Affordable Housing

SB 1085 Emerges from Crucial Committee Vote

| Matthew D. Visick

SB 1085 Clarifies that Affordable Housing Fees Do Not Apply to Affordable or Density Bonus Units When Senator Nancy Skinner introduced Senate Bill 1085 (SB 1085) in February, the bill proposed numerous revisions to the state Density Bonus Law. Many were geared toward incentivizing the development of moderate-income rental housing, including a 35% density bonus for projects that provide at least 20% of the units affordable to moderate-income families, concessions, and reduced parking requirements. The bill also limited cities’ ability to deny requested concessions, limited parking ratios for certain senior housing projects, and allowed concessions for student housing projects. Of particular interest to developers with projects in San Francisco, SB 1085 clarified that “[a]ffordable housing impact fees, including inclusionary zoning fees, in-lieu fees, and public benefit fees, shall not be imposed on a housing development’s affordable units or bonus units.” SB 1085 was passed by the full Senate in late June, after which it moved to the Assembly. On July 30, the Assembly Committee on Housing and Community Development approved SB 1085 conditioned on Senator Skinner amending the bill to remove the incentives for development of moderate-income rental units. These amendments were encouraged by affordable housing advocacy groups that argued the incentives would cause a reduction in the supply of low-income and very-low income units. The prohibition on imposing Affordable Housing fees on affordable or Density Bonus units remains in the bill. The City of San Francisco imposes an Affordable Housing Fee on Density Bonus units. Many practitioners believe that the imposition of these fees on Density Bonus units is fundamentally incompatible with the Density Bonus Law. In April 2019, Attorney General Xavier Becerra issued an Opinion that bolstered this view, concluding that the imposition of a “public benefit fee” on Density Bonus units reduced the benefits that the Density Bonus Law is intended to promote, and was therefore invalid. While the Attorney General’s Opinion addressed fees imposed only on the Density Bonus units, most practitioners understood its reasoning would also preclude generally-applicable Affordable Housing fees that were being applied to Density Bonus units. SB 1085 would make it explicit that Affordable Housing fees cannot be applied to Density Bonus or affordable units. The Committee’s approval of SB 1085 with the language limiting fees could be interpreted as a promising sign, given that Assembly Member David Chiu, a former San Francisco Supervisor, chairs the Committee. The bill must be approved by the full Assembly and the full Senate by August 31 to make it to the Governor’s desk in 2020. The San Francisco Board of Supervisors remains opposed to the bill.   Authored by Reuben, Junius & Rose, LLP Attorney Matthew D. Visick. 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.

