​Recently, the California Court of Appeal clarified a long-standing ambiguity about so-called “spot zoning” by municipal governments, determining that the practice of singling out a single property is proper so long as it is in the public interest.  In a time when anti-growth activists are proposing ballot measures and threatening to derail good projects, this development could make responsible growth in San Francisco just a little easier.

“Spot” Re-zoning: The Court of Appeal Hands Project Sponsors (and the City) a Victory

Last week, the California Court of Appeal published an opinion weakening a common objection to large or unique projects: that rezoning necessary for the project constitutes impermissible “spot zoning.”  In Foothill Communities Coalition v. County of Orange, (No. G048024, published 1/13/2014) the Court clarified that spot zoning is legal so long as it is in the “public interest.”

The facts of the case will sound familiar to project sponsors.  A landowner—here the Orange County Archdiocese—owned a parcel of land in unincorporated Orange County that was zoned for single-family residential use.  The Archdiocese wanted to construct a 153-unit senior living facility on the parcel, but under the Orange County’s zoning code, senior living facilities were not permitted in single-family residential zones.  The County Board of Supervisors created a new zoning category for senior living facilities and re-zoned the Archdiocese’s property.  Grassroots community groups and area homeowners challenged the Board’s actions as impermissible spot zoning.

As an initial issue, the Court explained that although spot zoning traditionally only referred to a City down-zoning a single parcel, the term now should apply equally to parcels singled out for either more permissive or more restrictive zoning.

The Court then concluded that although the Board’s actions did constitute “spot” zoning by allowing more permissive use on the property, it was permissible.  Explaining that spot zoning is “merely shorthand for a certain arrangement of facts,” the Court determined that the real legal issue is if the Board of Supervisors correctly determined the change in zoning permitting the senior living facility was in Orange County’s public interest.

The Court concluded that it was, and that Orange County’s administrative findings adopted when approving the project sufficiently showed how the project was in the public interest.  Specifically, the Court was satisfied by “factual findings of consistency” with Orange County’s applicable General Plan elements and an area plan for the neighborhood.  As explained in the Board of Supervisors’ approval ordinance and the County’s planning staff recommendation, the senior living facility was consistent with a number of different policies in Orange County General Plan’s housing element, as well as land use design goals and policies of an area plan.

The opinion validates existing San Francisco Planning Department procedure to link re-zoning to the goals and policies of the San Francisco General Plan, as well as any applicable area plans such as the Eastern Neighborhoods Plan.  It also highlights the importance of making sure project applications which entail re-zoning can be directly supported by these plans.  Because San Francisco’s Board of Supervisors and Planning Department have a policy to make a number of findings of consistency with the City’s general plan and other local policies in the context of project approvals that involve re-zoning, the Court’s opinion should serve as a blueprint for proper “spot” rezoning in the future.

Although most projects in San Francisco do not require re-zoning, the Court of Appeal’s opinion removes some uncertainty from large or unique projects that do. It should provide assurance to both the City and project sponsors navigating San Francisco’s complex and time-consuming entitlement process that at least one common objection to a project can be taken off the table with thoughtful planning.  It also reinforces the importance of ensuring accurate and thorough findings of consistency at each project entitlement stage.

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.

This week saw the introduction of two significant new housing policy measures designed to address an increasing call in the City for more housing of all types, particularly rental and affordable units.  With San Francisco’s robust economic turnaround now in full swing, a major question for policy-makers has become:  how do we grow not just jobs, but the housing stock, so that all these new workers have a place to live?

Density Increases

The first of the two proposals is from Supervisor Scott Wiener.  On Tuesday at the Board of Supervisors’ weekly meeting, Supervisor Wiener introduced an aggressive measure designed to increase density generally, and encourage affordable units.  The main components of the measure are as follows:

• In all zoning districts other than low-density single-family and two-unit districts, no affordable units will be counted in the density calculation for a project that proposes 20 percent affordable units on-site or as part of a tax credit project.  The net effect of this measure is a 20-percent increase in density, as long as the project provides 20 percent of the units as affordable on-site units or as part of a tax credit project.

• Under current law, when a project’s density calculation results in a fractional number, the calculation is adjusted downward for purposes of determining the allowed number of units.  Supervisor Wiener’s legislation would change this so the calculation is adjusted upward when the remaining fraction is one-half or greater.

