Last Thursday, the City’s Planning Commission held a lengthy informational hearing on SB 50 – proposed statewide legislation intended to spur housing development in transit and job-rich areas.

SB 50 was introduced by Senator Weiner on December 3, 2018.  It is essentially a revised version of last year’s failed SB 827, reformulated to expand its area of impact and to address some critics’ concerns about the potential for tenant displacement.

The bill would apply to residential projects on sites zoned to allow housing and located within either a “jobs rich” area (which is not well-defined but would likely cover much of San Francisco) or in proximity to public transit (within ½ mile of an existing rail transit station or ferry terminal, or ¼ mile of a “high quality bus corridor”).  Qualifying projects must also designate at least 2/3 of their total area for residential development and meet a minimum on-site inclusionary housing requirement.  The inclusionary amount is not set, but Planning staff anticipates this criteria would be met through compliance with the City’s local program.

As written, SB 50 would provide the following incentives:

• Projects located within ¼ mile of a rail transit station or ferry terminal would have a minimum height limit of 55 feet; minimum Floor Area Ratio (FAR) of 3.25; and would be exempt from minimum parking requirements and residential density limits.
• Projects located between ¼ and ½ mile of a rail transit station or ferry terminal would have a minimum height limit of 45 feet; minimum FAR of 2.5; and would be exempt from minimum parking and residential density requirements.
• Projects located within ¼ mile of a “high quality bus corridor” or within a “jobs-rich” area would be able to waive minimum parking requirements up to 0.5 spaces per unit and would be exempt from residential density requirements.

Qualifying projects could also request up to three “incentives or concessions,” which are identical to those under State Density Bonus Law.  This could include exceptions or reductions to local zoning standards for rear yard setback, unit exposure, open space, etc.   These requests could only be denied if they would either (1) not result in an actual cost reductions for the project; or (2) result in a specific adverse impact on public health and safety, or an historic property listed on the California Register.

SB 50 would not eliminate local design standards or approval processes, so qualifying projects would still need to obtain all applicable discretionary approvals (i.e. Conditional Use Authorizations) and undergo CEQA review.

Planning staff also interprets the language of SB 50 to allow layering of its density bonus and zoning incentives with those provided under State Density Bonus Law.  This could potentially allow qualifying projects to achieve an additional state density bonus of up to 35% on top of increased development capacity under SB 50, and to request up to a total of 6 concessions and incentives.

Although staff anticipates SB 50 could potentially result in some up-zoning throughout most of San Francisco, the bill includes some significant exemptions intended to minimize tenant displacement.  SB 50 would not apply to any property where there has been a rental tenant in the past 7 years, or where a rental unit has been removed from the market through an Ellis Act eviction in the past 15 years.  The City does not currently maintain a registry of rental properties, but that according to a 2017 American Community Survey, roughly 63% of San Francisco’s occupied housing units are occupied by renters.

The bill would also provide a temporary 5-year exemption for “sensitive communities,” which are defined as areas vulnerable to displacement pressures.  These communities have not yet been identified, but staff anticipates they would include the areas identified as part of the recent Committee to House the Bay Area (CASA) process.  In these areas, local governments would be given up to 5 years to adopt local re-zoning that encourages development of multi-family housing near transit and meets the same overall residential capacity and affordability standards provided by SB 50.  If that is not done by January 1, 2025, SB 50 would take effect in those areas.

Planning staff also noted that the practical effect of SB 50 would be lessened by the fact that many San Francisco neighborhoods that have been rezoned in connection with Area Plans already de-control density and have height limits set above the minimum thresholds in SB 50.   The properties anticipated to experience the greatest change if the bill passes as-written would be single-family and owner-occupied duplex properties in the City’s lowest-density (RH-1 and RH-2) zoning districts.

Thursday’s hearing included nearly three hours of public comment, after which Commissioners weighed-in with their initial thoughts on the legislation.  Commissioner comments varied, from support for the bill as a necessary measure to correct years of housing under-production to strongly-voiced concerns that it will undermine local zoning discretion and misses the mark on providing adequate tenant protections.

