This week’s update focuses on a scuffle over chain stores currently taking place in Malibu. In June, an appellate court overturned a voter-approved initiative imposing a number of restrictions on formula retailers, aka chain stores. Just last week, the Malibu Planning Commission proposed a more watered-down version of the chain store restrictions, aiming to pass judicial muster. The court’s rationale for invalidating the original ordinance, and the city’s retooled current approach, present an interesting case study about the limits of a city’s land use authority to restrict a certain kind of business. Intending to preserve Malibu’s “small-town, rural character” and prevent it from turning into “Anything Mall, USA”, in late 2014 Malibu voters passed an initiative that had two primary components. First, all mixed-use projects over 20,000 square feet needed to prepare a specific plan amendment to the Malibu General Plan, and then be put on the ballot of an upcoming election for a popular vote. Second, new chain stores were restricted in size, subjected to clustering limitations, and required to obtain a Conditional Use (“CU”) permit to open. The formula retail CU requirement was “establishment specific” and restricted in transferability: it ran solely with the operation of that business, and could not be transferred to a different chain store at the site, even if the new chain store proposed the exact same use. For example, a CU to operate a Burger King was effective if a new owner and operator proposed to keep a Burger King on the site, but not if a new owner or operator wanted to open an In-N-Out Burger. The trial court found both aspects of the initiative problematic, and the Court of Appeal agreed. The primary deficiency of the formula retail restriction was that it used the CU process to confer a “personal” interest that attached specifically to a permittee—and not the right to operate a certain kind of land use at a site. Malibu argued that formula retail stores are in and of themselves a certain kind of land use. The court rejected this rationale, explaining that a CU cannot be imposed against a specific kind of business, and must be grounded in the use of the land itself. The court’s example was Starbucks: Starbucks is not a land use; coffee shop or restaurant is. The California Supreme Court declined to hear Malibu’s appeal of the Court of Appeal’s decision in early August, making the appellate decision final. Just last week on October 30, Malibu’s Planning Commission recommended that its City Council approve a new watered-down version of the formula retail restrictions intended to correct deficiencies the court identified in the original ordinance. The two most important changes are (1) replacing the Conditional Use requirement with a new “formula retail clearance”—a ministerial approval processed by department staff that compared the proposal against size and clustering restrictions; and (2) allowing the “formula retail clearance” to be transferred to other businesses proposing the same use. It remains to be seen if the shopping center owners that challenged the original formula retail restriction will accept the retooled program. According to one news article, one of the lawyers who challenged the voter initiative expressed doubt about the legality of any land use restriction on what kind of tenant a property owner can rent to. Malibu’s past legal defeat and current proposal could be informative for how other jurisdictions structure their own rules. A number of cities regulate chain stores, including San Francisco. For example, San Francisco bans formula retail businesses in some parts of town and requires a CU to open a formula retail store in many others. Malibu’s initial effort to require a CU for new formula retailers was rejected by the courts, so it is now suggesting a ministerial approval so long as the chain store meets certain size and clustering restrictions.  Also, unlike Malibu’s initial proposal, San Francisco does allow a change from one business to another within the same use category without a new CU. But only in some circumstances:  the space cannot increase in size or add a commercial kitchen, and the new business must have fewer locations worldwide than the business which secured the CU. Malibu’s proposed new ordinance has a restriction on transfer when the new retailer would increase size, but does not attempt to limit the transfer to a chain store with more locations or a similar business proposing a commercial kitchen. It will be interesting to see if Malibu’s City Council adopts a program in line with what the Planning Commission recommended, and how opponents of the initial formula retail restrictions react to the ultimate proposal. Here in San Francisco, it seems unlikely that after years of increasing regulations on chain stores, the city will change its approach to eliminate process and discretionary land use authority in order to make it easier for those businesses to open.   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.

