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Gross Receipts Tax – City Real Estate Braces For Yet Another Expense

July 12, 2012April 12, 2017 | Andrew Junius

Like many other California municipalities, San Francisco continues to make efforts to increase its tax revenue while encouraging business growth. Unfortunately, these goals are not always compatible. In an effort to level the playing field between businesses with few employees and those with many, Mayor Lee and Supervisor Chiu have proposed a new gross receipts tax on businesses that would replace the current payroll tax. According to the draft legislation’s findings, the current payroll tax “discourages job creation and economic growth, lowers wages, and provides an unstable revenue stream.” The findings go on to state that by imposing a gross receipts tax, the tax burden will be better distributed “based on a business’s ability to pay.”

While some of these concerns with the payroll tax may be legitimate, the proposed legislation is yet another financial burden on real estate development and ownership. The Mayor’s office has worked to make the gross receipts tax “revenue neutral”, so that there is no net increase in taxes on all San Francisco businesses compared to the payroll tax. (However, business license fees would increase under the legislation and raise an additional $13 Million in new revenue.) There is no question that certain industries, including real estate, will be hit harder than others. Many property owners are concerned that the additional expense could slow the recent recovery.

Overview of Proposed Gross Receipts Tax

The gross receipts tax would impose different tax rates based on the type of business. The rates would be progressive, determined by the total amount of gross receipts received. For the most part, “gross receipts” include all payments of cash and property of any kind received by the business. There are no deductions or exclusions for companies that receive payments for client costs, cost of materials, or other expenses. The tax would be imposed regardless of where the revenue is generated – which could have a major impact on companies that make their headquarters in San Francisco. To help alleviate this burden, certain industries (not real estate) are allowed to determine 50% of the tax based on the percentage of payroll that is located in the City. Deductions are allowed for taxes imposed on retail sales or taxes that are reimbursed by a separately stated charge (for example, sales taxes, parking taxes, or real estate taxes paid by a tenant).

The new tax structure would be phased in over a five year period, based on a formula that allocates a portion of the tax to gross receipts, and a portion to payroll.

The real estate industry would be subject to the following gross receipts tax rates:

Amount of Gross Receipts / Rate
$0-$1M / 0.3%
$1M-$2.5M / 0.325%
$2.5M-$25M / 0.325%
Over $25M / 0.4%

Amounts received for the sale of real estate are excluded from the gross receipts tax, assuming that a transfer tax is paid. Also, rental income is only part of gross receipts if derived from properties located in the City. Rent controlled properties may deduct 50% of their gross receipts.

These rates are in the middle of the pack compared to other industries. For comparison, here is a brief overview of the other rates:

Retail 0.075% to 0.175%
Food and Manufacturing 0.125% to 0.45%
Real Estate 0.3% to 0.4%
Construction 0.3% to 0.45%
Professional/Financial/Tech 0.4% to 0.55%
Private Education/Health 0.525% to 0.65%

Other industries will certainly have concerns about the real estate tax, but we will focus on some of the concerns raised by the real estate community.

Real Estate Issues

The reaction from many in the real estate industry is that property owners already bear a high burden of taxes and City fees, beginning with the development of a project. Developers are well aware of the many fees to build or renovate a project in San Francisco, not to mention the length of time and political uncertainty. Property owners are also subject to real estate taxes, transfer taxes on sales (which just increased in 2010), and complying with other state laws and local ordinances applicable to real property. While in some cases the gross receipts tax will be passed on to tenants as part of common area expenses, this will further burden businesses that are located in San Francisco, and these businesses will essentially be paying the gross receipts tax twice. In addition to the tax rate, the following are concerns and comments that have been raised by the industry:

Gross receipts should exclude payments made by tenants for particular expense reimbursements or services such as parking fees, direct repairs, and tenant improvement costs
There should be an exception to avoid double taxing real estate receipts when distributions are made to partners or members of an LLC that also do business in San Francisco
Gross receipts should exclude any amounts necessary to repay initial capital contributions and acquisition loans, since these expenses are unique to the real estate industry, and this expense is already taxed as part of transfer taxes
Clarify that receipt of loan funds, equity contributions, and insurance proceeds are not part of the definition of gross receipts
Clarify that real estate development work and real estate consulting are not subject to the higher tax rate applicable to “Professional Services”
Tenant groups also are concerned that a tenant improvement allowance paid to the tenant could be caught up in the definition of gross receipts

Status of the Ordinance

Mayor Lee’s ordinance was scheduled to be heard today at the Budget and Finance Committee. In order to be included on the November 2012 ballot, the Board of Supervisors must approve the legislation by August 2, 2012. A potential competing measure, proposed by Supervisor Avalos, includes even higher tax rates and is also being considered by the Board. We will keep you updated as the legislation proceeds.

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, 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 in San Francisco Land Use

July 6, 2012April 12, 2017 | Andrew Junius

Mayor Lee Proposes Transformative Affordable Housing Reform

You’ve got to give it Mayor Lee – he is thinking big. For a guy who has spent his career working within the confines of local government, now in his new role as the City’s top policymaker, he has shown a bold willingness to make big changes to how local government is run. The latest example of our Mayor’s big-thinking is his current proposal to completely restructure the way affordable housing is funded in San Francisco.