House

Pending State Bills Seek To Boost Housing

| Thomas P. Tunny

This week’s update focuses on five pending bills in the State Legislature, all of which are intended to encourage housing development. These bills, if passed into law, could have a significant impact on housing production and real estate development in San Francisco. A typical mechanism in these bills for expediting housing production is to make the particular approvals ministerial, and therefore not subject to CEQA review. Lawmakers were expected to return from summer recess on July 13th. Due to at least one Assembly member testing positive for coronavirus, the resumption of the summer session has been delayed until the end of this month. This year’s legislative session is slated to end on August 31, 2020. AB 2580: Conversion of Motels and Hotels: Streamlining California Assembly Bill 2580 would allow a ministerial, streamlined conversion of non-residential hotels and motels into multifamily housing. Among its provisions, this bill would establish a process for use by cities and counties, including charter cities and counties, for the complete conversion of a non-residential hotel or motel into multifamily housing units that is streamlined, ministerial and not subject to a conditional use authorization. Because conversion of non-residential hotels and motels into multifamily housing would be a ministerial approval, such conversions would not require CEQA review. San Francisco has approximately 34,000 hotel rooms in more than 200 hotels. In the short-term, the conversion of hotel rooms to residential could bolster the stock of smaller, affordable units. However, as the economy recovers, the loss of hotel space could dilute or erode convention/tourist facilities in key locations near regional transit. Tenant protections may limit the ability to covert back to hotel to meet future needs. AB 2345 (Gonzales and Chiu): Density Bonus Expansion California Assembly Bill 2345 would amend the State Density Bonus Law to provide additional options to qualify for State Density Bonus. Currently, a project may receive one, two or three incentives or concessions, depending on the amount and levels of on-site affordable housing. Projects providing 100% affordable housing may receive four incentives or concessions, but are not eligible for waivers given that density limits are waived. This bill would provide an option to receive four or five incentives and concessions for projects in which greater percentages of the total units are provided for lower income households, very low income households, or for persons and families of moderate income in a common interest development. In addition, when providing the additional affordability specified above, the project is entitled up to a 50% bonus. The bill would also authorize an applicant to receive six incentives or concessions for projects in which 100% of the total units are for lower income units, as specified. The bill would also provide one incentive for Student Housing Projects that are 20% affordable. Due to San Francisco’s high inclusionary requirements, projects that provide onsite inclusionary housing may qualify for a larger bonus than 35%. A typical rental project would qualify for a 37.5% bonus and if located in a carve out area (North of Market Residential Special Use District, the Mission Area Plan, or the SOMA Neighborhood Commercial Transit District) may receive a 50% bonus. AB 3040 (Chiu): Allow Cities to Permit up to Four Units on Single-Family Home Parcels California Assembly Bill 3040 would allow jurisdictions to rezone parcels currently occupied by single-family homes for ministerial approval of up to four housing units, and to count these sites toward up to 25% of the housing units the jurisdiction must accommodate for its share of the Regional Housing Needs Assessment (RHNA). Because projects on these parcels would be designated for ministerial approval, CEQA review would not be required. The projects would still be subject to design review; however, local development standards applicable to the site cannot impede the development of four dwelling units. Covenants or other private provisions that prohibit or restrict the number of units would also be void. Single-family home sites counted toward the RHNA site inventory as potential four-unit sites must have been certified for occupancy at least 15 years ago. In San Francisco, over 40% of the city’s residential land is zoned for single-family homes (RH-1 zoning) and single-family homes occupy lots in additional areas of the city. Under this bill, San Francisco would choose where to allow four-unit buildings on single-family home parcels and likely would consider factors like access to transportation, neighborhood services, parks, and schools as well as historic status. SB 1120 (Atkins, Caballero, Rubio, and Wiener): Subdivisions California Senate Bill 1120 would authorize ministerial approvals of either or both (i) a housing development of two units and/or (ii) subdivision of a parcel into two equal parcels. To use this bill, the subject parcel would need to be zoned for residential uses and in a single-family zoning district. Certain hazardous, protected parcels or currently occupied parcels could not take advantage of this bill. Projects could not result in the demolition of 25% or more of existing exterior walls, a parcel smaller than 1,200 square feet, nor provide short-term rentals. CEQA would not be required. Objective requirements may be applied, provided the requirements do not prohibit the project. In San Francisco, approval processes for subdivisions and for new housing are discretionary and as such, require CEQA review. By making these projects ministerial, CEQA would not be required and the projects would be approved upon meeting the objective requirements. This would speed the entitlement process and limit the Department’s ability to apply design guidelines. SB 902 (Wiener, Atkins): Allow Cities to Permit up to 10 Units on Infill Sites in Transit-Rich or Job-Rich Areas We have previously updated readers on Senator Weiner’s Senate Bill 902, or ‘SB 50 Lite’. This bill would facilitate the passage of local ordinances to allow multifamily buildings with up to 10 units on qualifying parcels. The bill would not require any changes to existing zoning but could allow for faster passage of ordinances by removing the need for potentially time-consuming and costly CEQA review. A large portion of the city’s parcels would likely

