In the ever-changing landscape of San Francisco real estate development, where demand for office space continues to gain momentum, conversion of property in PDR zoning districts to office space has received recent attention.

Currently, the Planning Code permits the conversion of designated landmark buildings in PDR districts to office use.  This exception to the general prohibition of office use recognizes the need to ensure the economic viability of historically significant buildings.

In June, Pinterest reportedly signed a lease for the building at 2 Henry Adams Street, which houses the San Francisco Design Center in Showplace Square, with plans to convert a large portion of the building to office use. Pinterest’s offices are currently housed at 808 Brannan Street, having been in the vanguard of technology firms moving from Silicon Valley to San Francisco.  Once here, these firms face difficulty growing their operations in a city where large office spaces are scarce and much space under construction is already pre-leased to technology firms such as Trulia, Salesforce, LinkedIn and Dropbox.

Showplace Square, which straddles Potrero Hill and SoMa, has a concentration of warehouses, showrooms, and related PDR uses, such as the design showrooms at 2 Henry Adams.  The landlord of the four-story, 329,000 square-foot warehouse building is currently seeking historic landmark designation for the building, which would clear the way for the office conversion.  This was already seen as a challenge, as the Planning Commission would have to grant an office allocation to the building, something it has recently expressed reluctance towards for buildings in industrial districts.

In some ways, Pinterest is a logical fit for the space, as many of the showroom businesses at the Design Center already showcase products on the website.  Not surprisingly, however, the Pinterest deal has faced pushback from some of the businesses, many of which would be required to move, with some relocation assistance promised by the landlord.  In the meantime, the Historic Preservation Commission has recommended historic landmark designation of the building to the Board of Supervisors, and the issue is set to be heard by the Land Use and Economic Development Committee of the Board of Supervisors this Monday, July 7.

Last week, Supervisor Malia Cohen proposed legislation that would impose interim controls to limit the conversion of buildings to office space in PDR districts.  The legislation would subject such conversions to the conditional use process.  The process would require applicants to present the economic and fiscal impact of the conversion, with a complete economic impact analysis prepared by a licensed professional.  It would further require applicants to present information regarding the availability of space for PDR uses, compatibility of office at the location, and the effects of displacement of existing tenants, including providing to the City a proposed tenant relocation plan.  The matter is set to be heard Monday along with the landmark designation of the 2 Henry Adams building.  The controls are currently proposed to be in effect for 18 months.

The issue of conversion of PDR uses to office space has quickly become a hot button issue in the world of San Francisco land use, as the City seeks to preserve existing industrial spaces from the increasing demand for new office space.  The case of 2 Henry Adams Street presents a particularly challenging case, where the company that provides the technology through which many customers of PDR businesses browse and shop is encroaching on the space where those PDR businesses operate.  One thing is becoming increasingly clear:  the conversion of industrial buildings to office use, commonly approved in recent years, is no longer a sure thing.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose LLP is a full service real estate law firm.   We specialize in land use, development and entitlement law.   We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

​

​City Continues to Get Creative to Encourage More Housing Production

The San Francisco Planning Code has become an immensely complex collection of growth controls, design mandates and development fees.  Virtually every aspect of a proposed project size and use is regulated by the Planning Code.

That of course includes the floor area of the building as well as, for residential projects, the number of dwelling units permitted.  In addition to height limits and floor area limitations that put a literal ceiling on how large a building can be, the Planning Code has, for a long time, regulated residential density based on lot size.  In other words, it directly linked the number of residential dwelling units allowed on a site to the size of the site.  This makes some fundamental sense, but when combined with many other rules in the Planning Code, it ends up being one of a number of rules trying to regulate the same thing.  Height limits, and a variety of rear yard and other setback requirements, effectively limit the size of the building.  It has always seemed like overkill to further regulate the number of drilling units that can fit within any given building otherwise permitted by the Planning Code.  And the Planning Department has recognized this, and is moving toward more “form based” zoning (i.e., the envelope of the building is regulated, not the number of units or floor area within it…).

In an effort to support more density on our remaining in-fill sites and to incentivize the production of more affordable housing, Supervisor Wiener has proposed a completely sensible Planning Code amendment that would exempt affordable housing units from being counted under these lot density provisions.  This means that the density will be calculated based on the number of market rate units provided on the site, and then the affordable on-site units will be added in without penalizing the project in terms of density.

The proposed rule links up nicely with the Mayor’s push for accelerated construction of housing units, as well as the Planning Department’s apparent willingness to “prioritize” projects with at least 20% on-site affordable.  The Scott Wiener Rule would only apply to projects with 20% on-site affordable housing.  The Planning Commission will be hearing this matter this week on June 12.  We will continue to track this legislation.