It’s not hyperbole to state that affordable housing production in San Francisco is at a crisis point. A number of major events – the global economic downturn, the end of California Redevelopment, significantly reduced state and federal funding – have conspired to make housing for middle- and lower-income families almost non-existent in the City. Just last week, the Wall Street Journal published an article on the difficulty of renting an apartment in San Francisco, quoting one former New Yorker making the move here saying “finding a rental home in San Francisco is ‘so much more cutthroat’ than in Manhattan.” Needless to say, this is not an area where we want to be beating New York.

Enter Mayor Lee, whose common-sense, no-drama approach to governing has won him a large mandate from a public tired politicians bickering over irrelevancies. His proposed Housing Trust Fund, and the various components of the “deal” to fund it, could in one swift action provide a mechanism for increased affordable housing production, while significantly reducing the burden felt by developers of new housing.

The Trust Fund

The core of the affordable housing reform is the creation of a new Housing Trust Fund. This fund would be administered by the Mayor’s Office of Housing, and would be used to:

create, acquire, and rehabilitate housing affordable to households earning up to 120% AMI;

provide loans to households earning up to 120% AMI for the use of down payments for the purchase of a new home;

provide loans to households earning up to 120% AMI for the use of avoiding a homeowner’s loss of their home or rehabilitating housing;

fund infrastructure improvements that would support increased density in the City;

secure public bonds to be used to create, acquire, and rehabilitate affordable housing.

Funding for the Trust Fund would come from several sources. The City will kick in general fund monies each year, beginning with $20 million in the first year, increasing each year up to $50 million. The Mayor expects much of these monies to come from hotel tax revenue and leftover funds from the Redevelopment Agency. The remaining amount will come from two new sources of revenue.

Many of you have probably already heard that the Mayor and Supervisor Chiu will be introducing a ballot measure to change the payroll tax the City charges businesses into a gross receipts tax. If passed, new business registration fees are expected to generate $13 million, to be put towards the Housing Trust Fund.
Mayor Lee is also proposing a new transfer tax increase of 0.2% on transfers of real property sold for more than $1 million. This will spread the burden of affordable housing costs beyond just new residential developments to include all sales of such properties. Affordable housing funding is currently unstable, due to the fact that most funding comes from new residential development, which goes up and down depending on the development cycle and the economy. Since existing property sells every year in San Francisco, this will provide a much more stable source of affordable housing funds. As we’ve written before, this is also a more equitable way to pay for affordable housing – is there any reason why existing homeowners should not bear any of the affordable housing burden?

Some may argue that limiting the transfer tax to just sales of over $1 million is not equitable in itself. Indeed, roughly 19% of the residential property sales in San Francisco in May 2012 were for homes of $1 million or more, according to Pacific Union International. Board of Supervisors progressives John Avalos, David Campos, Jane Kim and Eric Mar have put a competing transfer tax increase on the ballot for this November, but it would only increase the transfer tax on the sale of properties for more than $2.5 million.

Relief for Residential Developers

And now for the good stuff. Mayor Lee’s Housing Trust Fund initiative would also reduce current affordable housing burdens on residential developers. These changes include:

Reducing the citywide on-site below-market rate (“BMR”) requirement from 15% to 12% (off-site and affordable housing fee would not change);

Prohibits the City from increasing the BMR percentages for on-site BMR, off-site BMR and the affordable housing fee;

Prohibits the City from adopting any new exaction or fee to be used for affordable housing;

Increases the unit count threshold subjecting residential projects to the Affordable Housing Program from 5 to 10 units.

It goes without saying that this is a significant improvement on the current affordable housing burden on residential developers. It’s not often in San Francisco that there is a serious discussion about reducing exactions and fees on new development. If enacted, all of these improvements (except for the Affordable Housing Program threshold increase) would be written into the City Charter, meaning it would take another Charter amendment to change the on-site BMR rate or add any new affordable housing fees.

The fate of the Housing Trust Fund is in no way secure at this point. The reform package is made up of several different legislative vehicles – the Trust Fund, the payroll/gross-receipts tax reform and the transfer tax increase are all separate ballot measures to be voted on separately this November. The Affordable Housing threshold increase is an ordinance that needs to be passed by the Board. That said, the Mayor has already lined up significant support. The Housing Trust Fund charter amendment is co-sponsored by Supervisors Wiener, Olague, Kim, Avalos and Mar. The payroll/gross-receipts tax reform is co-sponsored by Supervisor Chiu. That’s six Supervisors that are co-sponsoring some aspect of the reform package (and a politically diverse bunch too).

We will be watching the Housing Trust Fund Reform carefully as it makes its way through the process and will be keeping readers informed on future developments.

Student Housing Update – Planning Commission Approves

June 28, 2012April 12, 2017 | Andrew Junius

Under existing laws, housing units and SROs may be converted to student housing without special regulation by the Planning Code. The proposed ordinance would regulate the field for the first time. A significant goal of the proposed ordinance is to prevent existing forms of housing from being converted to student housing. Another goal of the ordinance is to enable the City to monitor student housing units to ensure that if the units return to unrestricted residential use, the City would be able to collect fees for the conversion.

On June 21, 2012, the Planning Commission approved a revised draft ordinance regarding student housing. The proposal will now move on to the Board of Supervisors Land Use Committee for further consideration.

