The San Francisco Planning Department is updating the City’s General Plan, and Department staff will be holding a two-week series of online workshops on the proposed General Plan updates beginning Monday, March 15th. All development projects must be consistent, on balance, with the General Plan’s objectives and policies, so these updates are of high interest for San Francisco developers.

Key General Plan Elements undergoing significant updates include the Transportation Element, the Community Safety Element, and the Housing Element. These updated elements will include environmental justice policies per the requirements of California Senate Bill 1000, which we blogged on in 2018. According to the Department, this round of General Plan updates will focus on goals and policies addressing racial and social equity, housing, transportation, climate resilience, and environmental justice.

The two-week workshop series is designed to gather public input via Zoom on the updates to the General Plan and to allow Planning Department staff to provide overviews of the various topics being addressed in the updates. Planning Department staff has indicated that the workshop series will also serve a capacity-building purpose, by encouraging meaningful and ongoing public engagement in the planning process, particularly among those San Franciscans who historically have been underrepresented in the planning process.

Registration for the online workshops can be accessed at this link. We will keep you posted on the timing and schedule for the General Plan updates as that information becomes available.

In 2020, California legislators considered but ultimately did not approve bills that would have substantially restricted the continued use of single-family zoning across the state. These efforts included SB 50 (Wiener), which would have required increased residential density near qualifying transit, and SB 1120 (Atkins), which would have allowed duplexes on most residential lots across the state, including single-family zoning districts. Both bills, along with many other 2020 housing bills, died in chambers in the final moments of the legislative session. Read our previous coverage here.

This year, legislators are back at work on similar legislation – SB 10 (Wiener), which would allow cities to up-zone qualifying parcels located in transit- or jobs-rich areas, and SB 9 (Atkins), a reprise of the SB 1120 duplex-zoning efforts. Both bills are already attracting attention from advocates and opponents of prior legislation. California’s effort to increase housing production and density through limits on single-family zoning comes in the wake of similar legislation in other parts of the country. In 2019, Oregon became the first state to adopt legislation effectively banning single-family zoning in many cities, and in 2018, the Minneapolis City Council unanimously voted to update its long-range Comprehensive Plan to eliminate single-family zoning.

Now, a number of California cities – including several in the Bay Area – are taking up the issue directly. The City of Sacramento made headlines last month when its Council unanimously approved a draft proposal to allow up to four units on lots within its single-family and duplex zoning districts. The City of San Jose has established an “Opportunity Housing” task force that will explore allowing up to four units per parcel in residential zones – a significant increase given that approximately 94% of San Jose residential land is designated for single-family housing and only 6% for multifamily. In San Francisco, Supervisor Mandelman has introduced legislation to allow fourplexes on corner lots and other traditional single-family neighborhoods within a half-mile of major transit stops. Most recently, the City of Berkeley unanimously adopted a resolution to begin the process of eliminating single-family residential zoning and allowing for other types of housing such as apartments, duplexes and triplexes in the next few years. Berkeley is also considering legislation that would legalize quadplexes throughout the city. The City of South San Francisco is also beginning to explore the issue.

These efforts to reassess traditional single-family zoning reflect a crossroads for local jurisdictions grappling with competing pressures to retain local control over land use decisions, and address inequitable access to housing, the effects of climate change, and the economic fallout from COVID-19. Taken together, these local proposals would result in more modest increases in residential density compared to proposed state legislation such as SB 10 and similar prior failed bills, but they reflect a growing effort to take on the issue directly at the local level, particularly within transit-rich jurisdictions.

The Coblentz Real Estate team continues to track the progress of these state-wide and local efforts. Please contact a member of our team for additional information and any questions related to the impact of these pending state and local regulations on land use and real estate development.

The Planning Department has a December 19 deadline to implement the small business streamlining provisions of Proposition H, which was approved by the voters last month. Proposition H expedites the approval process for principally permitted uses in Neighborhood Commercial (NC) and Neighborhood Commercial Transit (NCT) districts and relaxes zoning controls for a variety of businesses in most NC and NCT districts. Mayor Breed placed Proposition H on the ballot in response to the economic challenges of the COVID-19 pandemic and, calling out San Francisco’s “broken” permitting system, issued an executive order on November 19 requiring City departments to implement Proposition H within 30 days.