• In Neighborhood Commercial zoning districts, density can be increased to the density of the nearest Residential or Residential-Commercial zoning district if that district’s density is greater than the Neighborhood Commercial district’s density.

Supervisor Wiener’s legislation follows closely on the heels of his pointed opinion piece in the San Francisco Chronicle this week, in which he strongly criticized the all-too-common reality of residential projects being slowed, downsized, or disapproved as a project goes through our contentious entitlement process.  Supervisor Wiener highlighted the 1050 Valencia Street project, where the developer proposed a fully-complying project that included two affordable units on-site.  During a six-year review process, the developer agreed to reduce the number of units from 16 to 12 and to add car sharing.  The Planning Commission approved the project over objections by some neighbors and the adjacent Marsh Theater, and the Board of Supervisors rejected an environmental appeal.

Project opponents then appealed to the Board of Appeals, which eliminated the top story of the building.  That decision reduced the number of units from 12 to 9 and thus eliminated the 2 affordable units, because 10 units is the threshold triggering affordable-unit requirements.  On Wednesday night of this week, the Board of Appeals continued its issuance of a final decision to February 26, 2014.

TIC’s Under Fire

The second proposal is from Supervisor Eric Mar, concerning tenancies-in-common (TIC’s).  TIC’s are a type of property ownership where two or more people have an ownership interest in a single property together, but each owner has certain exclusive rights with respect to the other.  For example, two people could own a single building with two dwelling units, and each person has an exclusive right to one of the units.

TIC’s have generated some controversy in the City.  Proponents argue that TIC’s benefit the City because they are a less expensive homeownership option, thereby creating greater ownership opportunities for first-time buyers.  Opponents of TIC’s point out that TIC’s take rental units off the market.  

Supervisor Mar’s proposal is designed to address the loss of rental units.  Under his legislation, all proposals to convert rental units to TIC’s would be subject to Planning Department approval.  The Planning Department would ensure that the building complies with all applicable building codes, and would track the number of conversions.  While Mar says that TIC conversions are an unregulated market that needs oversight, others counter that the additional red tape may reduce the number of conversions and homeownership opportunities.  In addition, it is still unclear whether Mar’s proposal is even legal.  At some point, legitimate land use regulation ends, and interference with private contracts begins.  A TIC is a 100% private agreement between parties, and the City must tread carefully if they want to regulate in this area.  As of this writing, the ordinance language had not been released for public review.

We will continue to monitor these and other housing policy measures as they develop, and will keep readers informed of their progress.

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.

​Although the holidays are upon us, it has been a busy few weeks at City Hall.  Just Wednesday the Mayor proposed new administrative rules to address San Francisco’s housing shortage, with a particular emphasis on protecting renters and prioritizing projects with affordable units.  The Board of Supervisors is also set in the near future to upzone a number of parcels south of Mission Street between 7th and 9th Streets, permitting office and removing restrictions on residential density and retail uses.

Executive Directive: Prioritize Housing, especially Affordable, and Create Additional Administrative Hearing for Projects Proposing a Loss of Housing

On Wednesday of this week, Mayor Ed Lee issued an Executive Directive that could have a significant impact on the permitting and entitlement process for most residential projects.  The Executive Directive will affect residential projects twofold: giving administrative priority based on the amount of affordable housing in a project, and requiring at least one additional administrative hearing for most projects that propose to eliminate housing.

The Mayor has directed both the Planning Department and the Department of Building Inspection to prioritize projects that include housing.  Residential developments will be further prioritized based on the proportion of affordable units proposed (either on-site or off-site) with 100% affordable projects given the highest priority.  This provides an obvious incentive: developers who wish to see their projects come to market quickly should include more affordable housing than is currently required.  It also discourages projects which propose paying a fee instead of providing units, pushing them to the end of the line and delaying the entitlement process.  The details of how the Planning Department will implement this new directive are unclear at this point (it has until February 1 to come up with an approach), as is the delay facing project sponsors who elect to pay the in-lieu fee or provide only the amount of affordable housing required under the Planning Code.

Additionally, up to two new administrative hurdles would be created for projects proposing to eliminate housing or withdraw rental units from the market.  First, a mandatory Discretionary Review hearing before the Planning Commission would be required for any project proposing a loss of housing.  Many of these projects would appear before the Commission anyway under the existing rules for eliminating or merging units.  However, units valued above $1.3 million previously exempt from the discretionary review process would now be required to appear before the Commission.  

