Oakland

Downtown Oakland Specific Plan Approved

| Justin A. Zucker

Last month, the Downtown Oakland Specific Plan (“DOSP”) was adopted by the Oakland City Council, with the DOSP environmental impact report being certified July 16 and the implementing Planning Code, Zoning Map, and Municipal Code amendments passing on second read July 30.  The DOSP is intended to guide development over the next twenty years, to meet the projected housing and employment needs in Oakland’s downtown.  The plan encompasses approximately 850 acres, and is generally bounded by 27th Street to the north, I-980, Brush and Market Streets to the west, Embarcadero and Jack London estuary waterfront to the south, and Lake Merritt and Channel to the east. Approval of the DOSP is the culmination of a near decade-long process.  As previously reported, the preliminary draft DOSP was released in 2019 with the draft zoning amendments released in April 2022 and the Zoning Incentive Program released in July 2022.  The delay in adoption of the DOSP was to allow for enhanced community engagement, adapting to the evolving social and economic conditions stemming from the COVID-19 pandemic.  The DOSP has been designed to help prevent displacement of both people and culture, while encouraging development of downtown. The DOSP projects the addition of approximately 18.3 million square feet of new commercial space, 1.3 million square feet of new institutional space, and 500,000 square feet of new industrial space, resulting in approximately 57,000 jobs and $41 million in impact fees to fund affordable housing and transportation improvements.  In addition, 29,000 new housing units are planned for by the DOSP, including approximately 4,000-7,000 income-restricted affordable units, that would generate approximately $480-544 million in one-time impact fees to fund affordable housing. Some changes to the DOSP since publication of the draft include: Preservation of industrial land uses closest to the West Oakland industrial area, removing the “Green Loop” and other non-industrial improvements from Howard Terminal now that the Howard Ballpark is no longer going forward. Development intensity changes clustered in five small areas, including portions of the West of San Pablo Planning sub-area, specifically from Grand Avenue to 20th Street and east to Martin Luther King Jr. Way (height increases from 85 feet to 175 feet in the Final Draft Plan, 7.5 FAR to 12.0, and from 200 square feet of lot area per unit for residential density to 110 square feet of lot area per unit), as well as between 14th and 15th Street between Martin Luther King Jr. Way and Jefferson Street (height increases from 175 feet to 275 feet in the Final Draft Plan, 12.0 FAR to 12.0/17.0, and from 110 square feet of lot area per unit for residential density to 90 square feet of lot area per unit). Prohibiting demolition of the principal building at the sending site leveraged for the transfer of development rights program. Requiring ten percent of the affordable housing Zoning Incentive Program benefit to be provided as an in-lieu fee rather than allowing entirely on-site benefits where projects propose at least 125 units above the base. Creation of a new alcohol use special permit, relaxing controls in the non-residential districts within the plan area, removing the need for a major conditional use permit for alcohol permits. There are too many specifics of the DOSP to include in an email update. Please contact us if you have any questions.   Authored by Reuben, Junius & Rose, LLP Attorney, Justin A. Zucker. 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.

Appeal

Key Tax Appeal and Exclusion Request Deadlines

| Kaitlin Sheber

Property owners in San Francisco have a right to appeal the assessed value of their properties within a certain window of time and may request tax exclusions when performing certain work.  Typically, the Assessor determines the increased base year value for the portion of any taxable real property that is newly constructed.  The value of the land would remain unchanged when there is new construction.  However, the cost of some types of improvements, including seismic safety improvements and accessibility improvements, may be excluded from reassessment if a timely request is submitted. Below is an overview of key deadlines and time frames to keep in mind, especially as the Regular Assessment Appeal Period is open now through September 16, 2024. Key Appeal Deadlines for San Francisco: Regular Assessment Appeal Period Opened July 2 The open filing period for appealing 2024/2025 assessed property values began on July 2, 2024 and expires on September 16, 2024.  No appeals may be filed after September 16, 2024.  Note that the Assessment Appeals Board has 2 years from the date of a timely filed application to schedule, hear, and render a decision. Supplemental and Escape Assessment Roll Supplemental and Roll Correction assessment appeals are only accepted within 60 days after the date of the supplemental notice issued by the Assessor, and Escape assessment appeals are only accepted within 60 days of the issuance of the tax bill. Exclusion Deadlines: Seismic Safety Improvements Under the Revenue and Taxation Code Section 74.5, a new construction exclusion may be requested for (1) seismic retrofitting improvements and (2) improvements utilizing earthquake mitigation technologies that are constructed or installed in existing buildings.  To obtain the exclusion, the property owner must submit a completed BOE-64 form to the Assessor before or within 30 days after completion of the project. Additionally, all documents necessary to support the exclusion must be filed by the property owner within 6 months after completion of the project.  Failure to timely file the form and all necessary documents constitutes a waiver of the exclusion for that year.  The exclusion expires upon a change in ownership of the property. Accessibility Improvements Section 74.6 of the Revenue and Taxation Code generally allows an exclusion for construction, installation, removal, or modification of a portion or structural component of an existing building or structure to the extent that it is done for the purpose of making the building more accessible to, or more usable by, a disabled person.  To receive the exclusion, the property owner must notify the Assessor of its intent to use the exclusion before or within 30 days after completion of the project.  All documents necessary to support the exclusion must be filed with the Assessor within 6 months after completion of the project.   Authored by Reuben, Junius & Rose, LLP Attorney, Kaitlin Sheber. 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.

