​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.

​Ok, we get it.  It’s almost a cliché now to say that San Francisco is in the midst of a housing crisis.  For proof, check out this 1984 L.A. Times article on gentrification (dug up by the SF Housing Action Coalition) that you could easily mistake for an article published today (with the exception of $1,000/mo apartments in North Beach):  http://articles.latimes.com/1985-04-03/news/mn-28445_1_san-francisco-s-skyline.

But it does seem like we are now in a particularly exacerbated point in the crisis.  Take for example two recent data points on the housing sector:

• In 2013, San Francisco rents have increased 10.6%, the largest increase in the country and three times more than the national average of 3%.  

• 42,452 jobs have been created in San Francisco since 2011, yet an average of only 1,500 new dwelling units have been constructed per year since then.

It’s no wonder Mayor Lee has heavily pivoted from his early-term emphasis on job creation to housing affordability and production this year.  But he’s not alone in searching for solutions to the current crisis.  Several members of the Board of Supervisors have been pursuing measures to help.  These efforts differ sharply based on members’ ideas of what is causing the problem, but no question, they will all impact how housing is regulated in San Francisco.  Just this week, the Board of Supervisors considered two very different ordinances impacting housing.

In-Law Units:  It’s Your Turn to Come into the Light

In recent years we have seen an increasing number of ordinances “legalizing” existing development and land uses that were not established through the proper channels.  Supervisors Chiu and Wiener have co-sponsored an ordinance that will allow for the legalization of “in-law” dwelling units that were constructed in a building prior to 2013.  To be eligible, a unit must (1) be located in a zoning district that permits residential use and (2) be established without the benefit of a permit.  The ordinance will allow an owner of such building to legalize the unit, even if it increases the dwelling unit count of the building above what is permitted by the zoning district, without the need for any variances and without neighborhood notice.  

The tricky part of this process is that the in-law unit must also be made compliant with current Building, Fire, Electrical, Mechanical and Plumbing codes.  This could be either physically impractical or financially infeasible.  And how does an owner protect themselves from filing a legalization application with the city, finding out the work necessary to legalize the unit is impractical or infeasible, and then being stuck with a Notice of Violation from the city for an unpermitted unit?  The ordinance contains a provision that forbids the Department of Building Inspection (“DBI”) to seek an enforcement action in such situation unless it identifies “an imminent and substantial hazard.”  Since this leaves a lot of discretion to DBI inspectors, we recommend that any owner who pursues this process consult a building professional to perform an audit of the unit before any applications are filed with the city.

The ordinance contains protections for tenants as well.  Legalization of in-law units are not permitted if a no-fault eviction has occurred in the unit within the past 5 or 10 years (depending on the type of eviction).  Costs of legalizing the unit cannot be passed-through to tenants.  Legalized in-law units will remain subject to rent and eviction control if they were already subject to it.  

The ordinance passed on first reading this Tuesday, and must be passed on second reading next Tuesday before it is sent to the Mayor’s desk for signature.

Ellis Act Evictions:  Still Legal, but Pay Up!

Supervisors Campos, Kim, Avalos and Mar have co-sponsored another ordinance that aims to ease the effects of the housing crisis on tenants.  This ordinance would increase the amount of relocation expenses a landlord must pay to a tenant upon eviction under the state Ellis Act.

The Ellis Act allows landlords to remove their apartment buildings from the rental market, even if evictions of tenants would result.  It also allows local governments to require monetary payments from the landlord to the tenant to mitigate the impacts of the eviction.  Currently, a landlord must pay $5,265 per evicted tenant (up to a maximum of $15,795 per unit) and an additional payment of $3,510 for tenants who are over 62 years old or disabled.

The new ordinance would require a landlord evicting a tenant or tenants under the Ellis Act to pay a relocation expense equal to the difference between the monthly rent the tenant(s) is currently paying and the market rental rate for a comparable unit, multiplied over two years.  The payment would be split equally among tenants occupying the unit.  The ordinance would preserve the additional $3,510 payment for older or disabled tenants.  Landlords would have the right to petition the Rent Board for a downward adjustment in the payment due to undue financial hardship.

The ordinance was first heard on Tuesday and instigated significant debate.  Consideration of the ordinance was ultimately continued to next Tuesday.

These are just two of the latest ordinances that are intended to help with housing availability and affordability in San Francisco.  Other ordinances introduced this year to help the housing situation would:

• Exclude affordable housing units from dwelling unit density restrictions;

• Prohibit increases in rent based on additional occupants; and

• Allow construction of new in-law units exceeding dwelling unit density restrictions.

And no doubt we will see more.  No one expects the housing crunch to be solved, but these measures are an indication of the Board’s willingness to at least fight back against this intractable problem.

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.

​Are Split-Roll Taxes Still Alive?