The student housing proposal, in its current form, defines student housing as a dwelling unit, group housing, or an SRO that is occupied by students of an accredited post-secondary educational institution. In addition, the housing must be owned or controlled by the educational institution.

Conversions from any existing form of housing to student housing would be prohibited with the exception of: (1) housing that was built by the post-secondary educational institution; (2) housing in a convent, monastery, or similar religious facility; or (3) is on a lot directly adjacent to a post-secondary educational institution that will own, operate, or control the student housing, so long as the lot has been owned by the post-secondary educational institution for at least 10 years.

Projects that qualify for conversion of existing housing to student housing will be exempt from affordable housing requirements.

Conversion in the other direction (from student housing to unrestricted residential use) can be accomplished only with approval from the Zoning Administrator, and only if the building owner has made an extensive and good faith effort to find another qualified educational institution to lease the space.

Additional clarifications in the ordinance specify that student housing may be transferred from one qualified educational institution to another. Also, the definition of student housing has been revised to state that such housing may consist of all or a part of a building.

Residential and SRO buildings that have been vacant for at least one year or underutilized for at least two years, and create blight, will be eligible for conversion to student housing with conditional use authorization. To be considered underutilized, a building would need to have an occupancy rate of 20% or less for at least 2 years prior to the application.

The ordinance, as proposed, will apply to all residential buildings, including residential hotels. The goal of this provision is the rehabilitation of blighted residential hotel buildings in the Tenderloin neighborhood, although it is not restricted to that area.

For construction of downtown student housing as additions for buildings in the C-3-G and C-3-S Districts that are not designated as historically significant, or contributory to a historic district, additional square footage above that otherwise permitted based on floor limits may be approved. Approval of bonus square footage above the floor area limit is subject to obtaining a conditional use authorization. Open space requirements for new student housing will be one third of the amount normally required for a dwelling unit.

Finally, all new student housing in the South Park District will be subject to obtaining a conditional use authorization.

The proposed student housing ordinance now goes back to the Board of Supervisors Land Use Committee for further consideration. Overall, it encourages construction of new student housing, and prohibits, except in very limited circumstances, the conversion of existing housing to student housing.

We want to thank the San Francisco Housing Coalition who played a significant role working with the Planning Department and the sponsoring Supervisors on the proposed ordinance, and was successful in its efforts to encourage construction of new student housing.

ADA Changes On The Horizon

June 22, 2012April 12, 2017 | Andrew Junius

There has been a steady increase in the number of civil lawsuits in San Francisco that allege ADA, Unruh Act, California Building Code, and/or San Francisco Building Code accessibility infractions. In fact, the Office of Small Business found that more than 300 San Francisco businesses have been sued since 2005 for alleged ADA violations. In this update we review the current laws that govern accessibility, and some recent proposals for change.

Federal and State Disabled Access Laws

The federal Americans with Disabilities Act was enacted in 1990 to prohibit discrimination based on disabilities and to ensure equal opportunity and access for persons with disabilities. Individuals with disabilities are defined as those having physical and/or mental impairments that substantially limit a life activity. Many San Francisco small businesses fall under Title III provisions and are required under federal law to adhere to certain physical specifications. For example, the door to restrooms in public facilities must be considered accessible. Accessible doors are at least 36″ wide, fitted with lever-type hardware, and must not swing into required “clear areas.” The list goes on.

The Unruh Civil Rights Act of 1959 is a supplementary California law that “provides protection from discrimination by all business establishments in California, including housing and public accommodations.” The Unruh Act covers more individuals than the federal ADA – it extends protection to people with medical conditions and it only requires that the disability or disabilities limit, rather than substantially limit, a major life activity.

The California Building Code (CBC) and San Francisco Building Code (SFBC) are analogous to ADA provisions in many ways because they provide procedural and accessibility guidelines for building, electrical, plumbing, mechanical, housing, and energy systems for the State in general, and San Francisco, in particular. The San Francisco Department of Buildings and Inspection is responsible for enforcing these codes for small businesses. Most small businesses that provide goods and services to the public are required to comply with accessibility related laws, from the federal level to the city level. The conundrum is that many ADA regulations do not perfectly align to city and state regulations, thus creating confusion regarding necessary compliance and increased liability amongst small business owners and landlords. In addition, some San Francisco small business owners who have been sued had erroneously assumed that their initial procurement of city permits and licenses served as proofs of compliance with all accessibility laws, which is not necessarily the case.

Proposals for Change

Recently, legislation in Sacramento has been proposed in order to curb, what some see as abusive Americans with Disabilities Act lawsuits. California State Senate President Darrell Steinberg and State Senator Bob Dutton have co-sponsored SB1186, which would prohibit plaintiffs and their attorneys from threatening small businesses with “settlement demand” letters under the pretense of alleged ADA violations and require a written accessibility violation letter to be sent to a landlord or small business owner at least 30 days before a suit can be filed. It also compels commercial landlords to inform small business tenants whether their buildings are state-certified as ADA compliant. Some who oppose the proposed bill, like Margaret Johnson of the advocacy group Disability Rights California, believe that rules like the 30-day notice requirement would breach the civil rights of individuals with disabilities. Proponents of the bill, such as US Senator Dianne Feinstein, believe that the amended statute will diminish what some say are frivolous lawsuits linked to ADA compliance. The measure has passed the California Senate by a vote of 36-0, and is currently in the Assembly.