SB 50 is currently winding its way through the legislative review process, and is anticipated for vote in the Senate Transportation and Housing Committee at some point in the coming weeks.  Amendments and modifications to the current language are to be expected as part of the legislative review process.   Additional information from Planning staff on SB 50 and its potential impacts on local development is available at: http://commissions.sfplanning.org/cpcpackets/SB%2050_Memo.pdf

Authored by Reuben, Junius & Rose, LLP  Attorney Melinda Sarjapur

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.

Tomorrow, the San Francisco Planning Commission will consider two interesting legislative proposals on hot-button land use topics in the city. One would restrict—but not prohibit—new employee cafeterias in office developments, modifying a proposal from last year to ban them outright. The other would authorize accessory dwelling units in new construction.

Conditional Use for New Employee Cafeterias

The employee cafeteria proposal, introduced at the Board of Supervisors last summer, initially prohibited all new cafeterias. Finding an outright prohibition a bridge too far, the Planning Commission passed a motion disapproving the ordinance. In December 2018, the legislation was amended at the Board of Supervisors’ Land Use Committee to require a conditional use approval instead. That retooled proposal is back in front of the Planning Commission tomorrow.

The updated legislation proposes a number of factors for the Planning Commission to weigh when deciding on a cafeteria project. Some factors include: the cafeteria’s size; if it would be open to the public; its “impact” on existing businesses in the neighborhood; if meals would be free or heavily subsidized; if employers will also subsidize or pay for meals outside the cafeteria; the ability of existing restaurants to “absorb” increased demand that the office project would bring; the impact of cafeteria employees on demand for housing, public health, and social services; and if the cafeteria is open to all employees and contractors, such as janitors, servers, and security guards.

It appears the Planning Department recommends only including some of these factors, specifically cafeteria size; if it will be open to the public; impact on neighboring business; and if any subsidies or vouchers will be offered. Staff also recommends adding a factor about promoting economic opportunities for local residents and businesses through OEWD’s workforce system and First Source Hiring program.

At least a few of these factors may prove hard for project sponsors to demonstrate, including impact on existing businesses and those businesses’ ability to absorb increased demand, as well as the  cafeteria employees’ demand for housing, public health, and other social services throughout the city. Additionally, many criteria are specific to employers themselves and not to project sponsors or developers, potentially causing uncertainty about when an employee cafeteria could or should be proposed.

Notably, the Planning Department also recommends cafeterias be exempt from the CU requirement if they are located on the ground floor, open to the public, and employers either only subsidize 50% of meals or provide vouchers for use outside the cafeteria.

ADUs in New Construction

Recognizing that accessory dwelling units—historically called in-law units and now more commonly referred to as ADUs—can provide much-needed affordable by design housing, California lawmakers in recent years passed a series of amendments to streamline ADU production. San Francisco policymakers and elected officials have in large part worked quickly to implement state law. In particular, the Planning Department and the Mayor’s Office have consistently proposed ways to cut through red tape, while still maintaining certain development requirements. This most recent ADU ordinance continues that trend by addressing a simple way to add more housing: permitting ADUs in new construction, consistent with a new state law, and further streamlining some of these units that are the least likely to raise neighborhood concerns.

The Planning Department proposed a few interesting features for new construction ADUs. First, Planning staff recommends a 1,200 square foot cap on ADUs that can be approved ministerially. Larger ADUs can still be approved, but they would receive more input from staff and likely take longer to get through the permitting process. Staff also suggests reducing the amount of open space required for ADUs in RH zoning districts, recognizing that larger open space requirements for ADUs could lower the appetite of a property owner in these districts to pursue an ADU. Because the RH zoning districts cover a significant portion of San Francisco’s west side, this change could incentivize new housing in parts of the city with fewer residential projects.

On a macro level, being able to add ADUs into new construction projects is a helpful and logical next step to streamline production and get people living in those units. Currently, property owners in San Francisco can only process ADU permits after projects are constructed. While the Planning Department has implemented a number of best practices to streamline ADU permitting, eliminating the need to go through the building permit process twice is a common-sense solution.

We will continue to track these proposals as they make their way through the legislative process.