ADUs

San Francisco Expands ADUs and Electronic Permitting

| Jody Knight

State Law Changes to ADUs Incorporated into Planning Code Early this year, state law changed to allow additional flexibility in adding Accessory Dwelling Units (“ADUs”) to existing and proposed housing. In May, some of those changes were incorporated into Planning Code Section 207. Additional changes to align the Planning Code with state law are expected soon. The changes to the ADU program include an allowance for construction of ADUs in single family homes or detached auxiliary structures on the same lot. The Code changes allow for single-family “no waiver” ADUs under Section 207(c)(6), but limit expansion of the envelope of the single-family home or auxiliary structure for the ADU to 1,200 square-feet. State law also allows a Junior ADU (“JADU”) of no greater than 500 square-feet to be developed within the existing or proposed primary residence in addition to an ADU. Therefore, under the new state law, every lot can have at least three units. Single-family ADUs will require posted notice at the site, even if the ADU is built entirely within the envelope of an existing building. “Waiver” ADUs for single family homes and ADUs in multifamily buildings are regulated by Section 207(c)(4). For lots that have four or fewer existing dwelling units or where the zoning would permit the construction of four or fewer dwelling units, one ADU is permitted. For lots that have more than four existing dwelling units or are undergoing seismic retrofitting, or where the zoning would permit the construction of more than four dwelling units, there is no limit on the number of total ADUs permitted, subject to restrictions for prior evictions. No minimum lot size is required for construction of an ADU. Under Section 207, ADUs may be constructed in the buildable area of a lot, be converted from auxiliary structures, or be built within the envelope of an existing residential building. For auxiliary structures, dormers may be added even if the structure is within the required rear yard. The new state law also allows construction of a new detached unit, not otherwise subject to local development standards, if it is not more than 800 square feet, no more than 16 feet in height, and provides four-foot side and rear setbacks. In San Francisco, ADUs are not to be constructed from space within an existing dwelling unit, except that an ADU may expand into habitable space on the ground or basement floors if it does not exceed 25% of the gross square footage of the space. This limitation may be waived by the Zoning Administrator if waiver helps with the layout of the proposed ADU. In an effort to incentivize creation of new units, ADUs of up to 750 square feet are now exempt from impact fees by state law. ADUs of 750 square feet or larger are only subject to impact fees proportional to the size relationship of the ADU to the primary dwelling. In addition, ADUs are not required to be sprinklered where the main unit is not required to be sprinklered. Finally, state law now requires processing of ADU applications within 60 days. However, many property owners have experienced delay based on when the City deems a project application “complete.” The Planning Department continues to refine its procedures for ADUs, and we hope that property owners will encounter less red tape than they did in the past. DBI (Department of Building Inspection) Implements Electronic Processing and Over-the-Counter Permits COVID-19 has pushed DBI to implement its long-planned transition to electronic processing of permits. Electronic Plan Review (“EPR”) has a new online portal for building permit submittals that allows EPR through Bluebeam. For permits previously started in paper, DBI is evaluating the need to convert to EPR on a permit-by-permit basis. Conversion to EPR has resulted in delays as electronic submittals are processed, but should allow more efficient simultaneous review once permits move forward. DBI has also restarted processing Over-the-Counter (“OTC”) permits. On June 24, DBI began offering OTC curbside services in coordination with its permitting agency partners (Public Works, Planning, Fire, and the Public Utilities Commission). Curbside services are offered from 7:30 a.m. to 4:30 p.m. Monday through Friday, including the following: • Drop-in service for OTC without plans for up to two permits is available for up to 30 people per day between 7:30 a.m. and 9:30 a.m. Starting at noon on Fridays, Eventbrite tickets are available for the following week’s slots. • Previously submitted electronic OTC permits with plans are being processed by appointment between 9:30 a.m. and 3:30 p.m., with appointments prioritized by length of time in the queue. Currently, DBI is processing permits submitted electronically between 6/1/2020 and 6/14/2020; new applications for OTC permits with plans are to be submitted electronically and added to the queue. • Drop-in permit pick-up will be available throughout the day after DBI alerts a customer that a permit is ready. To use these OTC services, customers must arrive with forms complete and must wear face masks and stay six feet apart. The following types of permits may be processed OTC: Over-the-Counter without Plans • Re-roofing • Repair decks and stairs (less than 50%) • Replacement windows (same size and same locations) • Replacement garage doors • Minor dry rot repairs • Exterior siding repairs or replacement • In-kind kitchen remodel (no changes to floor plan or walls) • In-kind bathroom remodel (no changes to floor plan or walls) Over-the-Counter with Plans • Kitchen remodel (changing floor plans/walls) • Bathroom remodel (changing floor plans/walls) • Residential interior remodel (changing floor plans/walls) • New windows and exterior doors • Decks less than 10 feet above grade that meet Planning Code setbacks • Sign permits • Commercial tenant improvement projects • Office or other B occupancy remodels • Power door operators • Permits to comply with the Accessible Business Entrance (“ABE”) program • Voluntary seismic upgrades • Disability access barrier removal • Projects that do not require Planning Department neighborhood notification Expect delays. DBI is currently processing permits submitted more than a month