PDR Back At The Commission

Also at the Planning Commission this week is an informational presentation on the status of production, distribution and repair (“PDR”) in San Francisco.  While no formal action will be taken, it will be interesting to listen to comments from both commissioners and members of the public as to whether this type of zoning is actually working.

PDR uses – generally considered light industrial and manufacturing uses – have quietly been making a comeback in San Francisco in recent years.  The City’s manufacturing sector grew in 2012 for the first time since 1989.  Manufacturing jobs have grown from 2,500 in 2011 to 4,000 today.  The high-profile departure of chocolatier TCHO for Berkeley has raised concerns about whether current City policy is adequately protecting and providing space for home-grown small manufacturers.

On the other hand, there do appear to be a number of buildings in PDR-zoned districts that are not quite living up to their potential – and there are of course companies lining up to extract the highest and best use from these buildings.  

In the end, it is always important to remember how lucky we are in this fine City to be dealing with the problems we have.  The unemployment rate currently stands at 4.4% – the third lowest of all California counties.  Kudos to Ed Lee as well – the unemployment rate has been cut in half from when he came to office – at the time the rate was 9.4%.  This economic rise really has lifted all boats – the Chronicle reported last week that restaurants are having trouble filling jobs in their kitchens.

A nuanced conversation about PDR is certainly due – we hope Thursday’s hearing does not devolve into a zero-sum conversation.

And Finally…Formula Retail Stores Sales Are UP

And while the City continues to struggle with its formula retail controls, as the economy picks up speed both regionally and nationally, formula retailers’ sales across the country are up significantly.

ICSC reports that US formula retailers posted a mice 4.8% year over year gain for May according to their index.  This uptick in retail sales is a full 1% higher than a year ago on May 2013.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

​New Reporting Requirements for Developers, Lobbyists and Permit Expediters

Last month, Supervisor Chiu reintroduced legislation that would dramatically expand reporting mandates for lobbyists, permit expediters, and developers to report contacts with City officials and, in some cases, their donations to charitable organizations.  The legislation will be considered at the Board of Supervisors Audit & Oversight Committee on June 10.

Developer Disclosures

The most far-reaching and novel aspect of the legislation would require developers to disclose certain contributions to nonprofit organizations.  According to the ordinance, these new rules are necessary to “protect public confidence in the fairness and impartiality of…land use decisions.”

The requirements would apply to developers of “major projects,” i.e., any project with a construction cost over $1 million that needs a project specific EIR, or which relies on a previously certified EIR.  This latter category includes projects in Redevelopment areas, along with projects that receive a community plan exemption. This means the lion’s share of developers with projects in the Eastern Neighborhoods, Market-Octavia, West SoMa, Central SoMa, and Transit Center will be required to report certain charitable contributions.  The term “developer” is broadly defined to include “all constituent individuals or entities that have decision-making authority” over a project.

The reporting requirements would apply to cumulative donations of $5,000 or more to a nonprofit organization that has lobbied the City, i.e., “attempted to influence” any “legislative or administrative action.”  Donations are reportable for a period beginning one year before an environmental application is filed up to one year after a project is approved.

There are a number of problems with the legislation as written. First, it is overbroad. Donations to any nonprofit that attempted to influence any City legislative or administrative action – even actions wholly unrelated to a developer’s project – must be reported. Second, there is a mismatch between developer’s obligations and those of nonprofits, which enjoy a broad exemption from requirements to report lobbying activities.

Lastly, the ordinance may in fact dissuade developers from proactively building legitimate relationships with nonprofits while failing to shine a light on problematic ones.  This is because a reportable donation only includes a “gift of money, property, goods or services.”  It does not, however, include settlement agreements, where a nonprofit does not receive a “gift” but instead receives funds as compensation in exchange for giving up its rights to oppose or appeal a project.  

Perhaps the best way to illustrate is by example.  Developer A makes a $5,000 contribution to the San Francisco AIDS Foundation six months before filing an environmental application for a project.  Three years later, Developer A receives Planning Commission approval for the project, triggering the reporting requirement.  Developer A is not aware that the AIDS Foundation has contracts with the City and lobbies the City on public health matters and budgets.  Developer A has violated the ordinance and could be liable for a $5,000 fine.

Developer B has a project at the Planning Commission and has received word that a politically connected nonprofit will turn out in force to oppose it.  Developer B is informed that the nonprofit will sign a settlement and support the project in exchange for a $1 per year lease on office space in the building for a ten-year term.  Developer B and the nonprofit sign the agreement, worth $350,000 for the nonprofit over the life of the lease.  Neither the developer nor the nonprofit is required to report anything to the City.