Also, a multi-agency “clearinghouse” would be created to review all projects proposing to withdraw buildings from the rental market to evaluate the project’s “code compliance.”  This clearinghouse would not have any formal power to deny a permit, but would make recommendations to the Planning and Building Departments.  We will have to wait until February 1st to see how this clearinghouse will fit into the existing permitting and entitlement process, as well as whether its “code compliance” review could overlap with existing Planning and Building department responsibilities, creating yet another layer of red tape in the entitlement process.           

Upzoning Mission Street Parcels

On a different note, the Board of Supervisors could in the near future upzone approximately twenty five (25) parcels on the southern side of Mission Street between 7th Street and 9th Street.  Office use and formula retail use would become principally permitted, as well as more residential density flexibility.

The parcels would be re-zoned from the SLR (Service/Light Industrial/Residential) District to the more development-friendly MUO (Mixed Use—Office) District.  Office use on the parcels would go from not permitted to a principally permitted use.  Formula retail would be allowed on the ground floor as a principally-permitted use, avoiding a mandatory Planning Commission hearing.  All residential unit density restrictions would be removed, and dorm-style SRO and group housing are also permitted.

Although the properties’ 65-foot height limit would stay in place, the rezoning substantially increases the opportunities for creative mixed-use development along the two-block corridor.  The legislation was unanimously approved by the San Francisco Planning Commission as part of cleanup zoning associated with the recently-adopted Western SoMa Plan, and has been assigned to the Land Use and Economic Development Committee of the Board of Supervisors for consideration and approval.  We will continue to monitor its progress and, we hope, eventual approval by the Board.    

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.    

​Most easements are created when one party grants the right to use its land to another by contract, but prescriptive easements are acquired when one party fulfills certain conditions over a set period of time.  To obtain a prescriptive easement, a person must use the affected portion of another person’s property for the statutory period of 5 years, which use must be (a) open and notorious; (b) continuous and uninterrupted; (c) hostile to the true owner; and (d) under a claim of right.

A recent case decided by the Court of Appeal addressed a query related to the requirement that the use be adverse for the statutory 5 year period, namely, what if the property owner from whom you are trying to secure the easement has not been in continuous possession of their property for the 5 year period of your adverse use?  In King v. Wu (218 Cal.App.4th 1211 (2013)), the Kings’ predecessor had poured a concrete driveway on their property sometime on or around 1960, of which a strip of the driveway encroached on the neighboring property.  The Kings’ predecessor, along with the Kings themselves, had continuously employed the driveway for ingress and egress to their garage and for parking during their respective ownerships.  The Wus acquired the neighboring property in 1963 and in 2009 began to construct a metal guardrail over the encroaching strip of land. The Kings, in turn, filed suit to quiet title.

In response, the Wus raised an affirmative defense that they had not been in possession of their property for 5 continuous years during the Kings and the prior owner’s collective 49 year use of the encroaching strip of land because they had leased out the property during much of their ownership.  Therefore, because they were not in possession of their property for 5 continuous years, the required statutory period could not have run against them.  The Court of Appeal ultimately rejected the Wus affirmative defense stating that California law does not require the owners of the adversely used land to have been in continuous possession for 5 years.  They clarified that if at any point during the hostile use an owner or a landlord has been in possession, including constructively at the expiration of a renewable lease, he or she could have taken action to interrupt such use.  Because the Wus were in actual possession of their property for intervening years when there were no leases in place, as well as constructively at the end of each of the leases, they could not rely on the fact that they did not have actual possession for a continuous 5 year period while the Kings and/or their predecessor’s used the encroaching strip of land.

The King case did make it clear though that a prescriptive right cannot arise against an owner or landlord who has no possessory interest in the property at all during the period of hostile use.  The court in King referenced Dieterich Internat. Truck Sales, Inc. v. J.S. & J. Services Inc. (3 Cal.App.4th 1601 (1992)), in which that court determined that an action obtained solely against a landlord’s tenants cannot affect the landlord’s rights.  The Dieterich case held that a future interest, such as a landlord’s reversion, cannot be the subject of a prescriptive easement because the statutory period for acquiring the easement only runs against a possessory interest.  Therefore, if the property had been leased for the entire time period in which the Kings were asserting their adverse use, then the King case could have turned out very differently as against the Wus themselves.