Tax

San Francisco Tax Update

| Kevin H. Rose

Homelessness Gross Receipts Tax Upheld On June 30, 2020, the First District of the California Court of Appeal upheld the legality of the City and County of San Francisco’s “Homelessness Gross Receipts Tax.” This tax ranges from 0.175% – 0.690% of taxable gross receipts (depending on the industry), and is 1.5% for administrative offices. This tax is imposed on companies that earn more than $50M per year in the City and County of San Francisco. In upholding the tax, the Court of Appeal found that the Constitutional right of California voters to pass laws by initiative and a majority vote, is superior to the limitations on new taxes or special taxes which require a supermajority, 2/3 vote. The Court agreed with the City that because the tax was initiated by the people, and not the government, then only a majority vote was required. The Howard Jarvis Taxpayers Association has filed a notice of appeal to the California Supreme Court, so this may not be the last word on the issue. A copy of the court’s decision may be found here. Prop C Appellate Opinion Commercial Rent Tax Appeal Remains in Process The challenge to the San Francisco Commercial Rent Tax (funds for early childhood education) remains active in the First District of the California Court of Appeal. The Commercial Rent Tax is 3.5% for offices and 1.5% for Industrial space. Retail is generally excluded. Appellants’ arguments include (1) that politicians cannot use the citizens’ initiative process as a loophole to avoid the 2/3 vote requirement, (2) voters cannot exercise power that the Board of Supervisors does not have (i.e., a majority vote standard), and (3) that the requirements of Propositions 13 and 218 should apply because the decision in the Cannabis case cited by the City related to a procedural requirement, not the actual approval of the tax at issue. The appellants’ reply brief is due July 23, 2020. Given the decision on the Homelessness Gross Receipts Tax, it seems likely that the Commercial Rent Tax will also be upheld, and there will be a showdown in the State Supreme Court. Stay tuned. A copy of appellant’s brief may be found here. Appellant’s Opening Brief Protective Refund Claims In order to protect their rights to refunds, San Francisco taxpayers that are subject to the Homeless Gross Receipts Tax or the Commercial Rents Tax and wish to preserve their rights should file a protective request for refund with the San Francisco Tax Collector. Once the request is rejected, a Claim for Refund should be filed with the San Francisco Controller. Otherwise, refund claims may not be honored if the Supreme Court strikes down the tax. The following is a link to the request for refund form and filing information. Refund Form There may be other basis for challenging the taxes, including potential equitable arguments, that should be referenced when filing these requests/claims. You should consult with legal counsel or a tax representative to verify the process.     Authored by Reuben, Junius & Rose, LLP Attorney Kevin Rose. 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.

Homeowners Association

Recent California Condo/HOA Laws

| Jay Drake

The Davis-Stirling Common Interest Development Act (“Davis-Stirling Act”) is the primary body of law governing condo projects and homeowners associations (“HOAs”) in California. The state legislature enacted several bills that went into effect in 2020 that affect common interest developments (CIDs) such as condominium projects. The following is a brief summary of some recent changes to the Davis-Stirling Act (California Civil Code Section 4000 et seq.). Senate Bill 323 – HOA Elections This bill amends Sections 5100, 5105, 5110, 5115, 5125, 5145, and 5200 of, and adds Section 5910.1 to, the California Civil Code, relating to CIDs. This bill adds significant new requirements to the HOA election process. A few highlights: The ability of an HOA to impose conditions on a member’s eligibility to vote are constrained; while an HOA can disqualify a candidate from running for the HOA board of directors if that person is not a member of the HOA and for other specified reasons, the allowable grounds for disqualification are limited; inspectors of elections and ballots must be independent third parties; members’ email addresses must be included in the HOA membership list (unless a member opts out in writing). HOAs must make changes to their election rules to implement the requirements of SB 323. Senate Bill 326 Adds Sections 5551 and 5986 to, and amends Section 6150 of, the California Civil Code. Section 5551 – Inspection of Balconies This new law applies to condo buildings with three or more units. It requires HOAs to perform periodic inspections of all exterior elevated elements that are more than six feet off the ground and supported in substantial part by wood or wood-based products, such as balconies, decks, stairways and walkways. These inspections must be performed by a licensed structural engineer or architect, and be completed no later than 2025, and thereafter at least every nine years. Sections 5986 and 6150 – Authority to Commence Legal Proceedings These laws prohibit, with certain exceptions, an HOA’s governing documents from limiting an HOA board’s authority to commence legal proceedings against a declarant, developer, or builder of a CID. Members of an HOA must be provided with a notice specifying, among other things, that a meeting will take place to discuss problems that may lead to the filing of a civil action against a declarant, developer, or builder of a CID, which notice must inform members that the potential impacts of filing a civil action, including financial, to the HOA and its members will be discussed at the meeting. Assembly Bill 670 – Accessory Dwelling Units This bill adds Section 4751 to the California Civil Code. This law renders void any provision in an HOA’s governing documents that prohibits the construction or use of an “accessory dwelling unit” (ADU) on a single-family lot. An association may enact reasonable restrictions regulating ADUs so long as they do not effectively prohibit or unreasonably increase the cost to construct an ADU. This new law applies primarily to planned developments with single family lots that are separately owned, and is not applicable to most condo projects. Senate Bill 652 – Display of Religious Items This bill adds Sections 1940.45 and 4706 to the California Civil Code. Subject to specified exceptions, this law prohibits the governing documents of a CID from banning the display of religious items on the entry door or entry door frame of a member’s unit. A religious item must be displayed because of a sincerely held religious belief and may not, individually or in combination with any other displayed religious item, exceed the lessor of 36×12 square inches or the size of the door.     Authored by Reuben, Junius & Rose, LLP Attorney Jay Drake. 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.