Permit Expediters and Lobbyists

Lobbyists have been required to report contacts with City officials for some time. Supervisor Chiu’s ordinance would expand the universe of lobbyists dramatically.  At present, a lobbyist is someone who is promised or receives more than $3,000 in a calendar month for lobbying.  Lobbyists must register with the Ethics Commission and report contacts with public officials each month. Under the proposed definition, the definition of a lobbyist would be expanded to include any person:

• Who has more than five contacts with supervisors, commissioners, department heads and other specified public officials  (“public official”) during a calendar month; or

• Who makes one or more contacts in a calendar month with a public official on behalf of any person who pays the individual or individual’s employer.

A person lobbying on behalf of a business in which he owns a 20 percent share is not a lobbyist.  The practical effect of these changes is to require many business people who have limited contact with City officials to register and report their contacts to the Ethics Commission each month.  Failure to report lobbying activities could result in fines up to $5,000 per violation.  Clients and employers of lobbyists could be held jointly and severally liable for violations.

Though the ordinance would apply broadly to private sector employees, it will maintain broad exemptions for many groups that play an outsized role in shaping policy and budgets in City Hall.  For example, communications on behalf of a labor union representing City employees regarding collective bargaining agreements are exempt, as are communications by representatives of nonprofit organizations on behalf of their organization.  

Permit Consultants

Under the proposed legislation, permit consultants would also be required to register with the Ethics Commission and report their permit consulting services each month.  A permit consultant would include anyone who receives or is promised compensation to provide permit consulting services, excepting only contractors, architects or engineers of record for a project.  Permit consulting services include “any contact with the Department of Building Inspection, the Entertainment Commission, the Planning Department or the Department of Public Works to help a permit applicant obtain a permit.”  

The upshot is that any employee of a development firm that sends one email to a DBI plan-checker would be required to pay a registration fee and report contact to the Ethics Commission.  Attorneys, historic preservation consultants, and other professionals working to secure permits for a project would also qualify as permit consultants and be subject to stringent reporting requirements. However, professionals engaged by opponents to object to permits would not be required to register or report their activities.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

​What are a salesperson’s duties in a real property transaction when its employing broker represents both the buyer and seller through separate salespersons in the company?  A recent case entitled Horiike v. Coldwell Banker Residential Brokerage Company et. al. specifically addressed that question (225 Cal.App.4th 427).  In Horiike, Coldwell Banker, as the broker, represented both the buyer and seller in a residential sale through two different salespersons at the company.  The buyer ultimately sued Coldwell Banker and both salespersons for several causes of action, including breach of fiduciary duty.  The trial court granted a nonsuit on the claim for breach of fiduciary duty against the seller’s salesperson on the ground that such salesperson did not have a fiduciary duty to the buyer.  The buyer contended that seller’s salesperson had the same fiduciary duty to buyer as that of the broker.  The Court of Appeal agreed and held that when a broker is the dual agent of both the buyer and the seller in a real property transaction, the salespersons acting under the broker have the same fiduciary duty to the buyer and seller as does the broker, even though they are only representing one side of the transaction.

In Horiike, an agent at Coldwell Banker listed an owner’s home for sale with approximately 15,000 square feet of living space based on measurements from an architect, although public record listed the home at closer to 9,000 square feet.  Another agent at Coldwell Banker brought a potential buyer, Mr. Horiike, who went into contract on the property.   The buyer and seller signed the proper documentation alerting them to the dual agency by Coldwell Banker and the buyer eventually closed on the purchase.  Afterwards Mr. Horiike pulled building permits to begin renovations on the home which showed the square footage was materially less than 15,000 square feet. He thereafter brought the action contemplated in this case.

Horiike contended that seller’s agent, as an associate agent of Coldwell Banker, owed a fiduciary duty to him equivalent to the fiduciary duty owed to him by Coldwell Banker. The court agreed relying on statutory law which says that “when an associate licensee owes a duty to any principal in a real property transaction, that duty is equivalent to the duty owed to that party by the broker for whom the associate licensee functions”.  Since seller’s agent was an associate of the broker who was on both sides of this transaction, he owed a fiduciary duty to the buyer, in addition to his fiduciary duty to the seller.  

A broker’s fiduciary duty to its client requires the highest good faith and undivided service and loyalty.  The broker as a fiduciary has a duty to learn the material facts that may affect the principal’s decision.  The agent’s duty to disclose material information to the principal includes the duty to disclose reasonably obtainable material information.  A fiduciary’s failure to tell the principal material information is considered constructive fraud, which is a unique type of fraud applicable only to a fiduciary relationship.  In this case, seller’s salesperson was aware of potentially different values of square footage which could be material to the buyer.  Arguably, he should have investigated further and provided his findings to Mr. Horiike.

