Last spring, we reported on Senator Scott Wiener’s SB 827, which proposed major increases in height and density for qualifying housing developments.  Battle lines quickly emerged, with supporters claiming that the legislation was a bold, necessary solution to the housing affordability and climate change crises, and opponents asserting that it was a threat to neighborhood stability and an invitation to gentrification.  The bill was ultimately killed in Committee.  On December 3, Senator Wiener introduced SB 50.  Like SB 827, SB 50 would constrain local agencies’ ability to impose height and density limits and minimum parking requirements on residential developments (projects with at least two-thirds of the square footage designated for residential use) that meet the legislation’s “transit rich” and/or “jobs rich” criteria.  SB 50 introduces the term “equitable communities incentives” to describe the bill’s various waivers, concessions and incentives.

Senator Wiener added new features, and modified others, to address criticisms of the prior bill.  Highlights include:

• Expanding density incentives beyond “transit-rich” projects to “jobs-rich” projects (based on criteria such as proximity to jobs, area median income and quality of public schools) to capture more affluent areas outside major transit corridors.
• Delaying implementation for designated “sensitive communities” (generally, those with a high risk of gentrification or displacement based on indicators such as percentage of tenant population living at or below the poverty line) to allow time for planning efforts directed at affordable multifamily housing.
• Designating properties as ineligible if they have housed tenants in the past 7 years, or if the owner has evicted tenants under the Ellis Act in the past 15 years, prior to submittal of a development application; and
• Providing that projects are generally subject to the more restrictive of SB 50’s affordable housing requirements, or local city inclusionary housing ordinances.

The legislation has a number of co-authors and several early supporters, including Mayors Breed and Schaaf and the State Building Trades Council.  It is expected to be opposed by many of the same local communities that resisted SB 827 based on concerns such as loss of local control and gentrification.  The bill is currently awaiting Committee referral.

 

After over seven years of planning and public outreach, as of January 7, 2019, the Central SoMa Plan and its implementing legislation are finally effective.  The City’s analysis concludes that the Plan area has development capacity for over 8,000 new housing units (approximately 33 percent of which will be affordable) and over 30,000 new jobs, and will generate over two billion dollars of public benefits.

The key takeaways are as follows:

Rezoning

The Plan area is an approximately 230-acre site that runs roughly from 2nd Street to 6th Street, and from Market Street to Townsend Street, excluding certain areas north of Folsom Street that are part of the Downtown Plan. Very broadly, the Plan and its implementing legislation increase permitted height and density and streamline zoning controls for the majority of the Plan area.  With the exception of the Key Development Sites discussed below, height limits in large portions of the Plan area generally increased from 85 feet or less to 130 to 160 feet, subject to bulk controls to encourage building sculpting.  In exchange for this upzoning, the Plan requires increased public benefits, including payment of significant development impact fees.  See our prior blog post for a summary of other required exactions and public benefits, including privately owned public open space (POPOS) requirements.

The predominant new base zoning district is Central SoMa Mixed Use Office (CMUO), which largely replaces relatively restrictive zoning districts with more flexible mixed-use zoning controls and eliminates Floor Area Ratio (FAR) limits for larger projects that participate in the Central SoMa Mello Roos Community Facilities District (CFD) Program described below. The CMUO zoning district is characterized as an Eastern Neighborhoods Mixed Use District and as such, Planning Code Section 329 Large Project Authorization from the Planning Commission is required for projects that are greater than 85 feet in height or propose the net addition or new construction of more than 50,000 gross square feet.  Large Project Authorization is required in addition to any other required entitlements, such as Conditional Use (CU) authorization for, e.g., new hotel uses in the Plan area.