David Chiu, President of the San Francisco Board of Supervisors, has also introduced an ordinance that seeks to reduce the volume of ADA disability access lawsuits. Entitled “Disability Access Improvements for Small Business and Landlord Obligations,” the ordinance would require commercial landlords leasing to small businesses for public accommodations to bring all ground-floor entrances and exits into compliance with current access laws at the time a new lease is signed or an existing one is renewed. Furthermore, property owners would be required to inform small business tenants of all applicable federal and state accessibility law requirements. Lastly, the new ordinance would allow expedited permitting for entities pursuing accessibility improvements. The proposal is currently being reviewed and may be modified before being sent to the San Francisco Land Use Committee in late July.

Where to Go For Help

Whether or not the proposed bills are signed into law, compliance with Federal, State, and City regulations is essential. For a fee, a certified access specialist will inspect a property and grant Certified Access Specialist Program (CASp) Certification. Under the Construction-Related Accessibility Standards Compliance Act, business owners are granted special legal rights for utilizing a specialist, which can help defend against accessibility related lawsuits. There are a number of free resources that businesses can access for Federal, State, and local guidelines: the national ADA website at www.ada.gov for the 2010 ADA Standards, ADA Accessibility Guidelines (ADAAG), and the ADA Guide for Small Businesses; the San Francisco Office of Small Business Website at http://sfgsa.org/index.aspx?page=3805 or call (415) 554-6134 for information on all federal, state, and city laws pertaining to access requirements – the ADA, the California State Building Code, the Unruh Civil Rights Act, the California Disabled Persons Act, and the Construction-Related Accessibility Standards Compliance Act. Regina Dick-Endrizzi, the Executive Director of the Office of Small Business, is also available to field questions. Her office number is (415) 554-6481. The Department of Justice Toll-Free ADA Information Line is 1-800-514-0301 for business-related inquiries regarding the federal Americans with Disabilities Act.

Sheryl Reuben acknowledges the assistance of law clerk Joseph Mensah who made substantial contributions to the writing of this article.

Two Steps Forward, One Step Back: Transit Center EIR Appealed

June 15, 2012April 12, 2017 | Andrew Junius

Last month, the Planning Commission certified the Final Environmental Impact Report (“FEIR”) for the Transit Center District Plan (“Plan”) and Transit Tower after nearly five years of study. The two-inch-thick document covered the potential environmental effects of the Plan and Tower in extensive, if not excruciating, detail. Despite years-and millions in public funds-expended on a thorough and objective document, an appeal was filed yesterday.

The appeal was filed by perennial anti-development attorney, Sue Hestor, on behalf of the Save Our Parks Sunlight Coalition (“Coalition”), a group whose membership is comprised of Ms. Hestor’s organization, San Franciscans for Reasonable Growth (“SFRG”). Presumably, other groups are members of the so-called Coalition, though none are identified by name. Though Ms. Hestor upbraided the Planning Commission at the certification hearing only weeks ago for not possibly having read the voluminous FEIR or absorbed all of its minute details, the appeal now claims without any visible trace of irony that the document was not detailed enough.

As expected, the appeal focuses primarily on the shadows on public parks and other open spaces. Specifically, it alleges that the FEIR:

Understates the shadow impacts on parks under the protection of Proposition K, a voter-approved ordinance that precludes new shadows on parks under the jurisdiction of the Recreation & Parks Commission, unless the shadows would not have a significant or adverse effects;

Misapplies Proposition K by assuming that the Planning Commission and Recreation & Parks Commission can increase the amount of shadow allowed on downtown parks.

Unsurprisingly, the appeal offers nothing in the way of factual or legal support for any of these claims for one simple reason: there isn’t any. For those unfamiliar, an FEIR is not an approval of a project or plan; it is simply an informational document that must be objective, accurate, and adequately apprise the public and decision-makers of the environmental impacts before a project (or a plan) is approved.

There is no question that the FEIR’s analysis of shadow meets this standard. It devotes more than 81 pages of text and graphics to describing how the new skyscrapers allowed by the Plan would affect parks and open spaces. What’s more the analysis is deliberately conservative: every potential development site was modeled for a building that, in all likelihood, will be bulkier and taller than what eventually gets built. Potential new shadows on major parks were shown in hour-by-hour graphics at different times of year and the percentage of additional time parks could be shaded was quantified down to one-hundredth of one percent. Again, to be conservative, the FEIR didn’t account for real-world conditions like rain and dense cloud cover.

The result of this worst-case analysis? The parks most affected by new shadows could experience one-quarter of one percent (0.25%) more shadow than they do now. At Union Square and Portsmouth Square – the two parks that are the central focus of controversy – new shade would occur before 9:10 a.m. when park use is limited. Though the figures show that effects of new buildings will be minimal, that doesn’t mean they are “understated” or that the FEIR is somehow deficient. It just means that the heated rhetoric of the anti-shadow zealots isn’t grounded in objective reality.