In the wake of Propositions 13 and 62, many local districts have imposed “special taxes” to finance public facility construction and operations.  One such special tax is the school district qualified special tax, which was enacted by the Legislature in 1987.   (Gov. Code §§ 57009 et seq.)  School districts have the authority to impose such special taxes as long as the tax “applies uniformly to all taxpayers or all real property within the school district.”  (Gov. Code § 50079(b)(1).  New legislation (SB 1021) introduced last month by Senator Lois Wolk (D-Davis) would allow school districts to levy unlimited tax increases on select property owners through non-uniform parcel taxes. This would essentially overturn existing law.  

Over the years, school districts have attempted, unsuccessfully, to increase their parcel tax revenues by taxing different parcels differently, often referred to as “split-roll” taxes.  One such attempt by the Alameda Unified School District was rejected last year by the First District Court of Appeal.  (Borikas v. Alameda Unified School District, 214 Cal.App.4th 135 (2013).)  In that case, the overturned tax imposed a $120 yearly tax on residential parcels, while large commercial and industrial parcels were hit with $0.15 per square foot, with a maximum of $9,500 per year.

SB 1021 revives split-roll taxes and would provide numerous ways to vary tax rates.  For example, school districts could split parcel tax assessments within a district based on characteristics such as the size of the parcel, the size of improvements to the parcel or the use of a parcel.  This means different tax rates could apply to residential parcels than shopping malls, industrial parks, hotels and wineries.

The bill also would allow school districts to impose a different tax rate on unimproved parcels and to treat multiple parcels as one where the parcels are contiguous, under common ownership and constitute one economic unit. They would need to have “the same primary purpose” and not be separate and distinct properties that may be independently developed and sold.  We will keep track of this issue and keep you posted.

Sometimes You Can Fight City Hall

Developers in San Francisco are all too aware of the great deference courts accord to local agencies when agencies interpret their own codes.  That deference has become such a bedrock of land use jurisprudence that consideration is rarely given, if ever, to legally challenging such local agency interpretations.  A ruling last month by the Second District Court of Appeal, resolving a dispute that land use practitioners in San Francisco may find eerily familiar, may change this attitude.  (Tower Lane Properties v. City of Los Angeles, 168 Cal.Rptr.3d 258 (2014).)

On May 3, 2011, Tower Lane applied to the City’s Department of Building and Safety for building and grading permits for three residences, a pool and spa, a pool cabana building, a pool service and equipment building, accessory living quarters, and associated parking areas.  The Department of Building and Safety forwarded the building plans to the City’s Planning Department for review.

During its review, the Planning Department notified Tower Lane that to obtain a grading permit it must comply with Los Angeles Municipal Code Section 91.7006.8.2, which the Department asserted required approval by that Department of a tentative tract map whenever grading was conducted on a hillside area larger than 60,000 square feet.  Tower Lane objected to this requirement, arguing that Section 91.7006.8.2 required a tract map only when a subdivision of land was proposed.

The city argued the court should grant deference to the city’s interpretation of its own code, and uphold its tract map requirement.  The court disagreed.  While recognizing that a local agency’s interpretation must be given great weight, the level of deference accorded to an agency’s interpretation turns on “whether the agency has a comparative interpretive advantage over the courts, and also whether its interpretation is likely to be correct.”  Factors to consider in determining if an agency has a comparative advantage include whether “the legal text to be interpreted is technical, obscure, complex, open-ended, or entwined with issues of fact, policy, and discretion.”

The court ultimately was persuaded that the interpretation of Section 91.7006.8.2 did not require any particular expertise, and that the city over time had inconsistently applied the tract map requirement of Section 91.7006.8.2.  The court agreed with Tower Lane, and ruled that a tract map was not required.

Redevelopment Replacement

Ever since the dissolution of redevelopment agencies in 2012, Governor Brown has contended he would provide a redevelopment replacement tool.  Progress in this regard has been spotty.  In 2012, he vetoed a bill that would have partially restored tax-increment with no impact on the state general fund – and most likely would have done so again last year if the Legislature had sent him the bill again.

But the Governor may be relenting.  In his budget message in January, Brown made it clear that he would sign a bill loosening up the rules on little-used infrastructure financing districts, which allow the use of tax-increment financing without the old find-the-blight requirement from redevelopment days.  

Also, Brown seems likely to support a bill Assembly Majority Leader Toni Atkins (D-San Diego) has introduced to smooth recurring problems in the dissolution of local redevelopment agencies (AB 1963).  The bill is similar to Atkins’ AB 662 from last year, but drops a provision on amendments to project contracts that led Brown to veto it.  The revised bill contains continuity provisions that would allow projects begun under redevelopment agencies to be carried forward.  They include infrastructure financing districts, reimbursement of expenses taken on by housing authorities, and authorization to use bond proceeds on already-approved projects.  We will continue to track this issue.

