• California’s Changing Approach to Like-Kind Exchanges

    Internal Revenue Code (IRC) Section 1031 allows nonrecognition of gain or loss where property held for investment or for productive use in a trade or business is exchanged for like-kind property held for the same purpose. An issue arising under Section 1031 involves multiple owners of a real estate business entity holding one or more investment properties, where some owners want to maintain their investment while others want to cash out their investment. One common technique when the owners want to go their separate ways with investments is for the entity to redeem the interest of the member in exchange for an undivided interest in the property (a so-called “drop-and-swap”). Thereafter, the entity and the former owner join in the sale of the property to a buyer. Following the sale, the former owner can direct its share of the sale proceeds to a qualified intermediary to be reinvested in like-kind property without recognizing gain.

    While California law conforms to Section 1031, the California Franchise Tax Board (FTB) has historically taken a much more restrictive approach than the IRS. Particularly in the area of drop-and-swaps, the FTB has disqualified attempted 1031 exchanges by asserting the step transaction doctrine and examining a series of integrated transactions as a whole. But in 2015, the California State Board of Equalization (BOE) departed from the FTB’s narrow interpretation of the rules, unanimously overruling the FTB’s disallowance of like-kind exchange treatment under Section 1031. The BOE does not often issue formal guidance that may be cited as precedent. However, the 2015 decision—In re Rago Development Corp., 2015-DBR-001— was issued as a formal opinion. The decision involved a “swap-and-drop,” which is an exchange followed by a capital contribution of the replacement property to an entity in return for an ownership interest in the entity. In that opinion, the BOE rejected the FTB’s assertion that the step transaction doctrine should treat it as though the taxpayer had exchanged real property interests for interests in an LLC.

    More recently, in August 2018, the new California Office of Tax Appeals (OTA) (which replaced the BOE as an administrative board) issued an opinion rejecting the FTB’s disqualification of Section 1031 like-kind treatment based on the step transaction doctrine. In Appeal of Mitchell, the taxpayer held an interest in a general partnership owning a single property as its sole asset. The majority of the other partners sought to cash out their interest, but the taxpayer wanted to maintain her investment in real estate through a 1031 exchange. A sale of the property was arranged and the partnership redeemed the taxpayer’s partnership interest for a TIC interest in the property. Thereafter, through a qualified intermediary, the taxpayer’s proceeds from the sale were reinvested in qualified property outside of California.

    The FTB issued a Notice of Proposed Assessment to the taxpayer in Mitchell, asserting that the transaction did not qualify as a 1031 exchange and that she must recognize gain from the sale of the property. Asserting the step transaction doctrine, the FTB argued that the taxpayer failed to meet the “exchange” requirement of Section 1031 because the partnership, rather than the taxpayer, made the sale of the property and the taxpayer was only a conduit for the sale.. On this point, the FTB stressed the fact that the partnership, and not the taxpayer, negotiated the sale of the property with the buyer. Additionally, the FTB asserted that the taxpayer did not satisfy the holding requirement for a Section 1031 property because she only held her TIC interest in the property for two days—the days between the redemption of her partnership interest and the sale of her TIC interest in the property to the buyer. The OTA disagreed.

    As to FTB’s argument that the step transaction doctrine applied, the OTA referred to the Tax Court and Ninth Circuit decisions in Magneson v. Commissioner, 753 F.2d 1490 (9th Cir. 1985) and Bolker v. Commissioner, 760 F.2d 1039 (9th Cir. 1985) to ignore the series of integrated transactions accomplishing the exchange. In Magneson, the court acknowledged that combining the steps of a transaction may not be appropriate if the transaction could not have been achieved directly. In Mitchell, the fact that some of the partners sought to cash out their investment while others sought to continue their investment presented such a situation. The OTA also rejected the FTB’s support for the argument that the transaction failed because the taxpayer did not negotiate directly for the sale, since the taxpayer worked directly with the managing partner and the partnership’s attorney in structuring the multiple steps leading up to the sale. Further, in response to the FTB’s argument that the taxpayer did not “hold” the property for investment, the OTA explained that Section 1031 does not require ownership of the relinquished property for any period of time. Moreover, citing Bolker, the OTA noted that courts have allowed simultaneous or immediate transfers of replacement property following an exchange.