The appeal’s primary legal claim – that the amount of shadow on downtown parks can’t be increased – also falls flat. Proposition K does not flatly prohibit new shadows above certain numeric amounts. It prohibits new shadows that are both “significant” and “adverse.” The interpretation of these subjective terms was left to the Planning Commission and Recreation & Park Commission, which later adopted quantitative limits or “shadow budgets” for parks in the downtown area.

The appeal asserts that these shadow budgets are somehow locked into place as a voter mandate under Proposition K, even though they were adopted by the two commissions some five years after the ballot initiative passed. This position defies both logic and longstanding practice. The Planning Commission and Recreation & Park Commission have, on rare occasions, adjusted shadow budgets to allow construction of projects with clear social benefits and minimal impacts on parks. These include an addition to the Asian Art Museum and several affordable housing projects. As a key source of revenue for the next generation of downtown transit, minor increases in shadow allowances to carry out the Plan are justified, and the FEIR can’t be considered defective for pointing out the Planning and Recreation & Parks Commissions have the discretion to do just that.

Though the appeal is completely without merit, CEQA nonetheless mandates the Board of Supervisors consider it-an exercise that will needlessly consume the time and attention of elected officials and waste public funds. To add insult to injury, none of these costs will be paid by the appellant. San Franciscans for Reasonable Growth, which to most regular observers seems to be an organization consisting of one person, apparently received a fee waiver as a “community organization.” While the City is required to consider CEQA appeals as a matter of law, it should-especially where public projects are concerned-stop encouraging them with what amounts to a hijackers-fly-free policy.

The appeal is expected to be heard by the Board of Supervisors in early July. We encourage you to contact them to urge rejection of the appeal and approval of the Plan.

Property Owners Beware – Obligation Is On You To Prevent Prescriptive Easements

June 8, 2012April 12, 2017 | Andrew Junius

A persistent topic in real estate law is prescriptive easements, whereby one acquires the legal right to use the land of another without the owner’s permission. In the recent case of Connolly v. Trabue (204 Cal.App.4th. 1154)( 2012) the California Court of Appeal decided a dispute between neighbors concerning a prescriptive easement and the effect of significant delay by the party claiming the easement in asserting its rights.

The Dispute

In 1995 the Connollys bought two parcels of land in Humboldt County, which they used for cattle ranching purposes. By 1998, they had built a fence around these two parcels, which also enclosed a portion of an adjacent parcel, Lot 17. In 2003, the Connollys purchased Lot 17, then immediately sold it to Dobbs, with the agreement that the property line would be adjusted so that title to the fenced-in portion of Lot 17 would remain with the Connollys. However, the 2003 grant deed prepared by Dobbs did not specify that the subject portion of Lot 17 was excepted from the transfer, and the entirety of Lot 17 was transferred to Dobbs.

The Trabues bought Lot 17 in 2008, and a dispute soon arose concerning use of the fenced-in portion used by the Connollys. The Connollys claimed that notwithstanding that they had made no formal legal claim of an easement for over 10 years since their use of the subject property had begun, their right to use the area had already ripened into a prescriptive easement, as they had met all legal conditions, and the Trabues could therefore not prevent them from continuing their use of the subject area. The Trabues claimed the Connollys had waited too long to assert their easement rights, and, pursuant to the legal doctrine of laches, a prescriptive easement had not been established.

The Legal Framework

Under California law, a prescriptive easement is the right to use another’s real property acquired by open, notorious and continuous use of the property under claim of right and without the owner’s permission for a period of five years. Once these criteria are satisfied, an easement is established by operation of law, and no further action by the claimant is necessary. The burden is on the property owner to prevent such use of its land from ripening into an easement. If the property owner takes no action to stop the use of its land before the five year period has run, then a prescriptive easement may be established in the user’s favor.

“Laches” is an equitable doctrine that a legal right or claim will not be enforced or allowed if a long delay in asserting the right or claim has prejudiced the adverse party. Laches addresses delay in the pursuit of a right when a party must assert that right in order to benefit from it.

The Court’s Decision

Reviewing the facts of the case the Court of Appeals determined that since at least 1998 the Connolly’s had used, and continued to use, the subject portion of Lot 17 for cattle ranching purposes. The Connolly’s use was not concealed and was at all times open, apparent, visible, and adverse to all others claiming a right to the subject portion of Lot 17. The Connollys regularly locked the gate leading into the subject portion of Parcel 17. The Connollys were never given permission by anyone to use the subject portion Lot 17 and no one ever interrupted their use.

The Court held, contrary to the Trabue’s argument, that the doctrine of laches did not apply to the Connolly’s claim of a prescriptive easement. There can be no undue delay under the doctrine of laches where a claimant is under no obligation to act, but instead acquires a prescriptive easement by operation of law. A claimant’s rights vest by operation of law at the moment the requisite conditions for a prescriptive easement have been established for the five year period; no further steps are required to establish the easement. By maintaining their use of the subject portion of Lot 17 and meeting the required criteria for a five year period, the Connollys were under no obligation to take further action to perfect their rights. Any delay by the Connollys in formally asserting their claim of easement is not pertinent to the establishment of the easement. The Trabues could therefore not legally prevent the Connollys from continuing their long-standing use of the area.