Under Proposition H, the City must complete its review of permit applications for principally permitted uses in NC and NCT districts within 30 days “to the maximum extent feasible,” and the City is currently re-tooling its interdepartmental review process to comply with this newly imposed time limit. As an additional streamlining measure, Proposition H exempts any change in use within these districts to a principally permitted use from the 30-day neighborhood notification requirement that might otherwise apply.

Proposition H broadens the list of principally permitted uses in most NC and NCT districts, excluding the Mission Street, 24th Street, and SOMA NCT districts, allowing business owners to avoid the time and expense of the City’s conditional use (CU) authorization process. This expanded list includes temporary pop-up retail uses in bars and entertainment venues, co-working spaces within retail uses, certain office uses, and outdoor dining in parklets and the public right-of-way (dovetailing with San Francisco’s Shared Spaces program).

Planning staff provided an informational presentation on Proposition H at the Planning Commission’s November 19 meeting. Some commenters expressed concern that Proposition H’s “one-size-fits-all” approach might adversely affect neighborhood-serving businesses, particularly in neighborhoods such as the Mission. Some Planning Commissioners raised concerns regarding equitable access to Proposition H’s benefits across the small business community, and requested that the Planning Department collect and analyze data to better understand the program’s impacts throughout the City and adjust outreach accordingly.

For three years after Proposition H takes effect, the Board of Supervisors cannot further restrict principally permitted or conditionally permitted uses in NC or NCT districts. However, the Board may amend the ordinance to allow additional uses as principally permitted uses, or non-permitted uses as conditionally or principally permitted uses, and it may further streamline notice and permitting procedures. After this three-year period, the Board may amend the law without limitation.

In late October, we reported on a number of California, San Francisco, and regional propositions, including measures impacting real estate and other taxes, rent control, affordable housing, permits, and governance. At the state level, results were mixed and in some cases still too close to call, with voters clearly rejecting expansion of local residential rent control (Proposition 21), appearing likely to reject proposed changes to commercial property tax assessment (Proposition 15), but appearing likely to approve revisions to residential property tax reassessment. Greater certainty is expected in the coming days and weeks, and no later than December 4th, when county elections officials must report final results to the California Secretary of State. In San Francisco, voters approved all of the measures that we reported on, including major new and increased business taxes.

Summary of California Results:

Proposition 15

Would assess property taxes on certain commercial and industrial properties based on fair market value rather than purchase price, removing certain limitations originally established under Proposition 13. TOO CLOSE TO CALL.

Proposition 19

Would expand the exemption for property tax reassessment of replacement residences for homeowners over age 55, victims of wildfires, and severely disabled individuals, while also limiting the exemption from reassessment for transfers of residences between parents and children. TOO CLOSE TO CALL.

Proposition 21

Would have expanded local rights to enact rent control by allowing local governments to: (1) enact rent control on all housing units except (a) housing first occupied within the last 15 years, and (b) homes owned by natural persons who own no more than two single-family housing units; and (2) prohibit landlords from raising rental prices by more than 15 percent cumulatively during the first three years following a vacancy. REJECTED.

Summary of San Francisco Results:

Proposition A (Health, Parks and Street Bond)

Authorizes issuance of general obligation bonds of up to $487.5 million for capital projects across three primary categories: mental health, substance abuse, and homelessness; parks, open space, and recreation facilities; and street maintenance and repair. PASSED.

Proposition B (Department of Public Works)

Makes substantial changes to the Department of Public Works (DPW), creating a new Public Works Commission to oversee the Department and a new Department of Sanitation and Streets to perform a number of functions currently within the jurisdiction of DPW. PASSED.

Proposition F (Business Tax Overhaul)

Amends the San Francisco Charter and City Ordinances to eliminate the payroll expense tax, increase the Gross Receipts Tax rates, and increase the number of small businesses that are exempt from the Gross Receipts Tax. PASSED.

Proposition H (Save our Small Businesses Initiative)

Makes numerous changes to the San Francisco codes governing storefront commercial uses and small businesses: streamlining the City permitting process for principally permitted storefront uses in the City’s Neighborhood Commercial zoning districts, allowing eating and drinking uses in those districts to offer workspaces, removing certain neighborhood notice requirements for new principally permitted businesses, facilitating the use of outdoor spaces by eating and drinking establishments and other businesses, and eliminating the conditional use requirement for certain commercial uses. PASSED.

