It is no secret that California, including Bay Area, housing supply has not kept up with the demand. A strong economy and population growth have contributed to an increasing demand for housing. According to McKinsey’s October 2016 report on California’s Housing Gap, California ranks 49th in the US for housing units per capita (with the addition of 308 new units for every 1,000 new residents since 2005) with the current shortage of approximately two (2) million units. McKinsey’s report further found that although based on current construction rates one (1) million additional homes are expected to be built in California by 2025, in the same period the population is expected to increase by 3.6 million. An increased demand for housing combined with insufficient supply is also contributing to housing affordability. In the City of San Francisco, McKinsey’s report found that those earning 179% of the AMI (Area Median Income), or $140,000 per year, are unable to afford the cost of housing (with affordability threshold defined as 30% of pretax household income). Housing shortage can have many consequences, from the weakening of the economy via lost economic output to contribution into homelessness. According to the US Dept. of Housing and Urban Development, in 2015 approx. 25% of the US homeless population lived in California, a state which concurrently has often been deemed to be the 6th largest economy in the world if it were a country.
Pending State legislation regarding housing affordability.
One of the four (4) strategic goals for 2017 by the League of California Cities is to “Improve the Affordability of Workforce Housing and Secure Additional Funds for Affordable Housing.” During the 2017 legislative session, approx. 170 bills have been introduced in the Assembly and Senate that are directly related to housing. Some of the pending bills address potential new funding sources for affordable housing, such as SB2 (Atkins), the Building Homes and Jobs Act (which if adopted, could result in an estimated up to $300-$500 million annually due to a $75 recordation fee on certain real estate transactions), the Affordable Housing Bond Act of 2018, or SB3 (Beall) (which could potentially result in up to $3 billion in bond revenue), and AB71 by former San Francisco Supervisor David Chiu (that proposes elimination of mortgage tax deductions for second homes, potentially resulting in $300 million annually in funding allocation to low-income housing).
Other pending State legislation attempt to address housing production and affordability from a regulatory perspective, including SB35, the Housing Accountability and Affordability Act by former San Francisco Supervisor Scott Wiener, a proposal, which in some ways is similar to Governor Brown’s recent “by-right” proposal. State Senator Wiener’s proposal would require streamlining the project approval processes for certain projects if the local jurisdiction has not met its RHNA (Regional Housing Needs Assessment) goals at all income levels. The Workforce Housing Opportunity Zone proposal, or SB540 (Roth), would allow local jurisdictions to adopt specific plan(s) for Workforce Housing Opportunity Zone(s), subject to plan-based CEQA review, providing cities potential no-interest loans from OPR (Office of Planning and Research) for the specific plan development and CEQA review processes. In exchange, during the 5-year period subsequent to the adoption of the said specific plan, the local government would be prohibited from denying housing development within the said zone provided certain development criteria is satisfied, including the provision of a mix of housing at certain affordability levels.
Overall, it appears that Sacramento is increasingly focusing on local governments and their roles in housing production (and affordability), including potential use of tools such as withholding certain state grants to the extent RHNA goals are not met, and requiring for a more streamlined approval processes (especially in relation to CEQA review and public engagement processes).
Proposed changes to San Francisco housing regulations and policies.
San Francisco legislators and policymakers have also been quite busy with housing legislation recently. Last week Mayor Lee announced the launch of a “Housing Accelerator Fund,” which is a public-private partnership with the objective of preserving and producing affordable housing units.
This week Supervisors Safai, Breed and Tang introduced legislation with proposed changes to existing the Inclusionary Affordable Housing Program requirements. Among other changes, the Safai-Breed-Tang legislation would change the fee percentage (for projects with 25 or more units) to 23% for rental projects and to 28% for ownership projects, as compared to a 33% requirement pursuant to Prop. C from June 2016. Further, the on-site option (for projects with 25 or more units) would be changed to 18% for rental projects combined with a requirement whereby the affordable units would need to be affordable to households earning an average of 80% of AMI, with an equal distribution between households at 55%, 80% and 110% AMI levels. For ownership projects, the on-site option would be based on a 20% requirement, with the units affordable to households earning an average of 120% AMI, with an equal distribution between 90%, 120% and 140% AMI levels. As of today, and since the passage of Prop. C in June 2016, the on-site requirement for projects with 25 or more units has been 25%.
Family-friendly housing focus.
While much of the housing discussion in recent years has focused on overall housing production and affordability, another important perspective is family housing. Out of major US cities, San Francisco has the lowest number of households with children, at 18%. At the end of January, Planning Department, with the support of Supervisor Yee, released “Housing for Families with Children” policy paper, and addressed the Department’s initiative to create more family-friendly housing in San Francisco. The policy paper recognizes that while affordability is a key challenge for families, there are also other factors that impact the likelihood families are going to live in San Francisco, such as bedroom count, unit, and building features, and other amenities from transit options to schools and open space areas. The Department’s policy paper is one step towards the creation of family-friendly housing policies. Couple weeks thereafter, in mid-February, the Board of Supervisors unanimously approved a resolution urging the Planning Commission to adopt General Plan amendments for family-friendly housing, including creation of definitions for family-friendly units and buildings.
On February 14, 2017, Mayor Lee and Supervisor Tang introduced HOME-SF program, which is intended to facilitate construction of family-friendly housing for working class families, specifically those households in the 60-150% AMI range, which expands the typical AMI range by exceeding 120% AMI level. The legislation is expected to amend the 100% Affordable Housing Bonus Ordinance that was adopted in June 2016 under Ordinance No. 143-16 and to address many of the items discussed in the Planning Department’s Housing for Families with Children policy paper.
A Tool Kit to Close California’s Housing Gap: 3.5 Million Homes by 2025, by McKinsey Global Institute, published in October 2016.
Supervisor Safai, Breed and Tang’s proposed legislation was introduced under BOS File No. 170208.
Planning Department’s Housing for Families with Children was released on January 17, 2017.
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, the formation of limited liability companies and other entities, lending/workout assistance, subdivision, and condominium work.