King v. Wu illustrates that as long as a property owner has constructive or actual possession of its property during the period of an adverse use, then that owner is charged to interrupt the hostile use during those interim times.  It does not matter if the property owner did not possess its property for a continuous 5 year period.  The person using the land can obtain a prescriptive easement against the owner, provided they satisfy all of the remaining conditions.  This case could have implications for landlords who should be aware of possible encroachers on their property as they are responsible to interrupt the adverse use during their periods of possession and guard against another acquiring prescriptive easement rights.

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.

​Earlier this month, Supervisor Jane Kim introduced an interim resolution that would add at least one more layer of red tape to the office conversion process in SoMa.  The proposed resolution, which directs the Planning Department to review all office conversion applications to determine if there is existing legal or illegal residential use in the premises, will likely slow down the approval process to some degree for all office development projects in SoMa.

Proposed Interim Controls

The legislation is thought to have been prompted by the much-publicized attempt by a Market Street building owner to “convert” illegal residential and live-work units to the building’s original office use.  The legislation’s stated purpose is to address situations in which a building zoned for office use is currently being used as a residential or live-work space, and the owner seeks to reintroduce office use. However, it would likely delay all proposed office conversions in SoMa—not just those with current residential or live-work tenants.       

The resolution would prevent the Department of Building Inspection from issuing building permits for a commercial building “pending the Planning Department’s determination” that the proposed office space was not previously converted into ongoing residential use.  If the proposed office space was zoned office but is currently used as residential, the project sponsor would be required to appear in front of the Planning Commission at a public hearing and secure either Proposition M or conditional use authorization to convert to office.  Finally, the Planning Department and the Department of Building Inspection are required to conduct a study identifying all buildings in SoMa that have converted space from commercial to ongoing residential use.

Unanswered Questions Create Uncertainty for Building Owners

For building owners currently in the process of seeking Proposition M approval, or who have already secured entitlements but have not pulled building permits, the interim controls could delay the issuance of a building permit while the Planning Department confirms that the building does not have any residential use.  How long of a delay remains to be seen.  

The resolution does not direct the Planning Department to follow any single procedure to determine if a building’s office space has been converted into residential use.  Potential options include a costly and time-consuming inspection of each premises in SoMa by City employees; a building permit application search which is unlikely to identify illegal residential use; and a questionnaire submitted to building owners.  

The legislation has honorable intentions: preserving existing residential units during a housing shortage is important.  Its actual effects are more muddled though.  Building owners seeking to eliminate legal dwelling units are already subject to the Planning Code restrictions on dwelling unit removal, typically requiring approval from the Planning Commission – so the legislation would be duplicative in these situations.  The added effect of the legislation would be to require Planning Commission approval to remove illegal dwelling units.  How the Planning Commission could deny the removal of an illegal dwelling unit is anyone’s guess.  Of course, it may become clear in the coming weeks that the legislation’s sole intent is to stop or delay evictions of tenants at the Market Street building.

If the resolution is passed, the new rules would be in effect for one year only.  The proposed legislation will be heard at the Board of Supervisors’ Land Use and Economic Development Committee on Monday, November 25 at 1:30 p.m.  The hearing should provide some insight as to whether these interim controls have a chance of being adopted by the full Board of Supervisors.  We will continue to track this 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.

​Thousands of homes throughout San Francisco contain a secondary studio unit or small 1-bedroom unit, which is typically rented out to the general public.  Most of these units, commonly referred to as “in-law units”, violate Planning Code restrictions on residential density, as well as requirements for rear yard, open space, and off-street parking.  Many in-law units also are in violation of Building Code standards for residential units.  The existence of in-law units has been common knowledge for decades.   However, in the absence of complaints about specific units, the City has wisely chosen to devote its limited enforcement resources to more pressing issues.  

The City is now considering permitting the construction of new in-law units within the existing envelope of a residential building or auxiliary structure on the same lot in certain areas of the City.  Legislation proposed by Supervisor Scott Wiener would allow construction of new in-law units in the Castro Street Neighborhood Commercial District and within 1,750 feet of the district boundaries.