    A potential distinction between the facts of Mitchell and Magneson is the nature of the interests held by the taxpayers. While both cases involved general partnership interests, Magneson involved a limited partnership and Mitchell involved a general partnership. While the court in Magneson did focus a significant portion of its opinion on the nature of a general partnership interest, it did not make any distinction based on which type of partnership the general partner held its interest in. Rather, the opinion explained the similarities between holding property via a general partnership interest and through a TIC interest. This portion of the decision, however, was mostly aimed at distinguishing partnership interests from corporate shares. Ultimately, the court in Magneson focused much more on the underlying property, providing that the “critical basis for [the] decision is that the partnership, in this case, had as its underlying assets property of like kind to the Magnesons’ original property, and its purpose was to hold that property for investment.”

    In both Magneson and Bolker, the court reasoned that the individual transactions in either series would not have triggered a tax, and therefore the combination of transactions should not have triggered a tax. Following this reasoning, the OTA found that the transaction involved “the use of a series of reasonable, necessary, and integrated transactions to delay, not avoid, the recognition of gain, which section 1031 allows.” These decisions by the BOE and the OTA are an indication that California may be finally aligning itself with the federal standards for qualifying 1031 exchanges (although the FTB has not yet decided whether it will request a rehearing).

    For more information, contact Tax Partner Jeffry Bernstein at jbernstein@coblentzlaw.com. Research analysis provided by Jessica N. Wilson.

  • Dynamex Ruling Makes it More Difficult to Classify Employees as Independent Contractors

    The California Supreme Court recently issued its long-awaited opinion in Dynamex Operations West v. Superior Court, clarifying the standard for determining whether workers in California should be classified as employees or independent contractors. To ensure conformity with the Court’s ruling we recommend a review of your independent contractor relationships. Given the potentially very high costs of misclassification – multiple violations of California and Federal wage and hour laws with attendant back pay, overtime, penalties, interest and attorney fees – it is prudent to confirm that your agreements are fully compliant.

    The Dynamex Court held that individuals are employees unless the entity classifying the individuals can shoulder the burden of establishing that they should, in fact, be independent contractors under the ABC test. To meet the ABC test, each of the following three factors must be established:

    A. That the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

    B. That the worker performs work that is outside the usual course of the hiring entity’s business; and

    C. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

    Factor A which requires that the worker must be free of the control of the hiring entity in the performance of the work can be based on a myriad of related factors evidencing control of the employer over the worker’s performance of work, including whether the worker supplies his own tools or controls the specific details of his work, without interference by the hiring entity.

    Factor B mandates that to be considered an independent contractor, a worker must perform work that is outside the usual course of the hiring entity’s business. To illustrate the meaning of the “usual course of business,” the Supreme Court gave the example that “when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having “suffered or permitted” the plumber or electrician to be working as its employee. On the other hand, “when a clothing manufacturing company hires work-at-home seamstresses to make dresses form cloth and patterns supplied by the company that will thereafter be sold by the company,” or “when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes,” the works are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees” and not as independent contractors.

    Factor C which requires that workers must be customarily engaged in an independently established trade, occupation or business of the same nature as the work performed, requires a showing that the worker has “independently made the decision to go into business for himself or herself.” Such workers would be expected to have taken “the usual steps to establish and promote his or her independent business,” for example through “incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.”

    One final note, the Dynamex ruling only applies to wage orders, which set rules on minimum pay and basic working conditions such as meal and rest breaks. While the decision does not directly apply to other employment claims, such as workers’ compensation claims or tax claims, it seems probable that trial courts and courts, in general, will apply the Dynamex case to other California labor code claims that protect workers’ rights. Indeed, the case will likely trigger more litigation over each of the three factors and what they really mean, as applied to various types of workplaces.

    For further information on determining whether workers in California should be classified as employees or independent contractors, or assistance in reviewing your employee agreements for compliance, contact Coblentz Business and Employment partner Steve Lanctot at slanctot@coblentzlaw.com.

  • Commercial Landlords Beware: Competing Tax Measures on June Ballot

    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.

  • Five Essential Provisions to Ensure an Effective Influencer Agreement

    Authored by Lindsay Gehman; Originally published in The Daily Journal, May 24, 2018.

    Advertisers continue to utilize influencer marketing as an effective means of connecting with their target consumers and achieving a high ROI.  As such, it is imperative that advertisers and influencers enter into written agreements at the outset in order to ensure an effective campaign and a mutually beneficial relationship between the parties. Written influencer agreements allow the advertiser and influencer to get on the same page about expectations and risk allocation in order to help prevent future disputes.