Proposition I (Real Estate Transfer Tax)

Increases the real property transfer tax on transfers of property valued between $10 million and less than $25 million from 2.75 percent to 5.5 percent, and the rate on transfers valued at $25 million or more from 3 percent to 6 percent. PASSED.

Proposition J (Parcel Tax for SF Unified School District)

Imposes an annual tax of $288 on each parcel in the City to generate $50 million in annual revenue to support the San Francisco Unified School District for salaries and educational improvements. PASSED.

Proposition K (Affordable Rental Units)

Authorizes the City of San Francisco to own, develop, construct, acquire, or rehabilitate up to 10,000 affordable rental units, fulfilling the requirement of the California Constitution that the City seek voter approval for public low-income rental housing. PASSED.

Proposition L (Business Tax Based on Executive/Employee Pay Comparison)

Creates an additional tax on San Francisco businesses whose highest-paid managerial employee has a salary exceeding the business’s median employee compensation by a ratio of 100 or more to 1. Larger businesses subject to the Administrative Office Tax will pay an additional tax between 0.4 percent to 2.4 percent of their San Francisco payroll expense, and smaller businesses subject to the Gross Receipts Tax will pay an additional tax between 0.1 percent to 0.6 percent of their San Francisco gross receipts. PASSED.

Summary of Regional Results:

Measure RR (Caltrain Tax)

Authorizes a 0.125 percent sales tax increase in San Francisco, San Mateo, and Santa Clara counties to provide $100 million of annual funding for the Caltrain rail system. PASSED.

San Francisco voters will confront a number of tax measures on the November ballot. These measures are summarized below.

Proposition F – Adjustment of Baseline Funding and Business Tax Changes

Current Law:

San Francisco imposes a number of taxes under the Business and Tax Regulations Code (the “SF Tax Code”) on businesses engaged in business within the City. Three general taxes—so called because the revenues from which go to the City’s General Fund—imposed by the City are (1) the Business Registration Fee, (2) the Payroll Expense Tax, and (3) the Gross Receipts Tax. Currently, the SF Tax Code includes a small business exemption from the Gross Receipts Tax for businesses with less than $1 million in gross receipts attributable to the City.

The City also imposes special taxes on certain businesses, the revenues from which are dedicated to specific purposes. Two such special taxes are (1) the Early Care and Education Commercial Rents Tax  and (2) the Homelessness Gross Receipts Tax.

Proposed Changes:

Business Registration Fee. Effective beginning in the 2021-2022 fiscal year, Proposition F would amend the SF Tax Code to reduce the annual Business Registration Fee for businesses with $1 million or less in San Francisco gross receipts. The amendment would also provide for an increase in the Business Registration Fee for businesses benefiting from the increased ceiling for the small business exemption from the Gross Receipts Tax (discussed below). For most businesses with over $1 million to $1.5 million in gross receipts attributable to the City, the increase would be $230 to $245, depending on the activities of the subject business. For most businesses with over $1.5 million to $2 million in gross receipts attributable to the City, the increase would be $435 to $460, depending on the activities of the business.

Payroll Expense Tax. Proposition F would repeal the Payroll Expense Tax, effective as of January 2021.

Gross Receipts Tax. Under Article 12-A-1 of the SF Tax Code (the provisions governing the Gross Receipts Tax), Proposition F would make the following changes:

