In an opinion originally filed June 28, and later certified for partial publication on July 22, 2019 (upon the request of the California Building Industry Association), the Second District Court of Appeal affirmed a judgment denying a CEQA writ petition challenging a project converting a vacant former apartment building into a boutique hotel in Los Angeles’ Hollywood area.  Hollywoodians Encouraging Rental Opportunities (HERO) v. City of Los Angeles et al. (Millennium Settlement Consulting/1850 North Cherokee, LLC et al., Real Parties in Interest) (2019) ___ Cal.App.5th ___.  The MND for the project was legally adequate, and the City did not err in failing to prepare an EIR to analyze loss of affordable housing and tenant displacement impacts, because the former apartment building had been withdrawn from the rental market for years and was vacant at the time environmental review for the hotel project commenced.  Because the relevant CEQA baseline when review commenced in 2015 was a vacant building already withdrawn from the rental market, the record did not support a fair argument that conversion of the building to hotel use would have significant impacts on Hollywood’s stock of rent-controlled housing or displacement of residents.

The Facts

The project property is a vacant 18-unit apartment building in the Hollywood area of Los Angeles, originally built in 1939 and formerly subject to the City’s Rent Stabilization Ordinance (RSO).  (LAMC § 151.00 et seq.)  In 2009, the owner applied to demolish it and build a 39-unit condo project on the site, and the City adopted an MND for that project.

In May 2013, the owner filed an Ellis Act (Gov. Code, § 7060 et seq.) notice of intent to withdraw all 18 units from rental housing use; all units were vacated by October of that year; and the City approved the building for demolition.  In early 2014, however, the developer abandoned the condo project due to lack of financing.

One and one-half years later, in July 2015, the owner applied for approvals for a new hotel project that would convert the existing building into a 24-guest room boutique hotel.  These approvals included a CUP, a (later withdrawn) zoning variance for parking over 750 feet from the site, and a rear yard setback adjustment.

The City’s initial study for the hotel project found potentially significant but mitigable effects on aesthetics, biological resources, noise and public services, and less-than-significant or no impacts in all other study areas, including population and housing.  With respect to the latter impact category, the initial study concluded conversion of the building to a hotel would not displace housing units or residents because the apartment units had been withdrawn from the rental market in May 2013 and the building was vacant.  It further found the project did not meet the 25 multi-family units threshold of significance adopted by the City for population and housing displacement, in any event.

The City’s Zoning Administrator (ZA) adopted the MND (2015 MND) issued by the Planning Department, approved the necessary entitlements, and adopted the MND’s mitigation measures as conditions of project approval.  An area resident appealed the ZA’s decision to the Planning Commission, and then to the City Council, and after various interim steps in the City’s administrative proceedings (plaintiffs’ challenges to some of which are discussed in the opinion’s unpublished portion) the MND and project approval were upheld by the Council.

The Lawsuit

The area resident, another former tenant in the building, and an unincorporated association (collectively, “HERO”) filed a writ petition challenging the 2015 MND and the project approval, alleging (among other things) that an EIR was required “to analyze the direct, indirect, and cumulative impact of th[e] Project and similar projects on the supply of rent-stabilized housing and the dislocation of tenants from such housing.”

The trial court denied the writ petition, reasoning that a project’s impacts under CEQA are measured against a baseline that “normally consists of the physical environmental conditions in the vicinity of the project as they exist at the time the environmental analysis is commenced.”  Because environmental analysis for the hotel project commenced in 2015, at which time the building was vacant and no longer being rented, the trial court found “the City’s 2015 MND properly concluded that the Project would have no impact on population and housing because it would not displace any tenants or eliminate any rental units; the residents had vacated the property long before the hotel was even considered or proposed.”  It also found – apart from the baseline issue – that HERO failed to show physical as opposed to socioeconomic impacts, and further reasoned that setting aside Project entitlements would not result in the 18 units being returned to the rental market because the “City is bound by the Ellis Act and cannot compel the property owner to ‘bring back’ these units to their prior use and rent-stabilized status.”

The Appeal And The Court Of Appeal’s Baseline And Cumulative Impacts Holdings

Apart from the non-CEQA procedural issues it raised (which were rejected in the unpublished portion of the opinion and won’t be further discussed here), HERO advanced two primary arguments on appeal:  (1) substantial evidence supported a fair argument that the cumulative environmental effects of the project and similar related projects are significant and cause substantial adverse effects on human beings cognizable under CEQA; and (2) the initial study was deficient because it failed to inquire into the project’s cumulative effects and their substantial adverse human impact.

In independently reviewing the record for substantial evidence supporting a fair argument that the MND’s mitigation measures were inadequate to avoid all potentially significant project impacts, the court of appeal agreed with the trial court’s baseline analysis.  It held the City wasn’t required to prepare an EIR to address the Project’s alleged impact on the loss of rent-stabilized housing or the displacement of tenants because the property previously had been withdrawn from the rental market pursuant to the Ellis Act, which “prohibits local governments from ‘compel[ling] the owner of any residential real property to offer, or to continue to offer, accommodations in the property for rent or lease.’”  (Small Property Owners of San Francisco Institute v. City and County of San Francisco (2018) 22 Cal.App.5th 77, 85, fn. omitted, quoting Gov. Code, § 7060(a); see San Francisco Apartment Assn. v. City and County of San Francisco (2016) 3 Cal.App.5th 463, 477 [statutory scheme provides real property owners “the absolute right to exit the residential rental business”].)

