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.

As reported in our prior blog post, Assemblymember Phil Ting (D – San Francisco) introduced amendments to the State Density Bonus law (AB 915) that would specifically require all local jurisdictions to impose their local inclusionary housing requirements on density bonus units, unless the jurisdiction expressly exempts them by ordinance.

AB 915 was recently amended to (1) only apply in San Francisco and (2) grandfather density bonus projects with an application on file or processed before January 1, 2018. “Application” is not defined in AB 915, but where that term is used in the existing State Density Bonus law, it refers to the density bonus application itself.

The Assembly’s Committee on Local Government passed AB 915 by a 6-3 vote on May 10, 2017, and the bill is now before the full Assembly.

On the local level, imposition of inclusionary housing fees on density bonus units is currently being considered by the San Francisco Board of Supervisors as part of their deliberations on the Affordable Housing Bonus Program and competing inclusionary housing ordinances.  We summarize that legislation in “Wading Through the Flood of New Housing Legislation.” Whether inclusionary housing fees can be imposed on density bonus units may ultimately depend on the success of AB 915.

Having trouble keeping up with the seemingly endless torrent of new housing laws?  You are not alone.  Here is our summary of the key pending State and San Francisco legislation aimed at increasing housing/affordable housing production:

Proposed State Legislation

SB 35 (Wiener)

State Senator Scott Wiener has introduced amendments to SB 35 that would create a streamlined, ministerial (i.e., not triggering CEQA) approval process for certain infill projects in localities that fall short on regional housing needs assessment (RHNA) production goals.  We summarize the legislation and next steps in “Wiener’s Streamlined Infill Housing Approvals Legislation Continues to Move Forward.”

AB 915 (Ting)

On March 15, Assemblymember Phil Ting introduced new amendments to the State Density Bonus law.  The amendments would require a local jurisdiction to impose local inclusionary housing requirements on density bonus units, unless it adopts an exemption by ordinance.  As discussed below, local legislation proposed by Supervisors Safai, Breed and Tang would impose inclusionary housing requirements on density bonus units in the form of  an “in-lieu” inclusionary housing fee.  We discuss this new State legislation in “Ting Legislation Seeks to Pave the Way for Fees on Density Bonus Units.”

Proposed San Francisco Legislation

Competing Inclusionary Housing Ordinances (Safai/Breed/Tang and Peskin/Kim)

Board of Supervisors members have introduced two competing inclusionary housing ordinances.  The Safai/Breed/Tang ordinance comes closer to reflecting the City Controller’s recommendations and would also substantially increase the percentage of inclusionary housing units that are targeted for middle-income earners.  By contrast, the Peskin/Kim ordinance would maintain inclusionary housing percentages and income level distributions that are closer to existing requirements.  Both ordinances would add new complexity to the existing scheme by distinguishing between requirements for ownership and rental units and changing, among other things, income level distribution requirements, the basis for fee rate calculations, and unit mix requirements, with an emphasis on larger, family-focused units.  The Safai/Breed/Tang ordinance would apply the new unit mix requirements project-wide, with certain exceptions.  It would also extend the “in-lieu” inclusionary housing fee to density bonus units.  Read our analysis, including a comparison chart of the two ordinances, in “Competing Inclusionary Housing Proposals Introduced at the Board of Supervisors.”

Affordable Housing Bonus Program (Tang)

Supervisor Tang introduced an ordinance that would consolidate existing and add new density bonus programs to local law to encourage the production of affordable housing.  The Affordable Housing Bonus Program (AHBP) renames the existing 100 Percent Affordable Housing Program and adds three new components:  1) the HOME-SF Program, 2) the Analyzed State Density Bonus Program (ASDBP), and 3) the Individually Requested Bonus Program (IRBP).

The HOME-SF Program would provide development incentives, including up to two additional floors, in certain zoning districts.  To qualify, projects would need to include at least 30% affordable units on site.  Projects would generally be required to meet the minimum affordable housing percentages under the inclusionary housing ordinance, and provide additional units affordable to middle income households to achieve the 30% total.  The ASDBP would implement the current State Density Bonus law, but only within certain zoning districts.  It would allow up to a 35% density bonus for projects that include 12% or more inclusionary housing units, as well as incentives, concessions and waivers selected from a menu prepared by the Planning Department and its consultants.  Projects with 30% or more affordable units are eligible for priority processing.  The IRBP, which would apply in more zoning districts, would provide modified incentives and density bonuses to qualifying projects that do not meet the criteria for the ASDBP.  We summarize this legislation in “Affordable Housing Bonus Program Takes Shape in San Francisco.”