Rent control has been on the march in the Bay Area as of late.  In just the last year, rent control has been newly established in 3 cities, expanded in 3 cities, and considered and denied in another 3 cities in the region.  A repeal of the Costa Hawkins Act – the 1995 law that defines the boundaries of a rent control scheme a city may adopt – was proposed in the State Legislature this term.  While that proposal died in committee, it lit a match – a group called the Alliance of Californians for Community Empowerment just submitted a ballot initiative that would repeal the Costa Hawkins Act, which would put the future of landlord/tenant rights in the hands of California voters in November 2018. As originally approved, the Costa Hawkins Act struck a delicate balance between landlords and tenants.  The Act allowed California cities to apply rent control on older, more naturally affordable housing stock to protect existing tenants.  Newer housing units (those built after 1995) were exempted from rent control; the idea being not to discourage the construction of new housing with limits on rent rates.  Rent control was also limited to “vacancy decontrol” only – that is, even a protected unit could be re-rented at market rates when an existing tenant legitimately vacated.  This allowed existing tenants to stay in place without major rent increases while allowing landlords to increase their return on investment once a tenant voluntarily vacated a unit. That delicate balance appears to be teetering.  The median rent in the entire state of California (population 39M; land area 163k square miles) is now $1,410/mo. – nationwide only behind Washington, D.C. (population 681k; land area 68 square miles) at $1,470/mo. and Hawaii (population 1.4M; land area 11k square miles) at $1,490/mo.  These next stats should affect the entire political spectrum:  From 2000 to 2015, 800,000 residents near the poverty line left the state – and studies show the lack of affordable housing is costing the state $143B to $233B annually.  People may disagree on the solution, but you don’t meet many people these days that don’t recognize the problem with housing costs. What would be the effect of repealing Costa Hawkins?  Cities could enact or expand rent control to apply to housing built any time (including single-family homes and condos) and could apply vacancy control (prohibiting landlords from raising rents to market rate when a unit is voluntarily vacated).  Clearly, this would be a major policy shift, so expect an intense debate over the next year.  The initiative needs 366,000 signatures to make the ballot – but if it makes it on, just 50%+1 of the vote would be needed for it to pass.   Authored by Reuben, Junius & Rose, LLP  Attorney, John Kevlin 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 happens if you are a seller of real property and the purchase contract puts the full onus on the buyer to do its own due diligence and includes no affirmative representations by seller as to the condition of the property?  Are you exculpated from liability if a defect is discovered later by the buyer of which you actually knew or must have known?  A recent case RSB Vineyards, LLC v. Orsi (“RSB Vineyards”) discusses the potential liability of sellers of real property, whether commercial or residential, with respect to knowledge or imputed knowledge of material defects in such property.  (15 Cal.App.5th 1089 (2017)). In RSB Vineyards, Orsi (“Seller”) sold a property which had originally been a residential home and thereafter converted to a tasting room.  The conversion had occurred during the Seller’s ownership pursuant to plans approved by the County of Sonoma and a certificate of occupancy for a “winery/tasting room” was issued.  In advertising the property to potential buyers, Seller stated that the property had a vineyard vested winery permit and an active tasting room.  RSB Vineyards LLC (“Buyer”) entered into contract with Seller to purchase the property.  The purchase contract required that Seller deliver a property statement questionnaire (“PSQ”) to Buyer which required responses to certain questions regarding the condition of the property.  However, the PSQ was never delivered to Buyer and Buyer ultimately waived all contingencies and closed on the purchase.  Upon its ownership, Buyer’s architect discovered that the renovated residence was structurally unsound for commercial use and Buyer was forced to demolish it.  Buyer brought an action against Seller for, amongst other things, breach of contract, intentional misrepresentation, and fraud.  The lower court granted summary judgment in favor of Seller and Buyer appealed. The Court in RSB Vineyards reiterated that a real estate seller has both a common law and statutory duty to disclose.  Where the seller knows of facts materially affecting the value or desirability of the property and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer.  Undisclosed facts are material, such that a seller is required to disclose them in a real estate transaction if they would have a significant and measurable effect on market value.  When a seller fails to disclose a material fact, they may be subject to liability for nondisclosure since the conduct amounts to a representation of the nonexistence of the facts they have failed to disclose. In RSB Vineyards, Buyer’s architect alleged that the many deficiencies in the property should have been known by the Seller’s constructional professionals when completing the renovation and that this knowledge should be imputed to Seller.  The Court held that yes, if Seller was aware of these deficiencies, it had a duty to disclose.  However, the Court found the obligation to disclose only arose if Seller had actual or constructive knowledge of the deficiencies.  Since there was no evidence of direct knowledge by Seller, it must be proven that Seller “must have known” rather than “should have known”, in order to impute actual knowledge to Seller.  The Court found that the defects were not so apparent that Seller, as a layperson and not a construction professional, “must have known”.  The Court also considered whether knowledge of the deficiencies could be imputed to Seller through its architects and construction team, but ultimately found that such professionals were not acting as Seller’s agents in such capacities.  