Noting the lead agency’s need to use some measure of the environment’s state absent the project – i.e., the “baseline” – in order to assess the significance of a proposed project’s environmental effects, and that under CEQA Guidelines § 15125(a) the baseline “normally” consists of the physical environmental conditions existing in the project’s vicinity at the time environmental analysis commences, the court stated:  “The baseline determination is an important component of the CEQA process, as it sets the criterion by which the agency determines whether the proposed project has a substantial adverse effect on the environment.”  The rule is not an inflexible one, however, as environmental conditions may vary from year to year, and the agency has discretion to determine “in the first instance, exactly how the existing physical conditions without the project can most realistically be measured, subject to review, as with all CEQA factual determinations, for support by substantial evidence.”  (Citing Communities for a Better Environment v. South Coast Air Quality Management Dist. (2010) 48 Cal.4th 310, 328.)

Here, the City properly applied the general rule that the baseline consisted of physical environmental conditions as they existed when environmental analysis commenced, which conditions here consisted of a vacant, uninhabited building rather than a tenant-occupied rental property.  HERO’s argument that the City’s baseline relied on an “unproven hypothetical” that the owner’s 2013 Ellis Act withdrawal was irreversible had it exactly backwards – rather, it was HERO’s argument that posited the “unproven hypothetical” and “purely speculative” theory that the owner might at some point return the units to the rent-stabilized rental market.  Per the Court:  “Because the Project would not displace any tenants or remove any rent-stabilized units from the market – those events already had occurred independently of this Project – the City properly determined that an EIR was not required to analyze the Project’s impact on housing and population.”  The Court noted that “[g]iven the historical circumstances of this fact situation,” piecemealing concerns were not implicated, and there was no “evidence of [the initial study and 2015 MND being] an attempted end run around CEQA” – nothing suggested the 2015 hotel project was “a reasonably foreseeable consequence of the initial [failed demolition/condominium] project[.]”  (Citing Laurel Heights Improvement Assn. v. Regents of University of California (1988) 47 Cal.3d 376, 396; Arviv Enterprises, Inc. v. South Valley Area Planning Com. (2002) 101 Cal.App.4th 1333, 1336.)

Nor did HERO raise any viable issue regarding the initial study’s failure “to inquire into the cumulative impact of the Project with respect to loss of housing and displacement of residents.”  When there is no substantial evidence of an individual potentially significant effect, the lead agency may reasonably conclude a project’s effects will not be cumulatively considerable and need not require an EIR on that basis.  (Citing Sierra Club v. West Side Irrigation Dist. (2005) 128 Cal.App.4th 690, 701-702.)  Here, given the court’s baseline holding, there was obviously no substantial evidence the hotel project would have any adverse impact at all on the supply of rent-stabilized Hollywood area units or displacement of residents, so no analysis of the project’s cumulative impacts on population and housing was necessary.

The Expressly Unreached Issues:  Environmental Impacts Of Loss Of Affordable Housing And Human Displacement

The Court of Appeal made some interesting observations revealing some limitations on its holding, and also some areas of seeming divergence from the trial court’s alternative basis for its CEQA ruling – i.e., that the impacts alleged by HERO were “socioeconomic” rather than “environmental.”  It observed in footnotes that “the environmental factors to be considered in an initial study include a project’s potential impact on population and housing, and specifically, whether the project would “[d]isplace substantial numbers of existing people or housing” (quoting CEQA Guidelines, § 15000 et seq., Appendix G, § XIV), but that given its baseline holding it “need not consider whether the loss of housing or displacement of tenants could, under other circumstances not present here, result in a reasonably foreseeable indirect environmental impact cognizable under CEQA.”  In light of the “dispositive” CEQA baseline issue, the court found it unnecessary to reach “any related issues” such as “HERO’s argument … that the loss of affordable housing causes substantial adverse effects on human beings within the meaning of CEQA [citation] so as to require the preparation of an EIR[.]”  (Citing Guidelines, § 15065(a)(4).)

In the same vein, and in concluding its discussion of the CEQA issues, the court of appeal stated:

“The court is mindful of the shortage of affordable housing in the City of Los Angeles.  The visibility of homelessness is a daily reminder of the unmet need for shelter, and high rents are a burden for many who have housing.  This case, however, represents the confluence of two statutory schemes.  Because the subject property had been withdrawn from the rental market pursuant to the Ellis Act and was vacant, there were no displacement of population or housing-related impacts to be addressed in an EIR pursuant to CEQA.”

The conclusion, to me at least, seems inescapable that where a local agency’s proposed discretionary action will actually result in some loss of affordable housing that displaces persons from their only available shelter, physical CEQA-cognizable impacts on population, housing and human beings will result.  The project here didn’t actually have any such impacts, but when other projects may have such impacts then CEQA and its Guidelines will require that they be studied, assessed for significance, and mitigated if determined to be significant.  The City of Los Angeles recognizes this, as evidenced by its CEQA Thresholds Guide’s screening criteria which recognize a project’s impacts on population and housing displacement are significant where it would result in a net loss of one-half block (generally equivalent to 15 single-family or 25 multi-family dwelling units) of any types of housing, or the net loss of any number of units of very-low or low-income households.  While the Court of Appeal had no occasion to address such displacement impacts in this case, this issue will undoubtedly arise more frequently and will need to be directly addressed in future CEQA cases especially given California’s severe housing and homelessness crises.