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.

​While not quite as exciting as the NCAA Tournament (I’m sure many of you are watching on your computer today), California’s limited liability company statute was recently updated by the California Revised Uniform Limited Liability Company Act (the “Act”).  The Act, which took effect on January 1, 2014, was intended to update existing California law to reflect developments in this area over the past twenty years, include more detailed rules governing issues not covered by the company’s operating agreement, and to bring California law in line with the laws of other states.  (CEB Law Alert, October 1, 2013).  The Act also provides more specifics concerning when the Act cannot be overridden by the members.    

Although most of the substance of the Act is similar to existing law, there are a number of provisions that will impact the use of LLCs.  Some of the more relevant issues are discussed below.  Not all of the concepts are changes to the law, but serve as reminders about important issues.  

Management Structure

The Act retains the right of the LLC to be managed either by the members or a manager (or multiple managers).  If the articles of organization and the company’s operating agreement do not specify that the LLC will be managed by a manager, then the LLC will be deemed to be member managed, and all of the members will be agents of the Company.  This is a change from existing law where only the articles of organization needed to specify the structure.  

Member Approvals Of Major Decisions

The company’s operating agreement usually addresses what percentage of the members must approve a major issue, like merger, sale of the Company’s assets, or amendment of the operating agreement.  Previously, if these issues were not addressed, a majority vote was required.  Under the Act, the members must unanimously approve such decisions.  The operating agreement should clearly state the members’ intentions.

Becoming a Member

The Act allows a person to become a member without acquiring an interest in the profits of the company or making a contribution to the company.  Previous law did not provide for this.  The reason for the change was twofold – to accommodate common business practices and recognizing that an LLC does not necessarily need to have a specific business purpose.  

Distributions of Profits

Unless stated in the operating agreement, distributions of profits will be made to the members based on the value of the contributions from each member.  It is critical to specify the members’ intentions in the operating agreement.  In most cases, some members are intended to receive distributions for reasons that are not based on the amount of cash contributed.

Failure to Make Contributions May Result in Personal Liability to Third Parties

One of the most important protections of an LLC is to avoid personal liability to the owners/members.  The Act now includes an important exception.  If creditors of the LLC extend credit or act in reliance on a member’s obligation to make a contribution to the company, then that creditor may enforce the obligation personally against the member.  An example of this is where a lender agrees to make a loan to the company based on the member’s commitment to contribute capital at a later date.

Non-Cash Distributions May Be Made

The Act now allows a LLC to make distributions in kind (property, not cash) if the asset is fungible and each member receives a percentage equal in value to the member’s share of distributions.  This means that the property must have a value that is easily calculated.  However, a member may not demand a distribution in kind unless permitted by the operating agreement.  In some residential developments, members wish to receive condo units instead of cash distributions.  This can only be enforced if permitted by the operating agreement or elected by the vote of the members or managers, as applicable.

Duties of Care and Loyalty

In a member managed LLC, the members owe each other a duty of loyalty and care.  However, this standard of care is essentially one of gross negligence, unless otherwise provided for in the operating agreement.  In a manager managed LLC, the managers owe the members a duty of loyalty and care.  In all instances, the members and managers are bound by the covenant of good faith and fair dealing.

Limitations on Freedom of Contract

Although the Act recognizes the right to freedom of contract in creating an LLC structure, there are limits.  Here are some of the important limitations on what provisions may not be changed by the operating agreement:    

• Elimination of the duty of loyalty and care and the contractual obligation of good faith and fair dealing.  However, the operating agreement may specify categories of activities that do not violate the duty of loyalty and good faith and fair dealing;

• Any unreasonable restriction on the rights of members to receive documents relating to the company’s business;

• Change to the statutory restrictions on distributions (for example, prohibition of distributions if the company cannot pay its debts);

• Any provision that would eliminate liability for money damages for (i) receipt of a benefit to which the member or manager is not entitled, (ii) liability for excess distributions, (iii) intentional infliction of harm, and (iv) violation of criminal law.

The above is a limited summary of the changes to LLC laws.  Consultation with counsel is always a good idea when forming a new LLC.

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 February 26, 2014, something special happened in San Francisco.  On that date, the Board of Appeals held yet another hearing in a seemingly endless stream of hearings on the beleaguered, 12-unit, code complying residential project at 1050 Valencia Street.  What was special about this day was that, unexpectedly, the Board of Appeals reversed its previous decision, recognizing that the Housing Accountability Act (California Government Code Section 65589.5) limited their authority to dramatically reduce the size and density of the project.  As those that have been following this matter in the press over the last several years know, this was watershed event for a project that had become a punching bag for opposition groups in the vicinity.  Does this mean that the Housing Accountability Act will now become a major force in protecting well-thought-out, code and plan complying projects from unnecessary changes and size reductions in the future?  Time will tell.  In the years to come, looking back, 1050 Valencia may in fact be recognized an as important policy milestone in the City, notwithstanding its small stature.