Authored by Reuben, Junius & Rose, LLP  Attorney Mark Loper

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, Senator Nancy Skinner (D-Berkeley) introduced SB 330—the Housing Crisis Act of 2019. Unlike other housing-related bills introduced this legislative session, this bill would declare a statewide housing emergency. Through January 2030, the proposed legislation’s multipronged approach would streamline project approvals, freeze zoning controls once an application is deemed complete, restrict the assessment of fees to 2018 levels, limit new legislation that would impede residential development, suspend the applicability of certain development standards, and create new minimum standards for occupied substandard buildings. Most of these provisions would only apply in cities and counties with high rents and low vacancies, although the specific thresholds have not been defined yet.

The legislation attempts to streamline project approvals by limiting the number of “de novo” public hearings and requiring that a decision on the project be made at one of up to three hearings. This 3-hearing limit would eliminate the possibility of endless hearings and continuances, thereby reducing some of the risk associated with bringing a large and controversial housing development before the Planning Commission. Although it is unclear whether or not the 3-hearing limit also includes appeals, if it does, then this provision could have an even more profound effect on the approval process, especially in cities like San Francisco where there are multiple avenues for appealing a project.

To keep cities from delaying the third and final hearing, another streamlining provision would require cities to act on an application within 1 year after it is deemed complete. Although this may be a helpful provision to point to if it looks like the review process will exceed 1 year, it is unclear how effective it would be without a corresponding change under CEQA, which tends to drive the overall approval timeline.

The legislation’s proposed vesting of zoning controls is arguably the most aggressive provision. It prohibits any city or county from enforcing any changes in the zoning controls or the general plan after an application is deemed complete. This is much sooner than most other methods of establishing vested rights, which usually occur after project approval with a vesting tentative map or development agreement, or after construction begins for projects without those entitlements. This would also have the benefit of simplifying grandfathering issues.

Aside from the streamlining and vesting provisions, the legislation also:

• Freezes fees and exactions at the rates applied as of January 1, 2018;
• Eliminates any fees assessed against units that are affordable to households with incomes at or below 80% AMI;
• Requires cities to make a determination about the historic status of the site when the application is deemed complete;
• Prohibits the enforcement of parking requirements;
• Prohibits changes to the zoning or general plan classifications that would reduce the intensity of residential development permitted, including height, density, FAR, and open space;
• Prohibits design standards that would be more costly than those in effect as of January 1, 2018;
• Prohibits development moratoriums and caps on the number of discretionary permits for housing; and
• Requires the State to develop minimum health and safety building standards that would allow occupied substandard buildings to be deemed complaint with the Building Code for 7 years.

In an effort to avoid displacement, the bill would place an outright ban on the demolition of rent control units or Section 8 housing, while prohibiting the demolition of affordable housing units unless tenants are offered relocation benefits and the right of first refusal for units in the new development.

In introducing the legislation, Senator Skinner pointed out that California is ranked 49th out of the 50 states in terms of housing units per capita, and that the housing crisis is costing the State an estimated $140 billion a year in lost economic output. Just to keep up with current population growth, California needs an estimated 180,000 additional units of housing each year. And according to the California Department of Housing and Community Development, production has fallen far short, with an average of less than 80,000 new housing units being developed annually over the last 10 years. Although SB 330 would address some of the issues that are fueling the housing crisis, it may not go far enough.

Authored by Reuben, Junius & Rose, LLP  Attorney Sabrina Eshaghi

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

On December 11, 2018, the Board of Supervisors passed an ordinance (the “Ordinance”) eliminating required parking minimums citywide for all uses. The vote was 7-4, with Supervisors Cohen, Safai, Stefani, and Yee voting against it. Mayor Breed signed the Ordinance on December 21 and it went into effect on January 21.

Those in favor of the measure called it a forward-thinking policy that brings the Planning Code in line with the City’s Transit-First Policy. Proponents also argued that parking increases the cost to build housing and takes up space that could otherwise be devoted to walk-up residences, retail spaces, or landscaped areas. Those against the change expressed concern that it would hurt seniors and those in parts of the city where public transit options are lacking. To that point, Supervisor Cohen at one point asked that District 10 be carved out from the Ordinance, citing the lack of reliable transit in the area. She later withdrew that request.