This case is an important reminder that even if informed waivers are signed by all parties, salespersons at a brokerage firm representing both sides of a transaction should tread carefully and be aware of their respective duties to both buyer and seller.  Even though seller’s agent represented the seller and not the buyer in this transaction, due to the fact that the broker represented both principals through its respective salespersons, seller’s agent owed a fiduciary duty to both parties.  Seller’s salesperson could be held liable for constructive fraud to the buyer for failing to adequately investigate the amount of square footage at the property and provide the relevant information to Mr. Horiike.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

​Last December, Mayor Ed Lee responded to the City’s current housing affordability crisis by issuing Executive Directive 13-01, which asked City departments with control over the permitting process take action to prioritize the construction and development of new housing.  At this week’s Planning Commission hearing, the Planning Department will provide an update on the status of its response to the Directive, including a discussion of newly-implemented policies and anticipated work product of a recently-formed Housing Working Group.

The Executive Directive charged the Directors of the City’s Planning Department, DBI, Fire Department, Rent Board, and Mayor’s Office of Housing to form a Working Group with three primary tasks: (1) to recommend to the Mayor City policies and administrative actions that could be implemented to preserve and promote rental housing; (2) implement a process to have the Planning Commission consider Discretionary Review hearings when a loss of housing is proposed; and (3) serve as an advisory body to City department with permitting authority as a clearinghouse for code compliance checks for buildings that are being withdrawn from the rental market.

Planning and DBI issued a joint response to the Directive last February, which identified several process-improving changes intended to help in facilitating the production and retention of housing.  Since then, the Departments have been implementing their recommendations through short-term administrative policy changes.  

Most recently, the Planning Department prepared a Draft Director’s Bulletin No. 5, which summarizes and clarifies the new policies and, and provides guidelines for ensure their consistent implementation.  These policies include:

Priority Application Processing

The Department revised its policy for prioritizing the processing of residential applications.  The current policy prioritizes the review and processing of 100% affordable housing projects, followed by projects providing at least 20% on-site or 30% off-site affordable housing units, over all other types.  The Draft Bulletin clarifies that market-rate projects will be prioritized based on the amount of new on- or- off-site units provided; the greater the number of affordable units, the higher the priority for processing. However, applicants will still need to submit and be approved for priority processing before they can benefit from this policy.

Concurrent Review Procedures

For 100% affordable housing projects and project with at least 20% on-site or 30% off-site affordable housing, the Planning Department, DPW, the Mayor’s Office of Disability, DBI and the Fire Department will review applications simultaneously, when appropriate.   To take advantage of this process, applicants will need to request a pre-application meeting with all relevant agencies before filing a building permit.

Additional Process and Disapproval Recommendations for Certain Dwelling Removals

Applicant proposing the merger or removal of dwelling units in the City already face an uphill battle, but the Department’s revised policies would make the process even more challenging.  

According to the Draft Director’s Bulletin, applications for the merger of dwelling units, where both units are “demonstrably unaffordable” (appraised within the last six months for $1.506 million or more), will continue to be processed administratively by the Department without requiring a Mandatory Discretionary Review or Conditional Use hearing.   

However, for all merger applications where at least one of the units is valued under $1.506 million, administrative process is not available and the Department will automatically recommend that the Commission deny the merger application at the required hearing.  The Draft Bulletin states that is policy reflects the “exceptional and extraordinary circumstance” created by the current housing affordability crisis.   

The Department will also require a Mandatory Discretionary Review hearing for the removal of unpermitted housing (including Live-Work units) in buildings containing three or more units, and applicants will be required to submit a report by a qualified professional outlining the upgrades (and associated costs) required to legalize the unit.  Where a feasible path is available to legalize the unit, the Department will recommend that the Commission deny the removal permit and preserve the unit.

At this week’s Commission hearing, the Department will also discuss the Housing Working Group, which was recently formed in response to the Executive Directive.  Activities anticipated for this Group include (1) exploring changes to the City’s Inclusionary Housing Program to establish a “dial program” that would create more affordable dwelling units at a higher AMI and potential amendments to the off-site; (2) debating methods to improve the City’s entitlement and environmental review process; and (3) evaluating potential funding sources to support low- and- middle-income housing development.

Additional information on the Department’s activities in response to Executive Directive 13-01 is available at: http://commissions.sfplanning.org/cpcpackets/Executive%20Directive%20Status%20Update.pdf

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

​Existing zoning restrictions prohibit residential and office uses, and limit retail and institutional uses, in both PDR-1-D and PDR-1-G zoning districts.  These prohibitions have in fact discouraged production, distribution, and repair (“PDR”) development.