• Revise the Gross Receipts Tax rates and incrementally increase the Gross Receipts Tax rates for certain business activities, beginning with the 2021 tax year and continuing through the 2024 or 2025 tax year.[1] For certain business activities, the measure would initially reduce the Gross Receipts Tax rates from what they are currently, and incrementally increase the rates over the next four tax years.[2]
• Increase the ceiling for the small business exemption from the Gross Receipts Tax from $1 million to $2 million of gross receipts attributable to the City.
• Eliminate the credit for taxpayers that have paid a substantially similar tax to any other jurisdiction on the gross receipts attributable to and taxable by the City.
• Beginning with the 2021 tax year, adjust the required quarterly payments of the Gross Receipts Tax to the lesser of (1) 25 percent of the Gross Receipts Tax liability shown on the business’s return for the tax year, or (2) 25 percent of the Gross Receipts Tax liability, as determined by applying the applicable Gross Receipts Tax rates and small business exemption for the current tax year to the taxable gross receipts shown on the business’s return for the preceding tax year.
• If a final judicial decision invalidates the Homelessness Gross Receipts Tax, Proposition F would increase the existing Gross Receipts Tax on certain businesses for a period of 20 years, beginning with the tax year following the year a decision becomes final. This provision would include additional tiers of Gross Receipts Tax rates for businesses with taxable gross receipts over $50 million.
• If a final judicial decision invalidates the Early Care and Commercial Rents Tax, Proposition F would add a new Article 36 to the SF Tax Code to impose a new tax on the gross receipts from the lease of certain commercial space in the City for a period of 20 years. Proposed Article 36 would be substantially similar to the existing Early Care and Commercial Rents Tax, except that revenues would go to the City’s general fund.

Proposition I – Real Property Transfer Tax Rate Increase on Transfers of Properties of at Least $10 Million

San Francisco currently imposes a transfer tax on each commercial and residential property transferred, which includes transactions involving leases with a term of 35 years or more and certain transfers involving legal entities that own real property in San Francisco. Under the current provisions of San Francisco’s Real Property Transfer Tax Ordinance (the “Transfer Tax”), the Transfer Tax rate is variable, depending on the purchase price or the fair market value of the property transferred.

Currently, the Transfer Tax imposed on applicable transfers of property with a purchase price or value between $10 million and $25 million is approximately 2.75 percent.[3] The current Transfer Tax rate for transfers involving property with a purchase price or value equal to or in excess of $25 million is approximately 3 percent. Proposition I would amend the SF Tax Code to double the Transfer Tax applicable to transfers within these two tiers of consideration or value. For transfers within the $10 million to $25 million tier, Proposition I would increase the Transfer Tax to $27.50 per $500 of value or consideration, or 5.5 percent. For transfers in the $25 million or above range, the measure would increase the Transfer Tax to $30.00 per $500, or 6 percent.

Proposition J – Parcel Tax for San Francisco Unified School District

In June 2018, voters passed a measure very similar to Proposition J, but the funding to schools and education that the June 2018 measure proposed to provide has been indefinitely postponed due to pending litigation. Proposition J would change the City’s existing Parcel Tax from the current rate of $320 per parcel to $288 per parcel and make the revenues generated from the tax more specifically targeted toward educators’ compensation and educational improvements.

 

[1] The incremental increases in the Gross Receipts Tax rates vary across business activities, but the increased rate each year remains steady within each category of business activity.  For example, businesses within the category of Real Estate, Rental and Leasing Services would be subject to an increase of .014 percent to .015 percent each year.

[2] For example, some businesses within the Retail Trade business activity category would initially experience a reduction in Gross Receipts Tax rate by .022 percent.

[3] The Transfer Tax for this value tier imposes a tax of $13.75 for “each $500 or fractional part thereof” for the entire value or consideration, so the actual tax paid may not be exactly 2.75 percent of the value or consideration.

 

San Francisco voters will again confront a formidable ballot on November 3, 2020, with 13 San Francisco propositions to consider in addition to state and federal offices and measures. The local propositions address an array of topics, including governance, affordable housing, taxes, and permits. Some of the key measures impacting San Francisco businesses are summarized below. Except where indicated, the measures require a simple majority vote to pass.

Proposition A (Health, Parks and Streets Bond): Proposition A would authorize issuance of general obligation bonds of up to $487.5 million for capital projects across three primary categories: mental health, substance abuse, and homelessness; parks, open space, and recreation facilities; and street maintenance and repair. The projects funded by Proposition A are recommended in the City’s 10-year capital plan and are generally viewed as supporting employment and economic recovery in the wake of the COVID-19 public health crisis. The Citizens’ General Obligation Bond Oversight Committee would review how bond funds are spent. According to the San Francisco Controller’s Office report, Proposition A is not anticipated to raise taxes and is consistent with the City’s current non-binding debt management policy to keep the property tax rate for City general obligation bonds below the 2006 rate by issuing new bonds as older ones are retired and the tax base grows. The measure was proposed by Mayor Breed and placed on the ballot by a unanimous vote of the Board of Supervisors. Proposition A is supported by various community groups, the San Francisco Democratic Party, and local and state officials. Opponents include the Libertarian Party of San Francisco and the San Francisco Taxpayers Association. As a bond measure, Proposition A requires a two-thirds majority to pass.