In reality, the Planning Department and Commissioners have long been pushing back against proposals that include large amounts of parking, and developers looking to build less than the required amount could already circumvent the minimums by providing increased bike parking instead.

The elimination of the parking requirements was initially recommended by the Planning Commission as part of legislation to amend Better Streets Plan improvement requirements and curb cut restrictions. That legislation aimed to modify the triggers that would require project sponsors to construct streetscape improvements and to expand curb cut restrictions for off-street parking and loading to most zoning districts and certain designated streets, including those on the Citywide Transit Network and any officially adopted bicycle routes or lanes. The substance of that ordinance (BOS File No. 180914) was approved by the mayor on November 20, 2018, and the elimination of parking requirements was pulled out as a separate piece of legislation.

Historically, new residential projects in R districts were generally required to provide one parking space for each dwelling unit. Required parking minimums also applied to most non-residential uses, depending on the specific use type and zoning district.

With the enactment of the new changes, parking will not be required for any use type anywhere in the city.  Accessory parking is still allowed, up to a maximum amount. Previously, a use that triggered a minimum parking requirement could typically include accessory parking up to an amount not exceeding 150% the required number of spaces. Now, there is no minimum number of spaces that must be provided, and most use types may provide up to 1.5 spaces for each one space that was required under the old rules. You can review the maximum parking ratios for each use established by the new ordinance here.

The Ordinance does not amend Section 151.1, which regulates permissible off-street parking in the following districts: NCT, RC, RCD, RTO, Mixed Use, M-1, PDR-1-D, PDR-1-G, and C-3 Districts, and to the Broadway, Excelsior Outer Mission Street, Japantown, North Beach, Polk, and Pacific Avenue Neighborhood Commercial Districts.

As always, parking in excess of the maximum accessory amounts may be permitted only as a separate use, where the zoning controls for the particular district allow.

Notably, the Ordinance includes a grandfathering provision which carves out any project that submitted an environmental or development application prior to the effective date of the Ordinance. Which means that if you already have an application on file, the old rules will continue to apply.

Authored by Reuben, Junius & Rose, LLP  Attorney Chloe Angelis

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

On December 11, 2018, the San Francisco Board of Supervisors introduced legislation that would significantly impact the demolition and modification of residential units (BOS File No. 181216). The Planning Code requires most “demolitions” of residential units to obtain Conditional Use (“CU”) approval after a hearing by the Planning Commission, whether or not the unit is legal. Demolitions include not only the full elimination of a unit, but also renovations that remove a certain percentage of an existing structure. Therefore, changes to what is considered a demolition could dramatically increase the number of projects required to seek CU approval. In addition, the legislation would require CU approval for many residential additions.

As introduced, the legislation would do the following:

• require CU approval for most “major expansions” of residential buildings, defined as a 10% increase in square footage through vertical addition or 20% through horizontal addition, with exceptions for limited additions of one or two stories in the rear yard and Accessory Dwelling Units, and possible waiver of the CU requirement by the Zoning Administrator;
• remove the existing exception that allows demolition without CU approval of single-family homes in the RH-1 and RH-1(D) Districts that are demonstrably not affordable;
• provide new standards for what residential renovation projects constitute a “demolition” – removal of more than 50% of the sum of all existing above-grade external elements, removal of more than 25% of the surface of all external walls facing a public street, or removal of more than 25% of the building’s internal structural framework, bearing elements or floor plates, including all work permitted for the property within the prior five years;
• change the Building Code definition of demolition to align with the Planning Code and require submission of a report to DBI by a structural engineer;
• require the assigned planner to review demolition calculations, including the percentage of the interior and exterior elements of the existing structure to b removed and confirm the accuracy and completeness of plans for all projects, including conducting a site visit if necessary;
• impose a more restrictive standard on projects shifting square footage from one unit to another, requiring CU approval where a project reduces the square footage of a unit by more than 10% (currently 25%), and prohibiting merger of units resulting in any unit larger than 1,200 square feet; and,
• increase penalties for violation of demolition, merger and conversion restrictions, including both monetary penalties and the requirement that the original structure be rebuilt.

Projects that have received final approval from the Planning Department or Planning Commission prior to the effective date of the legislation would not be subject to the new rules unless the scope of work increases.