The Bottom Line 

What does this mean for market-rate residential projects?  It’s all about the definitions and qualifying criteria, which vary by legislation.  The local ordinances add complexity to an already complicated scheme, and more than ever, the calculation of benefits vs. exactions is site-specific.  It remains to be seen whether what is finally adopted provides sufficient incentive and certainty to produce more density and higher levels of affordability.

If the Wiener legislation passes, certain projects would qualify for expedited processing and would not be subject to CEQA review.  Under the competing inclusionary housing ordinances, local affordable housing requirements may change, and could increase or decrease from existing requirements.  Depending on the nature of the development project (where it is located, if it is 100% affordable, and if not, how many affordable units are proposed and at what income level, etc.), the project may qualify for one of four density bonus programs in the Tang ordinance, as well as priority processing.  The Ting legislation would require local jurisdictions to impose inclusionary housing requirements on density bonus units, as proposed by the Safai/Breed/Tang ordinance (the “in-lieu” fee discussed above), unless the density bonus units are specifically exempted by local ordinance.

Stay tuned, we will continue to track the legislation as it proceeds…

We reported in December that State Senator Scott Wiener marked his first day in state office by introducing legislation (SB 35) to address barriers to housing production. Senator Wiener has introduced amendments to SB 35 that would create a streamlined, ministerial (i.e., not triggering CEQA) approval process for certain infill projects in localities that (1) fall short on regional housing needs assessment (RHNA) production goals, or (2) fail to provide annual housing production reports to the State for two consecutive years before the infill project’s application. SB 35 has been passed by the Senate Transportation and Housing Committee, and is now before the Governance and Finance Committee for further consideration.

What Qualifies Under SB 35?

Under the current version of SB 35, certain multifamily and accessory dwelling unit projects would qualify for a streamlined, ministerial approval process if they meet various criteria, including being within a locality reporting RHNA housing production shortfalls or failing to provide annual housing production reports.

The percentage of affordable units and required affordability levels vary depending on the type of RHNA housing production shortfall reported by the locality. If the shortfall is for households earning below 80% of area median income (AMI), then the majority of project units must be affordable to those households. If the shortfall is for “above moderate-income households” (i.e., households earning above 120% AMI under the current RHNA schedule), then 10% of project units must be affordable to households earning below 80% AMI. Shortfalls for moderate-income households (i.e., households earning between 81% and 120% AMI) aren’t addressed in the current version of SB 35.

If a local inclusionary housing ordinance requires a greater percentage of units to be affordable to households earning below 80% AMI (more than 10% of project units in the “above moderate-income households” shortfall scenario, or more than 50% of project units in the “below 80% of AMI” shortfall scenario), that local ordinance would set the floor for the required percentage of affordable units needed for SB 35 streamlining eligibility.

Very generally, the remaining criteria require an eligible project to be:

1. located on a qualifying urban infill site zoned for residential or residential mixed use development with at least two-thirds of the square footage designated for residential use;
2. consistent with objective zoning and design review standards, including the State Density Bonus Law;
3. outside of certain sensitive areas (e.g., coastal zone) and certain high-risk areas (e.g., floodways); and
4. not located on a site with an existing historic resource or certain existing housing (e.g., rent controlled units or units occupied by tenants within the past 10 years) that would be demolished.

In addition, a qualifying project must be subject to certain enforceable prevailing wage requirements. If the project includes subsidized units, those units must remain subsidized for 45 or 55 years, for ownership and rental units, respectively.

The State Density Bonus law has been in effect for almost 40 years, but it has required a prolonged housing crisis to push San Francisco to adopt a local implementing ordinance.  Last year the Board of Supervisors adopted the 100 Percent Affordable Housing Program for affordable housing projects, but was unable to agree on a program for market-rate projects.  Supervisor Katy Tang has now introduced legislation that would consolidate existing and add new density bonus programs to local law.