Proposition B (Department of Public Works): This Charter Amendment would make substantial changes to the Department of Public Works (DPW) at a time when complaints about the condition of San Francisco streets are widespread. It would create a new Public Works Commission to oversee the Department and a new Department of Sanitation and Streets to perform a number of functions currently within the jurisdiction of DPW. Functions to be transferred to the Department of Sanitation and Streets include street cleaning and maintenance and street tree maintenance. The new Department of Sanitation and Streets would also be overseen by a new Commission. According to the San Francisco Controller’s Office report, Proposition B would cost between $2.5 million and $6 million annually beginning in 2022 and would shift approximately half of DPW’s employees to the new Department of Sanitation and Streets. The Charter Amendment was submitted to the voters by the Board of Supervisors by a vote of 7-4. Proposition B’s supporters include the San Francisco Labor Council, the San Francisco Democratic Party, and various local public officials. Opponents include the San Francisco Taxpayers Association and the San Francisco Republican Party.

Proposition F (Business Tax Overhaul): Proposition F would amend the San Francisco Charter and City Ordinances in significant ways. These include eliminating the payroll expense tax, ultimately increasing the Gross Receipts Tax rates, and increasing the number of small businesses that are exempt from the Gross Receipts Tax. Overall rates for some businesses would increase, with the new rates phased in over a 3-year period effective in 2021. There would also be temporary tax decreases for certain industries that have been heavily impacted by economic impacts from COVID-19. The measure allows one-time spending of a projected $1.5 billion from two dedicated taxes (homelessness, child care) that are currently being assessed and impounded pending the resolution of litigation. It also authorizes two contingent taxes that would be imposed if the two dedicated taxes are invalidated by the courts. The San Francisco Controller’s Office projects that Proposition F would result in approximately $97 million in annual net new revenue to the General Fund and $1.5 billion in one-time revenues from the impounded dedicated taxes. Proposition F was placed on the ballot by a unanimous Board of Supervisors vote. It is supported by the San Francisco Democratic Party and various groups representing small businesses, child care and other non-profit organizations, and unions representing nurses, firefighters, health care and other workers. Its opponents include the San Francisco Chamber of Commerce, various pro-business groups, and the Libertarian Party of San Francisco.

Proposition H (Save Our Small Businesses Initiative): This Initiative Ordinance, submitted to the voters by Mayor Breed, would make numerous changes to the San Francisco codes governing storefront commercial uses and small businesses. It would, among other things, streamline and expedite the City permitting process for principally permitted storefront uses in the City’s Neighborhood Commercial zoning districts, allow eating and drinking uses in those districts to offer workspaces, and remove certain neighborhood notice requirements for new principally permitted businesses. It would also make changes to facilitate the use of outdoor spaces by eating and drinking establishments and other businesses. In addition, the conditional use requirement for certain commercial uses would be eliminated. According to the San Francisco Controller’s Office report, Proposition H would minimally to moderately increase City costs. Proposition H is supported by various small business associations, the San Francisco Democratic Party, the San Francisco Republican Party, and the Libertarian Party of San Francisco. Although limited formal opposition was submitted to the Department of Elections, groups including the San Francisco Tenants Union, the San Francisco Green Party, and other progressive voters’ organizations oppose Proposition H.

Proposition I (Real Estate Transfer Tax): Proposition I, an Initiative Ordinance submitted to the voters by five members of the Board of Supervisors, would increase the real property transfer tax on transfers of property valued between $10 million and less than $25 million from 2.75 percent to 5.5 percent, and the rate on transfers valued at $25 million or more from 3 percent to 6 percent. The San Francisco Controller’s Office estimates that Proposition I could result in an increase in annual net revenue of approximately $196 million, but also notes that the nature of real estate transactions and associated tax revenue is highly volatile and could result in tax avoidance strategies. Proposition I is supported by the San Francisco Democratic Party and various tenants’ rights and pro-housing organizations. It is opposed by the San Francisco Chamber of Commerce and various building owner and real estate organizations.