One interesting aspect of these changes is the interplay between demolition requirements and the Discretionary Review (“DR“) process, under which neighbors can challenge projects that propose an expansion of the existing envelope and have that challenge heard by the Planning Commission. If a project will be heard by the Planning Commission whether or not a DR is filed, there is less incentive for property owners to compromise with neighbors to avoid a Planning Commission hearing.  Therefore, we would expect both a greater number of hearings, and more contentious battles at the Planning Commission.

The legislation is currently scheduled to be heard by the Planning Commission on March 7. It could be amended before Planning Commission hearing or after it returns to the Land Use and Transportation Committee of the Board of Supervisors, which is chaired by the primary sponsor of the legislation, Supervisor Aaron Peskin. Given the number of projects impacted, City agencies and numerous property owners will be voicing their opinions about this legislation. Stay tuned for updates.

Authored by Reuben, Junius & Rose, LLP  Partner, Jody Knight

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.

The year has just started, but there are already several pending pieces of housing legislation and other initiatives to watch in 2019, both locally (San Francisco and Bay Area overall) and statewide.  The 2019-2020 legislative session opened in Sacramento just last month and 26 housing bills have already been introduced.  This article summarizes a few key housing undertakings to watch closely in 2019.

Senator Wiener Starts the Legislative Session with SB 50 (version 2.0 for SB 827)

Among the housing bills introduced in December is Senator Scott Wiener’s SB 50, which is essentially a revised version of the failed SB 827 from the 2018-2019 legislative session.  The bill proposes to streamline entitlement processes for certain residential projects that are considered either “Transit-Rich” or “Jobs-Rich” projects due to their proximity to transit (0.5 mile radius from a transit stop along a high-quality bus corridor) or jobs (certain areas identified by the Dept. of Housing and Community Development and the Office of Planning and Research).  Projects that qualify would be entitled to receive an “equitable communities incentive,” which can consist of waivers from maximum density controls and parking requirements that exceed 0.5 spaces per unit, and waivers from height and FAR limits that are less than 45 feet and 2.5 FAR, or 55 feet and 3.25 FAR, depending on whether the project is located within ½ or ¼ mile distance from a major transit stop.

The Return of Redevelopment Agencies (version 2.0 for AB3037)

Among the first bills introduced for the current legislative year, Assembly Member David Chiu introduced AB 11, the Community Redevelopment Law of 2019.  A similar bill was introduced by him last year as AB 3037, however, that bill did not proceed to adoption.  The elimination of redevelopment agencies in 2012 was a significant hit (and loss of funding mechanism) to California cities and counties.  AB 11 would allow cities and counties to form new agencies (referred to as affordable housing and infrastructure agencies) to capture tax increment within certain agency boundaries for the purpose of providing funding and development for certain housing and infrastructure projects, including the issuance of bonds.  If adopted, AB 11 would create redevelopment agencies similar in purpose and powers to the former redevelopment agencies that existed prior to 2012.

CASA and Bay Area’s Housing Crisis

CASA, or the Committee to House the Bay Area, is an initiative by MTC (Metropolitan Transportation Commission) and ABAG (Association of Bay Area Governments) that has been proceeding for the last 1.5 years after the release of the Plan Bay Area 2040 in Summer 2017.  CASA is an ambitious effort that created a blue-ribbon task force that brought together a varied and diverse group of Bay Area leaders and stakeholders, including developers, elected officials, housing advocates, labor representatives, civic leaders, and others, in an effort to fix the housing crisis.  CASA’s objective is no small task, however, the stakes regarding the future of the Bay Area are high as well.

CASA is co-chaired by Fred Blackwell (San Francisco Housing Foundation), Leslye Corsiglia (Silicon Valley @ Home), and Michael Covarrubias (TMG Partners).  In December, CASA came out with “CASA Compact,” a 15-year policy reform document proposing recommendations to alleviate Bay Area’s housing crisis.  Implementation of CASA Compact would require participation from all stakeholders, including legislation from Sacramento, regional ballot measures, and action by local governments, particularly in the next 3-5 years.  CASA Compact includes 10 distinct Elements, covering tenant protections, housing inclusion and capacity, approval processes and timelines, and funding and coordination.  The document also provides several action items, including without limitation, the re-establishment of redevelopment agencies (see AB 11 above), Prop. 13 amendments reallocating the distribution of tax revenues, funding to reduce and prevent homelessness, stabilization of the construction labor force, and legislative changes to the voter thresholds required for passage of bond measures for affordable housing investments and housing production (55% vs. 2/3rds).  The collaboration between different stakeholders that make up CASA and the issuance of CASA Compact is quite impressive, and the implementation and realization of CASA is high on the list of 2019 efforts to follow.