In light of the foregoing, the Court held that no fraud was committed by Seller. Buyer also alleged that Seller made affirmative misrepresentations about the property in the offering memorandum by implying the property was suitable for a commercial tasting room.  The Court held that the statements regarding the winery permit and active tasting room were those of fact and not a warranty about the propriety of the activities at the site.  Therefore, since there was no affirmative assertion by Seller, there could be no cause of action for misrepresentation. Finally, Buyer alleged a claim for breach of contract based upon Seller’s failure to deliver the PSQ to Buyer.  The Court held that this claim too failed because Buyer could not establish a causal connection between the alleged breach and its claimed damages.  The PSQ only required disclosure of “known” problems.  Therefore, the failure to provide such document, although required by the contract, would not have prevented the Buyer’s loss.  Regardless, the Court determined that Buyer waived Seller’s failure to provide the PSQ when Buyer waived all contingencies prior to its receipt. The Court in RSB Vineyards did not find that this seller of real property was culpable, but the Court did reiterate that such liability could be imposed, depending upon the facts.  This case highlights that a seller could be held liable for failing to disclose known defects (or those that they “must have known”, including through an authorized agent), even if there are no affirmative representations about the property by seller in the purchase contract and the buyer is solely responsible to do its own due diligence on the property.  Sellers may be well served to contemplate what matters about its real property are incapable of being discovered by potential buyers and consider disclosure to avoid any potential damages.   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. 0

In the midst of the ever consuming housing crisis, it may be a good idea to take a step back and consider projections of future job creation in the City, and critically important, where those jobs should be located.  There is no question that job growth in the bay area has outpaced housing production.  That is hardly surprising when you think about it:  businesses don’t need a permit from your local government to create a job; a developer needs a permit, time, money, skill, and some luck these days to create housing.  But that doesn’t mean we should not be looking at where the next job centers are going to be located. The Planning Department is nearing the end of the Central SOMA planning process. Started in 2010, it was and continues to be a “jobs plan.”  San Francisco needs this type of jobs zoning in order to stay competitive in the decades ahead.  Unfortunately, some in the community are now raising San Francisco and the Bay Area’s jobs-housing imbalance as a reason to reconsider the basic premise of the Central SOMA plan.  We do not agree with these voices.   On October 5, 2017, the Planning Department staff presented an excellent response to these concerns.  The full presentation can be found here: Jobs-Housing Capacity and Growth Planning staff makes well reasoned arguments for why Central SOMA is an obvious choice for this growth, even with the existing housing shortage: City-based jobs are transit accessible and therefore accessible to a greater range of workers, regardless of income or car ownership. They are denser, greener, cleaner and more energy efficient than jobs located outside of the urban core. Regardless of the jobs-housing balance between various cities, there is a huge San Francisco intercity commute (i.e. many more residents work in the City than commute to the City); Without locating a significant share of future job growth in key San Francisco locations, it will be impossible for the Bay Area to meet its greenhouse gas reduction targets; The bottom line for Central SOMA is this: whether San Francisco zones for this type of job growth or not, the jobs are going to come and they’re going to have to be located somewhere. So we have to plan for the next area to accommodate significant job growth.  We believe the City’s planning for Central SOMA is spot on.  There are fewer and fewer such areas close to transit, so we need to plan them carefully. The City’s downtown financial district is nearing complete buildout. There are virtually no soft sites North of Market, and the new office building at 350 Bush is likely to be the last major project in the area for a very long time.  And the South of Market financial district also appears to be nearing full buildout. Many of the remaining sites along Folsom Street are under post-redevelopment control and set aside for housing already. Most of the City’s planning in the last couple of decades has been housing focused.  The Rincon Hill Area plan was pure housing.  The Market-Octavia plan allowed for the creation of high-density residential at the intersection of Market and Van Ness – which is now transitioning into the HUB plan – again a primarily housing plan. The Eastern Neighborhoods plan adopted in 2008 was a bit of a mixed bag, but certainly opened up as much land for housing as it did for commercial uses. And the significant downzoning of many industrial parcels essentially kept the status quo in that part of town: no housing or office is permitted. The Transit Center District Plan, approved by the Board of Supervisors a few years ago, arguably includes significant up-zoning for job creation.  This was the plan that allowed the Salesforce Tower at 1000 feet high to go forward, as well as several other tall buildings coming out of the ground right now.  But the plan doesn’t preclude significant residential development, and several high-rise housing projects have moved forward under the plan. Rezoning a small portion of SOMA to allow for and encourage job creation is the right way to go.  The Central SOMA Plan area generally goes from Second Street to Sixth Street and Townsend to Folsom Street.  This also happens to be where the new Central Subway (under Fourth Street) is rapidly nearing completion.  This seems like an obvious area to zone for job creation.  This portion of SOMA has languished for decades under zoning that simply didn’t work.  