The proposed legislation would authorize the Zoning Administrator to waive existing density, rear yard, open space, and off-street parking requirements in order to create new in-law units.  In-law units constructed with a waiver of Planning Code requirements will be subject to the rent and other restrictions provided by the San Francisco Residential Rent Stabilization and Arbitration Ordinance if the existing building, or any existing dwelling unit in the building, is already subject to the Rent Ordinance.  As required by state law, the draft ordinance has also been submitted to the California Department of Housing and Community Development.  The proposed ordinance is presently pending before the Board of Supervisors Land Use and Economic Development Committee.

The proposed legislation is long overdue and stands a good chance of approval.  Homeowners will support the added flexibility and potential for rental income.  Tenant’s rights organizations will be supportive of a new, legal source of affordable housing.  Some opposition from neighborhood groups is expected, owing to increased density and on-street parking issues.  

If Supervisor Wiener’s legislation is approved, new construction of in-law units is likely to spread to other districts throughout the City.

The current draft legislation will restrict the number of in-law units to one unit per building that has no more than 10 existing units, and two in-law units per buildings that have more than 10 existing dwelling units.  New in-law units will be limited to 750 sq. ft. of space.  In-law units shall not be permitted to be constructed using space from an existing dwelling unit, i.e. the in-law unit must be constructed in a storage space, garage, or outbuilding.  

The legislation, in its current form, does not address legalization of existing in-law housing units.  Legalization could be added as the legislation proceeds through the public hearing process.

State planning and zoning laws set forth in the California Government Code have encouraged the creation of in-law units since 1983.   A number of California Court of Appeals decisions from the 1990s provide broad support for property owners seeking approval of in-law units under local ordinances.  

Governor Brown Vetoes AB 1229

On October 13, 2013, Governor Brown vetoed AB 1229, the bill that would have superseded the holding of Palmer v . City of Los Angeles, 175 Cal.App.4th 1396 (Second District, 2009) and allowed cities to require affordable rental housing as a condition of development.  Palmer struck down such requirements as a violation of State law restrictions on rent control.  San Francisco will likely retain its current fee-based form of Inclusionary Affordable Housing.  A project’s eligibility to provide on-site rental units at below market rate rents will continue to be governed by Costa Hawkins Agreements, which are currently in use by the San Francisco Planning Department.  Costa Hawkins Agreements with developers provide an avenue for the City to grant permission for below market rate rental units in new developments on a case by case basis, in exchange for conditional use authorization and/or variances from provisions of the Planning Code relative to rear yards, off-street parking, dwelling unit exposure, density, and the like, or where public financing is utilized for a project.  

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 week, San Francisco tenant, labor, and community organizations presented a comprehensive policy agenda to address what they call an “eviction epidemic” in San Francisco.  According to the San Francisco Rent Board’s Annual Statistical Report for fiscal year 2012-2013, eviction notices have increased by 36 percent compared to 2012.  The report also shows that the Ellis Act, a state law which allows property owners to “go out of business” and remove residential dwellings from the rental market, was used 81 percent more than last year, providing the basis for almost 10 percent of all evictions.  The tenant activist groups claim the eviction epidemic is compounded by buyouts, demolitions, and the failure of developers to build below-market-rate units and they seek to resolve these issues by proposing changes to land use regulations, building codes, and rent control ordinances.  The legislative package includes proposals to control the unregulated conversion of residential dwelling units to tenancies in common, mergers of units and other discretionary city approvals of projects facilitated by no-fault evictions, and to strengthen rent control protections for tenants. Not surprisingly, the package did not include any ideas on how to make development of new housing projects less complicated, but that is a topic for another article.

Currently, buildings with five six or more residential units are ineligible for conversion to condominiums in San Francisco.  There are also major hurdles to overcome in converting projects with five or less units.  However, when a landlord invokes the Ellis Act and removes residential units from the rental market, these units may be converted into other forms of “joint ownership,” such as tenancies in common.  The tenant groups argue that these converted units are essentially condominiums, yet they are not subject to the stringent consumer protection and health and life safety controls that are placed on condominium projects.  The tenant groups propose to amend the Planning Code to require that as a condition of changing rental units into tenancies in common, project sponsors must seek a conditional use permit, including a condition that the building is brought into compliance with current building codes.  Conditional use permits add complexity, time and expense, and can be hotly contested by opponents.