The Plan area is also part of a new Central SoMa Special Use District (SUD), which creates an additional layer of zoning controls.  Some of the major SUD controls are: designating the largest sites (over 40,000 square feet) South of Harrison Street as predominantly non-residential; imposing new PDR/Community Building Space requirements on projects with at least 50,000 gross square feet of office space; imposing active ground floor requirements, including requiring “micro-retail” units between 100 and 1,000 square feet for certain projects; imposing renewable electricity requirements; and generally prohibiting new formula retail bar, formula retail restaurant, and standard group housing uses.  See new Planning Code Section 249.78 for a complete list of requirements and restrictions in the SUD.  Up to 25 feet of additional building height is permitted for certain projects in the SUD that provide certain additional public benefits, including 100 percent affordable housing projects.  See new Planning Code Section 263.32.

Again, there is generally no maximum FAR in the Plan area.  The purchase of Transfer of Development Rights (TDR) is generally required for larger non-residential projects (50,000 gross square feet or greater) on “Tier C” properties (as defined under Planning Code Section 423.2) for the portion of the project FAR between 3.0:1 and 4.25:1.  TDR must be obtained from a Preservation Lot (as defined under new Planning Code Section 128.1) also within the SUD or a lot containing a building with 100 percent affordable housing units.

Key Development Sites

The Plan identifies eight Key Development Sites, which are significantly upzoned, including increased height limits for towers 200 to 400 feet in height (depending on the site), in combination with more permissive Planning Code controls under the SUD and new Planning Code Section 329(e) exceptions, which vary to some extent by site.  Key Development Site projects must provide additional Qualified Amenities (as defined in new Planning Code Section 329(e)) and on-site childcare facilities (for office or hotel projects), in addition to the other required public benefits, including payment of substantial development impact fees.  There are also special height exceptions for qualifying projects on certain Key Development Sites under new Planning Code Sections 263.33 and 263.34.

Central SoMa Mello Roos CFD

The Central SoMa Mello Roos CFD Program participation requirement under new Planning Code Section 434 applies to projects in the Plan area that include new construction or the net addition of more than 25,000 gross square feet of non-residential development on “Tier B” or “Tier C” properties, or more than 25,000 gross square feet of new residential condo development on “Tier C” properties.  See the definitions under new Planning Code Section 423.2.  The CFD Program participation requirement is only triggered for projects that also exceed the applicable Prevailing Building Height and Density controls under Planning Code Section 249.78(d)(1)(B), meaning that many smaller projects are exempt.

Legislation for the formation of the CFD was introduced by the Board of Supervisors on December 4, 2018 (BOS File No. 180622).

Central SoMa Housing Sustainability District

The Central SoMa Housing Sustainability District (HSD) encompasses the entire Plan area.  As explained in more detail in our prior blog post, residential projects 160 feet in height or less (unless 100 percent affordable) in the HSD meeting specified criteria, including minimum density and affordability requirements, qualify for a 120-day streamlined ministerial (i.e., no CEQA) review and approval process, including design review by the Planning Department.

Qualifying projects first require an informational public hearing followed by Planning Department approval, which will be appealable to the Board of Appeals.

On September 30, Governor Brown signed AB 2923, which could pave the way for BART to develop up to approximately 20,000 residential units, plus about 4.5 million square feet of office and commercial uses, on about 250 acres of BART-owned land. It requires cities and counties to adopt local zoning standards for BART-owned land that conform to BART Transit Oriented Development (TOD) zoning standards and establishes a streamlined approval process for qualifying projects. The law sunsets on January 1, 2029.

The new law seeks to ease traffic congestion and increase housing production and affordability by making it easier to develop housing on certain BART-owned land. An eligible TOD project (defined below) qualifies for streamlined ministerial approval (no additional CEQA review) if it meets certain standards related to height, floor area ratio, etc. There are exclusions for projects that have specified adverse, unmitigated environmental impacts.

An “eligible TOD project” is a project at an infill site on BART-owned land with at least 50 percent of the floor area of the project dedicated to residential uses, unless a local specific plan provides for a different amount of residential uses on the site. The site must form a contiguous area of at least 0.25 acres, with at least 75 percent of its area located within one-half mile of an existing or planned BART station entrance. It must also be within an area represented on the BART Board, which excludes areas south of San Francisco. Eligible TOD projects must also meet requirements regarding housing replacement, tenant displacement and relocation, affordable housing, and labor standards.