Not permitting either housing or office, the area has essentially been undeveloped since the 1980s. So it seems a bit odd that as the City tries to bring the Central SOMA plan in for a safe landing after years of work, several critics have emerged attacking the plan for not being housing friendly enough.  The Planning Department has done an excellent job in addressing these concerns.  Despite the ongoing housing crisis, good planning requires that a diverse array of uses be encouraged towards building a complete city.  Forcing every planning effort to combat the housing crisis will inevitably lose sight of our other priorities, such as providing for new job space and promoting the fast-growing PDR sector. What seems to have been forgotten in this entire dialogue is that San Francisco is a regional job hub and the Bay Area’s transit infrastructure – BART, CalTrain – was specifically designed to bring workers into the City.  Muni also acts like a giant funnel, bringing workers from the far corners of the City to our job center downtown.  The critics of the current jobs plan are conveniently forgetting that San Francisco has been and will continue to be a big part of the Bay Area’s economic job-creating engine for the foreseeable future…and it is very good for the City to anticipate that and, well, plan for it. Authored by Reuben, Junius & Rose, LLP  Attorney, Andrew Junius The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with

It is common for owners of commercial real property to hold title through a separate legal entity.  By doing so, owners can generally maintain their Proposition 13 tax basis and avoid an increase in property tax – notwithstanding changes in the ownership of the entity – until a transfer of ownership occurs.  A transfer may occur by a sale of the asset or by a change in the controlling interest of the legal entity.  Payment of documentary transfer tax – on the other hand – could be avoided in some jurisdictions until the sale of the asset to a third party, notwithstanding internal transfers of ownership of the legal entity. The California Supreme Court recently determined that local jurisdictions may use the “change-in-control” framework established under Proposition 13 to impose documentary transfer tax when there is a change in the beneficial ownership of an entity that holds title to real property.  The decision disregards the textual distinctions between the statutory language of Proposition 13 and the Documentary Transfer Tax Act (“Act”).  It does, however, validate the aggressive documentary transfer tax interpretations made by some jurisdictions, including the City and County of San Francisco, which has adopted a standard that interprets “realty sold” as including “any acquisition or transfer of ownership interest in a legal entity that would be a change of ownership of real property. . . .”  See San Francisco Bus. & Tax Regulations Code § 1114.  The documentary transfer tax imposed on commercial real property sales can significantly increase transaction costs. The Relevant Statutory Framework Proposition 13 provides considerable property tax benefits to the owners of real property, insofar as the tax basis for commercial real property is not increased to fair market value unless and until ownership of the property is transferred.  One relevant exception is that property may be reassessed when there is a “change of ownership” in the entity that owns the real property.  Generally speaking, if more than 50% of the ownership of a legal entity that owns real property changes, all property owned by that entity is subject to reassessment. The “change of ownership” framework that applies under Proposition 13 is not used under the Act.  Instead, documentary transfer tax may be imposed by a city or county whenever real estate is “sold” within its jurisdiction.  Cal. Rev. and Tax Code § 11911 [emphasis added].  The Act contemplates that the documentary transfer tax will be imposed on “each deed, instrument, or writing” pursuant to which a conveyance of real property is made.  Id. The 926 North Ardmore Avenue, LLC v. County of Los Angeles Decision In late June of 2017, the California Supreme Court issued its much-anticipated decision in 926 North Ardmore Avenue, LLC v. County of Los Angeles.  Rehearing was denied.  In North Ardmore, the Court considered whether documentary transfer tax may be assessed when beneficial ownership of real property is conveyed, i.e., when there is a change of ownership of a legal entity that indirectly owns the property, through another entity.  The Court determined that documentary transfer tax may be imposed when the beneficial ownership of real property is conveyed in exchange for the payment of money or other consideration, i.e., circumstances which the Court determined “reflects a sale.” The facts of North Ardmore illuminate the complexities of some estate plans and the potential consequences of those complexities.  There, the original owners of the commercial property – Husband and Wife – held title in the name of a family trust.  Approximately 35 years later, the Husband passed away, and the trust assets passed into an administrative trust (“Trust”) for the benefit of the Wife (“Spouse”).  The adult children of Husband and Wife were named as successor trustees (“Trustees”). After Trustees received control over the Trust and the Property, they then formed other legal entities and completed a variety of transactions pursuant to which the indirect ownership of the property was conveyed to other legal entities that were under their sole control.  The entity that held title to the asset did not change.  In exchange for the various transfers, however, several promissory notes were conveyed to the Wife, by means of other trusts created for her benefit. The Trustees reported the various transfers in the ownership of the entities by filing a Change in Ownership Statement with the Board of Equalization, as required by California Revenue and Taxation Code section 480.2(a).  Based on that filing, the Los Angeles County Assessor determined that a change of ownership occurred and issued a supplemental property tax assessment.  The County also levied documentary transfer tax, which was challenged. The Supreme Court’s Analysis The California Supreme Court identified the issue in North Ardmore as whether the County had authority to tax the written instruments that transferred the beneficial ownership of the property from the Trust to the legal entities they controlled.  