Tenant groups also seek to prohibit the approval of a demolition, merger, or conversion of a residential dwelling unit if one or more of the units have been subject to a no-fault eviction within the last ten years (i.e., an Ellis Act eviction).  They claim the Ellis Act is often abused when speculators purchase buildings with long-term rent controlled tenants, evict them through the use of the Ellis Act, and then demolish, merge or convert the units to more lucrative luxury housing or commercial uses.  Supervisor Avalos has already introduced legislation to address this issue (Board of Supervisors File No. 130041) and the Planning Commission voted 6-1 last week to support the changes to city laws that Supervisor Avalos proposes.  Among other things, the new legislation seeks to amend the Planning Code to prohibit the evictions described above.  Supervisor Avalos and the tenant groups hope these legislative changes will deter property owners from invoking the Ellis Act and evicting longtime tenants in order to combine the rental units into a single unit and sell it for a significantly higher price.

Finally, the tenant groups claim that speculators attempt to drive out tenants by conducting extensive and harassing construction in buildings while tenants are in place, in hopes that the tenants will just move out without having to invoke the Ellis Act.  The groups seek to increase building inspections of buildings where there is construction with tenants in place, and to adopt standards to protect against constructive evictions during construction.  The groups believe this issue will be resolved if the City restricts non-essential building permits where no-fault evictions are pending, such as during the one-year eviction notice period during an Ellis Act eviction.  In order to maintain the City’s housing stock and discourage abuse of the Ellis Act, the tenant groups recommend the City to define tenancy in common agreements as lease agreements.  They claim that tenancy in common agreements provide owners with exclusive rights to occupy a unit, just like a rental and therefore, tenancies in common should be treated like rentals.  This would likely have a chilling impact on tenancies in common since Ellis Act evictions result in restrictions on future rentals.

This ambitious policy agenda will significantly tighten already stringent restrictions on rental unit conversions to tenancies in common and will impede opportunities for home ownership in San Francisco.  Given the limited availability of residential housing stock and high purchase price barriers, the Board of Supervisors will need to carefully balance the competing goals of providing rental housing and new home ownership opportunities.

More information about the policy agenda may be found here: http://www.beyondchron.org/news/index.php?itemid=12001.

Thanks to Stephanie Haughey in our office who contributed to 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.

​In a unanimous decision released last week, the California Supreme Court held that a city’s demand for a developer to set aside a certain portion of its units in a housing project as below market rate (“BMR”) or pay an equivalent in-lieu fee was an “exaction” for purposes of the California Mitigation Fee Act.   

This ruling is significant because it allows developers to start construction of projects subject to inclusionary housing requirements, and then later challenge the imposition of BMRs and/or in-lieu fees when the project nears completion.  It also sets the stage for future decisions requiring a city’s inclusionary housing program to meet a stricter standard of review, beyond that applied to most land use regulations.

The case, Sterling Park L.P. v. City of Palo Alto, involved a project to construct 96 residential condominiums on a 6.5 acre lot on West Bayshore Road in Palo Alto.   The project was subject to Palo Alto’s inclusionary housing program, which required that all residential projects involving five or more acres to set aside at least 20 percent of its units as BMRs, or agree to alternate terms set by the city.  The developer, Sterling Park, entered an agreement with the city to provide 10 units as BMRs and to pay additional in-lieu fees.   However, when the project was being finished and Palo Alto requested conveyance of the BMRs over a year later, the developer filed suit to challenge the inclusionary housing requirements.

Palo Alto moved for summary judgment, arguing that the inclusionary housing requirement was not an “exaction” under the Mitigation Fee Act, but rather a land use regulation subject to the Subdivision Map Act, and that the developer’s lawsuit was time-barred.   The trial court and appellate court both agreed with the city, but the Supreme Court reversed, holding that the inclusionary housing program requirements were “exactions” subject to the Mitigation Fee Act.   

The Mitigation Fee Act was passed by the California Legislature in response to developers’ concerns that local agencies were imposing development fees that were unrelated to their projects.   Before the Act, a developer was unable to challenge the validity of fees imposed on residential projects without refusing to pay them, and, since payment is often a condition of obtaining a building permit, a challenge would force the developer to abandon or significantly delay construction of the project.   However, the Act established a procedure whereby a developer could pay the fees under protest (or provide satisfactory evidence of arrangements to pay in the future), obtain a building permit, and proceed with the project while pursuing a legal action to challenge the fees.  The statute of limitations for appeals filed under the Mitigation Fee Act does not begin to run until a city issues a notice of the amount of fees and the right to file a protest.  