Proposition J (Parcel Tax for San Francisco Unified School District): This Initiative Ordinance, submitted to the voters by Mayor Breed, would impose an annual tax of $288 on each parcel in the City to generate $50 million in annual revenue to support the San Francisco Unified School District for salaries and educational improvements. The School District has faced the threat of budget cuts and layoffs in recent years, and Proposition J aims to address these budget shortfalls. If adopted, Proposition J would replace a very similar parcel tax approved by 61 percent of the voters in 2018. This existing parcel tax—which, at $320 per parcel annually, is higher than the $288 tax proposed under Proposition J—is currently on hold pending litigation asserting that the 2018 ballot measure required a two-thirds majority vote to pass. Proposition J would provide a workaround to these legal challenges by repealing the 2018 parcel tax and imposing a new parcel tax that is subject to two-thirds majority voter approval. Proposition J offers an exemption to the tax for property owners over the age of 65 in owner-occupied units. Proposition J is supported by various teacher and parent organizations, the San Francisco Labor Council, and the San Francisco Democratic Party. It is opposed by the San Francisco Taxpayers Association.

Proposition K (Affordable Rental Units): This Initiative Ordinance, submitted to the voters by a unanimous Board of Supervisors vote, would authorize the City of San Francisco to own, develop, construct, acquire, or rehabilitate up to 10,000 affordable rental units, fulfilling the requirement of the California Constitution that the City seek voter approval for public low-income rental housing. Article 34 of the California Constitution—which arose from public sentiment against public housing when it passed by voter referendum in 1950, now widely recognized as motivated by racism—requires majority voter approval before any city or other political subdivision of the state may construct, develop, or acquire “low-rent housing projects” using public funds. (Article 34 places no restrictions upon the development of affordable housing by non-governmental entities.) Proposition K would not designate funding or implement a plan for City-led affordable housing development, but voter approval would be the first step toward such development if a plan is created and funded in the future. Proposition K is supported by the San Francisco Democratic Party, various state and local officials, and various tenants’ rights and housing organizations. It is opposed by the Libertarian Party of San Francisco.

Proposition L (Business Tax Based on Executive to Employee Pay Comparison): Proposition L, submitted to the voters by a unanimous Board of Supervisors vote, would create an additional tax on San Francisco businesses whose highest-paid managerial employee has a salary exceeding the business’s median employee compensation by a ratio of 100 or more to 1. The increased tax would vary between those larger businesses subject to the Administrative Office Tax, and smaller businesses subject to the Gross Receipts Tax, with larger businesses paying an additional tax between 0.4 percent to 2.4 percent of their San Francisco payroll expense, and smaller businesses paying an additional tax between 0.1 percent to 0.6 percent of their San Francisco gross receipts. The San Francisco Controller’s Office estimates that the tax would result in between $60 million and $140 million in additional annual revenue, but notes that these estimates could vary based on changing economic conditions, fluctuations in executive compensation, and relocation risk associated with the tax increases. Proposition L’s supporters include the San Francisco Democratic Party, the San Francisco Labor Council, and various state and local officials. Its opponents include the San Francisco Taxpayers Association.

Measure RR (Caltrain Tax): This measure would authorize a 0.125 percent sales tax increase in San Francisco, San Mateo, and Santa Clara counties to provide $100 million of annual funding for the Caltrain rail system. Caltrain has historically received 70 percent of its funding from rider fares; however, with ridership down as much as 95 percent due to the COVID-19 pandemic, there is some uncertainty around Caltrain’s future financial stability. This funding would cover operational costs to allow Caltrain service to continue through the pandemic while fare revenue remains low, while also providing longer-term financial support for Caltrain to electrify its trains, offer affordable fare options for low-income riders, and expand train service in accordance with its 2040 Strategic Plan. Before a compromise was reached between the various agencies over the summer, the sales tax measure was nearly scuttled by political disputes over Caltrain’s governance; now, possible changes to the governance structure will be considered separately from the tax increase, and not through an electoral vote. Measure RR is supported by various pro-transit organizations and various government officials. It is opposed by the Silicon Valley Taxpayers Association. As a local tax measure, Measure RR requires a two-thirds majority to pass, calculated collectively across the three counties.

While the focus in November is on the top of the ticket, Californians also face a long list of ballot measures. Here we focus on three major measures that impact California real estate: Propositions 15, 19 and 21.