It characterized the task as one of statutory interpretation.  The Court then noted that the statutory language provides that “when realty is sold . . . the document effecting that sale is subject to taxation.”  The taxpayer argued that the mere conveyance of an interest in a legal entity – even an entity that owns real estate – does not result in the sale of realty.  It also argued that documentary transfer tax was not properly assessed because no document conveying the property was recorded. The relevant section of the Act – California Revenue and Taxation Code section 11911 – was found to be ambiguous because it makes no distinction between a written instrument that conveys a direct interest in real property and an instrument that conveys an interest in a legal entity that owns real property, i.e., an indirect interest.  The Court resolved the ambiguity with reference to California Revenue and Taxation Code section 11925, which contains an exemption that relates to partnerships, and provides that the documentary transfer tax will not be imposed if the entity is a “continuing partnership” that continues to hold title to the realty.  The Court also referenced a similar exemption in the Federal Stamp Act, on which

Last week, RJR’s Matthew Visick wrote about Senate Bill (SB) 35—which streamlines the approval process for multi-family residential projects that include affordable housing in many urbanized cities.  SB 35 was passed by the State Legislature earlier this month and is awaiting signature by the Governor.  You can read that update here. SB 167 is another pro-housing bill recently passed by the State Legislature and pending Governor Brown’s signature.  The bill makes it more difficult for cities to deny or lower the density of housing projects that comply with zoning laws and general plan policies, and mandates sizable fines if cities fail to comply. The bill would amend the Housing Accountability Act (the “Act”), which was enacted in 1982 and limits the discretionary authority of local agencies to deny housing projects, or to reduce the size and density of housing projects. If it becomes effective, SB 167 would give some teeth to the Act. Under Section 65589.5(j) of the Act as it stands, if a housing project is consistent with applicable general plan and zoning standards in effect when the application is deemed complete, a city cannot disapprove the project or require that it be developed at a lesser density unless written findings show the project would have a “specific adverse impact on public health or safety,” and there is “no feasible method to satisfactorily mitigate or avoid the adverse impact” other than disapproval of the project or approval at a lower density. Currently, those findings must be supported by “substantial evidence on the record.” SB 167 toughens this standard, requiring that the findings be based on “a preponderance of the evidence on the record.” The bill mandates that if a local agency deems a housing proposal to be inconsistent, not in compliance, or not in conformity with an applicable plan, program, standard, policy, or ordinance, the agency must provide the applicant with written documentation explaining its determination. This provision should work to limit the extent to which agencies can arbitrarily conclude that projects are inconsistent with general plans and other local policies. If the agency finds a housing development to be inconsistent with applicable policies, it must provide its written explanation within 30 or 60 days of the date the development application is determined to be complete—the 30 day deadline applies to projects proposing 150 units or less, and the 60 day deadline applies to projects proposing more than 150 units. If the local agency fails to provide this documentation, then the housing project will be “deemed consistent, compliant, and in conformity with the applicable plan, program, policy, ordinance, standard, requirement, or other similar provision.” Importantly, SB 167 clarifies that receipt of a density bonus under Section 65915 cannot be cited as the basis for finding a proposal inconsistent with applicable plans, ordinances, or standards.  The Act currently allows a project applicant, a housing organization, or a person who would be eligible for residency in the proposed project to bring an action to enforce the provisions of the Act. SB 167 would entitle a housing organization to collect attorney’s fees when it prevails in such an action. The bill would further amend Section 65589.5(k) so that in an instance where a local agency disapproves a housing project that complies with applicable zoning standards or imposes a condition that the project be developed at a lesser density, without making the required findings, the court must issue a judgment compelling compliance with the Act within 60 days. SB 167 also creates a new provision that requires the court to impose fines on a local agency that has violated the Act and failed to comply with a court order compelling compliance within 60 days. Under the new rules, the fine is set at a minimum of $10,000 per housing unit proposed on the date the project application was deemed complete under the Permit Streamlining Act. The fine must be paid into a local housing trust fund. If a court’s order has not been carried out within 60 days, the new bill authorizes the court to go so far as to issue “an order to vacate the decision of the local agency and to approve the housing development project, in which case the application for the housing development project, as proposed by the applicant . . . shall be deemed approved unless the applicant consents to a different decision or action by the local agency.” Much of SB 167’s strength lies in the authority it provides to the court. This means that sussing out how much impact these changes will have may depend on developers’ willingness to challenge local agency disapprovals or density reductions beyond the administrative level. Assuming Governor Brown signs the bill, as expected, only time will tell whether SB 167 will actually serve to bolster the Housing Accountability Act.   Authored by Reuben, Junius & Rose, LLP Associate, 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, the formation of limited liability companies and other entities, lending/workout assistance, subdivision, and condominium work.