Small business

Mayor’s Measure Proposes to Cut Red Tape for Small Business

| Tiffany Kats

Even before COVID-19’s devastating economic impacts, the process of opening a small business in San Francisco was often difficult, lengthy, and expensive. Between high rents and operating costs and the shift to online shopping and food ordering, many small business have been forced to close. Retail vacancies have risen with many potential new businesses deterred by San Francisco’s bureaucratic, drawn-out process to get the necessary approvals. Closures, occupancy restrictions, and declining sales volumes due to COVID-19 have dramatically accelerated these long-term trends, with the Golden Gate Restaurant Association estimating that 50 percent of restaurants may fold as a result. In response, Mayor London Breed recently introduced a new ballot measure for the November 2020 election—the Save our Small Businesses initiative—that focuses on two main goals: (1) streamlining the permitting and inspection process for new businesses and (2) relaxing zoning in all of the City’s neighborhood commercial (“NCD”) and neighborhood transit (“NCT”) zoning districts. The ballot measure was submitted by the Mayor directly to the voters and requires a simple majority of the votes to pass. According to a 2019 report that is cited in the ballot measure, building permit applications for commercial uses took an average of 172 days to be issued, during which time small businesses were forced to pay rent without any income while waiting for permit issuance. In addition, many businesses must provide neighborhood notification when changing from one use to another, even if that use is principally permitted in the zoning district. This encourages appeals that can further delay new businesses for 4-6 months and introduce a high degree of risk. However, perhaps the most difficult are uses that require a Conditional Use Authorization (“CU”) from the Planning Commission. The same 2019 report found that it took an average of 332 days for CUs to be approved between 2015 and 2017. In all, the process of obtaining the necessary permits and inspections to open a commercial business in San Francisco can take over a year and a half, imposing extreme financial hardships on new small businesses. Combined with the anticipated rise in vacancies due to COVID-19, these standard operating procedures practically guarantee long-term vacancies on neighborhood shopping streets and long-term declines in sales tax revenues to the city. Permit and Inspection Streamlining First, the ballot measure proposes a 30-day time limit to review permit applications for commercial uses that are principally permitted in NCD and NCT zoning districts. One of the biggest factors contributing to the lengthy permitting process is the need for permits to be reviewed by many City agencies, including the Planning Department, Department of Building Inspection, Fire Department, Department of Public Works, and Health Department. Currently, the multi-agency review is completed sequentially. However, the ballot measure would instead allow “parallel cross-department review” of applications, during which the applicable City agencies would collectively have to complete their reviews within the allotted 30-day period for qualifying projects. If permit review is not completed within 30 days of submitting a complete application, the applicant would be provided with an explanation detailing why a longer review is necessary (e.g. additional information is needed from the applicant). In addition, scheduling and completing necessary pre-approval inspections further delays new businesses from opening. The ballot measure would require City agencies to coordinate their inspections and schedule them within two weeks of an inspection request for principally permitted commercial uses in NCD and NCT districts. The inspection itself would be limited to compliance with an objective checklist adopted by the agency. Alternatively, an applicant would be able to submit an inspection report from a qualified entity to comply with inspection requirements. Zoning Code Changes The Mayor’s ballot measure also proposes overhauling the zoning in almost 50 NCD and NCT zoning districts. By principally permitting more commercial uses in these districts, it would allow businesses to qualify for streamlined review and thereby enable new small businesses to open quicker and at a lower cost. The following uses would generally be principally permitted on all floors in all NCD and NCT zoning districts: • Arts activities; • Movie theaters; • Community facilities; • Public facilities; • Social service or philanthropic facilities; and • Retail professional services. In addition, animal hospitals, general entertainment, restaurants, and limited restaurants would generally be principally permitted on the first and second floors only in NCD and NCT zoning districts. Note that formula retail restaurants and limited restaurants would not permitted in certain districts. Finally, non-retail professional services (most office uses) would be principally permitted on the second floor in all NCD and NCT districts; restrictions on other floors would vary by district. The ballot measure would also help address the mandated reduced capacity in restaurants and limited restaurants in compliance with COVID-19 social distancing. First, the measure would permit food services in “parklets.” Parklets refer to on-street parking spaces that have been converted into sidewalk extensions with publicly accessible seating, landscaping, bike parking, and art. The measure would also make it easier to obtain permits for outdoor dining on back patio areas in NCD and NCT zoning districts. Eligible outdoor activity areas must: (1) be located on the ground floor; (2) operate only between the hours of 9am and 10pm; (3) not be associated with a bar use; and (4) only include seated areas for restaurant and limited restaurant uses. Outdoor dining areas that do not meet all of these conditions would need a CU. Finally, the measure would allow businesses to diversify their services and products by permitting certain types of co-working uses as “retail workspaces.” Retail workspaces may rent space on a daily or hourly basis as an accessory use to eating and drinking establishments, such as restaurants and cafes. To qualify, the eating and drinking use must face the street and occupy at least one-third of the total gross floor area. (Unlike most other accessory uses, retail workspaces can occupy up to two-thirds of total area as accessory.) In addition, the accessory retail space must be open to the general public and would be