Housing Accountability Act – The Policy

The Housing Accountability Act has been kicking around since 1982 and has not been a factor in San Francisco development until now.  While today the housing crisis has reached critical levels in places like the Bay Area, housing development has been difficult in California for decades because of laws like CEQA and communities that see growth as the enemy.

 

The Act in effect gives local officials some legal cover when they are besieged by angry project opponents who are intent on stopping housing projects in their neighborhood.  The Act was given new life in 2011 when the California Court of Appeal in Honchariw v. County of Stanislaus (200 Cal.App.4th 1066) ruled that the Act applies to all housing projects, not just affordable projects.  In a nutshell the Act limits local authorities by requiring a very specific set of findings that make it extremely difficult for Cities to reduce the density of a project for subjective reasons like neighborhood character, aesthetics, or other difficult-to-measure (and impossible to challenge) criteria.

For a local agency to condition approval of a housing project on reducing the density of that project to less than proposed and otherwise permitted by law, the agency must determine that the project would have a “specific adverse impact on public health or safety” unless the density is reduced.  That finding simply could not be made for the 1050 Valencia Street project, requiring the Board to withdraw its original condition requiring that the top floor of the Project be removed.

Housing Accountability Act – The Details

Section 65589.5(j) of the Act states that when a proposed housing development complies with the applicable, objective general plan and zoning standards, but a local agency proposes to approve it only if the density is reduced, the agency must base its decision on written findings supported by substantial evidence that:

1. The development would have a specific adverse impact on public health or safety unless disapproved, or approved at a lower density; and

2. There is no feasible method to satisfactorily mitigate or avoid the specific adverse impact, other than the disapproval, or approval at a lower density.

A “significant adverse impact” is defined as a “significant, quantifiable, direct and unavoidable impact, based on objective, identified written public health or safety standards, polices, or conditions as they existed on the date the application was complete.”  This is an incredibly high standard, in that it is difficult to imagine a scenario where a housing project would have a significant negative impact on public health.

At the Board of Appeals meeting on Feb. 26, the project sponsor argued that eliminating the top floor of the Project, as proposed by the Board at their first hearing, would have resulted in a loss of approximately 2,600 square feet of residential floor area. This represented a significant decrease in the proposed density of development. The Board struggled with this issue, and there were two closed door meeting sessions with the Board and the City Attorney to discuss the application of the Act in private before final action was taken.  The Board ultimately decided it could not make the written findings required by the Act.  In effect, the Board acknowledged that the development of new homes in a dense urban area does not threaten public health or safety.  What a shock.

Where We Go From Here

The Act, especially after the Honchariw decision, provides one of the more powerful tools to prevent arbitrary downsizing of projects facing significant neighborhood opposition.  As 1050 Valencia demonstrated, we now know that a fully code-and-plan-complying residential project that needed no other Planning Commission approvals should be “protected” under the Act from significant loss of floor area that would reduce its density.  Will this apply to other projects that must seek some type of Planning Commission approval?  It is hard to say.  The critical language in subsection (j) states that the special findings related to public safety must be made when a project “complies with the applicable, objective general plan and zoning standards.”  What this means in San Francisco is hard to tell. 

Our Planning Code is incredibly complex and very few larger projects are able to obtain building permits “as of right” (i.e. without some type of Planning Commission authorization).  Conditional use projects are probably not protected under the Act, as a conditional use, by definition, must receive a special blessing by the Planning Commission.  However, a number of projects receiving other types of Planning Code approvals, including the relatively new Eastern Neighborhood Large Project Authorization (LPA) process may in fact be protected under the Act.  A project receiving an LPA could be argued to “comply with the applicable objective general plan and zoning standards”, especially if no special exceptions or other variances or waivers are necessary.

San Francisco is a City where developers have few, if any, effective tools to help them process good housing developments in a timely manner and avoid arbitrary downsizing.  This relatively old state law may have just gotten some new life, dropping an important tool into the developer’s tool box.

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’ve reported in past updates, there are seven pending pieces of legislation to tighten formula retail controls and several other policy changes have been adopted within the past year.  Before this rush of new regulation, new chain retail stores were prohibited from opening in several neighborhoods:  Hayes Valley, North Beach, and Chinatown.  In other Neighborhood Commercial Districts (“NCD”), new formula retail uses are allowed only if the Planning Commission approves them as a Conditional Use.  Only a few areas are exempt from formula retail restrictions—notably downtown along with industrial and formerly industrial areas on the City’s eastern side.  