Authored by Reuben, Junius & Rose, LLP  Partner, Tuija Catalano

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.

Unpredictable construction and labor costs continue to have a significant impact on project viability.  A September 2018 Meyers Research study, Cost Drivers Impacting Housing, funded by the California Homebuilding Foundation, identifies construction material shortages and costs as a significant factor impacting the supply of housing.  Framing lumber, ready-mix concrete, plywood/engineered wood, and gypsum were cited as impacting up to 21% of survey respondents.  On October 10, 2018, the Associated General Contractors of America reported double-digit cost increases in common construction materials.  Its chief economist, Ken Simonson, commented that the cost-data likely under-reports actual increases, as data was collected prior to the imposition of new and additional tariffs.  Local press coverage suggests that construction costs are significantly impacting the delivery of housing in the Bay Area.

One way that general contractors can protect against construction cost increases is by confirming material supply bids under California Commercial Code section 2205.  That is, when a contractor receives a quote for construction materials that exceeds $2,500, and it intends to rely on that quote in making its own bid for a construction contract, the contractor should notify the merchant of its intent to do so.  This action makes the material supply quote irrevocable for a period of 10 days after the contract is awarded to the prime contractor, for up to 90 days after the bid was rendered.  The quote can be formally accepted by the contractor in that 90-day time-frame.

The failure to confirm the construction materials quote releases the merchant from its offer.  The consequences to a construction project can be significant insofar as the merchant no longer has an obligation to supply the materials, and it has no obligation to honor the original quote.  Construction delays and cost overruns often result.

Project developers can assure that general contractors obtain a “firm offer” to supply construction materials by including confirmation requirements in the bidding documents for a project.  The obligation to notify the merchant should be reiterated when the construction contract is awarded.  If the contractor fails to confirm the offer, resulting cost increases should not be borne by the developer.

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.

Authored by Reuben, Junius & Rose, LLP  Attorney, Corie A. Edwards

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

What terms must be included in a lease option to purchase to ensure enforceability?  If a tenant exercises an option to purchase, when does the lease and related obligation to pay rent cease?  A recent Court of Appeal case, Petrolink, Inc. v. Lantel Enterprises, decided just these issues. (21 Cal.App.5^th 375 (2018)).  In Petrolink, the Court of Appeal held that once a tenant exercises its option to purchase under a lease agreement, the lease terminates, the tenant becomes a vendee under a purchase contract and tenant’s obligation to pay rent under the lease ceases.  Further, the Court found it permissible to set the purchase price of the property as the “fair market value”, as determined by an appraiser, rather than a set price.  The Court may insert its definition of “fair market value” if the parties are unable to resolve on a purchase price and the standard is definitive enough to render the option enforceable.

A lease for commercial property in San Bernardino County between Petrolink, as tenant, and Lantel, as landlord, included an option to purchase the property at “fair market value” based on an appraisal.  Petrolink exercised its option to purchase but each party’s appraiser’s valuation was materially different and they could not agree on a price.  The parties sued each other for various causes of action.  During the pendency of the litigation, Petrolink continued to pay rent.  The trial court held that Petrolink had exercised its option and that Lantel was obligated to sell the property to Petrolink at the Court’s determination of “fair market value”.  The trial court denied Petrolink’s request to offset against the purchase price the rental amounts paid since exercising the option and Petrolink appealed.