Storefront Tax

Delay to San Francisco’s New Vacant Storefront Tax

| Tara Sullivan

We all have experienced this: a favorite store or local restaurant closes down after decades in business, citing the difficult climate to do business in San Francisco.  The rent is too high, costs to operate are too much, people shop and order food online instead of in person.  The numbers of closures have proliferated over the past five years, hitting every sector of the market and every neighborhood in the City. The result is a vacancy rate between 2 and 24 percent in the neighborhood commercial corridors.[1] On March 3, 2020, just 13 days before the City’s mandated stay-safe-at-home Order took effect, San Francisco voters approved the Prop D: Vacancy Tax Ordinance, which imposed an annual excise tax on landlords who had vacant ground floor commercial space.  Sponsored by Supervisor Peskin, the law was intended as one tool in a larger toolbox, including streamlined permit processes, that would address San Francisco’s rising number of vacant storefronts in the neighborhood commercial corridors. The tax, passed by 70.09% of the electorate (above the 66 2/3rds required to pass), was to begin in January 2021.  It imposes a scaled tax on owners who keep their storefronts vacant for 6 months or longer, with the money going into the Small Business Assistance Fund to support the maintenance and operation of small businesses in San Francisco.  The tax is calculated based upon the following: 1) the number of feet facing the street or ground level commercial space; and 2) how long the space has remained vacant. The vacancy tax has tiered tax levels, which vary depending on how long the storefront was vacant.  It would apply as follows: In 2021, owners or tenants would be taxed $250 per street-facing foot; In 2022, owners or tenants would be taxed either $250 or $500 per street-facing foot if the space was kept vacant in the immediately preceding year; and In 2023 and later, owners or tenants would be taxed either $250, $500 or $1,000 per street-facing foot depending on the number of immediately preceding years in a row the space was kept vacant. For example, a storefront with 15 feet of frontage that was vacant on January 2021 and remained vacant for three years, would be taxed $3,750 in 2021, $7,500 in 2022, and then $15,000 in the years after.  The law does take into account permit processing and contains exceptions for certain nonprofits. While on paper it seems inconceivable that a storefront could remain vacant for a three-year period, certain San Francisco neighborhoods such as North Beach, consistently have vacancies for multi-year periods.[2]  There has been many articles and studies done about the origin of the vacancies in San Francisco –  the changing face of brick-and-mortar retail to online purchasing, the high costs of running a small business (from minimum wage to mandatory health insurance), zoning restrictions regulating large chain stores, and the onerous permit process which can take anywhere from 6 to 18 months.[3] However, proponents of the Vacancy Tax argued that one main reason for the high number of vacancies is the prohibitively high rents that landlords charge, hoping to draw higher-scale and larger businesses.  Few small business owners, even the most profitable ones, can make the numbers work with high rents.  Prop D was promoted as an antidote to that issue, with the thought that high tax rates would incentivize owners to lower rents, resulting in these spaces to be leased and occupied. When Prop D passed in March of this year, few predicted that the City and nation would be impacted by Covid-19 and the subsequent economic fallout related to it.  Between March 3rd (the day Prop D was passed) and March 6th, the City and State declared state of emergency, with a stay safe at home order imposed on March 16th.  All non-essential business were forced to close, which impacted every neighborhood in San Francisco.  Most stores were boarded up, with many unsure when or even if they can reopen.  While San Francisco is currently operating under a phased reopening plan, it is too early to know the true vacancy rate in San Francisco resulting from Covid-19.  Most expect it to be higher than before Prop D was passed on March 3rd.  Even formerly “healthy” retail corridors such as Hayes Valley will see an increase in ground floor vacancies. On June 9th, the Board of Supervisors unanimously passed an Ordinance on first read calling for the suspension of Prop D for the 2021 tax year (BOS File No. 20-0420).  Recognizing that “one week after [the] election, our way of life was fundamentally flipped on its head,”[4] Supervisor Peskin called for the delay in its implementation so that studies could be done once the City fully reopens.  It is likely that the high vacancy rate for ground floor spaces will continue well into 2021, with no real “normal” returning for retail and eating and drinking businesses in the near future.  It is too early to tell whether the Vacancy Tax will be implemented in its current form, or if it will be delayed further due to a continued economic downturn.[5]  Either way, this new tax, while well intentioned, conflicts with current conditions on the ground today. Owners of commercial spaces can point to one piece of good news – they won’t be penalized for vacant spaces until 2022.   [1] Mission Street Corridor Economic Analysis, August 30 2017, prepared for SF OEWD by Strategic Economics: https://oewd.org/sites/default/files/Invest%20In%20Neighborhoods/MissionStreetReport_Final_08-30-2017_0.pdf [2] Shwanika Naryan, Ronald Li, Shuttered Stores: North Beach’s Crisis, SF Chronicle, June 13, 2019. https://www.sfchronicle.com/business/article/San-Francisco-s-North-Beach-is-littered-with-13972898.php [3] See Shwanika Naryan, Ronald Li, Bayview Sees Loss and Change, SF Chronicle, December 13, 2019: https://www.sfchronicle.com/business/article/Bayview-retailers-haven-t-seen-San-14899446.php; Shwanika Naryan, Ronald Li, West Portal Worries, SF Chronicle, September 27, 2019: https://www.sfchronicle.com/business/article/Wealthy-worried-watching-In-West-Portal-14470344.php#photo-18342062 [4] https://www.sfchronicle.com/business/article/SF-supervisor-wants-to-delay-vacancy-tax-as-15232781.php#photo-19289895 [5] The Board of Supervisors is empowered to amend the measure to lower the rate with a two-thirds majority vote.  State law requires that amendments to increase or extend local taxes be approved by the voters. However, amendments to lower a local tax may be passed legislatively