Proposition 15: Split Roll Tax for Commercial/Industrial Properties. Proposition 15 would remove certain limitations established under Proposition 13 (passed in 1978) that place a 2 percent cap on increases to assessed property values. The proposed “split roll” would assess property taxes on certain commercial and industrial properties based on fair market value rather than purchase price. Commercial and industrial properties with a fair market value of $3 million or less would be exempt from Proposition 15 reassessment, but if an owner of such a property owns other commercial or industrial properties in California, those properties would also count against the $3 million limit for the exemption. The proposed split roll would not change the overall property tax rate, nor would it apply to residential or agricultural property.

Proposition 15 was placed on the ballot through signature collection. Supporters (including the California Teachers Association, the SEIU and the Chan Zuckerberg Initiative) say that Proposition 13 provided a significant tax break over a long period of time to businesses and that there are other priorities now for cities, counties and school districts. Opponents (including business and taxpayer associations) cite the significant new tax burden on businesses from this and other proposed local measures, particularly in light of the challenging economic climate and businesses leaving the state.

Proposition 19: Change Assessed Value Calculations for Residential Property. California law currently allows certain homeowners—such as those who are over age 55, severely disabled, or victims of wildfires or other natural disasters—to transfer their assessed property values to replacement residences intra-county, and to certain other counties that have adopted local ordinances allowing for reciprocity. Proposition 19 would expand the exemption to all replacement residences state-wide for these specified groups of homeowners. California law currently also allows exemptions from reassessment for two types of transfers between parents and children: (i) transfers of principal residences and (ii) transfers of up to $1 million worth of assessed value of other real property. Proposition 19 would limit the exemption available for (i) and eliminate it for (ii). It would allow a limited exemption from reassessment only for a transfer of a principal residence between parent and child where the property continues as the recipient’s principal residence. If the property value at the time of transfer exceeds the transferor’s assessed value by less than $1 million, the transfer would be exempt from reassessment. However, if the property value exceeds the transferor’s assessed value by $1 million or more, then the recipient’s assessed value would be the current value of the property less $1 million.

This measure was placed on the ballot by the State Legislature. Supporters (including realtors and firefighters associations) say that Proposition 19 will incentivize seniors to downsize and free up new housing inventory and flatten wealth inequality, and that limiting property tax exemptions will provide important funds to local governments, state firefighting and other uses. Opponents (including taxpayer associations) claim that Proposition 19 is driven by realtors who are focused on increased commissions, and cite the new property tax laws as unduly burdensome.

Proposition 21: Expansion of Local Residential Rent Control. Proposition 21 is one of several measures proposed in recent years by the voters and in the Legislature to expand local rights to enact residential rent control. State law currently limits local rent control laws by exempting single-family housing units with separate, alienable title (such as condos, townhouses and single-family homes) and newly constructed housing completed on or after February 1, 1995. It also allows landlords to reset rent after a tenant vacates. For tenants in place, the Tenant Protection Act of 2019 limits annual rent increases statewide for most rental housing that is more than 15 years old, to the lesser of (i) 5 percent plus inflation, or (ii) 10 percent, excluding single-family housing units (unless the owner is a real estate investment trust, corporation, or LLC with a corporate member).

Proposition 21 would expand local rights to enact rent control by allowing local governments to: (1) enact rent control on all housing units except (a) housing first occupied within the last 15 years, and (b) homes owned by natural persons who own no more than two single-family housing units; and (2) prohibit landlords from raising rental prices by more than 15 percent cumulatively during the first three years following a vacancy.

Proposition 21 was placed on the ballot by signature collection. Supporters (including various tenant advocacy and social justice groups and the AIDS Healthcare Foundation) say that Proposition 21 would allow local control and allow cities to put measures in place to address the state’s homelessness and housing affordability crisis. Opponents (including the California Apartment Association and other real estate advocacy and investment groups) claim that it will constrain housing supply by creating a chilling effect on investment and will decrease tax revenues for city and state government.