The Court’s decision in Connolly confirms that a property owner must be proactive and take steps to prevent a prescriptive easement from being established over its property by operation of law where the required conditions are present. While Connolly involved a rural setting, issues surrounding prescriptive easements are common in urban areas, and property owners should be aware of any use of their land that could ripen into an easement.

Potential New Planning Rules – Housing Production Reporting

May 31, 2012April 12, 2017 | Andrew Junius

For more years than we care to count, Reuben & Junius has been appearing at the Planning Commission in support of multi-unit residential projects. At most, if not all, of those hearings, one Planning commissioner or another, or speakers opposing the project would consistently and predictably raise questions of the project sponsor and/or make critical comments about the Planning Department’s project processing such as; (1) will these residential units be for sale or for rent – the complaint being that very little product was being produced that would be affordable to the middle-class; (2) if the units are going to be for-sale condominiums, how much will they cost; and (3) the Planning Department has no means of tracking the cumulative production of residential projects and their respective affordability level.

Generally, we were able to deflect the questions with a combination of lack of knowledge of market conditions in the coming years and the fact that there are no Planning Code provisions that required a project sponsor to declare rental vs. for sale, rental or for sale price points, or any other proprietary information.

Housing Production Reports

Things may change. Supervisors Christina Olague, Jane Kim, David Campos, and Eric Mar have proposed adding a new Article 5, “Housing Preservation and Production” to the Planning Code. The portion of the legislation that we wish to highlight is entitled Housing Production Reports. This section would require Planning Department staff reports to the Planning Commission for individual developments to include: (a) the expected unit type and household income levels of buyers or renters of the proposed projects, and (b) how the units in the project would address the City’s quantified production goals for housing at different income levels.

Under state law, housing developments cannot be denied just because production targets have been exceeded. Nonetheless, project opponents in San Francisco routinely urge that projects be denied because “we’ve already built enough market-rate housing already.” According to the legislation, San Francisco exceeded its market-rate housing production targets for the 1999-2006 period by more than 50 percent. Had the reporting requirement been in place in 2006, for example, market-rate developments would have gone to the Planning Commission with a staff report indicating that production targets for such housing had been met. Again, this alone is not an adequate basis for denying a project, but it is nonetheless problematic for staff reports to include information that can be easily weaponized by the City’s seasoned development foes. Indeed, with the City’s affordable housing requirements set uniformly on a city- or district-wide basis, it is hard to see what purpose – other than empowering opponents – the project-level reporting requirement will accomplish.

In addition to project-based reporting, running data would need to be updated on a quarterly basis. And although couched as an effort to maintain an accurate continuous total of housing approvals and how those new approvals address the City’s production goals as expressed in the Housing Element of San Francisco’s General Plan, it is hard to see how this data will be assembled absent a requirement that project sponsors provide detailed economic forecast information (sales or rentals, price points, buyer/ renter anticipated gross income levels, unit costs, etc.). In that the legislation requires that the Planning staff provide the data prospectively as residential projects are processed for entitlement, it seems logical and likely that project sponsors will be required to participate in assembling the information with regard to their respective projects.

Predicting The Future Is Not Easy

It has been our experience in the San Francisco market that economic cycles are inevitable and that they are both short and steep. The role of a speculative residential developer requires a great deal of guesswork in trying to anticipate delivery of product into the right market. It is virtually impossible to assemble a site, even one that includes a single parcel, conceptually design a project, submit applications to the Planning Department and pursue those applications through entitlement, prepare construction drawings and submit for plan check through the Department of Building Inspection, obtain financing, and then spend at least a year constructing a building, all within one cycle. In fact, perhaps the most unpredictable segment in that sequence is the time spent at the Planning Department, which can often exceed a year, notwithstanding the number of units contained in the proposed project, which ultimately means that residential developers are at the mercy of a process that they cannot control and also at the mercy of market forces that are virtually impossible to time.

To the extent that the proposed “Housing Preservation and Production” legislation seeks to maintain accurate up to date factual data on the construction of housing and who that housing will serve, it may make more sense to collect the data as projects are completed and sold or rented.

Brick And Mortar Retailers Fight For Level Playing Field

May 25, 2012April 12, 2017 | Andrew Junius

As people increasingly shop online, the uncollected sales taxes leave billions of dollars out of the reach of state and local governments. We have recently seen the very public tiff between Amazon and the State of California over this issue. Traditional retailers continue to argue that it is simply unfair for online retailers not to pay the same sales taxes that they do. Many groups are now calling for a federal response to require the collection of sales tax by remote retailers. This week we review some history on this issue and the status of the latest federal legislation.

Quill v. North Dakota – The Nexus Rule

We start in 1992, when the U.S. Supreme Court in Quill v. North Dakota ruled on the matter of sales tax on remote sales. In Quill, the Tax Commissioner of North Dakota sought to require Quill, an out-of-state mail order house with neither outlets nor sales representatives in the state, to collect and pay a use tax on goods purchased for use in that state. The Supreme Court ruled that sales tax must be charged only if a retailer has a physical presence, or “nexus”, in the state where the purchase is used. 504 U.S. 298. The court held that it would be too complicated for retailers to parse through 45 state and more than 7,500 local tax systems in order to ascertain the appropriate sales tax charge. Some states, like California, are now claiming that affiliate programs run by those like Amazon establish such a nexus, in order for states to recover the uncollected sales taxes. Further, brick and mortar retailers argue that they operate at a competitive disadvantage to remote sellers who do not charge or collect sales tax and thus lose business to online retailers not tied to a particular state.