San Francisco

Legislation Imposing Moratorium on Commercial Evictions Fails to Pass

| Jody Knight

Senate Bill 939 (“SB 939”), which was the subject of our June 17th Update, would have imposed significant statewide restrictions on commercial evictions and allowed tenants to renegotiate or terminate their lease. The Legislation failed to advance from the Senate Appropriations Committee yesterday, and will not move forward this session. In response, SB 939 sponsors, Senators Scott Wiener and Lena Gonzalez, issued a press release urging the Legislature and Governor to take steps to help small businesses and nonprofits. It remains to be seen whether similar provisions are introduced in the future, but those efforts would be met with similar concerns about the serious economic impacts of upending commercial leases. We will continue to follow legislation aimed at the economic fallout of COVID-19.   Authored by Reuben, Junius & Rose, LLP Attorney 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.

California Considers Stringent Restrictions on Commercial Evictions

| Jody Knight

As COVID-19 continues to shape our economic future, elected officials are weighing how to intervene in commercial evictions. Some municipalities have imposed temporary moratoria on evictions. Senate Bill 939 (“SB 939”), introduced on February 6, 2020 by Senators Scott Wiener and Lena Gonzalez, would go much further. The legislation would impose significant Statewide restrictions on commercial evictions of broadly defined “small businesses” for months after the COVID-19 state of emergency declared on March 4, 2020 is lifted. SB 939 would prohibit a commercial landlord from serving a notice of eviction on a tenant until 90 days after the Governor lifts the state of emergency order. Eviction protection would apply to an eating or drinking establishment, place of entertainment, or performance venue that operates primarily in California and has experienced a specific decline in revenue due to COVID-19. Any eviction actions commenced after the date of the emergency COVID-19 order, but before the adoption of SB 939, would be void and unenforceable. The Legislation would further provide tenants with additional time to pay unpaid rent accrued during the state of emergency. The balance of any unpaid rent accrued during the state of emergency would be due 12 months after it ends, unless otherwise negotiated with the landlord, and no interest or late fees would be due if paid within that 12 months. Perhaps of most concern to commercial landlords, the legislation would provide qualifying tenants with the right to conduct negotiations with the landlord in order to modify any rent or economic requirements, and if unsuccessful, to terminate their lease. No additional rent would accrue, and the tenant would be required to pay only any rent accrued outside of the state of emergency plus three months’ worth of the past due rent incurred during the state of emergency. The right to lease termination would remain in effect until the earlier of two months after the state of emergency or December 31, 2021. Currently, this provision would be limited to businesses with fewer than 500 employees. Not surprisingly, the Bill is generally supported by tenant groups and restaurant trade associations and opposed by landlords and business associations. Among other concerns, opponents point out that most commercial properties are owned by families or small landlords. In addition to questions about the fairness of the bill, there is concern that the law could cause ripple effects throughout the economy, including widespread mortgage default by owners of commercial property. Proponents argue that there are no Statewide protections for small businesses, and that many restaurants simply cannot keep paying the rent due, either now or in the uncertain future of social distancing and a battered economy. As urgency legislation, SB 939 would take effect immediately if passed by a 2/3 vote in each house of the Legislature and signed by the Governor. The bill has been amended several times since introduction. Additional amendments are anticipated, but have not yet been released. The Legislation was passed by the Senate Judiciary Committee on May 22. It was then considered by the Senate Appropriations Committee on June 9 and will be heard by Appropriations again on June 18. If the bill is not passed out of the Appropriations Committee by June 19, it will not move forward in this legislative session. If the bill does pass, litigation is almost certain. We will continue to follow this legislation and the debate over commercial evictions during the COVID-19 era.   Authored by Reuben, Junius & Rose, LLP Attorney 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.