Where an option to purchase exists in a lease agreement, the exercise of the option to purchase causes the lease to terminate.  The lease is then replaced with a binding contract of purchase and sale.  Since the lease is terminated, the obligation to pay rent also ends at such time unless there is express language in the lease that requires continued rental payments.   The trial court held that the purchase and sale contract was not enforceable unless and until the Court fixed the “fair market value”.  As such, the lease did not terminate, and rents remained due, until such “fair market value” was set.   However, the Court of Appeal held that the lease ceased to exist as of the date of exercise by Petrolink even though the purchase price still needed to be determined – the key date being the date of exercise, not the date all terms were confirmed.  The Court of Appeal did not ignore Lantel’s hardships during litigation.  It held that Lantel, as the seller and landlord, did lose its use of the purchase money during the time between the exercise of option by Petrolink and performance and close of purchase.  As such, the Court held that Lantel was also entitled to some compensation to account for the delay of purchase.

The Court of Appeal did uphold the trial court’s finding that the option to purchase was enforceable even though the purchase option did not specify an exact price.  An option is transformed into a purchase and sale when there is an unconditional, unqualified acceptance by the optionee of the offer in harmony with the terms of the option and within the time span of the option contract.  Typically, an option must set all material terms – especially price – to be enforceable.  In Petrolink the Courts found that “fair market value” at the time of exercise was a standard which could be objectively determined, even if the exact number was not pre-determined in the lease itself.

In Petrolink we understand more about how courts may treat options to purchase in leases – specifically what material terms may be required and the timing of lease termination.  Lease and option language should be drafted carefully to ensure the parties are comfortable with the financial impacts of the exercise of an option to purchase and to avoid any unintended consequences.

Authored by Reuben, Junius & Rose, LLP  Attorney, Lindsay Petrone

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.

Two legislative measures introduced at the Board of Supervisors last week provided some updates to land use policy in San Francisco.

Mayor Breed Gives a Lifeline to Stalled Housing Projects

Proposition C, which significantly increased affordable housing requirements on new housing projects, provided some relief with grandfathering provisions for many pipeline projects.  Projects that had applications submitted between January 1, 2013, and January 12, 2016, qualify for the grandfathering if they secure a site or building permit on or before December 7, 2018.

Many of these projects, due to lengthy permit processing times, are at risk of not meeting the upcoming December 7 deadline.  Mayor Breed’s legislation effectively extends this deadline by giving projects that do not get a site permit by December 7 a total of 30 months from the date that the project is approved, including any appeal to an administrative body or City board, to secure a building or site permit.

By some estimates, the Mayor’s measure would keep alive 3,420 units of housing, 498 of which would be permanently affordable.  While promising, this proposal at this time is just that – a proposal.  The legislation must be approved by the full Board of Supervisors to become operative.

Supervisor Peskin Introduces Permanent Union Square Controls

The significant, nation-wide changes that have happened in recent years in the retail economy, caused by the massive growth of online shopping, have had an impact on Union Square.  Large brick and mortar retailers are increasingly rare, and instead, the trend is moving towards experiential retail requiring less floor area, thus leaving significant vacancies in Union Square properties.  The Planning Department, Planning Commission, Mayor’s Office, and Union Square Business Improvement District have been studying these issues over the last two years.

One of the primary questions has been the extent to which office use should be allowed in Union Square (i.e. within the C-3-R zoning district).  Many suggest that allowing office use would fill vacant spaces and vitalize the district, which in turn would help support Union Square retail and restaurants by bringing more patrons to the area.

New office uses in excess of 5,000 sf in the Union Square area have required a conditional use authorization, and thus have been regulated, since the adoption of the Downtown Plan in 1985.  However, in the last few years, due to the changes in the retail industry, policy discussion has taken place on the desired amount and location of office uses in Union Square.  Last week Supervisor Peskin introduced legislation that would impose stricter, permanent controls on office use in Union Square.  Currently, office uses are prohibited on the first floor, but are allowed on upper floors with a conditional use authorization, so that the existing controls have provided Planning Commission the ability to evaluate office proposals on a case-by-case basis taking into its consideration location, amount of street frontage, floor plate size and other circumstances that may impact retail viability.

Pursuant to the proposed office uses would be prohibited on floors 1 – 3.  On floors 4 – 6, a conditional use authorization would be required for a use size greater than 5,000 square feet.  Office use would be allowed on floors 7 and above with no restrictions.  The legislation also imposes a new $4/square-foot impact fee on new retail-to-office conversions.  The legislation is expected to be heard by the Planning Commission on October 18, 2018, which is the first opportunity for any members of the public to comment on the proposed permanent controls.