The law requires the BART Board of Directors to adopt new TOD standards for height, density, parking, and floor area ratio for eligible TOD projects on BART-owned land (TOD Standards) by July 1, 2020. Adoption of the TOD Standards is subject to CEQA review, with BART serving as the lead agency. The minimum TOD Standards are generally set as the 2017 BART TOD Guidelines (TOD Guidelines)—these also apply if BART has not adopted TOD Standards by July 1, 2020. The lowest permitted height is set at the higher of 150% of the height permitted in the TOD Guidelines or the approved height in nearby areas, as defined in the bill. There are also parking requirements for auto-dependent stations and limits on local parking requirements.

Affected local jurisdictions must adopt an ordinance that conforms to the TOD Standards within two years after BART’s adoption of the TOD Standards, or by July 1, 2022 if BART has not adopted TOD Standards for a station. The BART Board is required to review local zoning standards and confirm consistency with the TOD Standards. Certain local provisions are exempt from the TOD Standards if they are already in substantial compliance with the TOD Guidelines. Nothing in the new law affects the application of density bonuses.

AB 2923 was endorsed by the City and County of San Francisco, housing and other non-profit advocacy groups such as the Bay Area Council, SPUR, the Silicon Valley Leadership Group, SFHAC, YIMBY Action, and various building trades and business advocacy groups. The opposition included Alameda County, various East/North Bay cities, three members of the BART Board, the League of California Cities, and the American Planning Association, California Chapter.

Proposition C—the Commercial Rent Tax for Childcare and Early Education—is set to take effect on January 1, 2019, and increase the Gross Receipts Tax (“GRT”) on commercial rents in San Francisco.  As discussed in our previous post, Proposition C competed with Proposition D—the Housing For All Commercial Rent Tax—and prevailed with San Francisco voters in June.

The City’s existing GRT regime already imposes a tax on the gross receipts of many businesses operating within San Francisco, with a current GRT rate of approximately 0.3% imposed on commercial rents.  Gross receipts tax refers to the tax on the total amount of money received or accrued by a person from doing business in San Francisco, less specific statutorily excluded items.  In addition to the existing GRT, the City’s new Commercial Rent Tax imposes a tax of 1% on amounts received for rentals of “warehouse space,” and a tax of 3.5% on amounts received from rentals of other “commercial space” in the City.

The Commercial Rent Tax will significantly increase the local tax burden on commercial property owners in San Francisco, and taxpayers’ advocacy groups have filed suit against the City and County of San Francisco seeking to invalidate it, claiming that Proposition C was passed in violation of the California Constitution.  At issue is whether the “special tax” imposed by San Francisco voters by initiative requires a two-thirds majority to pass.

Unless the challenge is successful, the Commercial Rent Tax will take effect on January 1, 2019.  Landlords may be able to pass some of the resulting expense on to their tenants with triple net leases, depending upon the expense pass through language in the leases.  Going forward, landlords will need to consider this tax when drafting such provisions, and tenants will want to pay close attention as well when negotiating their leases.

Commercial landlords in San Francisco who already pay tax on the lease of their space will find the process familiar, as returns for the new tax will be filed in the same manner and on the same schedule as the current gross receipts tax.  The rules for filing combined returns applicable to the current rent tax will apply: the taxpayer must file returns on a combined basis with all of that taxpayer’s related entities, i.e., those entities with which the taxpayer is permitted or required by the California Franchise Tax Board to reflect income on the same combined report.

For a more in-depth discussion of the GRT regime in San Francisco, including its history, the current applicability, and information about determining the tax, please refer to the recent Coblentz publication examining this topic.