Like so much of this unprecedented year, the 2019-2020 California Legislative Session ended with unexpected twists and pointed disappointments as the Assembly and Senate wrestled with the coronavirus pandemic, social distancing protocol, and friction between Assembly and Senate leadership in the final hours of the session, ultimately resulting in a number of highly anticipated housing bills failing to pass.  High profile bills that died include SB 995 (extending the former AB 900 expedited CEQA review process for environmental leadership development projects through 2024); SB 1120 (providing ministerial approval and subdivision processes for residential duplexes on single-family zoned lots); and SB 1085 (expanding the Density Bonus Law to include qualifying moderate-income rental projects and student housing projects, among other changes).

Despite the failure to pass key bills, there were some notable developments regarding housing-related bills, several of which are heading to the Governor’s desk for signature.  The Governor has 30 calendar days, ending on September 30, 2020, to sign these proposals into law.  Key bills include:

AB 2345 (Gonzalez, Chiu): AB 2345 makes a number of important changes to the state Density Bonus Law, which was originally adopted in 1979 and has recently gained traction as a critical tool for increasing housing production across the state. The existing Density Bonus Law requires local governments to grant additional residential density and to provide relief from certain development standards that would result in project cost savings (referred to as “concessions” or “incentives”) for projects that incorporate qualifying amounts of income-restricted units.

Among other changes, AB 2345: increases the maximum density bonus from 35% to 50%; reduces the qualifying thresholds of total affordable units to qualify for both two and three incentives or concessions; and reduces the amount of parking a local government can require of a developer requesting a density bonus.  AB 2345 also requires that local governments include information regarding the total number of density bonus applications received and approved that year in their state-mandated annual progress reports to the Department of Housing and Community Development.

AB 725 (Wicks): AB 725 is intended to make a dent in California’s “Missing-Middle” housing crisis, by requiring that many jurisdictions across the state plan for moderate-density housing (e.g., duplexes, fourplexes, garden apartments, townhomes, etc.) through their state-mandated general plan housing elements.  AB 725 requires that qualifying jurisdictions allocate at least 25% of their state-mandated Regional Housing Needs Allocation for moderate and above-moderate units to housing sites zoned for at least four units, with moderate income sites being capped at a density of 100 units per acre.  These sites must be identified in the housing element inventory of land suitable for residential development.  Accessory dwelling units or junior accessory dwelling units do not count towards the 25% requirement.  AB 725 will apply only to housing elements due after January 1, 2022.

AB 831 (Grayson): AB 831 provides several important clarifications to SB 35 (Wiener), the housing streamlining bill adopted in 2017 that established a ministerial approval process for qualifying housing projects in jurisdictions that are not meeting their state-mandated goals for above-moderate and lower-income housing production.  Consistent with SB 35, AB 831 clarifies the limits of local government discretion in implementing projects already approved under SB 35.  AB 831 limits local agency discretion regarding its review and approval of public improvements necessary to complete an SB 35 project, such as installation of utilities, pedestrian and bicycle connections, and landscaping.  It also clarifies that SB 35 projects may be modified following SB 35 approval and limits local agency discretion in reviewing such modification requests.

AB 831 also clarifies the applicability of the SB 35 requirement that two-thirds of a qualifying mixed-use project must be dedicated to residential uses.  In response to a superior court determination, AB 831 clarifies that the two-thirds residential requirement is intended to apply to the proposed project itself, not to the underlying zoning.  AB 831 is urgency legislation that will take effect immediately upon the Governor’s signature.

AB 168 (Aguiar-Curry): AB 168 establishes a mandatory consultation process with Native American Tribes for projects intending to utilize SB 35 streamlining to determine if the proposed project would impact a tribal cultural resource.  Prior to submitting an SB 35 application, AB 168 requires that developers submit a pre-application that triggers a “scoping consultation” process between the local agency and any California Native American Tribe traditionally and culturally affiliated with the proposed project site.  An SB 35 application may then be submitted under the following circumstances: if no California Native American Tribe seeks to engage in consultation; if no potential tribal cultural resource impact is identified during the scoping consultation period; or if a potential tribal cultural resource impact is identified and the parties can agree to methods, measures, and conditions to treat the resource. However, an SB 35 application may not be submitted if a potential tribal cultural resource impact is identified and the parties cannot agree to such measures, or if a tribal cultural resource is identified that is listed on a designated register.

Please contact a member of the Coblentz Real Estate team for additional information and any questions related to the impact of these new bills on land use and real estate development.