The Sterling Park decision could have implications beyond the timeline for appealing BMR requirements – it could also set the stage for future decisions that invalidate or significantly restrict inclusionary housing ordinances throughout the state.    This is because, if the validity of inclusionary housing requirements can be challenged as “exactions,” a city seeking to impose them would have to show both that an “essential nexus,” exists between the requirements and the state interest being advanced, and that there is a “rough proportionality” between the amount of the proposed exactions and effects of the proposed development.   By contrast, most land use regulations are considered valid exercises of a city’s police power if it can be shown that they bear a reasonable relationship to the public welfare – a far more deferential standard.  

The Supreme Court will have an opportunity to further clarify its interpretation of inclusionary housing programs in the near future, as it recently granted the Pacific Legal Foundation’s petition for review of California Building Industry Association v. City of San Jose.   In that case, the CBIA sued to invalidate San Jose’s inclusionary housing ordinance, arguing that it imposed an exaction on developers and was facially invalid because the city had failed to show a “reasonable relationship between the requirements imposed. . . and any increased public needs for affordable housing caused by such new residential development . . .”    In response, the city argued that the ordinance was simply a land use regulation, valid as long as it bore a reasonable relationship to the public welfare.   The trial court ruled in favor of CBIA, and enjoined the City of San Jose from implementing the ordinance.   However, in June the Court of Appeals reversed, holding that the inclusionary housing ordinance was a not an exaction, but instead a land use regulation subject to the more deferential standard of review.

The Supreme Court’s decision in CBIA v. City of San Jose should help to shed some light on the future standards applicable to a city’s inclusionary housing program, and could have some cities in the Bay Area scrambling to protect their programs against legal challenges.

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 2009, the Palmer v. City of Los Angeles decision held that the inclusionary rental housing program in Los Angeles  violated the Costa-Hawkins Act, which prohibits local governments from rent-controlling units built after February 1, 1995.   Since then, cities have navigated around the Palmer decision with relatively minor changes in the form, but not the substance, of their inclusionary housing requirements.  In San Francisco, for example, developers are no longer required to provide on-site inclusionary units.  Instead, paying an affordable housing fee is the default option, and developers may voluntarily opt to provide on-site units where certain conditions are met.

In response to Palmer, affordable housing advocates in Sacramento pushed aggressively for AB1229, a statewide law that would reverse the decision by allowing cities to require inclusionary rental units.  It was narrowly passed by the Legislature over bipartisan objections.   Last week, Governor Brown vetoed the bill, recalling his experiences in Oakland:

“As Mayor of Oakland, I saw how difficult it can be to attract development to low and middle income communities.  Requiring developers to include below-market units in their projects can exacerbate these challenges, even while not meaningfully increasing the amount of affordable housing…”

The failure of AB 1229 will not impact San Francisco’s inclusionary housing program, which has been revamped to comply with Palmer.  However, San Francisco’s approach to Palmer is based on a narrow exemption to the Costa-Hawkins Act.  The exemption allows cities to restrict rents in projects that received (a) a direct government financial contribution or (b) a density bonus or development incentive under the state Density Bonus Law.

In order to provide affordable rental units, builders must enter into a Costa-Hawkins Agreement with the City.  In most cases, the agreements are based on a project having received a bonus or incentive under the Density Bonus Law. However, the bonuses and incentives cited in most agreements are far less than what is required by state law.

In fact, prior to the Palmer decision, the City took the position that the Density Bonus Law applied only where projects provided more affordable housing than was required under the Planning Code.   This meant that most private projects were not, in the City’s eyes, eligible for any bonuses or concessions.  The City quietly reversed itself only when it became necessary to avoid the impact of Palmer  on its inclusionary housing program.  A recent court decision, Latinos Unidos del Valle de Napa y Solano v. County of Napa (“Latinos Unidos”) confirmed that the current approach is correct: density bonuses are available for projects including only required affordable housing. 

In spite of its stated commitment to affordable housing, the City has lagged in implementing what could be a powerful tool  to encourage housing production.   It has failed to pass an ordinance describing how the Density Bonus Law is to be implemented – an ordinance expressly required by state law.  In the rare instances where the City has granted bonuses, it has required zoning legislation by the Board of Supervisors.   State law specifically declares this unnecessary.