This summer, the San Francisco Board of Supervisors approved legislation that increased the Transportation Sustainability Fee (TSF) for large non-residential projects, amended the HOME-SF (Housing Opportunities Mean Equity-San Francisco) Program to temporarily (through 2019) reduce Program requirements, and created a new administrative approval process for 100% Affordable Housing Bonus Program projects.

TSF Increase for Large Non-Residential Projects

In June 2018, the San Francisco Board of Supervisors approved a Transportation Sustainability Fee (TSF) increase for large non-residential projects (over 99,999 gross square feet (gsf)) citywide, with certain exceptions.  This increase follows a major overhaul of transportation fee requirements in 2015, which imposed higher transportation fees citywide for most projects.  The legislation characterizes the increase as $5.00 per gsf (based on the 2015 original TSF rate); however, according to the current Development Impact Fee Register, due to interim increases based on indexing, as of January 1, 2018, the TSF was $21.14, and the actual fee increase is $2.90 per gsf.

There are certain exemptions and exceptions to the fee increase.  For example, for most large non-residential projects in the Central SoMa Plan Area, the fee will be $21.04 upon the effective date of the Central SoMa Plan Area rezoning and associated Planning Code amendments under Board of Supervisors File No. 180184.  The fee increase also does not apply to projects with a Development Agreement approved prior to June 5, 2018.

The TSF for residential, hospital, health services, PDR, and other smaller non-residential projects (under 99,999 gsf) is not affected by the legislation and there are no changes to existing grandfathering clauses and exemptions.

Amendments to HOME-SF Density Bonus Program

In July 2018, the San Francisco Board of Supervisors approved legislation to temporarily reduce HOME-SF Program requirements.

As explained in more detail in our prior blog post, the HOME-SF Program seeks to increase affordable housing production, particularly housing affordable to middle income households, by encouraging project sponsors to provide additional on-site units as affordable.  Certain Planning Code modifications and density bonuses may be granted by the Planning Commission for qualifying projects, including up to 20 feet of additional building height without the need for a Height Map amendment. Previously, in order to qualify for the Program, at least 30% of on-site units were required to be designated as affordable, as compared to the lower percentages (18 to 20% for rental and ownership projects, respectively) otherwise required under the San Francisco Inclusionary Housing Ordinance.

The recent legislation reduces HOME-SF Program requirements for projects with a complete Environmental Evaluation (EE) application on file before January 1, 2020.  For qualifying projects with 25 or more total units, the 30% requirement is reduced to 23% or 25% for a height bonus of up to five and ten feet, respectively.  For projects seeking a height bonus between eleven and 20 feet, the 30% requirement still applies.  For smaller projects only seeking a height bonus of up to five feet, the 30% requirement is reduced to 20%, which, again, is the same as the current on-site Inclusionary Housing Ordinance requirement for ownership (i.e., condo) projects.

Although the required AMI spread for affordable ownership units (80%, 105% and 130% of AMI) and affordable rental units (55%, 80% and 110% of AMI) remains the same, changes were made to the percentage of affordable units required at those AMI levels.  For example, although a qualified HOME-SF Program project seeking 20 feet of additional building height would still be required to designate at least 30% of on-site units as affordable, more of those units could be rented at 80% and 110% of AMI. See Planning Code Section 206.3(f) for more information.

The recent amendments also require the Planning Commission to approve or deny a HOME-SF Program project within 180 days of submittal of a complete application, unless an EIR is required for the project. See Planning Code Section 328 for more information about the Planning Commission review process.

New Administrative Approval Process for 100% Affordable Housing Bonus Program Projects

The July 2018 legislation referenced above also created a new administrative review and approval process under Planning Code Section 315.1 for 100% Affordable Housing Bonus projects, as defined under Planning Code Section 206.4.