On September 15th, the California Legislature passed Senate Bill 35 (SB 35) which, if signed by the Governor, will streamline the approval process for multi-family residential projects that include affordable housing in many urbanized cities and counties.  SB 35 is part of a large package of bills the Legislature passed this term that seeks to incentivize the construction of affordable housing throughout the state, including a controversial new fee on certain real estate transactions that would fund affordable housing projects.  Given that these measures were negotiated with the Governor’s office, many in the Capitol expect the Governor will sign them into law. The Current State of the Law For decades, state law has required every city and county to plan for how it will meet its share of regional housing needs, but there were few consequences for a city or county if that planning did not result in actual housing construction.   Beginning in 1969, state law required each city and county to adopt a Housing Element as part of its General Plan which would set forth how that city or county would meet housing needs within its community for people at all income levels.  In the 1980’s, the state Department of Housing and Community Development began assigning housing goals to each region in the state which resulted in a Regional Housing Needs Allocation (RHNA) for each city or county.  Each city and county was then required to include in its Housing Element a plan for how it would accommodate its RHNA, including a designation of specific sites that could accommodate the needed residential development.  However, in many communities, this planning did not result in sufficient projects being built. SB 35 Would Streamline the Entitlement Process for Certain Multi-Family Residential Projects SB 35 would provide consequences for cities and counties in urbanized or partially-urbanized areas that fail to meet their RHNA goals.  If a city or county does not issue sufficient building permits to meet its RHNA goals, multi-family residential projects that would contribute to meeting those RHNA goals would receive a streamlined review that would be limited to whether the project meets objective planning criteria and design review (i.e., no conditional use permit may be required).   A city or county would have between 60 and 90 days, depending on the number of units included in the project, to provide the project sponsor with a written explanation as to how the project conflicts with any objective criteria and an explanation of the conflicts.  If the city or county fails to meet this timeline, the project would be deemed to meet the objective criteria.  A city or county would also have between 90 and 180 days, depending on the number of units in the project, to conduct any required design review of the project, which must also be based on objective and generally applicable design criteria and “shall not in any way inhibit, chill, or preclude the ministerial approval” of the project.  SB 35 would also limit a city or county’s ability to impose parking requirements on a qualifying project, and provide that entitlements for certain projects with 50% or more affordable units will not expire. The streamlined review SB 35 would provide is limited to projects that meet a long list of criteria, including: (1) the project must dedicate between 10-50% of the units to households making below 80% of the area median income, with the percentage of units depending on the type of affordable housing the city or county has failed to permit; (2) the project must be located in a city or county that includes some urbanized area; (3) at least 75% of the perimeter of the project site must adjoin parcels developed with urban uses; (4) the site must be zoned for residential development, or mixed-use development with at least 2/3 of the square footage devoted to residential use; (5) any price- or rent-restricted units must be subject to recorded durational restrictions of 45-years for rental units and 55–years for ownership units; (6) the project would not require demolition of specified types of rental housing or historic structures; and (7) for projects with more than 10 units, the project is subject to prevailing wage requirements and, in certain situations, other labor standards. In addition, SB 35 would not apply to projects that are: (1) within the Coastal Zone; (2) on prime farmland or farmland of statewide importance; (3) within a wetland; (4) within a very high fire zone; (5) on a hazardous waste site; (6) within a delineated earthquake fault zone; (7) within a floodplain; (8) on lands identified for conservation in an adopted natural resources protection plan; or (9) on land subject to a conservation easement. Nothing Good Lasts Forever The streamlined review provided by SB 35 would significantly constrain cities and counties’ ability to deny qualifying housing projects, and may well spur development that will help ease the state’s housing crisis.  Assuming that the Governor signs it, project sponsors will want to act quickly to take advantage of it.  The streamlined review provisions in SB 35 will expire on January 1, 2026. Authored by Reuben, Junius & Rose, LLP Partner – Matthew 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, the formation of limited liability companies and other entities, lending/workout assistance, subdivision, and condominium work.

On November 9, 2016, California voters approved (by a 56-44% margin) Proposition 64, the Adult Use of Marijuana Act (AUMA), which allows adults to possess and cultivate marijuana for recreational purposes. Municipalities were given until January 1, 2018 to plan for regulation of the industry, at which time recreational retail use will begin and additional State-wide regulations will be imposed. Like other California municipalities, San Francisco has been struggling to implement regulation of recreational marijuana. Mayor Ed Lee has directed the Department of Public Health and the Planning Department to work on creation of a regulatory scheme, but it is not yet clear how existing regulations on medical marijuana will be revised to allow for recreational use. Many on the Board of Supervisors have expressed concern about a “proliferation” of Medical Cannabis Dispensary (MCD) applications, with recreational legalization on the horizon. This week, the Board’s Land Use and Transportation Committee heard and referred to the full Board an interim moratorium on MCDs that would remain in place for 45 days unless: (1) extended by ordinance; or (2) permanent controls are adopted to address the proliferation of MCDs and the regulation of non-medical cannabis outlets. The moratorium does not apply to MCDs that have already been approved or are scheduled for a hearing before the Planning Commission as of September 11, 2017. We do not yet know how long the moratorium will be in place, but it is clear that the City has significant work to do to establish regulations for this industry at the intersection of zoning, public health and safety. At the same time this week, the San Diego City Council voted on cannabis regulations allowing cultivation, manufacturing, and testing of marijuana (supply chain businesses) with conditional use approval. While a major step forward for San Diego’s recreational cannabis industry, the regulation also imposes land use controls on the businesses, including capping the total number of marijuana supply chain businesses at 40 and limiting them to industrially zoned areas. San Diego has boosted taxes on the industry to capitalize on what is sure to be a lucrative expanding industry. It will be interesting to compare how California’s cities work to implement Prop 64. Stay tuned for an upcoming article about cannabis regulation by Reuben, Junius and Rose’s Tom Tunny in the September edition of the View, the quarterly Bay Area publication by Commercial Real Estate Women (CREW). In the article, Tom will explore the implementation of Prop 64, including the Mayor’s Directive, the intersection of medical and recreational cannabis regulation, and how cannabis may impact the culinary and hospitality industries in San Francisco. Authored by Reuben, Junius & Rose, LLP Associate –  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.  