Authored by Reuben, Junius & Rose, LLP  Attorney, Thomas Tunny

Photo from San Francisco Examiner 

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

On August 30, 2018, the San Francisco Planning Commission received an informational debriefing from Planning Department Staff on a proposed new policy (Record No. 2018-005411CRV; the “Policy”) on construction of residential roof decks. The purpose of the Policy is to mitigate potential impacts to adjacent residents resulting from the addition of a roof deck, including, but not limited to, the quality of life from noise, diminishment of privacy, and reduction of light to adjacent properties. The Policy that Staff presented would impose restrictions on the construction of roof decks in residential districts, specifically, RH-1, RH-1(D), RH-2 and RH-3. The Policy would drastically restrict the ability to pull an over the counter permit for a roof deck.

Staff indicated that the Policy was the result of an increasing number of requests for the Discretionary Review of small-scale residential roof deck projects. The impacts referenced by Staff can result from the intensification of use of a building’s area not historically an active space, i.e., space not previously used, including additions of amenities such as outdoor kitchenettes or grills, hot tubs, televisions, and even putting greens.

Interestingly, at the hearing, Staff did not present data on the increased number of requests for Discretionary Review for roof decks as compared to other projects. The increase in requests could be the result of an uptick in requests made across the board generally and not just specific requests pertaining to roof deck additions. Meaning, the percentage of requests regarding roof deck additions could be static with respect to historical figures for discretionary review requests.

As currently proposed, the new Policy would impose the following construction restrictions on roof deck permit applications: (1) limit the size to no greater than one-third of the roof area; (2) 5-foot setback of guardrails except for rear building wall (also recommends 5-foot setback from shared side lot lines and from the edges of light wells); (3) internalized staircase or roof hatch only for single-family dwellings or one minimally sized stair penthouses for multi-unit buildings. Decks that comply with these requirements would still be eligible for an over the counter permit, but those that do not would be subject to more thorough design review.

In addition, Staff indicated that they are still considering the appropriateness of roof decks at the front of buildings. There is a belief that roof decks at the front would provide opportunities to increase eyes-on-the-street. With respect to access, Staff recommended creating a hierarchy of preferred means of access, prioritizing less obtrusive means, e.g., roof hatches and internalized staircases, over stair penthouses, to minimize impact.

While the details are still up for debate, the Planning Commissioners are generally supportive of some version of a streamlined roof deck policy. The Planning Commission indicated they believe that the Policy will lead to greater consistency in the review and approval of roof deck projects. The overarching concern the commissioners had was reciprocal privacy for both the roof-deck owner and adjacent neighbors.

The Planning Commission expressed apprehension to impose use restrictions on roof decks, e.g., no kitchenette, grills, or hot tubs—given that deck appliances and furniture are arguably outside the scope of the Planning Commission and such restrictions would be difficult to enforce. The Planning Commission, however, indicated physical restrictions, e.g., size and setback requirements, would be prudent planning. At this time, no definitive restriction of uses was requested to be added to the Policy by the Planning Commission.

It bears noting that Staff indicated there is a desire to develop similar guidelines, hopefully in a year, for roof decks on larger, multi-unit residential and mixed-use projects. Restriction of roof decks in larger projects could lead to development hurdles with respect to the provision of open space to a project’s future residents or privately-owned public open space required in the Downtown Plan Area. Staff indicated that low-density residential buildings were being targeted first because they are more manageable place to implement restrictions, at least initially.

Because this was an informational presentation, no action was taken on the Policy. The next steps will be for Planning Department Staff to prepare a resolution based on comments received for adoption by the Planning Commission.  Staff did not provide a timeline on when the resolution would be finalized. We will continue to monitor this Policy as it may have far-reaching impacts for all construction projects.

Authored by Reuben, Junius & Rose, LLP  Attorney, Justin Zucker

Photo from Curbed SF, available at: https://sf.curbed.com/2016/8/3/12371004/roof-deck-marina-rent-apartment

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.