The Marketplace Fairness Act

Congress has responded to this increased pressure by introducing the Marketplace Fairness Act. S.1832. A similar bill was introduced in the House of Representatives called the Marketplace Equity Act of 2011 (H.R. 3179). The Marketplace Fairness Act (“Act”) was brought before the Senate on November 9, 2011. The Act requires that states simplify their sales tax laws in order to ease the concerns raised in the Quill case. The Act grants states the authority to compel online and catalog retailers to collect sales tax at the time of a transaction, subject to an exception for those businesses which do less than $500,000 in total U.S. remote sales. The sales tax would be attributed to the locality where the item is delivered to the purchaser. The caveat is that states are given this authority to compel the collection of sales tax from remote sellers only after they have simplified their sales tax laws. States may elect between two options in order to simplify their sales tax laws. One, a state can join the other 24 states that have already voluntarily adopted the measures of the Streamlined Sales and Use Tax Agreement. The Streamlined Sales and Use Tax Agreement requires member states to comply through the use of consistent sourcing rules, definitions, methods, and protocols for the calculation, collection and reporting of sales/use tax. California is currently not yet a member state of the SSUTA. Alternatively, states can adopt certain simplification mandates, such as designating a single state organization to handle sales tax registrations and establishing a uniform sales tax base for use throughout the state.

The Debate

There are lobbyists both in favor of and against the bill’s passage. Those against the bill say that the additional sales tax on online purchases is a bad idea in a weak economy because it decreases consumer spending for groups with limited budgets. Also, online retailers like Ebay argue that it could stifle online commerce and destroy jobs, which in turn could decrease income taxes flowing to the state. Tod Cohen, eBay’s Vice President for Government Relations and Deputy General Counsel, stated “this is another Internet sales tax bill that fails to protect small business retailers using the Internet and will unbalance the playing field between giant retailers and small business competitors. It does not make sense to expand Internet sales tax burdens on small businesses at a time when we want entrepreneurs to create jobs and economic activity.” Supporters argue that the additional revenue from collecting sales taxes from remote sales would help those states facing budget shortfalls. Further, they believe it would make it more fair for those retailers who operate out of a brick and mortar shop. Haley Barbour, the governor of Mississippi has said “good public policy says it is past time that our brick and mortar merchants on Main Street and in our shopping centers get a level playing field with Amazon and the internet-that they get fair treatment for paying our taxes.” Mr. Barbour further commented that the passage of the bill would allow Mississippi to collect an estimated $300 million in currently uncollected sales taxes. As of the date of this article, the Act has been referred to the Finance Committee, so the debate will continue for the time being.

The outcome of this legislation is important for Californians. On the one hand, according to the University of Tennessee Center for Business and Economic Research, 18% of California’s $23 billion deficit could be closed if online retailers collected sales tax for sales attributable to California. On the other hand, there is a fear that the state could be hampered by the requirement to streamline their sales taxes and it could negatively affect small businesses in California and reduce job growth.

Transportation Fee Reform – More Than Just A Fee Hike

May 18, 2012April 12, 2017 | Andrew Junius

To those who are not from here, San Francisco can sometimes seem a little backwards. It’s cloudy in the summer. We bike to work. Instead of confining our spices to one rack at the grocery store, we have entire shops devoted to spices. And we discourage new parking.

As avid readers of the R&J update know, San Francisco policymakers have been steering a significantly new course for transportation policy over the past few years. In the spirit of the City’s “Transit First” policy, zoning is generally not requiring parking anymore, denser development is being planned for near transit stops, and large investments are being made in upgrading our transit, pedestrian and bicycling systems. One thing that hasn’t caught up to this new wave of transportation policy is environmental review.

Currently, when new development projects undergo environmental review, transportation impacts are studied based on, for example, how new automobile traffic will affect nearby intersections. The problem with this narrow approach is that many intersections in the City are already overburdened, and new development easily triggers higher (costlier, more time-consuming) environmental review and preparation of many redundant transportation studies (TS). The City is now devising a way for virtually all projects to avoid heightened environmental review due to transportation: by using a new citywide fee that expands the existing Transit Impact Development Fee (“TIDF”).

TS Out – TSF In

This new Transportation Sustainability Fee (“TSF”) would expand the existing TIDF to apply to residential development. Single family homes and development of less than 800 square feet would be exempt from the fee. By paying the fee, a development project would be mitigating any potential adverse impacts it could have on transportation. Critically important for streamlining projects and avoiding redundant work: no transportation study would be required. Preparation of a negative declaration or EIR could be avoided for projects with potential adverse impacts limited to transportation.

The Nitty-Gritty.

In essence, the TSF would replace the TIDF. The City is currently estimating the following fee rates for the TSF:

Residential: $5.53/sf
Office: $12.64/sf
Retail/Entertainment: $13.30/sf
PDR: $6.80/sf
Cultural/Institution/Education/Medical: $13.30/sf
Visitors Services: $12.64

The residential fee is completely new. The fee rate for office, retail and institutional uses would increase slightly. PDR fees would drop significantly.

