The Governor’s Housing Package - Affordable Housing Production in California Gets a Boost from Sacramento

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Best Best & Krieger LLP

A package of 15 new housing bills will have far-reaching implications for every city in California. Collectively, these new laws are meant to significantly boost affordable housing production by removing local land use discretion in favor of greater state authority and streamlined approval processes. Communities will need to prepare for this new legal landscape. Three of the bills — SB 2, SB 3 and AB 571 — were enacted as urgency statutes and took effect immediately when signed on Sept. 29 by Gov. Jerry Brown, though SB 3 is further subject to voter approval. The remaining 12 bills will take effect Jan. 1, 2018.

SB 35: Streamlined Approval for Affordable Housing
Perhaps the most talked about bill of the package, SB 35 looks to expedite the local approval of developments that include affordable housing. Qualifying projects will be subject to a ministerial review process, which means that cities may not require a conditional use permit and that California Environmental Quality Act review is largely limited.

To qualify for this new process, a project must be located in a city that has failed to produce enough housing to meet its regional housing needs allocation, or RHNA, by income category and must meet numerous objective criteria set out in the statute. If a project meets these criteria, the developer may opt to seek expedited approval. However, doing so will require the developer to pay prevailing wages and may necessitate that a skilled and trained workforce be used to complete the project. These considerable disincentives will likely decrease the attractiveness of this process.

Cities should note that even if this new approval process is not likely to be widely used locally, they are still required to include additional information in their annual reports to the Department of Housing and Community Development. This information will determine whether the city is meeting its RHNA by income category, and thus subject to this new approval process. Staff should acquaint themselves with the new requirements prior to the next reporting deadline in April 2018.

AB 879 and AB 1397: Housing Element Reporting
Currently, state law requires each city to prepare an annual report to HCD to document the status of the city’s general plan and its implementation. There are specific reporting requirements for the material concerning the city’s housing element. In keeping with SB 35’s expanded requirements for cities not meeting their RHNA goals, AB 879 and AB 1397 will require all cities to include additional information in their annual reports. This granular data collection focuses on the number of units and projects proposed, approved and built during the year.

The new laws likewise increase the amount of information required to be included in housing elements themselves, including a demonstration of local efforts to remove nongovernmental constraints that leave a delta between the city’s planning for housing at all income levels and the actual construction of that housing. The revised reporting requirements will mandate that cities look to the “realistic development capacity” of sites when calculating unit totals. Certain projects that offer at least 20 percent of their units at costs affordable to lower income persons may be developed by right.

These amendments to the Housing Element Law will also vest HCD with the authority to undertake a study of the “reasonableness” of local fees charged to new developments and to include findings and recommendations regarding possible amendments to the Mitigation Fee Act “to substantially reduce fees for residential development.” The study is required to be completed by June 30, 2019.
SB 166: Maintaining Sites for Affordable Housing by Income Category
Cities are currently required to ensure that their housing element inventory identifies or includes programs to make sites available to accommodate its RHNA throughout the planning period. Under the “No Net Loss Zoning Law,” cities may not reduce residential density or allow development at a lower residential density unless the city makes findings supported by substantial evidence that the reduction is consistent with the general plan and there are remaining sites identified in the housing element adequate to meet the city’s outstanding RHNA. The new gloss added by SB 166 is that cities that allow development at reduced densities must now be prepared to meet remaining unmet RHNA need by income category within 180 days.

The law is explicitly meant to discourage cities from approving market-rate housing or non-residential uses on opportunity sites without coming to terms with where their unmet need will find a new home. As with SB 35, careful recordkeeping and understanding of your city’s current RHNA attainment by staff and decision makers will be essential as land use applications are processed.

SB 167, AB 678 and AB 1515: Giving the Housing Accountability Act More Teeth
These bills are meant to bolster the Housing Accountability Act, a 35-year-old statute that is often referred to as the “Anti-Nimby Law.” Essentially, the Act restricts the ability of a city to disapprove or require density reductions in certain housing developments. Though often invoked with regard to affordable housing projects, portions of the Act pertain to all housing developments, even if they do not contain affordable housing.
These bills will, among other things, impose new notification requirements to inform applicants of inconsistencies with local requirements, increase the burden of proof on cities seeking to disapprove or condition projects, adopt a hefty fine that may be imposed by courts on cities for violations, and decrease the deference with which cities’ judgment on certain interpretations is treated.

Though SB 35 has received more press, this trio of bills will probably have far greater implications for most cities in the State as they come to terms with the new requirements and potential ramifications for running afoul of them. Staff will need to be prepared to identify and explain, in writing, on short timelines, inconsistencies with local requirements to avoid defaulting to a “deemed consistent” finding.