    Here are five essential provisions of every influencer agreement, which are drafted from the perspective of the advertiser/agency. Another key consideration when drafting influencer agreements from the agency’s perspective is to ensure that the influencer agreement (just like any other vendor agreement) ladders up to the agreement between the agency and its client, the advertiser, as tightly as possible.

    Content Ownership and Rights

    It is imperative to specify who owns the content created by the influencer. If the influencer retains ownership and the advertiser only receives a license to use such content, the scope of such license should be drafted as broadly as possible, both in terms of what the advertiser may do with the content (i.e., repost, create derivative works, etc.) and the type of media it covers (i.e., the advertiser’s website and social channels, broadcasts, publications, etc.). In connection with these rights, the influencer should also provide a license to use his or her name, blog name or social media handle, likeness, voice, image and testimonials to the advertiser in connection with the use of the content.

    Exclusivity

    In some cases, advertisers expect that they will be the only brand featured in the content they are asking the influencer to create. Accordingly, the influencer agreement should include a clause that prohibits the influencer from monetizing the content in any way without the advertiser’s consent. In addition, advertisers oftentimes expect that the influencer will not work with a competitor of the advertiser during the campaign and sometimes for some period thereafter. In such cases, the influencer agreement should include an exclusivity provision that lists the competitors that are off limits as well as the term of the restriction.

    Termination

    Because digital campaigns are fluid and can change on a dime, advertisers typically require broad termination rights that allow them to terminate the influencer agreement without cause on little to no advance notice. On the flip side, since influencers are typically selected for their unique expertise or influence (and are therefore difficult to replace), advertisers seek to limit the influencer’s ability to terminate without cause. In terms of what the influencer must be paid in the event of early termination, advertisers typically push for paying only for deliverables that have been accepted prior to the termination date.

    Regardless of where the termination notice period nets out, advertisers should include a morals clause that allows them to terminate the influencer agreement immediately in the event the influencer violates any law or if the influencer’s conduct violates generally acceptable standards of behavior such that the advertiser’s association with the influencer could damage the advertiser’s reputation. Related to this, a clause that requires the influencer to take down any content featuring the advertiser from the influencer’s website or social channels upon the advertiser’s request should be included.

    Representations, Warranties, Covenantsand Indemnification

    In addition to standard representations, warranties and covenants like authority and no conflict, advertisers will also want influencers to represent, warrant and covenant that the influencer has obtained all rights and licenses necessary for the advertiser to use the content, that the content will not infringe or violate any intellectual property rights and that the content will comply with all applicable laws, rules and regulations, including the Federal Trade Commission’s then current Guides Concerning the Use of Endorsements and Testimonials in Advertising and the applicable social media platform’s terms of service.

    Advertisers will also expect the influencer to indemnify the advertiser in certain instances, including if the influencer breaches the agreement or if the influencer acts in a negligent or willful fashion.

    Social Media Policy

    To the extent the advertiser has its own Social Media Policy – which every advertiser should – that Social Media Policy should be attached to the influencer agreement as an exhibit, and the influencer should be required to comply with the policy. Social media policies typically include practical guidance around disclosures, the editorial process and other “best practices” that the influencer should follow.

    Click here to view a PDF of the article.

  • Regional Measure 3 Aims to Reduce Transportation Woes

    On the June 5, 2018 primary ballot, voters in the nine Bay Area counties will vote on Regional Measure 3 (RM-3).  The measure would authorize toll increases on seven Bay Area bridges – all but the Golden Gate Bridge – to fund large-scale improvements to the region’s transportation infrastructure.  If approved, tolls would increase by $1 in January 2019, with subsequent $1 increases in January 2022 and 2025.

    The legislation aims to remedy the Bay Area’s “traffic epidemic” by funding approximately $4.5 billion of transportation improvements over the next 25 years.

    Some of the major projects that would be funded by the toll increases are:

    • Provision of 300 new BART cars to decrease overcrowding – $500 million
    • Extension of BART through Santa Clara to Downtown San Jose – $375 million
    • Extension of CalTrain Downtown to the new Transbay Transit Center – $325 million
    • Bay Area Corridor HOV Express Lanes on the I-80 Bay Bridge, I-580, I-680 in Alameda and Contra Costa, I-880 in Alameda, I-280 in San Francisco, and Highway 101 in San Francisco and San Mateo – $300 million
    • Implementation of the Ferry Enhancement Program, which would include new vessels, additional and more frequent routes, and a new terminal in Mission Bay – $300 million
    • Improvements to the Contra Costa Interstate 680/State Route 4 Interchange, which would include widening of Highway 4 – $210 million

    The ballot measure has the official endorsement of many prominent organizations, including the Bay Area Council, the League of California Cities, SPUR, the San Francisco and Oakland Chambers of Commerce, and the California Labor Federation.

