 creates a temporary (until January 1, 2026) streamlined, ministerial (i.e., no CEQA) approval process for certain housing projects in localities that fall short on regional housing needs assessment (RHNA) production goals or fail to provide certain annual housing production reports.  To qualify, a project must be a multifamily “infill” development that is consistent with “objective zoning and design review standards.”  Our prior SB 35 post contains more information about other eligibility criteria, including compliance with prevailing wage requirements.  SB 35 now also includes workforce requirements that will be phased in over time.

SB 35 creates targeted streamlining based on the type of RHNA shortfall:

• If the shortfall is for households earning 120% or more of Area Median Income (AMI), a project providing 10% of units affordable to households earning below 80% AMI may be eligible for streamlining, unless a higher inclusionary percentage applies in that locality.
• If the shortfall is for households earning below 80% AMI, then a project providing 50% of units affordable to households earning below 80% AMI may be eligible for streamlining, unless a higher inclusionary percentage applies in that locality.

State Density Bonus Law projects are treated differently under SB 35. As explained in our prior post, that law provides for additional density and other concessions, incentives or waivers of development standards for certain housing projects with on-site affordable housing units. When application of the State Density Bonus Law results in an inconsistency with “objective zoning and design review standards,” that inconsistency is excused for purposes of applying SB 35. For example, if rear yard requirements are waived for a density bonus project, the project would be deemed consistent with that requirement for purposes of SB 35.

Affordable Housing Funding

SB 2 creates a permanent source of funding for affordable housing and is projected to generate as much as $250 million per year by imposing a $75 fee on recorded documents for many real estate transactions. SB 3 places a housing bond onto the ballot in November 2018, which, if passed by California voters, would authorize the issuance of $4 billion in housing bonds, some of which would be earmarked for veterans.

Inclusionary Housing Requirement “Fixes”

AB 1505 authorizes localities to require on-site inclusionary affordable housing units in rental projects, superseding the Court of Appeal’s 2009 decision in Palmer/Sixth Street Properties, L.P. v. City of Los Angeles, which determined that such requirements were invalid under the Costa-Hawkins Act as an impermissible form of rent control.

AB 1505 also gives the State’s Department of Housing and Community Development (HCD) the authority to intervene if a new local inclusionary housing ordinance requires more than 15% of rental units to be affordable to low-income households in localities that fall short on the production of above moderate-income (120% AMI) units.  HCD may require an economic feasibility study to establish that the inclusionary ordinance does not “unduly constrain” housing production.  It may reduce the inclusionary requirement to 15% if the economic feasibility study is inadequate for one or more specified reasons (e.g., if it was not prepared by a qualified entity).

The California Supreme Court has just granted broad authority to counties and cities to impose documentary transfer tax (“DTT”) on certain transfers of interests in legal entities. Before June 29, 2017, tax practitioners’ prevailing view was that documentary transfer tax generally could not be imposed on transfers of interests in legal entities. There were two exceptions. First, for transfers of partnership interests that caused a partnership to terminate for tax purposes. Second, for charter cities that were permitted to enact their own DTT ordinances and had, in fact, enacted broader DTT rules. No more. On June 29, the California Supreme Court decided in 926 North Ardmore Avenue, LLC v. County of Los Angeles¹ that all California counties and cities may impose DTT on certain transfers of interests in legal entities.

California Revenue and Taxation Code Section 11911 allows a county or city to impose DTT on “each deed, instrument, or writing” by which real property “shall be granted assigned, transferred, or otherwise conveyed.” The statute’s language does not appear to permit DTT to be imposed on transfers of legal entity interests, such as stock, partnership interests, or LLC membership interests. Charter cities, however, are permitted to enact their own DTT ordinances, some of which have imposed DTT more broadly. For example, a San Francisco ordinance permits DTT to be imposed any time that a transfer of ownership interests in a real property owning legal entity would be treated as a change in ownership of real property under California Revenue and Taxation Code Section 64.

926 North Ardmore involved an attempt by the Los Angeles County Recorder to impose DTT on a transfer of partnership interests that gave rise to a change in ownership of the real property that the partnership owned indirectly through a lower-tier entity. Los Angeles County had not enacted an ordinance specifically imposing DTT on such transfers. The taxpayer, 926 North Ardmore Avenue, LLC, challenged this attempt. The California Supreme Court found for Los Angeles County. It ruled that despite the lack of any specific statutory authorization, California counties and cities can impose DTT on transfers of legal entity interests that give rise to a “change in ownership” of real property held by such legal entities under California Revenue and Tax Code Section 64(c) or (d). That is, DTT can be imposed even if the government entity imposing DTT is not a charter city that has enacted an ordinance allowing for DTT imposition in that situation. This is a sea change in the DTT world and contrary to what practitioners had widely believed was the state of the law.

California Revenue and Taxation Code Subsections 64(c) and 64(d) provide that real property held by a legal entity undergoes a change in ownership in two distinct situations. Under Subsection (c) and related property tax rules, a change in ownership occurs when any person or entity acquires control of a legal entity. Specifically, this occurs when a person or entity comes to own more than 50 percent of the voting stock of a corporation or more than 50 percent of both the capital and profits interests of a partnership or LLC. This ownership threshold can be met through direct ownership of the interests or indirect ownership through upper-tier entities. Under Subsection (d), a change in ownership of real property held by a legal entity occurs when: (1) persons or entities have contributed real property to a legal entity, (2) the transfer was exempt from reassessment under the so-called proportional ownership exception, and (3) the original contributors then, collectively, cumulatively transfer more than 50 percent of the total interests in the legal entity. In the case of a corporation, the 50 percent threshold is met when more than 50 percent of the corporation’s voting stock is transferred. In the case of a partnership or LLC, the 50 percent threshold is met when more than 50 percent of the profits interests and capital interests in the partnership or LLC are transferred.