In late July, the Board of Supervisors finally passed—and the Mayor signed—the compromise inclusionary affordable housing ordinance. We discussed the near-final legislation in our June 23 update, which you can access here. The broad strokes of that legislation are now law: partially grandfathered rates passed in June 2016 remain in place but most if not all will eventually sunset; new projects are subject to higher rates across the board but with tranches of affordability levels for BMR units; and on-site and off-site percentages will increase each calendar year until they reach a cap. The final legislation also includes a minimum citywide dwelling unit mix requirement for new projects. Coming in at 46 pages, it surely sets a record for word count in a city or county’s inclusionary ordinance. This week’s update is going to focus on some of the details buried deep in the ordinance that could be important to housing projects, starting with the new minimum dwelling unit mix. New citywide dwelling unit mix Before this legislation, a number of zoning districts had minimum unit mix requirements, the most common being the 40% 2-bedroom and 30% 3-bedroom unit mix in Eastern Neighborhoods mixed use districts such as UMU. The new requirement applies to all projects adding 10 or more units anywhere residential use is allowed that did not previously have a minimum unit mix. At least 25% of units must be 2-bedroom and at least 10% 3-bedroom. Some kinds of projects are exempt, including group housing, some student housing, SRO housing, HOME-SF projects, and affordable projects. Projects proposed before January 12, 2016 or approved before June 15, 2017 also do not need to comply. And the Planning Commission can grant an exception if the project will serve a “unique population” or there are physical constraints that make compliance unreasonable. Rate frozen in year “complete” environmental application is submitted To some, one of the most frustrating aspects of recent changes to the inclusionary program since last year was ongoing uncertainty: projects were proposed (and often financed) under one set of rules and assumptions, but by the time a project was up for entitlements or ready to start construction the rules had changed—sometimes more than once. The new legislation addresses this problem by freezing a proposed non-grandfathered project’s inclusionary rates on the day a complete environmental evaluation application is submitted. But there is a catch: a building permit or site permit to construct the project needs to be pulled within two and a half years of the project’s approval. If not, the project is subject to the inclusionary rates in place when the permit is pulled. Increased interim rates for Mission, North of Market SUD, and SOMA NCT In the Mission planning area, the North of Market Special Use District Subareas 1 and 2, and SOMA NCT zoning district, the city is studying affordability requirements on a neighborhood level. Until those studies are finalized and new affordability requirements adopted, the fee and off-site percentage is set at 30%, and onsite is set at 25% for rental and 27% for ownership. Additional fee on density bonus units California’s density bonus law allows qualifying projects to receive up to a 35% density bonus on top of a principally-permitted project. In the past, the City has not applied the inclusionary housing program to the density bonus aspect of the project. The compromise legislation requires density bonus projects proposed after January 1, 2016 to pay the inclusionary fee on all density bonus units. Interestingly, California State Assemblymember Phil Ting is trying to get a bill passed that amends the density bonus law to essentially do the same thing. Specific to San Francisco, the bill would apply the City’s inclusionary housing ordinance to the total number of units in a project—including the density bonus units. But San Francisco’s default method of compliance with its local inclusionary requirement—the fee—now already applies to the density bonus aspect of a project. To be fair, Assemblymember Ting’s bill was proposed before City’s ordinance was finalized, so maybe he will not pursue it any longer if he thinks the compromise ordinance’s additional fee on density bonus units can stand on its own. And his bill would also allow sponsors to do additional on-site or off-site units instead of just paying the fee. But the fact that he proposed the bill at all makes the additional fee on density bonus units a noteworthy requirement to follow. Fee or replacements for eliminated BMR or rent-controlled units Taking a page from the density bonus law, in addition to minimum affordability requirements, San Francisco now requires projects that demolish rent-controlled units or deed-restricted below market rate units to replace the eliminated units for projects doing on-site or off-site BMRs, or pay a fee on the replacement units for projects that are feeing out. For example, a 50-unit rental project doing on-site affordable units that demolishes two rent-controlled units will need to provide 11 affordable units in total, 9 for the 18% affordability requirement and 2 replacement BMRs. This update contains just a brief discussion of some of the details in the new program; it is not meant to be comprehensive. There are other aspects of the program that will inevitably raise questions as a project makes its way through the entitlement and approval process.  We will continue to engage with city stakeholders to ensure that the inclusionary program is as clear and understandable for our clients as possible.   