  • Latest Updates to the Central SoMa Plan: What’s New?

    On May 10, 2018, the San Francisco Planning Commission voted unanimously to adopt the Central SoMa Plan and its Implementation Program by certifying the EIR and recommending approval of implementing legislation, with modifications. It also recommended approval of the proposed Central SoMa Housing Sustainability District (HSD), which is separately sponsored by Mayor Mark Farrell and Supervisor Jane Kim. The Central SoMa legislation will next be considered by the Board of Supervisors.

    Central SoMa Plan

    The Planning Commission’s recommended modifications include a Central SoMa Mello Roos Community Financing District (CFD) participation requirement for projects that include new construction or the net addition of more than 40,000 gross square feet on a “Tier B” (residential only) or a “Tier C” property, as defined under proposed Planning Code Section 423.2.  An exception would apply if the project’s square footage would not exceed the total that could be approved under current law.

    See the Central SoMa website for information about other recommended modifications. The recommended modifications to increase potential housing production, which are summarized in our prior blog post, were incorporated in the substituted legislation introduced by Mayor Farrell and Supervisor Kim last month.

    Central SoMa Housing Sustainability District

    The HSD would include all property within the Central SoMa Plan Area. Residential projects in the HSD meeting the following criteria would qualify for a 120-day streamlined ministerial (i.e., no CEQA) review and approval process, including design review by the Planning Department:

    • Residential uses are principally permitted (i.e., do not require conditional use authorization) on the subject property;
    • Residential density would be between 50 and 750 units per acre;
    • The majority of the square footage would be for residential uses;
    • No more than 24,999 gross square feet would be for office uses;
    • The building height would not exceed 160 feet (unless the project is a 100% affordable housing project);
    • At least 10% of units would be designated as permanently affordable to very low or low-income households, as defined under Planning Code Section 415;
    • Prevailing wages would be paid and/or skilled labor would be used for construction, depending in part on the number of units proposed and project timing;
    • There is no locally significant historic structure (i.e., designated landmark or contributory or significant structure under Articles 10 or 11 of the Planning Code) on the project site;
    • There would be no demolition, removal or conversion of any existing dwelling unit(s) on the project site;
    • If a density bonus is requested, there would be no significant shadow impact;
    • All applicable mitigation measures in the Central SoMa FEIR would be implemented;
    • All applicable adopted design review standards would be met; and
    • All applicable zoning standards would be met.

    The clock on the 120-day HSD review and approval process would not start until the Preliminary Project Assessment (PPA) process is completed, all required application materials and affidavits (e.g., to implement mitigation measures) are submitted, and any studies required pursuant to any applicable mitigation measures are completed to the satisfaction of the Planning Department’s Environmental Review Officer.

    HSD project approval would follow a public hearing held by the Planning Department and would be appealable to the Board of Appeals.  A building or site permit for the project would generally need to be obtained within 36 months of project approval.

    The proposed Central SoMa HSD legislation is authorized under AB 73, which was sponsored by Assemblymember David Chiu and signed into law in 2017.

    We will continue to monitor the proposed legislation through the approval process.

  • Land Use Showdown: Battle Lines Are Drawn in SB 827 Housing Density and Height Debate

    [Originally posted on March 19, 2018, updated on April 11, 2018]

    Building on the state’s major housing legislation from 2017, Senator Scott Wiener’s SB 827 proposes major increases in height and density for qualifying housing developments. A project would generally qualify if it is within either a 1/2 mile radius of a major transit stop or a 1/4 mile radius of a stop on a high-quality bus corridor, as defined in the bill. The legislation was introduced in January and was amended on March 1 and April 9, principally to address tenant relocation and inclusionary housing concerns and to extend the operative date of the bill to January 1, 2021 (with a potential one-time one-year extension) to address timing concerns raised by San Francisco and other local jurisdictions. For qualifying sites, permitted heights would be at least 45 to 55 feet (originally, 45 to 85 feet), regardless of local height limits, unless the height increase would result in a specific, adverse impact, as defined in the bill. Major areas of the state, including large portions of several of its largest cities, would be affected.

    Battle lines have emerged, with supporters such as SPUR, SFHAC, Silicon Valley Leadership Group, the Bay Area Council, and California YIMBY claiming that the legislation is a bold, necessary solution to the housing affordability and climate change crises. Opponents such as the City of Palo Alto, League of California Cities, and the Sierra Club of California assert that it is a threat to neighborhood stability and an invitation to gentrification.