Mayor Ed Lee, together with three members of the Board of Supervisors, recently proposed legislation to encourage the development of PDR uses, and small enterprise work spaces.  The proposed legislation would amend the Planning Code to allow office, retail, and certain institutional uses to be combined with PDR uses in new mixed-use development projects.  The proposed legislation encourages development of small enterprise work spaces, defined as a building that includes discreet work space units, commonly referred to as business incubators which are independently accessed from the building’s common areas.

Subject to obtaining a conditional use authorization from the Planning Commission, applicants with parcels of 20,000 sq. ft. or larger located in PDR-1-D or PDR-1-G zoning districts north of 20th Street shall be permitted to construct new developments containing a minimum of one-third (total gross floor area) of PDR uses.  The remaining two-thirds of total gross floor area may be allocated to office use, retail uses, or institutional uses such as assembly, social services, child care, schools, colleges, religious facilities, residential care, and job training centers.  Each small enterprise use in a project would count as 0.5 square feet of PDR space and 0.5 square feet of non-PDR space.  

The existing land use category known as “integrated PDR” would be eliminated from the Planning Code.  The Restricted Integrated PDR Special Use District would be eliminated from the Code.  The proposal would allow up to 33% of new PDR space to be characterized as accessory retail use.  To be eligible, the development site must be vacant or nearly vacant (i.e., built to a floor area ratio of 0.3:1 or less).  Small enterprise work spaces would be limited to a maximum of 1,500 square feet each, although these work spaces would be allowed to be a part of a mixed-use building.

The proposed legislation is likely to facilitate construction of new PDR buildings and mixed-use buildings with PDR uses, and make it easier for new PDR uses to obtain permits.  The proposed Code changes reflect needed corrections to the existing PDR zoning controls, which were created in 2008 as part of the Bay View and Eastern Neighborhoods Plans.  The proposed changes reflect experience gained over the past 6 years with respect to zoning restrictions in PDR districts, and the reality that it remains difficult to finance construction of new PDR space even in PDR zoning districts.  Allowing office and other uses to be part of new PDR projects is expected to help alleviate this problem.

The increase in the permitted size of small enterprise work spaces from the current maximum of 100 square-feet to the new maximum of 1,500 square-feet per workspace should encourage development of small PDR businesses including those with accessory retail space.  

After more than a decade of controversy relative to replacement of former warehouse uses and many types of industrial uses by 21st century uses and modern industries such as technology, biotech, research and development, and internet services, the legislative proposal is a fresh approach to seeking a balance between maintaining PDR mandates while recognizing that technology office uses are the new bedrock of San Francisco job creation, economic development and growth.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

​As we reported in our July 13, 2013 Update, last year the San Francisco Board of Supervisors (“Board”) passed an ordinance establishing the Expedited Conversion Program (“Program”), designed to alleviate the huge backlog of Tenancy in Common (“TIC”) units waiting to convert to condominiums.  The Program permits qualified TIC owners to convert their units to condominiums, in exchange for payment of a conversion fee (“Fee”) of $20,000 per unit (although the fee may be reduced for qualifying units).

The ordinance provides that an applicant for conversion under the Program may appeal to the Board for a reduction, adjustment or waiver of the Fee “based upon the absence of any reasonable relationship or nexus between the impact of development and the amount of the fee charged…”  While this standard for appeal is vague, it appears to be limited to a general challenge of the Fee requirement in the Program, as opposed to a challenge based upon the impact of the Fee as applied to a particular TIC owner.  To the Board’s chagrin, this right of appeal of the Fee resulted in appeals not anticipated by the ordinance, such as an appeal based upon an owner’s inability to pay the Fee due to financial hardship.

To avoid further appeals not permitted by the Program, Supervisor London Breed sponsored an ordinance that was passed by the Board on April 29, 2014.  The new ordinance authorizes the Clerk of the Board to reject appeals of the Fee if the Clerk determines that the appeal on its face does not challenge, on a factual or legal basis, the relationship or nexus between the impact of development and the amount of the Fee charged.  To temper this authority granted to the Clerk, a Board Supervisor may permit the appeal and schedule a hearing, even if the Clerk determines that the appeal does not meet these standards.    

To balance the limitation of appeals in the new ordinance with the legitimate concerns of cash-strapped TIC owners who are unable to pay the Fee when required under the Program, the new ordinance permits certain qualifying low and moderate income owners to defer payment of the Fee until six months after the condominium map is recorded.  This is intended to give such owners time to refinance their units based upon its increased value as a condominium, and presumably use money from the refinance to pay the Fee.