The Affordable Housing Bonus Program (AHBP) renames the existing 100 Percent Affordable Housing Program and adds three new components: 1) the HOME-SF Program; 2) the Analyzed State Density Bonus Program (ADSBP), and 3) the Individually Requested Bonus Program (IRBP).

HOME-SF Program

The HOME-SF Program seeks to increase affordable housing production, especially housing affordable to middle income households.  It provides incentives to sponsors of housing projects that set aside at least 30% of on-site units as affordable, including the minimum percentage and income range required under the inclusionary ordinance, and reaching the 30% threshold by providing units affordable to middle income households (defined here for ownership as an average of 120% of Area Median Income (AMI), equally distributed at 90%, 120% and 140% of AMI, and for rental as an average of 80%, equally distributed at 55%, 80% and 110% of AMI).  The legislation limits the zoning districts to which the HOME-SF Program applies, and among other things, excludes the RH-1 and RH-2 Zoning Districts.  It is not available where a project would demolish, remove or convert residential units, or is seeking a density bonus under one of the three other programs.

Eligible projects must establish that the project will not result in certain specific environmental impacts, will provide a unit mix that includes a higher percentage of larger units designed to accommodate families, and will include certain ground floor active uses. A qualifying project would be eligible for certain incentives, including up to 20 additional feet of height that may be used for up to two additional stories, and an additional height of up to 5 feet at the ground floor in certain cases.  Projects under this program would require conditional use approval, with some specified limits on the Planning Commission’s ability to modify the project.

Analyzed State Density Bonus Program (ADSBP)

The ADSBP is based on the State Density Bonus Program, and offers a specific menu of incentives, concessions and waivers analyzed by the Planning Department and its consultants. Like the HOME-SF Program, the legislation limits the zoning districts to which the ADSBP applies. Among other things, it excludes the RH-1 and RH-2 Zoning Districts, and is not available where a project would demolish, remove or convert residential units, or is seeking a density bonus under one of the three other programs. The project sponsor must establish that the project will not result in certain specific environmental impacts, and that it meets other criteria.

A qualifying ADSBP project that provides 12% or more of its units as on-site affordable units would be eligible for a density bonus of up to 35%, and various other concessions and incentives. In some cases, a height increase of up to two stories would also be permitted. Projects with 30% or more affordable units would also be eligible for priority processing.

Individually Requested Bonus Program (IRBP)

Finally, the IRBP is available to projects that generally comply with State Density Bonus law, but are not consistent with the pre-vetted menu of concessions, incentives and waivers offered in the ADSBP, and therefore require individualized analysis. The criteria are similar to the ADSBP, except that it applies to a broader range of zoning districts (generally only RH-1 and RH-2 are excluded, except where the Code would allow 5 or more units on sites within those districts).

Qualifying projects are eligible for density bonuses up to 35%, as well as other concessions and incentives proposed by the City or the Developer that are appropriate for the project and will result in identifiable, actual cost reductions. In some cases, waivers from development standards may also be granted.

Amendments to the legislation were adopted at the March 13 Board of Supervisors Land Use and Transportation Committee hearing, and the legislation has been continued to allow time for additional public review.

Assemblymember Phil Ting (D – San Francisco) introduced new amendments to the State Density Bonus law on March 15, 2017 that would specifically require local jurisdictions to impose their local inclusionary housing requirements on density bonus units, unless the jurisdiction expressly exempts them by ordinance.

As mentioned in our recent inclusionary housing legislation blog post, local legislation proposed by Supervisors Safai, Breed and Tang would require that an “in-lieu” inclusionary housing fee be paid for any density bonus units, as recommended by the City Controller. As we previously reported, that requirement would be additive, meaning that millions of dollars of additional fees could be due for market rate housing projects with otherwise required inclusionary housing units provided on-site. As currently drafted, AB 915 authorizes the general approach in Supervisors Safai, Breed and Tang’s density bonus fee proposal and could open up the door to other options for satisfying local inclusionary housing requirements vis-à-vis the density bonus units (e.g., off-site and on-site).

This legislation joins the larger debate about the appropriate level of incentives necessary to encourage developers to participate in a local density bonus program. As discussed in a prior post, fees on density bonus units is one of the major issues expected to be discussed when the Board considers the competing inclusionary ordinances in the coming months.