Last year, the Planning Commission, Board of Appeals and Board of Supervisors tightened the definition of formula retail, expanded the geographic scope of formula retail controls, and moved toward an objective, numeric limit on new formula retail in one neighborhood.  Specifically, under Supervisor Kim’s interim zoning regulations extend formula retail restrictions downtown for the first time; they require a conditional use for formula retail in Mid-Market.  In the Upper Market NCD, the Planning Commission also adopted a policy to recommend disapproval of any formula retailer that brings the concentration of formula retail to 20 percent or more of total linear store frontage within a 300-foot radius.

In deciding an appeal of a proposed store, the Board of Appeals effectively altered the definition of formula retail.  The Planning Code defines formula retail as a standardized retail business with more than eleven locations in the United States.  The Board of Appeals decided that spaces a formula retailer has leased but not yet occupied also count toward this threshold.  Pending legislation—some tailored to specific neighborhoods, others citywide in scope—would further extend this definition to apply to a retailer with more than 11 locations worldwide, or any establishment that is more than 50 percent owned by a formula retailer.   

Faced with so many proposals, the Planning Commission put the brakes on all proposals to allow time for a comprehensive study of the issue.  The first portion of that study will be presented by the Planning Commission today.  Among its key conclusions:

• Formula retail is especially concentrated in commercial or mixed-use districts where conditional use approval is not required.  This includes downtown, the waterfront, and a handful of shopping centers scattered across the City.  In these districts, formula retailers make up 25 percent of all retail establishments and occupy 53 percent of all retail square footage.   

• Commercial districts with formula retail restrictions have lower concentrations of chain retail:  only 10 percent of all establishments and 24 percent of retail square footage.  The report concludes that regulations likely influence the lower concentration, but “other factors” – the prevalence of formula retails, smaller customer bases, and fewer large commercial spaces – also play a role.

• The impacts of formula retailers are hard to generalize.  A major chain retail store can serve as an anchor that brings new customers that increase sales at nearby stores.  This can also cause rents to increase.  On the other hand, formula retailers can detract from the distinctiveness of a district and cause a decrease in sales and rents and increased vacancies.

• Broader economic conditions are the main driver of rents and vacancies in neighborhood commercial districts, i.e. increases in rent do not track approvals or disapprovals of formula retail.   That said, formula retail controls may create some lower-cost opportunities for local entrepreneurs.    However, this demand is primarily for small spaces: 80 percent of local stores are smaller than 3,000 square feet.  Formula retail controls could contribute to long-term vacancy of larger spaces, which can be a drag on the surrounding district.

• Although the report includes information about wages and benefits in the retail sector as a whole, it does not provide meaningful comparisons of formula versus local retail.  It notes that wages offered by both—on average—are similar, but this generalization masks large differences between different types of stores.  It notes that benefits like paid sick leave and healthcare are less common in retail than other sectors. Benefits are more common in large (99 percent) and mid-sized companies (92 percent) than in small ones (72 percent), but these figures are not specific to the retail sector.  

The next phase of study will look at formula retail at the neighborhood level and evaluate how it correlates with other “neighborhood and economic factors.”  This will include case studies of three specific neighborhoods to see how formula retail controls affect storefront vacancy rates, rents, retail sales and aesthetic character.  Selection criteria for the neighborhood case studies will be discussed at today’s hearing.  The second phase of the report is scheduled for completion in late March, with Planning Commission policy recommendations to follow in April.

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 Condo Law

Common interest developments (“CIDs”) in California are governed by the Davis-Stirling Common Interest Development Act (“Davis-Stirling Act”).  CIDs mean a condominium project, planned development or stock cooperative.  A central purpose behind the Davis-Stirling Act is protection of residential condo owners, who may be regular folks whose homes happen to be condos.  The Davis-Stirling Act is also intended to provide guidance and rules for residential homeowners associations, which consist of and are often managed by the residential condo owners.  

However, many of the policies supporting the Davis-Stirling Act do not apply in a commercial context.  Commercial condo owners are not considered to require the same protections as residential owners.  Unlike residential homeowners, owners of commercial condos are presumably professionally advised, well-informed and governed by other provisions of commercial law.  The Davis-Stirling Act recognizes the differences between residential and commercial CIDs by exempting commercial and industrial common interest developments (“Commercial CIDs”) from some of its provisions (See Civil Code Section 1373).  For example, certain provisions of the Davis-Stirling Act related to operating rules, rental restrictions, budget requirements, assessment increase restrictions and disclosure on transfers, do not apply to Commercial CIDs.  Such rules are considered to be unnecessary in a commercial context, and may interfere with commerce and increase the costs of doing business.  

Even though the Davis-Stirling Act exempts Commercial CIDs from some of its provisions, the inclusion of both types of CIDs under the Act has proved confusing for property owners, homeowners associations and their counsel.  It has been unclear whether other provisions of the Davis-Stirling Act apply to Commercial CIDs, especially as the Davis-Stirling Act has been amended over the years.