To participate in the conversion Program, certain units must have been continuously owner-occupied for designated periods of time (typically 3 years), with no gaps in occupancy greater than 3 months.  This presents a hardship for those buildings in which there was a foreclosure due to an owner’s failure to pay its mortgage, as such units often stay vacant for several months until a TIC new owner occupies the unit.  Such a foreclosure would prevent the other innocent TIC owners from converting under the Program through no fault of their own.  To alleviate this hardship on innocent owners in a TIC building where a unit has been unoccupied for greater than 3 months due to a foreclosure, the new ordinance increases the permitted period gap in occupancy for one qualifying unit per TIC building to one year.  

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

​Today, a long-awaited economic study of formula retail controls in San Francisco was presented to the San Francisco Planning Commission.  Before diving into the details, some background: in response to a number of recently-enacted and pending proposals at the Board of Supervisors which would increase formula retail controls in San Francisco, the Planning Department in June 2013 commissioned an economic analysis of San Francisco’s existing formula retail controls and the impacts of the proposed legislation.  A retailer which has eleven or more other stores in the United States with certain standardized features is considered a formula retailer.

The study, prepared by Strategic Economic Consulting Group, confirmed some hard truths about San Francisco’s formula retail controls, particularly that they are successful at deterring companies which would qualify as formula retailers from pursuing new locations in San Francisco’s neighborhood commercial districts.  At the same time, the results of the study emphasized the positive impact these retailers have on blighted neighborhoods, demonstrating that these companies are ideal tenants for large-scale spaces and can prevent long-term vacancies—if only the barriers to entry were lowered somewhat.  The study also questioned the utility and effectiveness of many proposed changes to formula retail controls in the city.

Controls May Deter Formula Retailers…

Among the highlights of the study are its conclusions regarding the effects formula retail controls have on a neighborhood.  The study—which included the first comprehensive mapping of all formula retail stores in San Francisco—concluded that the relatively low concentration of formula retailers in neighborhood commercial clusters likely means the cost, uncertainty, and delay associated with the conditional use approval process deters retailers from attempting to open stores in these neighborhoods.  

Formula retailers are also most highly concentrated downtown, South of Market, in tourist-oriented areas like the northeastern waterfront and Union Square, and in shopping centers.  With the exception of most shopping centers in neighborhood districts, these areas do not have formula retail controls.

…Which Might Not Help Other Retailers or the San Francisco Economy

Formula retailers generally tend to occupy larger spaces than non-formula retailers — approximately 85% of formula retailers occupy spaces over 3,000 sq. ft. in size, while 80% of non-formula retailers use less than 3,000 sq. ft.  This seems to suggest that often formula and non-formula retailers do not compete for the same spaces, or at the very least most other retailers cannot or do not wish to lease large-footprint spaces.  Indeed, the study concluded that there is not a consistent relationship between the approval of a new formula retail application and an increase in local rents and subsequent vacancies.

In fact, the disapproval or withdrawal of a formula use application may lead to long-term vacancies at the site:  the large and deep retail spaces that are natural fits for many formula retailers can sit vacant for extended periods of time after a project is disapproved or abandoned, and these large vacant spaces can act as a drain on the surrounding district’s overall performance as a shopping and commercial destination.  

Assessing Current 11-Store Threshold and Proposed Legislation

Finally, the authors of the study addressed the existing formula retail controls, as well as the many pieces of legislation proposing changes to these controls. 

The study recognized that many local companies can become victims of their own success—such as San Francisco locals Philz Coffee and Pet Food Express, each of which recently passed the 11-store threshold.  The authors suggested raising the store threshold to twenty or even fifty stores.  Because the majority of formula retailers (approximately 75%) have fifty or more stores nationwide, raising the threshold could protect local fast-growing companies from the time, cost, and uncertainty associated with the conditional use authorization process, while at the same time requiring most formula retailers to still navigate that process.  

San Francisco’s legislators have proposed a number of potential changes to the existing controls.  These changes include augmenting the definition of formula retail to count businesses with more than 10 stores worldwide—as opposed to in the United States; expanding the types of businesses which may be considered formula retailers; and including subsidiaries of formula retailers.  Additionally, the Planning Department recently began to apply numerical thresholds for concentrations of formula retail stores in certain districts.