    On March 15, the Planning Commission held an informational hearing on SB 827, and the Planning Department prepared a detailed analysis of how it would apply in San Francisco. The report concludes that SB 827 would apply throughout most of San Francisco and would significantly upzone most of the areas of the City where there has traditionally been resistance to increasing height and density limits. Among questions and concerns raised in the report:

    • The height limits would be additive to state density bonus incentives and could result in heights greater than proposed in the legislation.
    • The City could continue to enforce certain objective design standards (for example, to require building sculpting), as long as certain minimum floor area ratio (FAR) limits are preserved. However, the bill’s language creates some uncertainty about exactly what local discretion is retained.
    • The legislation does not include funding or time for local jurisdictions to study and implement impact fees to mitigate effects of the upzoning. The April 9 amendments attempt to address this concern.

    At the Planning Commission hearing, there was support for some of the objectives of the legislation, but Commissioners generally expressed concern about the “one-size-fits-all” approach and potential negative consequences for San Francisco if the bill passes in its current form.

    On April 3, the San Francisco Board of Supervisors took a formal position in opposition to the legislation.  Previously, following vigorous public debate, the Land Use and Transportation Committee approved amendments to a resolution in opposition to SB 827. The resolution was reframed to urge amendments that would preserve certain local control and allow the economic benefit of height and density increases to be recaptured for affordable housing and other public benefits.  The full Board rejected the Committee’s recommendation and instead approved a resolution introduced by Supervisor Peskin opposing the bill.  The vote was 8-3, with Supervisors Breed, Safai and Sheehy opposed. Opposition was generally focused on the legislation’s impact on local control, lack of public benefits and mitigation, and tenant displacement.  Proponents emphasized the magnitude of the state-wide housing crisis and advocated for amendments to address displacement and other issues.

  • San Francisco Finally Poised to Adopt Central SoMa Plan

    [Originally posted on March 23, 2018, updated on April 11, 2018]

    Following more than six years of planning and public outreach, the City initiated the formal approval process for the Central SoMa Plan (Plan) at the Board of Supervisors and Planning Commission on February 27 and March 1, respectively. The Historic Preservation Commission (HPC) and Planning Commission held informational hearings on the Plan on March 21 and March 22, respectively. The HPC also considered initiation of the formal landmark designation process for certain buildings and districts identified during the Plan process. The Planning Commission is scheduled to consider the EIR and approvals on May 10, with the Board considering the legislation thereafter.

    The Planning Commission’s approval package is over 600 pages, and the modifications proposed to the current land use controls are extensive. The summary below highlights some of the key changes proposed in the draft documents and describes those very generally. Please see the implementing legislation for specific language and details.  As evidenced by Commissioner comment at the March 22 hearing, there is continued focus on the jobs/housing balance in the Plan area, with possible changes to increase the number of potential housing sites.

    Plan Overview

    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 implementing legislation would increase height and density and streamline zoning controls for certain properties. In exchange for this upzoning, the legislation would impose increased community benefits requirements, as described below. The legislative package includes amendments to the General Plan (including adoption of the Plan), Planning Code, Administrative Code, and Zoning Maps. The City’s analysis concludes that the Plan area has development capacity for up to 40,000 jobs and 7,000 housing units, and will generate about $2 billion in development impact fees.

    Key Zoning Controls

    Under the new zoning controls, the predominant new base zoning district would be Central SoMa Mixed Use-Office (CMUO). The CMUO zoning would largely replace relatively restrictive zoning districts with more flexible, mixed-use zoning. Certain subareas would remain principally designated for residential, PDR or other non-residential uses. The Plan area would also be subject to a Special Use District overlay (SUD). Some of the major SUD controls are: designating the largest sites (over 30,000 square feet) South of Harrison Street as predominantly non-residential, imposing new and replacement PDR requirements on certain larger sites, designating areas where nighttime entertainment is principally or conditionally permitted, and imposing active ground floor use requirements, including requiring “micro-retail” units of 1,000 square feet or less, and limiting formula retail uses. The SUD also extends the Transferable Development Rights (TDR) program to historic buildings and 100% affordable housing sites in the Plan area, and requires purchase of TDRs from the Plan area or the Downtown’s C-3 Districts for a portion of the FAR (between 3.0:1 and 4.25:1) for certain large (over 49,999 square feet) non-residential projects.