rates

Proposed Legislation Could Slash Transfer Tax Rates – For Some

| Michael Corbett

Looking to kick-start housing production in San Francisco, Supervisor Ahsha Safaí recently introduced legislation that would significantly reduce the city’s transfer tax rate – a fee imposed by the city on real estate transactions – for certain residential projects that satisfy a detailed set of preconditions. Specifically, the proposed tax cuts would apply to rental residential projects (including those subject to a recorded condominium map) that meet the following criteria: Include no less than 12% affordable on-site units, calculated by excluding any permitted density bonus units. Receive a Certificate of Final Completion and Occupancy (“CFCO”) on or after June 3, 2014. Used/Use 100% union labor. At least one year before and through the date of the transfer, collectively have a minimum of $25 million in investment from union pension fund(s). If passed, the legislation would lower transfer taxes from 5.5% to 3% for qualifying properties valued between $10 million and $25 million, and from 6% to 3% for properties worth more than $25 million. For qualifying properties that received a CFCO prior to the ordinance’s passage, the reduced transfer tax rate would expire on June 30, 2029. Applicable projects that are issued a CFCO after the passage of the ordinance would be able to capitalize on the reduced rate through December 31, 2033. The value brackets that the ordinance targets likely mean the tax cuts will primarily apply to mid- to large-scale residential projects. Projects such as 100 Van Ness Avenue, 99 Ocean Avenue and 101 Polk Street would appear to be within the qualifying group of projects that could avail themselves of the tax benefit if the ordinance were to pass and those properties brought to market. Notably, Supervisor Safaí’s proposed legislation is only made possible through the passage in March of Prop. C. In addition to allowing a one-time transfer tax exemption for owners of properties converted from commercial to residential use the first time they are sold following conversion, that tax measure also authorized the Board of Supervisors to amend, reduce, suspend or repeal (but not increase) the transfer tax without voter approval. Supervisor Safaí, who is running for mayor, looks to capitalize on this authority, saying that reducing the tax rate could create an incentive for owners that have been on the sideline, waiting for a more favorable economic environment before bringing their properties to market. San Francisco’s transfer tax rates shifted mightily at the turn of the decade and has since been a hot-button issue for owners and investors alike.  In 2020, San Francisco voters approved Prop. I, which doubled the transfer tax from 3% to 6% on the sale of properties over $25 million, and from 2.75% to 5.5% on deals worth between $10 million and $25 million. The city’s Controller’s Office at the time projected that the measure could increase city revenue by $196 million per year on average. While the tax generated $520 million in fiscal year 2021-22, transfer tax revenue plummeted in fiscal year 2022-23 to $186 million. With historically high vacancy rates for commercial properties, dramatically higher interest rates, and a general decline in deal volume and aggregate sales prices across all property types in the city since 2021, the gross revenue from transfer taxes for fiscal year 2023-24 may yet fall further. It is unclear if the proposed legislation would materially swing the tide in increasing transfer tax revenues for the city. On balance, the ordinance would be a step in the right direction towards promoting new residential deals and investment to help generate much-needed housing production. It will certainly make it easier to finance qualifying projects. Yet, with tens of thousands of residential units currently approved but not financeable, it can be argued that the ordinance – with its narrow scope and 5- to 10-year sunset provisions – does not go far enough to provide the spark that will begin the thaw of an otherwise frozen housing pipeline. If you have any questions or would like to discuss this proposed legislation or existing transfer tax rates, please contact Michael Corbett from Reuben, Junius & Rose, LLP, at (415) 567-9000 or mcorbett@reubenlaw.com.   Authored by Reuben, Junius & Rose, LLP Attorney, Michael Corbett. 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 Now a 10% City Under SB 423 / SB 35