The study concluded that most of these changes would not have their intended effect.  For example, the international expansion would likely affect international companies seeking to place their first United States store in neighborhoods with a strong ethnic identity, such as Japantown or Chinatown, as well as in high-end shopping districts like the Upper Fillmore.  Subsidiaries would only account for three percent of formula retailers, and many of these subsidiaries already have more than 11 stores in the US, meaning they would already be subject to the conditional use process.  Making new categories of uses subject to formula retail controls—such as personal, business, and medical services, which include salons, gyms, and dialysis centers—could impact residents’ daily needs and make maintaining vacancy rates more difficult in many neighborhoods.    

Finally, case studies of the Upper Fillmore, Ocean Avenue, and Geary Boulevard neighborhood commercial districts demonstrated that it is impossible to define a single ideal level of formula retailers across multiple neighborhoods of differing character, urban form, and demographics.  A single formula retail concentration threshold across the entire city would not have its intended effect.

Next Steps

In early May, the Planning Commission will adopt the results of the study, as well as make policy recommendations.  This final report and policy recommendations are slated to be presented to the Board of Supervisors later that month.  The hope is that the report’s conclusions and recommendations increase the Board’s understanding of the economics of formula retail controls before any new legislation is enacted.  We will continue to monitor the progress of the new legislation.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

​On April 8, 2014, Supervisor Jane Kim introduced new affordable housing legislation creating the “Housing Balance Special Use District,” which new Special Use District (SUD) is co-terminus with her Supervisorial District (generally covering SoMa, the Tenderloin, and Treasure Island).  While the provision of affordable housing is a public policy most of us can support, Supervisor Kim’s recent proposal unfortunately creates more problems than it solves.  Moreover, this proposal comes at a time and in an area of the City where affordable housing numbers are robust, leading to the inevitable question, “If it ain’t broke, why fix it?”  

In May 2011, the Western SoMa Citizens Planning Taskforce documented that in the Western SoMa neighborhood (which largely overlaps with the proposed SUD), 37.8% of new housing units built from 1993 through 2009 were affordable units.   Supervisor Kim herself points out that in this area between 2006 and 2013, 71% of new housing consists of market rate housing, and 29% of new housing is available at below market rates.  

These are strong affordable housing numbers, especially considering that 20% is the highest percentage of affordable units required by the City under existing law in market rate housing projects, and that number applies only when the developer chooses to provide units off-site or pay an in-lieu fee.  The required percentages when the developer provides units on-site are even lower.  Clearly, existing affordable housing requirements are working, and working particularly well in the proposed SUD.

Notwithstanding these realities, and the existing regulatory difficulties already facing developers of housing in the City, Supervisor Kim feels one more layer of regulation is needed.  Here’s how it works.  In any case where a “market rate housing project” is proposed and the overall existing ratio of affordable units to market rate units constructed or entitled since 1993 in the SUD at that time is less than 30%, that market rate housing project must obtain conditional use authorization from the Planning Commission.  Removed affordable units and rent controlled units demolished, converted or removed from rent control will be subtracted from the ratio.

Among the criteria to be considered by the Planning Commission are whether allowing the project would substantially hamper the location or viability of affordable housing in the SUD, and the extent to which approval of the project would cause or exacerbate the displacement of very low, low, or moderate income households from the SUD.  If the Planning Commission approves the market rate housing project, it must find that the project promotes the health, safety and welfare of the City and the SUD, in spite of any potential adverse impacts on affordable housing and potential displacement of lower income households in the SUD.  In the event the Planning Commission disapproves the housing project, it must make findings to explain how the project as proposed would have specific adverse impacts upon the public health and safety of the City and the SUD.

Surprisingly, a market rate housing project is defined as any housing project that consists of less than 100% affordable units.  Thus, the legislation actually will work to suppress the production of affordable housing by imposing a potential conditional use requirement on housing projects even where they might propose up to 90% affordable units.  Imposing yet another entitlement requirement on proposed housing projects will make the projects less economically viable, particularly those projects with a high affordability component, which already have narrow profit margins, and ultimately suppress the production of both affordable and market rate units.  Such suppression of housing production directly contradicts the recent aggressive push by City leaders to construct more housing and address the City’s serious supply crisis.

The legislation also flies in the face of the Western SoMa Plan, which was a community-developed plan that took over 10 years to accomplish.  The Plan already establishes a delicate balance of new housing allowed, and provides for a single, streamlined entitlement application for project approval.  Placing a conditional use authorization requirement on new developments will add $103,000 in additional application fees to such projects – even though these projects had to go to the Planning Commission already.

Another problem with the legislation is the burden it imposes on an already resource-strained Planning Department.  The Department is tasked with calculating the number of affordable and market rate housing units constructed or entitled within the SUD.  The Department also must calculate the number of rental units withdrawn from rent control, and subtract that number from the number of affordable units.