The City is also contemplating a TSF reduction for preferred-policy projects. Reduced fee rates would apply to space housing small businesses, projects proposing reduced parking, affordable housing projects, and residential projects of 20 units or less. Fee reductions may also be available in the Market/Octavia and Eastern Neighborhoods plan areas, where area-specific impact fees already apply.

The TSF must itself undergo environmental review, and will not be considered for passage for at least 18 months. In the meantime, the existing TIDF is being updated (yes, this generally just means increased). As currently written, the updated TIDF would apply to all new non-residential development of 800 square feet or more (instead of the current 3,000 square foot threshold) and the proposed non-residential fee rates listed above would go into effect. This updated TIDF is expected to go into effect this October.

We expect a lot of debate over transportation fee reform over the next few years. On one hand, the residential development community could take issue with a brand new fee that applies to development. On the other hand, all development (including residential) could see a huge benefit in simply avoiding environmental issues related to traffic. We will keep you posted as the TIDF update moves through the legislative process this year, and as the TSF ordinance is considered in a few years.

This Week In Land Use – May 10, 2012

May 10, 2012April 12, 2017 | Andrew Junius

The Future of the Fee Deferral Program

On April 23, the Board of Supervisors’ Land Use and Economic Development Committee held a hearing to consider the impacts and future of the Fee Deferral Program. The Fee Deferral Program commenced on July 1, 2010 and is scheduled to expire on July 1, 2013. The hearing was primarily an information-gathering session, and the Committee plans to take these issues up again in approximately six months. As such, the next six months will be very important in determining the political future of the Fee Deferral Program.

Critics of the Fee Deferral Program point to the deferred fees and express concern that affordable housing and infrastructure needs are not being met. The Fee Deferral Program was originally designed as a financial incentive to make development more affordable and encourage new projects in bad economy, the Program arguably a better way for the City to do business in any economy. Under the Program, a developer that chooses to defer payment of fees still pays a 15 or 20 percent down payment on the fees, and then pays the remainder of the fees prior to the issuance of the first certificate of occupancy with interest generally ranging from 2-3 percent. This can be a significant amount of money for big projects that pay up to $20 million in impact fees – with a 20 percent down payment, 2.5 percent of $16 million is $400,000.

Moreover, the only perceived problem presented by the Fee Deferral Program for the provision of affordable housing and infrastructure was that a “lag time” resulted between the time when the City previously received fees and when the City now receives fees. But the April 23 Committee hearing revealed that the City is now catching up and will soon completely close this lag time, and the City will be budgeting for and receiving impact fees just as it was before.

The benefits of the Fee Deferral Program are that the City receives a bit more in revenues; developers no longer have to pay significant carrying costs on up-front money; if investment still is necessary to pay the deferred fees, that investment is more secure because the project is closer to completion; and the City significantly reduces its risk of having to reimburse fees for stalled or failed projects.

We will continue to monitor the progress of the Fee Deferral Program as it could have a significant effect on the future of development in San Francisco.

On the Horizon: Van Ness Bus Rapid Transit

The planning and construction of the Van Ness Bus Rapid Transit (BRT) Project is taking a significant step forward over the next few weeks as staff from the San Francisco County Transportation Authority (Authority) and San Francisco Municipal Transportation Agency (SFMTA) is recommending a Locally Preferred Alternative (LPA) for the Project. Construction of the BRT Project is significant not only because of the changes it will produce for public transit along Van Ness Avenue, but also because of its potential impacts on other construction projects along the Van Ness corridor.

According to the Project’s Draft EIS/EIR, the LPA recommended by staff has the longest construction schedule at an estimated 21 months. The Project will extend for two miles along Van Ness between Lombard and Mission Streets. Construction of the BRT stations, transit way, and medians would take place in an approximate 43-foot-wide area in the center of the roadway. Two traffic lanes would generally remain open on either side of the construction area. If necessary, the parking lane on both sides of the street would be closed during the construction work. When parking lanes or a second travel lane is closed, construction will be staged in three-block segments. Construction could begin in 2015.

The Draft EIS/EIR reviewed three build alternatives for consideration: one that had the transit line running along the outside lane (Alternative 2), and two center lane options (Alternatives 3 and 4). Staff’s LPA is a hybrid of Alternatives 3 and 4: a center-running line with right side boarding, a single median, and limited left turns. The BRT is intended as an affordable approach to creating rapid transit along Van Ness, and would incorporate the following features:

A dedicated bus lane separated from regular traffic;
All-door, level boarding, and proof of payment to promote faster boarding and de-boarding;
Shelters with seating;
Pedestrian safety enhancements;
Transit signal priority with traffic signals recognizing an approaching BRT vehicle; and
“Traffic signal optimization,” a timing technology for all traffic lights in the corridor.

The LPA recommendation is scheduled to be considered by the Authority Plans and Programs Committee on May 15, and by the Authority Board on May 22. It is also scheduled to be considered at the SFMTA Board on May 15. Once the LPA is selected, it will be analyzed in the Final EIS/EIR, which is scheduled to be completed this Summer. The Authority and Federal Transit Administration will certify the Final EIS/EIR in Fall 2012, and SFMTA ultimately has approval authority for the Project.