| Daniel Turner

On June 28, 2024, the California Department of Housing and Community Development released its annual determinations under SB 423 (formerly SB 35). Enacted in 2018 (as SB 35), SB 423 requires streamlined, ministerial approval for qualifying housing projects in jurisdictions that are not meeting their Regional Housing Needs Allocation (RHNA) goals, in exchange for providing a certain level of affordability in the project. Each June, the Department reviews permitting data from jurisdictions across the state and determines whether a jurisdiction has made sufficient progress toward producing housing for households at various income levels (i.e. lower, moderate, above moderate, etc.). Jurisdictions that have made sufficient progress toward their goals are not subject to SB 423; however, only 47 of California’s nearly 540 local jurisdictions fall into this category. Jurisdictions that have not approved enough above-moderate income units (i.e. market rate units) are required to ministerially approve code-compliant projects that offer 10% of their units as affordable to 50% AMI for rentals or 80% AMI for ownership units. These are commonly known as “10%-jurisdictions.” Jurisdictions that have not permitted enough very low or lower income housing units are required to approve code-compliant projects that offer 50% of their units as affordable to 80% AMI. These are commonly known as “50%-jurisdictions.” A jurisdiction that fails to produce housing in multiple income categories can be both a 10%-jurisdiction and a 50%-jurisdiction, and a project proponent may choose which affordability scheme to follow in such cases. Under HCD’s June 28 determinations, a majority of the Bay Area’s cities and counties have been deemed 50%-jurisdictions. Notably, San Francisco has been deemed a 10%-jurisdiction for the first time, and it is now subject to the lower affordability thresholds for projects wanting to utilize SB 423. If you would like to learn more about qualifying for SB 423’s streamlined review and approval process, please reach out to our office.   Authored by Reuben, Junius & Rose, LLP Attorney, Daniel Turner. 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.

Three New Housing Bills To Keep An Eye On

| Mark Loper

This week’s client alert discusses three pro-housing bills sponsored by Bay Area legislators that are pending in Sacramento: Buffy Wicks’ AB 2011 cleanup bill; a bill adding a new streamlining option for converting commercial buildings to residential authored by Matt Haney; and Scott Wiener’s proposal to extend the performance period of certain entitled but not built housing projects by two years, and allow those projects to defer certain impact fees until their certificate of occupancy. For background, according to UC Berkeley’s Terner Center for Housing Innovation, over 215 housing-related bills were introduced in California’s 2024 legislative session, representing almost 10% of all new bills. Topics include streamlining, tenant protections, potential solutions to construction cost issues, and addressing impediments to housing production in the Coastal Zone, among other topics. It should come as no surprise that the Bay Area caucus is at the forefront of legislation to increase housing production. Assemblymember Wicks’ AB 2011 cleanup bill, AB 2243, would make several technical amendments that help clarify the scope and applicability of this streamlined ministerial program for housing on sites that principally permit commercial uses. It also loosens a few eligibility criteria, potentially opening up more sites for the program, and changes some AB 2011-specific zoning controls. The bill would: Allow sites facing a road 50 feet or wider to use AB 2011, if the height limit at the site is 65 feet or higher (currently, the minimum street width is 75 feet). Remove the prohibition on AB 2011 projects within 500 feet of a freeway and 3,200 feet of a refinery if the project provides enhanced air filtration systems. Allow AB 2011 on: sites where parking is allowed with a Conditional Use permit; qualifying regional malls; office buildings converted to residential; and sites near public parks and parking lots or structures. Prohibit cities from imposing higher local inclusionary requirements unless they can demonstrate that the project is economically feasible. Otherwise, the project will be subject to AB 2011’s own on-site inclusionary requirements of 8-15% for rental projects and 15-30% for condos (with a sliding scale based on AMI levels). Increase minimum residential density for ground-up construction and eliminate density limits for conversion projects. Clarify that the residential density limits for an AB 2011 project can be increased using the Density Bonus Law (“DBL”), and that AB 2011 projects in the Coastal Zone can use the DBL’s additional density, waivers, and concessions even though they would need to get a coastal development permit. Assemblymember Haney’s adaptive reuse program (AB 3068) makes the approval process for converting qualifying buildings streamlined and ministerial. It borrows many concepts from AB 2011 and SB 35/423 including imposing the same processing timelines and requiring prevailing wages, apprenticeship programs, and health care expenditures for construction workers. Sites need to be in urbanized areas and surrounded by other urban uses and cannot propose the conversion of light industrial buildings. A minimum of 50% of an existing building must be converted, allowing buildings to retain non-residential uses. The project would also need to comply with either a local jurisdiction’s inclusionary housing program or the bill’s own requirements, whichever is higher. Interestingly, the adaptive reuse program would also allow the development of new buildings on undeveloped areas and parking adjacent to the commercial building proposed to be converted, if certain criteria are met. It would also allow the new construction aspect of the project to use the Density Bonus Law. Also, AB 3068 would allow but does not require cities and counties to offer financial incentives for up to 15 years to subsidize affordable units that are part of an adaptive reuse project. The annual payments to property owners would be equal to the amount of property tax revenue that the local government receives, less the assessed valuation when the sponsor applied for the payment program. Finally, Senator Wiener’s bill—SB 937—would grant a two-year extension to the performance periods of certain residential projects. Projects entitled under any of the following programs would be eligible for the automatic extension: AB 2011, SB 35/423, the Density Bonus Law, Yes in God’s Backyard (SB 4), 100% affordable projects, and projects with 10 or fewer units. The project needs to have at least 2/3 residential square footage, and the entitlement needs to be issued prior to and still be in effect as of January 1, 2024. Senator Wiener’s bill also would delay the payment of development fees used to construct public facilities or improvements until a certificate of occupancy is issued. And it would not allow a city to charge interest on deferred fees. These changes could increase the financial feasibility for housing developments by allowing project sponsors to defer payment until after construction is complete. We will continue to track these and other notable bills as they navigate the legislative process.   Authored by Reuben, Junius & Rose, LLP Partner, 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.