Not only does the legislation impose this heavy workload burden on the Planning Department, but it is easy to foresee the resulting complications.  It is simply not possible for the Department to accurately count the number of affordable and market rate housing units constructed in the SUD on a quarterly basis.  Estimates no doubt will result, and disputes will arise over those estimates.  Even more difficult to calculate will be the number of rental units withdrawn from rent control.

Supervisor Kim no doubt had good policy intentions in proposing the Housing Balance SUD.  Unfortunately, the legislation does not appear to serve its own intentions.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

​Planning Department Continues to Streamline CEQA Process While Heightening Air Quality Performance Standards

As many of us know, the Planning Department has the (mostly) thankless job of being the lead agency running the environmental review of most new development projects in the city.  That being said, the Department still is bound by the requirements of the California Environmental Quality Act and must carry out its mandates – even when they are not efficient or don’t make sense.  In recent years, the Department has been aggressively working to streamline the CEQA process, which saves time and money for both project sponsors and the city alike.  

Having essentially taken hazardous materials off the table of potential triggers for heightened environmental review last summer, the Department is now moving onto air quality.  Along with the Department of Public Health, they have drafted legislation that would enhance and expand the existing ventilation requirements while simplifying the environmental review process for air quality.  Specifically, the legislation would accomplish the following:

• Replace the current map of sensitive air quality zones with a new map with a smaller sensitivity zone (basically covering areas around freeways, South of Market, the Tenderloin, the Embarcadero, and a handful of other major intersections in the city).  If a project is located in this new sensitivity zone, it will no longer have to conduct a project-specific study as they do now – the project simply needs to incorporate heightened ventilation standards that are equivalent to a Minimum Efficiency Reporting Value (MERV) 13 filtration standard.

• Expand the air quality/ventilation requirements to cover all projects (1) located in the new sensitivity zones, (2) containing “sensitive uses,” and (3) proposing new construction, major alterations of 25,000 square feet or more, or a Planning Code change of use.  Sensitive uses include all residential, educational and institutional uses.

So long as a project complies with these standards (which they would be required to by the new legislation), it could not trigger heightened environmental review due to air quality impacts on the new uses in the project.  There would still be a limited potential to trigger heightened environmental review due to construction air quality issues.  The legislation significantly simplifies the process – either a project is subject to the ventilation requirements or it is not.  No project-specific review would be necessary.  

The Planning Department has cited several studies which conclude the increased costs of the MERV 13 ventilation systems are negligible when applied on a whole building (versus individual unit) basis.  Again, these heightened standards will only apply to “sensitive uses,” so projects involving office, retail or industrial uses will not be impacted.

The new ventilation requirements represent a delicate balance the Planning Department is trying to achieve – increasing performance standards that will improve public health while simultaneously improving the entitlement process for developers.

Board of Supervisors Continues In-Law Unit Push – New In-Law Units to be Permitted in the Castro

The Board of Supervisors was busy this week making major changes to the way in-law dwelling units are regulated in the city.  As we reported last week, the Board passed on first reading an ordinance that would allow for the legalization of in-law units that have been created without a permit.  The ordinance was approved on second reading this week and now goes to the Mayor’s desk for signature.

The Board also passed legislation on first reading this week to create a pilot program that would allow for the creation of new in-law dwelling units in the Castro district.  Within a certain defined area in the Castro, property owners may create a new in-law dwelling unit, which can be approved with a waiver from density (allowing density above what is otherwise permitted) and other Planning Code requirements, so long as they meet the following requirements:

• The unit is constructed within the existing envelope of the building;

• The unit has no more than 750 square feet of habitable space; and

• The unit does not incorporate space from any existing dwelling unit.

As Supervisor Wiener stated Tuesday, these new units – required to be created in existing buildings, of modest size and not reducing existing housing – will be far more affordable than dwelling units that are coming on-line in new housing developments.  In-law units created in buildings subject to rent control will also be subject to rent control.

And Finally, Eviction Relocation Payments Look Set to Pass

As we reported last week, Supervisor Campos has proposed legislation that would increase required relocation payments that landlords pay to tenants when those tenants are subject to a “no fault” eviction.  The legislation would require the relocation payment to essentially cover the difference in rent between the current rent the tenant is paying and the fair market rent for a comparable unit for a period of two years.  The legislation passed on first reading at the Board on Tuesday with a 9-2 vote, which, if it holds, is a veto-proof majority that the Mayor would not be able to overturn.  

The housing crisis continues to motivate the Board to seek creative mitigations – not necessarily complete solutions – to the problem.  We will continue to track these changes in housing policy closely, as they will have far-ranging impacts throughout the development community.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.