These projects will now be reviewed and approved administratively by the Planning Department, notwithstanding any otherwise applicable Conditional Use (CU) authorization requirement related to a specific land use or use size limit.  The Planning Director may also grant “minor exceptions” to Planning Code requirements (in addition to  Planning Code Section 206.4 modifications), including exceptions from residential usable open space, loading, rear yard, dwelling unit exposure and parking requirements, and modifications of other Planning Code requirements that could otherwise be modified through the Planned Unit Development (PUD) process, regardless of the zoning district. These exceptions are similar to what is currently available by Planning Commission authorization for downtown projects and projects in the Eastern Neighborhoods under Planning Code Sections 309 and 329, respectively.  Even though these modifications are substantially broader than those otherwise permitted under Section 206.4, they are available  in limited circumstances (i.e., to “appropriately shift” building mass to respond to the surrounding context and only if such modifications “do not substantially reduce or increase the overall building envelope permitted under Section 206.4.”).

The Planning Department’s determination will be appealable to the Board of Appeals through the  building permit process, but any requests for Discretionary Review (DR) by the Planning Commission will be denied if and when the Commission delegates its DR authority to the Department for 100% Affordable Housing Bonus projects, as contemplated by the legislation.  The CEQA determination for a project will be separately appealable to the Board of Supervisors, unless the project qualifies for ministerial approval under Senate Bill (SB) 35, as locally implemented pursuant to Planning Director Bulletin No. 5 (which should be amended to account for new Section 315.1). See our prior blog posts for more information about SB 35 and the local implementation of SB 35.

California voters will consider a November ballot initiative (Proposition 10) that would repeal the 1995 California Costa-Hawkins Rental Housing Act (“Costa-Hawkins”). Costa-Hawkins generally limits rent controls that may be imposed by local jurisdictions on housing units in buildings with a certificate of occupancy issued after February 1995, prohibits local jurisdictions from expanding rent control to include “vacancy control,” and exempts single-family homes and condominiums from rent controls, with limited exceptions.

In San Francisco and Los Angeles, Costa-Hawkins prohibits rent control for housing units in buildings with a certificate of occupancy issued after June 1979 and October 1978, respectively, because of the local rent control ordinances that were in effect in those cities when Costa-Hawkins was adopted. In other words, in San Francisco, rent control only applies to tenants in buildings built before June 1979, meaning that generally, owners of buildings built after that date can increase rental rates at any time (subject to required notice) to reflect market conditions.

Proposition 10 is not the only attempt to repeal Costa-Hawkins in the recent past. In 2017, Assembly Members Chiu, Bloom and Bonta introduced AB 1506 to repeal Costa-Hawkins, which was rejected by the Assembly Housing and Community Development Committee, in part because two Democrats abstained from voting.

If passed by California voters, the ballot initiative would allow—but not require—local jurisdictions to adopt rent control laws without any state-imposed limitations related to the type of housing or the date that a certificate of occupancy was issued for a building (see above). If Proposition 10 were to pass, the San Francisco Board of Supervisors could vote to impose rent control on units in buildings built after June 1979, including new construction. Earlier this month, the San Francisco Board of Supervisors voted on a resolution to support Proposition 10. That resolution failed, with “no” votes from Supervisors Cohen, Safaí, Stefani and Tang.

The Coalition for Affordable Housing is leading the campaign in support of the initiative and the California Apartment and Rental Housing Associations are leading the opposition, with major donations from the real estate investment and development communities. A myriad of elected officials, businesses, organizations, labor unions representing the construction trades, and some affordable housing developers and advocates are also in opposition. Opponents generally argue that Proposition 10 would worsen the existing housing crisis because it would discourage investment in housing. Supporters, including the California Democratic Party and the California ACLU, generally argue that Proposition 10 is necessary to protect residents from being displaced due to skyrocketing rent increases.

Earlier this summer, Bay Area voters passed Regional Measure 3 with 54% of the vote, authorizing $4.5 billion of transportation improvements throughout the region. Commuters will pay a $1 toll hike on seven Bay Area bridges, excluding only the Golden Gate Bridge, beginning on January 1, 2019. Our original article summarizing RM-3 lays out the planned improvements. 