San Francisco

City Expands Demolition Controls to High-Value Homes

| Jonathan Kathrein

For years, San Francisco has required a conditional use permit as a prerequisite to demolishing a residential building. In addition, the building could not be demolished until a building permit for the replacement structure was approved. The theory behind the prohibition is that existing housing is the City’s most affordable housing and should be preserved. However, until recently there was an exception that exempted  the demolition of a residential building in RH-1 and RH-1(D) single-family zones from the conditional use requirement if the residence was demonstrably unaffordable. A house that is demonstrably unaffordable is one that has a value greater than 80% of the value of single-family homes in the City. The value includes both structure and land value. Under the exception, an applicant had to provide an appraisal made within the last six months. Critics saw the demonstrably unaffordable exception as a loophole serving the wealthy, and one that could be manipulated. In February, Supervisor Rafael Mandelman introduced legislation amending the Planning Code to require conditional use authorization for applications to demolish single-family homes that are demonstrably unaffordable (“Mandelman Ordinance”). The Mandelman Ordinance grandfathers applications made before the legislation was introduced on February 11, 2020. Supervisors Peskin, Fewer, and Yee joined as co-sponsors. The Board of Supervisors unanimously approved the Mandelman Ordinance. It is now on the Mayor’s desk and will go into effect 30 days after the Mayor’s approval. The unanimous Board of Supervisors’ approval would be enough to override a Mayoral veto. The Mandelman Ordinace removes the demonstrably unaffordable exception in Section 317 of the Planning Code that generally prohibits demolition of existing housing without a public hearing and a conditional use permit. Before the Mandelman Ordinance left the Board’s Land Use and Transportation Committee, Supervisor Peskin proposed amendments to further tighten demolition regulations. As the amendments may require a re-hearing by the Planning Commission, the Committee carved out these amendments into a second ordinance (“Peskin Ordinance”) to be reviewed on a separate track. The Peskin Ordinance would subject a broader range of projects to conditional use requirements for demolition by  lowering the threshold of work required before a renovation, remodel, or alteration is considered a demolition. The Peskin Ordinance lowers the threshold for two types of changes to a building that require conditional use approval. First, an alteration that removes more than 50% of the front and rear façade or the removal of more than 65% of all the exterior walls would be considered a Residential Demolition. Currently, an alteration that does both is considered a Residential Demolition. One or the other alone is not enough to trigger the restriction. Second, an alteration that would remove more than 50% of the vertical envelope elements or an alteration of more than 50% of the horizontal elements would be considered a Residential Demolition. Currently, an alteration is a Residential Demolition if it does both, but not one or the other. Like the Mandelman Ordinance, the Peskin Ordinance grandfathers applications made before the legislation was introduced on February 11, 2020. However, the Peskin Ordinance is subject to change. It will be considered by the Land Use and Transportation Committee and may need to be re-considered by the Planning Commission before it can be enacted by the Board of Supervisors. Please keep in mind that there are many subtleties to both new and existing law. Please contact Reuben, Junius & Rose, LLP for more information.   Authored by Reuben, Junius & Rose, LLP Attorney Jonathan Kathrein. 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.  

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