Though it would certainly be challenging to get a bonus approved given the City’s past reluctance, the benefits are compelling.  For example, a rental project meeting the minimum 12 percent requirement for affordable housing would be eligible for a 23 percent density bonus, plus an incentive or concession to help defray affordable housing costs.  In addition, cities are prohibited from applying “any development standard that will have the effect of physically precluding” a development from providing bonus units.  This could allow for height, bulk or floor area bonuses in districts where density is limited only by the allowable building envelope.  In Wollmer v. City of Berkeley, the Court of Appeals upheld height, floor area and setback variances, which were needed to allow density bonus units. 

Finally, the benefits of implementing the Density Bonus Law would not accrue only to builders.  The general public is the intended beneficiary:  the law is meant to address the housing shortfall as a matter of “urgent public necessity” so that Californians are not “forced to unnecessarily accept further limitations on their personal aspirations, their social and economic mobility, and their physical comfort and well-being.”  That seems like something San Francisco can get behind. 

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 a decision surprising to many in the residential home building industry, the California Court of Appeal recently ruled that California’s Right to Repair Act (also known as SB 800) (the “Act”) does not provide the exclusive remedy in cases where actual damages have occurred to a home because of construction defects.  In Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC (Case No. G046731, Cal. App. 4 Dist., September 26, 2013), the Court concluded that even when a construction defect claim falls within the scope of the Act, where actual damage to a home has occurred, a property owner is not limited to the remedies provided in the Act, and retains common law rights and remedies.

BACKGROUND

In 2004, Eric Hart purchased a home from Brookfield Crystal Cove LLC (“Brookfield”). In 2008, the home was flooded when a fire sprinkler pipe burst.  Brookfield acknowledged its liability for, and repaired, the damage to Hart’s home.  Hart moved into a hotel for several months while Brookfield repaired the damage to the home.  Hart’s homeowner’s insurance provider, Liberty Mutual Insurance Company (“Liberty Mutual”), paid for Hart’s hotel and other relocation expenses during that time.

In 2011, Liberty Mutual exercised its rights under Hart’s homeowner’s insurance policy and filed a subrogation claim against Brookfield to recover the hotel and relocation expenses it incurred related to the repair of damage from the burst sprinkler pipe.  The claim included common law causes of action for strict liability, negligence, breach of contract, breach of warranty and other claims.  In a subrogation action, the insurer steps into the shoes of its insured.  Thus, Liberty Mutual’s right to recover from Brookfield was dependent on whether Hart would have been able to recover from Brookfield for the hotel and relocation costs.

In response to Liberty Mutual’s claim, Brookfield argued that the claim was time-barred under the section of the Act that requires any claim for plumbing issues to be made within four years of the close of escrow for the owner’s purchase of the home.  Because Liberty Mutual did not file the claim until 2011 (seven years after Hart bought his home), Brookfield argued the claim did not meet the time limits in the Act, and must therefore be dismissed.  While the trial court agreed with Brookfield and dismissed Liberty Mutual’s claim, the Court of Appeal reversed the trial court’s decision.

COURT OF APPEAL DECISION

The Court of Appeal decided that claims under the Act were not the only options for a property owner seeking recovery for actual damages.  The Court determined that the Act was not intended by the California legislature to provide the sole remedy for actual damages to residential property.  Rather, the primary purpose of the Act was to provide a property owner with remedies for repair of construction defects before the defects caused actual damages.  The holding also stated that the Act was not intended to eliminate a homeowner’s other rights under the common law when actual damages have occurred to the owner’s property.  For this reason, even if Liberty Mutual’s claims under the Act were time-barred and properly dismissed, its other common law claims should not have been dismissed as untimely.  The Court noted that the Act was adopted in large part to overturn the previous court case of Aas v. Superior Court (2000 24 Cal.4th 627) which held that in the absence of actual damages to the property, a homeowner could not file a claim for construction defects in residential property.  Thus, the Court determined that the Act was largely intended to provide a homeowner with a means of pre-damage redress for defects that such owner would not have under the Aas decision, and the Act was not intended to limit an owner’s other rights once actual damages have occurred.

IMPLICATIONS OF DECISION

When the Act went into effect in 2003, many believed it provided the exclusive remedy for construction defect claims for new construction residential projects, including time limits for such claims.  The Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC decision calls this belief into question, in particular with respect to common law claims involving actual damages.  This uncertainly may make it difficult for those in the residential building industry to predict and protect themselves from claims related to construction defects, and the applicable timeframes for such claims.

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.