AB 72: Housing Element Compliance Reviews by HCD With Possible Decertification
This new law authorizes HCD to review “any action or failure to act” by a city that it independently determines is “inconsistent” with an adopted housing element or Government Code section 65583 (part of the Housing Element Law), including any failure to implement any programs included in the housing element. In carrying out this exercise, HCD may “consult with any local government, public agency, group, or person, and shall receive and consider any written comments from any public agency, group, or person.” Once HCD supplies its written findings to the city, a 30-day timeline begins, by the conclusion of which the city must respond to the findings.

If these findings determine that the city’s action or failure to act does not “substantially comply” with the Housing Element Law, and if HCD previously certified the city’s housing element update, then HCD may revoke that certification until it determines that the city has come into compliance. Additionally, HCD may notify the California Office of the Attorney General that the city is in violation of state law, if HCD finds that the housing element, an update thereto, or any action of failure to act described above does not substantially comply with the Housing Element Law or that the city has taken an action violating the Housing Accountability Act, the “No Net Loss Zoning Law,” the Density Bonus Statute or the State’s prohibition on discrimination against affordable housing found in Government Code section 65008.

AB 1505: Permitting Inclusionary Housing Ordinances for Rental Units Again
Inclusionary housing ordinances encourage the development of affordable housing by requiring residential developers to either build a minimum percentage of affordable units or, generally, pay a fee in-lieu of actual construction. These fees are then aggregated and used to build affordable housing elsewhere. Until 2009, cities routinely imposed such requirements on both rental and ownership projects. In that year, however, the California Court of Appeal in Palmer/Sixth Street Properties v. City of Los Angeles held that such an obligation, as applied to rental housing, violated the Costa-Hawkins Act (Civil Code section 1954.50, et seq.). That Act reserves to landlords the right to set initial and subsequent rents for buildings constructed after 1995.

AB 1505 looks to legislatively supersede Palmer by adopting statutory language specifically authorizing cities to require, as a condition of development of residential rental units, that the development include a certain percentage of affordable units, so long as the ordinance also supplies an alternative means of compliance, such as in-lieu fees, land dedication and so forth. AB 1505 does so, however, not by repealing or amending the Costa-Hawkins Act, but by adding new language to the Planning and Zoning Law. (A companion bill, AB 1506, would have repealed the Costa-Hawkins Act entirely, but that effort was put on hold in the face of stiff opposition and is now a two-year bill, meaning it could still be considered next year.) HCD review and an economic feasibility evaluation may be required of ordinances that require the inclusion of more than 15 percent rental units, depending on the city’s attainment of its RHNA and its compliance with annual reporting requirements.

AB 1521: Strengthening the Preservation Notice Law Regarding the Preservation of Assisted Housing Developments
California’s existing Preservation Notice Law generally requires owners of enumerated housing developments that include subsidized units to meet certain notice requirements if the affordability of those units is coming to an end. It also requires such owners to give certain parties the opportunity to submit an offer to purchase the development. It does not require the owner to accept any such offer.

AB 1521 seeks to make this law a more effective affordable housing preservation tool by implementing a host of new requirements, including requiring that notice of expiration be provided three years in advance (for expiration dates after January 2021), requiring owners to either accept bona fide purchase offers at fair market value from certain parties or continue to hold the property for five years (and seek to continue the affordability of the project), increasing the potential penalties for violations of the law (including referral to the Attorney General’s Office and the payment of attorney’s fees to challengers in some instances), and HCD monitoring of compliance with these requirements.

SB 2: Establishing a Permanent Source of Funding for Affordable Housing Through New Real Estate Transaction Document Fees
As an urgency statute, SB 2 is now in effect. The loss of the nearly $1 billion generated annually for affordable housing through the elimination of redevelopment has been keenly felt throughout the State, and ad hoc measures taken in the wake of redevelopment have, in the State’s opinion, proven inadequate to make meaningful improvements in the availability of affordable housing stock.

In an effort to establish a new “permanent, ongoing source” of funding for affordable housing production, SB 2 creates a new “Building Homes and Jobs Trust Fund” that will be financed through a fee imposed upon the recordation of certain real estate transaction documents. The fee of $75 per document (with a cap of $225 for a single transaction per parcel of real property) will be collected by county recorders and sent to the State Controller. Until the end of 2018, the use of such funds will be shared among local governments, which may request funds for updating their planning and zoning ordinances to streamline housing production, technical assistance to such efforts and state efforts to fight homelessness. Funds collected after Jan. 1, 2019, will be made available according to a different formula. At that point, funds will be distributed to qualifying local governments, who will receive 70 percent of such fees for affordable housing, workforce housing, matching funds in local housing trust funds, and the realization of other enumerated housing objectives. The remaining 30 percent of fees collected will be used by the state for programs aimed at farmworker housing, mixed-income multi-family housing, and associated efforts.