New Commercial Condo Law

To clarify the law applicable to Commercial CIDs, the California legislature passed Senate Bill 752, which went into effect on January 1, 2014.  SB 752 separated the laws governing residential CIDs from the laws governing Commercial CIDs by establishing the Commercial and Industrial Common Interest Development Act (Civil Code §§6500-6576) (“Commercial Act”).  The Commercial Act provides for the creation and regulation of Commercial CIDs.  A “commercial or industrial common interest development” means a development that is limited to industrial or commercial uses by law or by recorded CC&Rs.  

The Commercial Act mirrors much of the Davis-Stirling Act.  The foundational provisions of the Davis-Stirling Act related to the fundamental character of CID property ownership, governing documents, ownership rights and interests, and assessment collection and enforcement have been retained in the new law.  The exemptions for Commercial CIDs in the Davis-Stirling Act have generally been retained in the new law.  

While there are similarities between the Commercial Act and Davis-Stirling Act, there are key differences.  The Commercial Act omits certain procedural provisions of the Davis-Stirling Act related to open meetings of the owners association, voting and election procedures, record inspection rights, delinquent assessment procedures, managing agent requirements, exclusive use common area requirements, accounting, use of reserve funds, reserve planning and dispute resolution procedures.  Protections for the members of the owners association have been reduced with respect to voting rights and required disclosures.  The new law also omits the entire chapter pertaining to finances in the Davis-Stirling Act, eliminating the requirement for distribution to members of an association budget and other financial disclosures.  The new law has significantly revised provisions from the Davis-Stirling Act pertaining to dispute resolution, and owners of commercial condos do not have a statutory right to request alternative dispute resolution in the event of a dispute under the governing documents, even with respect to actions taken by the board of directors regarding delinquent assessments.

It is important to note that the new Commercial Act only applies to Commercial CIDs.  Therefore, any “mixed-use” CID that includes commercial and residential condos will still be governed by the Davis-Stirling Act.

Special thanks to Stephanie Haughey who assisted with research and drafting of this Update.

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.

​Real estate developers who intend to sell residential units in larger condominium buildings should be aware of a change in California law as of July 1, 2014 with respect to liquidated damages in purchase contracts. Specifically, developers of certain larger scale projects will no longer be able to include liquidated damages provisions in an amount that exceeds 3% of the purchase price without concerns as to enforceability. Liquidated damages are a specific damages amount set forth in a purchase contract – typically the amount of the deposit- which a seller is entitled to automatically if the buyer defaults. California Civil Code Section 1675 (“Section 1675”) governs certain standards for liquidated damages provisions, including a maximum calculation which is presumed to be valid and reasonable.  

Section 1675 provides for a presumption of validity if the amount of liquidated damages does not exceed 3% of the purchase price.  If such sum does exceed 3% of the purchase price then the provision is invalid and unenforceable unless the party seeking to uphold can establish that the amount actually paid is reasonable.  Projects with 10 or more units can stipulate an amount more than 3% of the purchase price but the seller needs to perform a detailed and timely accounting upon the buyer’s default and provide a refund to the buyer of any amounts in excess of the greater of 3% of the purchase price, or the total of seller’s damages resulting from buyer’s default.  After the accounting is complete, the amount is presumed reasonable if it does not exceed 3%, unless the buyer proves otherwise.  Sellers typically set the deposit as 3% of the purchase price in order to ensure the liquidated damages provision will be upheld.

However, in 2008 the California legislature passed a bill, AB 2020, which added a temporary provision to Section 1675 granting an exception for certain larger scale projects, specifically that their purchase contracts could include liquidated damages of up to 6% of the purchase price and still be considered valid, unless the buyer could establish the amount was unreasonable.  These projects are defined as those which are 20 or more residential units, standing over 8 stories high, a high density infill development, located in a city or county with a population density of at least 1,900 residents per square mile and involve a buyer who pays a purchase price for the condominium unit of more than $1,000,000 (which amount has been adjusted annually by the Bureau of Real Estate).   Like the provision applying to projects of 10 or more units discussed above, a purchase contract in a project that meets these requirements can still provide for liquidated damages higher than 6% of the purchase price, but the seller is required to complete a detailed accounting upon the buyer’s default and provide a refund to buyer of any amounts in excess of the greater of 6% of the purchase price, or the total of seller’s damages resulting from buyer’s default.  Thereafter, the amount is presumed to be valid if it does not exceed 6% of the purchase price, unless the buyer can prove it was unreasonable.  AB 2020 contemplated that this allowance for certain larger projects would sunset and became inoperative on July 1, 2014 and repealed as of January 1, 2015.  To date, no legislation has been passed extending these dates or making this provision permanent.