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 Monday June 19, the Land Use Committee of the Board of Supervisors introduced a revised version of the compromise Inclusionary Affordable Housing legislation that Supervisors Breed, Kim, Peskin, Safai, and Tang introduced in May. We expect the legislation to be heard again, likely for the final time, at the Land Use Committee on July 10th. Any additional clarifications and/or potential amendments should be addressed prior to or at the July 10th hearing, before the Committee forwards the legislation on to the full Board of Supervisors for a vote, possibly as early as July 11. After Prop. C passed in June 2016, the Board of Supervisors adopted trailing legislation (Ord. 76-16) updating the affordable housing requirements, which resulted in the current Citywide affordable housing scheme—with a 25% on-site requirement or a 33% fee/off-site requirement for projects with 25+ units, and a lower 12% on-site or 20% fee/off-site requirements for projects with 10-24 units. Prop. C also called for the City Controller’s Office to prepare an analysis to determine the maximum feasible inclusionary housing requirements. The Controller presented its preliminary findings in the fall of 2016 and final recommendations in February 2017. Over the last few months the Planning Commission and Board of Supervisors have heard two competing versions of updated affordable housing legislation—the Peskin-Kim proposal and the Safai-Breed-Tang proposal. Last month, compromise legislation was introduced by the five Supervisors, and that version of the legislation was further amended at the Land Use Committee meeting on June 19. The Compromise legislation is pending under BOS File no. 161351 (and is available here: https://sfgov.legistar.com/View.ashx?M= F&ID=5243 881&GUID=CFA3750B-25F3-4C15-9C57-20E691DE66A2). Under the current version of the legislation, projects that have submitted an Environmental Evaluation Application (“EE Application”) before January 1, 2013 are subject to the old 12% on-site/20% fee and off-site rates. For projects that submit an EE Application between January 1, 2013 and January 12, 2016, the existing grandfathered rates apply, set forth in Planning Code Section 415.3(b).[1] Notably, the amended legislation adds a requirement that a project sponsor obtain a building or site permit within 30 months of project approval. Projects that fail to procure a permit within that timeframe would be subject to the inclusionary affordable housing requirements applicable at the time such permit is obtained. Affordable Housing In Lieu Fee: As currently proposed, for 10-24 unit projects, a 20% in-lieu fee requirement applies. Projects with 25 or more units that wish to pay the fee are subject to an amount equivalent to 33% if ownership units or 30% if rental units. Each year, by January 1, the City (via the Mayor’s Office of Housing and Community Development (MOHCD)) would be required “to adjust the fee based on the cost of constructing housing.” The affordable housing fee would also be imposed on any additional units or square footage authorized pursuant to the State Density Bonus Law (excluding projects that filed a complete EE Application by January 1, 2016). Affordable On-Site Unit Option: 10-24 unit projects would continue to be subject to a 12% on-site requirement, with sales prices at 80% AMI or less. Rental units would need to be offered at a rent set at 55% AMI or less. Starting on January 1, 2018, the City (via MOHCD) would increase the on-site requirements by 0.5% each year, until the requirement maxes out at 15%. Projects with 25 units or more would be subject to the following requirements: On-Site Ownership Units: 20%, of which: 10% to be affordable to low income households (price set at 80% AMI or less); 5% to be affordable to moderate income households (price set at 105% AMI or less); 5% to be affordable to middle-income households (price set at 130% AMI or less); and Ownership units to be offered at 130% AMI or above may not be studio units. On-Site Rental Units: 18%, of which: 10% to be affordable to low income households (rent set at 55% AMI or less); 4% to be affordable to moderate income households (rent set at 80% AMI or less); 4% to be affordable to middle income households (rent set at 110% AMI or less); and Rental units to be offered at 110% AMI or above may not be studio units. Regardless of these rates, the maximum affordable rent or sales price may not be higher than 20% below the median rental or sales price for the neighborhood in which the project is located, defined in accordance with the American Community Survey Neighborhood Profile Boundaries Map. For Projects with at least 25 units, the on-site requirement will increase by 1% each year for two consecutive years, beginning on January 1, 2018. Starting January 1, 2020, the required on-site requirement will increase by 0.5% each year, until the requirement reaches 26% for ownership units and 24% for rental units. The amended legislation further requires the Planning Department and Controller to do a study of areas where an Area Plan, Special Use District, or other re-zoning is being considered or has been adopted after January 1, 2015, in order to determine whether a higher on-site requirement is feasible on sites that have received a 20% or greater increase in developable residential gross floor area or a 35% or greater increase in residential density. Affordable Off-Site Option: 10-24 unit projects would be subject to a 20% off-site requirement, with the sales prices at 80% AMI or less. Rental units would need to be offered at a rent set at 55% AMI or less. Projects with 25 units or more would be subject to the following requirements: Off-Site Ownership Units: 33%, of which: 18% to be affordable to low income households (price set at 80% AMI or less); 8% to be affordable to moderate income households (price set at 105% AMI or less); 7% to be affordable to middle-income households (price set at 130% AMI or less); and Ownership units offered at 100% AMI or above may not be studio units. Off-Site Rental Units: 30%, of which: 18% to be affordable to low income households (rent set at