    Current height limits in the Plan area are generally 85 feet or less, with heights up to 130 feet allowed on some parcels close to the Downtown Plan area. Under the Plan, in certain areas (generally near the Caltrain Station, along 4th Street, and adjacent to the Downtown Plan area and Rincon Hill), height limits are proposed up to 130-160 feet, subject to bulk controls to encourage building sculpting. A limited number of these parcels are proposed for towers 200-400 feet in height.

    Exactions and Public Benefits

    The Plan and its implementing legislation include detailed requirements regarding public benefits, urban design, streetscape and other key controls, including an “urban room” concept that encourages building area up to the sidewalk edge and a height equivalent to the width of the street. “Skyplane” (performance-based and setback) controls would apply to building heights beyond the base urban room. The controls also seek to limit the impact of the major towers through separation requirements and floorplate limits.  Projects proposing more than 50,000 square feet of most non-residential uses (except PDR) are required to provide privately owned public open space (POPOS) or pay an in-lieu fee, similar to the Downtown C-3 Districts. The Plan and zoning controls also address sustainability (for example, through living roof, solar photovoltaic, thermal systems and greenhouse gas-free electricity requirements), as well as streetscape improvements and other strategies to limit parking and enhance pedestrian, bicycle and transit conditions. These include, for example, banning or limiting curb cuts, prioritizing on-site loading, and capping residential parking at 0.5 spaces per unit, and office parking at one space per 3,500 square feet.

    The implementing legislation for the Plan also includes new development impact fees and taxes to fund proposed community benefits, including community facilities, transit, affordable housing, and open space. These exactions would be imposed by tier (Tier A 15-45 feet, Tier B 50-85 feet, and Tier C 90 feet or more). The Planning Department staff report includes a draft Public Benefits Program that summarizes the sources and uses of development impact fees and taxes generated by new development in the Plan area. Pages 18-21 include a fee analysis for prototypical non-residential and residential development, with the applicability and amount varying by Tier, and in some cases by square footage and other criteria. In addition to existing City-wide fees, the new development impact fees and taxes proposed for most Plan area projects include the Central SoMa Community Infrastructure Fee, the Central SoMa Community Services Facilities Fee, and participation in a Mello-Roos Community Facilities District (CFD). As explained above, TDR and POPOS requirements would also apply to certain non-residential projects.

    Changes Proposed in Planning Department Staff Report

    The Planning Department staff report for the April 12 hearing makes two recommended changes to address public and Commissioner comments regarding the jobs-housing balance. First, the zoning would be revised to allow two larger sites that were previously anticipated as primarily commercial to become primarily residential, resulting in approximately 640 additional units. Second, several additional sites would be designated Central SOMA Mixed Use Office, which is expected to yield another approximately 600 units, for a combined increase of over 1,200 units from what was originally proposed in the Plan.

    We will continue to monitor the proposed legislation and implementing documents through the approval process.

  • Assemblyman Chiu Unveils AB 3037 Community Redevelopment Proposal

    Assemblyman David Chiu has unveiled his long-promised legislation to establish a modified version of the state’s former redevelopment program, aimed at creating major state funding for affordable housing, transit, and other infrastructure. Chiu introduced AB 3037 as placeholder legislation on February 16 and amended it on March 19. Committee hearings began on April 11.

    When redevelopment agencies were eliminated in 2011, cities and counties lost approximately $1 billion in annual funding for affordable housing. Following on the heels of major state housing legislation passed in 2017, AB 3037 would allow cities and counties to establish new agencies (each, a “redevelopment housing and infrastructure agency”) to capture tax increment within designated geographic areas for affordable housing, transit priority projects and other specified infrastructure and community facilities. The legislation attempts to address critiques of former redevelopment agency spending abuses by adding auditing and other accountability measures. The state would also agree to repay any property tax losses to local school districts.

    Key features of the legislation include:

    • A requirement for state (Strategic Growth Council) consent that establishment of the local agency would further statewide greenhouse gas reduction goals.
    • Department of Finance review and approval based on specified standards, including state fiscal capacity and consistency with a to-be-negotiated tax revenue cap.
    • Housing preservation and development requirements, including implementation of anti-displacement policies, and dedication of at least 30% of the available increment to affordable housing.
    • Detailed auditing and record keeping, with major fines for non-compliance.
    • Authority to issue bonds to finance housing or infrastructure projects.

    We will continue to track this legislation as it moves through Committee hearings.

  • Farewell to Costa-Hawkins Agreements for On-Site Affordable Rental Units in SF

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

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

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