On July 1, 2014, this temporary exception becomes inoperative and Section 1675 is restored to a 3% presumption of validity rather than 6% for these certain larger scale projects. Projects involving 10 or more units can still stipulate liquidated damages in excess of 3% of the purchase price, but the seller is required to do an accounting and refund any excess to buyer and runs the risk of challenge as to enforceability.  We will be following this matter to see if any legislation extends the operation of this temporary provision.  If this special allowance for larger scale developments is not extended, affected parties should be aware and account for this in their purchase contracts.  

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.

​In light of the dramatic increase in rental housing costs over the past year, the City is devoting substantial time, effort, and resources to attempt to address the chronic insufficiency of affordable rental units.

Mayor Ed Lee has asked the directors of the Planning Department and the Department of Building Inspection to implement the following tasks toward meeting this challenge: 

• Recommend actions to promote more rental housing in San Francisco;

• Require Planning Commission discretionary review when a loss of housing is proposed; and

• Advise other municipal departments with permitting authority over buildings that are proposed for withdrawal from the rental market with respect to Planning and Building Code restrictions on such withdrawal.

The two directors have formed a working group that includes representatives from other City agencies, SPUR, and a number of housing associations.  The working group has committed to immediately implement administrative changes in the permitting process that will speed review of new housing permits, retain existing units, and encourage development of more housing.  In addition, the working group has requested that the Rent Board strictly enforce restrictions on owner move-in evictions to ensure that the owner, or close relative of the owner, moves in to the evicted tenant’s unit within three months and occupies the unit as a principal residence for 36 consecutive months.  Once an owner move-in eviction has occurred in a building, no future owner may utilize that path to evict a tenant.  

Recommendations for policies and procedures to be adopted in the short term include the following:

• Prioritize 100% affordable housing projects and projects with at least 20% onsite affordable housing.  Provide priority processing for market rate housing proposals based on the project’s proportion of affordable units produced. Priority processing is intended to be implemented in both the Planning Department and the Department of Building Inspection.

• Encourage developers to maximize density when constructing major alterations or new housing projects.  

• Discourage removal of illegal dwelling units in those cases where it is feasible to bring them up to code.  

• Encourage concurrent review of proposed projects by the Planning Department, Department of Public Works, Department of Building Inspection, and Fire Department to expedite approvals.  

• Seek improvements at the City’s Department of Human Resources to expedite hiring of additional staff to review housing permits.

The working group has further recommended a variety of longer term policies that are intended to set the City on a course to approve 30,000 new and rehabilitated dwelling units by 2020.  The working group has identified the following steps that will require legislation to be adopted by the Board of Supervisors:

• Planning Code amendments to facilitate construction of accessory dwelling units.

• Development of affordable housing on public property.

• Building Code amendments to allow a new construction type of one or two levels of concrete podium with five or six stories of wood frame construction above, totaling a maximum of seven stories, while not being considered a high rise structure.

• Building Code amendments to modify natural light requirements.

• Streamline historic resource reviews under CEQA.  There is a general consensus that the current system adds too much time and expense to projects.

Further recommendations by the working group for longer term efforts include the following:

• Advocate for amendments to state law, including the Ellis Act, Costa-Hawkins Act, CEQA, and the Subdivision Map Act to provide the City with increased ability to regulate housing at the local level.

• Provide increased protections for existing affordable units.

• Amend the Planning Code to facilitate new housing types that are affordable by design.  This means smaller units and increased density.

• Identify project types, such as 100% affordable projects, which may be approved via ministerial review for Planning Code conformance and without discretionary review.

• Implement the state housing density law.  This would include state authorized density bonuses.  

• Eliminate the current 375-unit cap on the production of micro-units.

• Consider reducing or eliminating the Planning Code requirements for residential exposure, open space, and parking requirements.  

• Allow for fee payments in lieu of variances.

• Add residential units to soft-story buildings.

• Study creation of environmental regulations by ordinance that could replace case-by-case mitigation measures and thereby simplify CEQA review.

• Explore efficiencies that would reduce the need for review of transportation impacts of housing projects.

• Expedite environmental review for housing projects.

• Support CEQA exemptions for construction of accessory dwelling units on properties that already have multiple units.

Proposed Production, Distribution and Repair (PDR) Reform Legislation Under Consideration

The Board of Supervisors is considering proposed legislation to make the development of PDR space more economically viable by permitting office and institutional uses, research and testing laboratories, and life science laboratories to subsidize the construction of PDR space on properties that are vacant or underutilized and that do not contain significant PDR space that would be demolished.  The proposal is geographically limited to PDR-1-D and PDR-1-G Zoning Districts that are located north of 20th Street and that are parcels of 20,000 square feet or larger.  At least one-third of the total gross floor area developed on the parcel would be required to contain PDR uses.  All projects seeking entitlement pursuant to this legislation would be required to obtain a conditional use authorization from the Planning Commission.