San Francisco commuters may have already noticed new Muni railcars on the N-Judah line, added in late June 2018 with money from other sources. With RM-3 funding on its way, Muni officials estimate that 68 new cars – featuring automated stop announcements and new seating configurations – will go into service by the end of next year.

RM-3 requires the Bay Area Toll Authority (BATA), a joint-powers agency with the Metropolitan Transportation Commission (MTC), to establish an independent oversight committee to manage the allocation of funds throughout the nine Bay Area counties. The committee would submit an annual report to the State Legislature, detailing the status of the projects in the Measure’s operating and capital expenditure plans.

The construction schedule for RM-3 projects is not expected to be determined until next year, pending the resolution of a taxpayers’ lawsuit seeking to invalidate the Measure.  The lawsuit claims that the toll hikes are a tax requiring a two-thirds vote of the Legislature to qualify for the ballot.

We expect more information about the RM-3 improvements beginning in January of 2019, when the Measure is scheduled to take effect, and we will continue to provide updates.

 

Competing special purpose tax measures are on the San Francisco June ballot, both of which would raise the tax on gross receipts from the lease of commercial space in San Francisco.  The tax rates in the measures – generally, 1.7% and 3.5% – would be a steep increase over the current gross receipts tax rate applicable to commercial rents of around 0.3%.  Either proposed tax would be in addition to the gross receipts tax already in effect and would become operative on January 1, 2019.

Prop D: Housing For All Measure

Proposition D would impose a tax of 1.7% on gross receipts from the lease of commercial space in San Francisco to fund low- and middle-income housing and homelessness services.

Exemptions would apply to:

• A small business with gross receipts within San Francisco of $1,000,000 or less.
• Private foundations and non-profit organizations that are exempt from income taxation under California or federal law. Further, rents paid by such organizations are not considered gross receipts subject to the tax.
• Any structure or portion thereof being used for “production, distribution and repair”, “retail sales and services”, or “entertainment, arts and recreation” (as these categories of uses are defined in San Francisco’s Planning Code).

This measure is sponsored by San Francisco Supervisors Ahsha Safai, Jeff Sheehy, Katy Tang, Malia Cohen and Mark Farrell.  A two-thirds supermajority vote is required for the approval of this measure.

Prop C: Universal Childcare for San Francisco Families Measure

Proposition C would impose a tax of 1% on gross receipts from the lease of warehouses in San Francisco and 3.5% on gross receipts from the lease of all other commercial space to fund early care and education for children up to five years old.

Exemptions would apply to:

• A small business with gross receipts within San Francisco of $1,000,000 or less.
• Private foundations and non-profit organizations that are exempt from income taxation under California or federal law. Further, rents paid by such organizations are not considered gross receipts subject to the tax.
• Rents paid by federal, state or local governments.
• Any structure or portion thereof being used for “industrial uses”, “arts activities”, or “retail sales or service activities or establishments” other than “formula retail” uses (i.e., chain stores) (as these categories of uses are defined in the San Francisco Planning Code).

“Industrial uses” and “arts activities” are significantly narrower subsets of the uses that comprise “production, distribution and repair” and “entertainment, arts and recreation”, respectively, under the Planning Code.  For example, unlike under Proposition D, “business services” uses would not be exempt.  Another difference from the Proposition D exemptions, as noted above, is that “formula retail” uses would not be excluded under this measure (i.e., leases for chain stores such as Starbucks would be subject to the tax).

San Francisco Supervisors Jane Kim and Norman Yee led the citizen initiative campaign for this measure.

Proposition C requires a simple majority to pass, whereas Proposition D requires a two-thirds vote to pass.  However, only one of the two proposals can be adopted because each measure provides that if both are approved by San Francisco voters in June, then the measure with more affirmative votes will become operative.  The San Francisco Controller estimates that Proposition D would generate approximately $70 million in net annual revenue for San Francisco compared with approximately $146 million expected from Proposition C.