SB 3: Will Voters Approve $4 billion in General Obligation Bonds for Affordable Housing and Veterans’ Home Ownership?
On election day Nov. 6, 2018, voters will have the chance to determine whether to adopt $4 billion in general obligation bonds earmarked for a variety of housing programs, with $1 billion slated for veterans’ homeownership programs and $3 billion allocated to a wide assortment of affordable housing measures, including housing rehabilitation loans, transit-oriented development assistance to local governments, grants for infill construction of high-density affordable and mixed-income housing, farmworker housing, and additional CalHome funding. If passed by the voters, SB 3 expressly authorizes the Legislature to amend any law related to programs to which funds are, or have been, allocated under this new funding mechanism.

Unlike many of the bills in this package, SB 3 enjoyed wide support from local governments and their allies, affordable housing advocates and the development community. Its ultimate fate remains to be seen.
SB 540: Streamlining CEQA Review for Workforce Housing Developments
SB 540 will allow cities to establish Workforce Housing Opportunity Zones, within which review and approval of qualifying housing developments will be streamlined — provided enumerated criteria are met. The mechanism is meant to ease the burden of housing production by completing necessary planning and environmental review in advance, allowing developers to bring projects online more quickly. However, prevailing wages must generally be paid and associated Labor Code provisions met for qualifying projects, likely dampening the appeal of this new process.

To utilize a Workforce Housing Opportunity Zone, the Legislature specified that any interested city will have to adopt a specific plan and complete an environmental impact report. Specified mitigation measures from this EIR will then apply to all projects constructed within the zone’s planning area.

Though the contents of specific plans are typically left largely to cities’ discretion, Workforce Housing Opportunity Zone specific plans will need to address the numerous factors set forth in the statute, which even dictates the length of time required between public hearings. (HCD funding may be available to cities to help meet some of the associated planning costs.) Provided a proposed project complies with the specific plan, the city will be required to approve it, unless a limited universe of findings to support a denial can be made. New timelines are established for approval of such projects, and approvals have a five-year life prior to their expiration.

AB 73: Housing Sustainability Districts: A New Approach to Incentivizing Local Approval of Affordable Housing
AB 73 amends the Government Code to allow cities to adopt ordinances creating housing sustainability districts. The purpose of such districts is to incentivize housing development by allowing streamlined environmental review and state payments to cities to support adoption of this new tool.

A proposed housing sustainability district ordinance must be approved by HCD. Some of AB 73’s requirements for a housing sustainability district include residential use by right in the zone, minimum affordability mandates, minimum density ranges, maximum area coverage and a preclusion on moratoria that may be adopted. AB 73 also generally requires that a prevailing wage be paid for projects within a district.

Like SB 540, the housing sustainability district concept also allows for upfront environmental review. Comprehensive environmental review is performed for the creation of the district itself, which will provide mitigation measures for future housing projects in the district to mitigate identified impacts. If the housing project meets the district’s standards, the district’s environmental review is less than 10 years old, and the project complies the mitigation measures, then no additional environmental review is required.

Cities with HCD-approved housing sustainability district ordinances will be entitled to receive a “zoning incentive payment” from the State. The payments will be based on number of new residential units to be built within the district and will be paid out in two phases, with the first installment coming due upon the city’s adoption of their approved HSD ordinance, and the second due upon the attainment of specified benchmarks. SB 73 does not indicate the amount of these payments.

AB 571: A Bid to Increase Development of Farmworker Housing
As an urgency statute, AB 571 was effective when signed. AB 571 amends the Health and Safety and the Revenue and Taxation codes to expand eligibility of farmworker housing projects for affordable housing tax credits and to expand HCD’s contribution to migrant farm labor centers.

Certain farmworker housing projects are eligible for the Low Income Housing Tax Credit Program administered by the California Tax Credit Allocation Committee. AB 571 expands eligibility of farmworker housing for the tax credits by redefining “farmworker housing” to mean 50 percent — down from 100 percent — of the units are available to and occupied by farmworkers and their households. It will also now allow for the California Tax Allocation Committee to allocate tax credits to farmworker housing projects that receive federal low-income housing tax credits.

The HCD’s Office of Migrant Services is required to assist with the development and operation of migrant farm labor centers. AB 571 affords OMS more tools and relaxed standards in this effort by authorizing HCD to advance payment of up to 20 percent of the annual operating costs of a migrant farm labor center, and allowing for HCD funding of migrant farm labor centers beyond the standard 180 days (up to 275 days, cumulatively, per calendar year).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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