Consequently, taxpayers must now carefully consider with their tax advisers whether any transfers of legal entity interests could cause a change of control of a legal entity that holds real property or a could cause them to exceed the 50 percent thresholds described in Subsection 64(d). Before 926 North Ardmore, the prevailing view was that these concerns only needed to be addressed in charter cities with ordinances specifically allowing DTT to be imposed in these situations. After 926 North Ardmore, these are statewide concerns. Given that DTT rates of tax can be substantial in some jurisdictions, for example up to 3 percent in San Francisco, we encourage tax payers to seek the advice of counsel when transferring interests in any legal entity that owns real property, whether directly or indirectly through a lower-tier entity.

^1. Cal. S. Ct. No. S222329.

Barring any last-minute surprises, the Board of Supervisors will finally adopt compromise inclusionary housing legislation on July 18^th that would, as shown in our summary comparison chart, make many major changes to the City’s existing program.  The key provisions of the legislation affecting large projects with 25 or more residential units can be found in our prior blog post on this topic.

Recent noteworthy changes, including an important change to existing grandfathering protections for certain pipeline projects, are summarized below.

• The legislation now provides that projects with a complete Environmental Evaluation (EE) submitted prior to January 12, 2016 will be grandfathered not only as to inclusionary housing percentage requirements, but also Area Median Income (AMI) and other inclusionary housing requirements. Recall, however, that to maintain grandfathering protections, existing law requires issuance of a building or site permit for construction of any off-site or on-site inclusionary housing units by December 7, 2018, with an extension for the duration of any litigation challenging the City’s approval of the project.
• The legislation now provides that the inclusionary housing percentage for non-grandfathered projects will be set as of the date a complete EE application is submitted. Recall, however, that the legislation will require issuance of a building or site permit for construction of the principal project within 30 months of project approval to maintain that percentage requirement, with an extension for the duration of any litigation challenging the City’s approval of the project.
• The legislation now provides that the project sponsor must demonstrate that the project is eligible to provide off-site or on-site inclusionary housing units, if proposed, at least 30 days prior to approval of the principal project; if there is any subsequent reduction in the number of proposed on-site inclusionary housing units, Planning Commission approval at a noticed public hearing will be required.
• The legislation no longer proposes to prohibit studio units priced at 100% AMI or above. Instead, it now provides that at least two people must occupy off-site inclusionary housing units priced at 100% AMI or above and on-site inclusionary housing units priced at 110% AMI or 130% AMI, for rental or ownership units, respectively.
• The legislation now requires an updated Controller’s analysis to be completed by January 31, 2018, after which time the Board of Supervisors may revise in-lieu fees. The legislation now provides that the in-lieu fees will be based on the total cost of constructing affordable housing, including both development and land acquisition costs.

The Land Use and Transportation Committee of the Board of Supervisors is now scheduled to consider compromise inclusionary housing legislation on June 12^th, following a continuance at the Committee’s June 5^th hearing. As shown in our summary comparison chart, the legislation would generally retain existing grandfathering protections as to the total percentage of affordable units for certain pipeline projects, but would make many other major changes to the City’s existing program.

The most significant change would be to the required percentage of on-site affordable units for large projects (25 or more units).  The proposed percentages are 18% for rental projects and 20% for ownership projects, as compared to 25% under existing law.  The legislation would also adjust income level restrictions for affordable units.  In large rental projects, affordable on-site units would need to be provided as follows:  10% low income (affordable to households earning 55% of Area Median Income (“AMI”) or less); 4% moderate income (affordable to households earning 80% of AMI or less); and 4% middle income (affordable to households earning 110% of AMI or less).  A similar affordability breakdown would be set for on-site large ownership projects, but with higher permitted AMI levels.  Overall, the legislation marks a partial shift toward providing workforce housing under the City’s inclusionary housing program.  The overall affordable percentages for large projects would increase by 1% annually for two years (low income), and then by 0.5% annually (moderate/middle income), until affordable percentages reach 26% for ownership projects and 24% for rental projects.

The legislation includes a neighborhood affordability component, which would require maximum rents or sales prices for on-site affordable units in both large and small projects to be at least 20% below median rents or sales prices for units in the surrounding neighborhood, defined according to the Planning Department’s Neighborhood Groups Map.  This could lead to significant variation in affordable rents and sales prices across neighborhoods.

The City would also impose an affordable housing fee on any additional units obtained by a project sponsor through compliance with the State Density Bonus law, unless an Environmental Evaluation (“EE”) application was filed for the project by January 1, 2016.

For project sponsors choosing either the in-lieu fee or off-site options for large projects, the affordability requirement would be 30% for rental projects and 33% for ownership projects, creating a new distinction between rental and ownership projects.

The legislation would also apply a new, City-wide unit mix requirement to all projects containing 10 or more units, not just to the inclusionary affordable units within those projects.  It mandates that at least 25% of the total units include two or more bedrooms, and at least 10% include three or more bedrooms.  The unit mix requirement would not apply to projects with an EE on file by January 12, 2016, HOME SF projects providing 30% of on-site units as affordable, projects within areas or Special Use Districts imposing a stricter unit mix requirement, or certain specified housing types (e.g., SRO units, student housing and senior housing).  Project sponsors could seek waivers or modifications of the unit mix requirement through the Conditional Use process or, where applicable, the Section 329 Large Project Authorization process.