In addition to the normal conditional use criteria, the Planning Commission would consider additional criteria including the likely viability of the new PDR space; whether the project is located in an appropriate location for the proposed non-PDR use, including whether the location of non-PDR uses would be compatible with or destructive to PDR uses on the site or in the vicinity.  The legislation proposes that such projects will have Notices of Special Restrictions recorded on title that will state that PDR uses shall never be less than one-third of the total gross floor area of the parcel, including any future building, alterations, or expansions on the parcel.

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 Thursday, the San Francisco Planning Department delivered its first informational presentation to the Planning Commission on the status of a study that could have far-reaching effects on the City’s future regulation of formula retail (a.k.a “chain store”) uses.

In the summer of 2013, faced with a dizzying array of 9 new and pending proposals that would revise the City’s treatment of formula retail, the Planning Commission called for a time out.   On July 25, 2013, the Commission passed Resolution No. 18931, recommending to the Board of Supervisors that the issue of formula retail be further studied to  “increase understanding of the issue overall and to examine potential economic and visual impacts of proposed controls versus the absence of new controls,” before new legislation was enacted.

Hot on the heels of this resolution, the Department commissioned a new study of formula retail uses in the City, with the goal of assisting decision-makers in analyzing future legislation.  Strategic Economics was selected as the consulting firm to carry out the study, which is funded entirely by the Planning Department.

The study is anticipated to be complete by the end of April and involves two phases.  The first phase (already underway), focuses on data collection and analysis, including mapping of the City’s existing and proposed formula retail controls, identifying and mapping existing formula retail locations citywide, and collecting data on a range of economic and neighborhood characteristics.   

The Department will then select four narrower topics on which to base written issue briefs that will be presented to the Commission in late February.   Likely areas of study for these briefs include: (1) Exploring the potential effects of changes to the definition of “formula retail” uses under the Code; (2) Additional characterization of existing formula retail uses in San Francisco (such as by size of chain, square footage of establishments, type of retail, etc.); (3) Focusing on the effects of formula retail controls on specific store types (e.g. restaurants, groceries, coffee shops, pharmacies, pet stores, etc.); and (4) Employment impacts of formula retail versus other retail uses.  However, the Department is still in the process of selecting final topics.

In the second phase, the Department will select three neighborhoods to be evaluated through focused case studies.  These case studies will assess the impact of formula retail and formula retail controls at the neighborhood level.  

The Department has already conducted two small focus group meetings attended by stakeholders from a range of interests, including large formula retailers, small independent businesses, neighborhood advocates and business groups.  Similar focus groups will be conducted during the second phase as well.  In addition, the Department is seeking to solicit public feedback through its informational presentations to the Commission.  The tentative dates for future Commission presentations are February 27th (at the completion of Phase 1); March 27th (during Phase 2); April 24th (at the completion of Phase 2).  

Once the study is complete, the Department plans to use the data and analysis to recommend a series of policy changes to the Commission.    The Commission may then make recommendations to the Board of Supervisors regarding future legislation.

At last Thursday’s hearing, the Department shared some of the study’s Phase 1 preliminary draft findings, based on data purchased by the City from Dun & Bradstreet.  These draft findings included:

• There are approximately 1,180 formula retail establishments in San Francisco, accounting for nearly 11% of all retailers.   By comparison, nationally approximately 32% of all retail establishments are part of chains that include 10 or more outlets.

• Stores account for the majority of formula retailers in the City, followed by restaurants, bars and cafes.   Of the 1,180 existing formula retail establishments in the City, 57% are stores; 22% are restaurants, bars or cafes; 19% are banks, credit unions or savings and loans; and 2% are retail services such as copy centers, pet care, laundry mats or dry cleaners.

• Banks, credit unions, and savings & loans make up less than 20% of the City’s total formula retail establishments, but more than 80% of all banking establishments in the City are formula retailers.

• Within broad use type categories, there is significant variation in the prevalence of formula retail.  For example, while only 10% of the restaurants, bars, and cafes in the City are formula retail, nearly 50% of all coffee shops are formula retail.  

• For some other retail types, the prevalence of formula retail varies by size of the establishment.  For example, 84% of all large pharmacies (3,000 square feet or more) are formula retail, compared to just 3% of small pharmacies (less than 3,000 square feet.  Similarly, 76% of grocery stores with at least 12,000 square feet are formula retail, compared to 1% of grocery stores with fewer than 12,000 square feet.

The Department is scheduled to deliver its next informational presentation to the Commission on February 27th, which will include a discussion of the focused issue briefs.

Additional information on the status of the Department’s study is available at: http://commissions.sfplanning.org/cpcpackets/2013.0936U.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.