San Francisco Housing Element Rezoning Program – Status

| Thomas Tunny

As previously discussed in a February 2024 Update, the Planning Commission has been holding informational hearings concerning its state-mandated implementation actions and zoning amendments identified in the certified 2022 Housing Element. The Housing Element was adopted in January 2023.  Beginning in Spring 2023, the Department began working on four key Housing Element implementation areas: Affordable Housing Funding and Strategies Activating Community Priorities Housing Production and Process Improvements Expanding Housing Choice (Housing Element Rezoning Program) On June 6, the Planning Department updated the Commission and public on the Expanding Housing Choice program and coordinating with the Mayor’s Executive Directive on “Housing for All”. Expanding Housing Choice Expanding Housing Choice will amend zoning policies in Housing Opportunity Areas (“Well-Resourced Neighborhoods”) to increase capacity for multi-family housing to satisfy the City’s Regional Housing Needs Allocation (RHNA) gap of 36,200 housing units.  Within the broad geography covered by the Housing Opportunity Areas, the rezoning program is focused on transit corridors, commercial corridors, and key opportunity sites, as these locations leverage existing infrastructure and feature the types of sites more likely to be developed and expected to yield the greatest amount of new housing.  Most rezoned areas will allow midrise housing (65’-85’ tall, or 6-8 stories), with higher height limits considered in selected locations.  In the areas surrounding these transit corridors and key sites, parcels will be permitted to build 4-plexes and 6-plexes under recently adopted legislation.  The Planning Department has set a target of building 25-50% of the City’s new permanently affordable housing units in the Housing Opportunity Areas. Objective Design Standards As discussed in previous Commission hearings, the Planning Department is developing Objective Design Standards (ODS) in parallel with Expanding Housing Choice that will complement the Planning Code and provide objective development standards. Under the California Housing Accountability Act (HAA), local jurisdictions cannot use subjectivity in determining whether a project can be approved or denied. They may only evaluate projects against objective standards, defined as rules which: “…Involve no personal or subjective judgment by a public official and are uniformly verifiable by reference to an external and uniform benchmark or criterion available and knowable by both the development applicant or proponent and the public official before submittal.” A copy of the draft ODS is available here:  SF Objective Design Guidelines Ultimately, the Planning Department will create Objective Design Standards for every scale and typical residential project type subject to the HAA.  Subsequent updates will expand these standards to apply to other residential project types, sizes, and geographies.  As an initial step, the ODS will be primarily applicable to housing projects in the Housing Opportunity Areas. Specifically, the draft standards were created to apply to midrise housing developments (e.g., 65’ to 85’ tall, or 6-8 stories), large sites (e.g., greater than 1 acre), and sites allowing tall buildings (>85’). These standards were scoped as a companion to the rezoning and focus on the Housing Opportunity Areas and rezoned parcels. The Planning Department is continuing to meet with community organizations to solicit feedback to refine the draft zoning proposal and will schedule additional informational hearings to provide updates and delve into additional topics related to the rezoning.  We will continue to keep readers apprised.   Authored by Reuben, Junius & Rose, LLP Attorney Thomas Tunny. 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.

NEW STATE LAWS AIM TO SIMPLIFY HOA GOVERNANCE

| Jay Drake

Assembly Bill 648 – HOA Meetings by Teleconference. In an effort to enable greater access to homeowners association (“HOA”) meetings, and enhance HOA members’ ability to participate and comment on matters of interest, the Davis-Stirling Common Interest Development Act, the primary body of law governing HOAs in California, was amended to allow HOA meetings to be held by teleconference. Assembly Bill 648 was signed into law and became effective on January 1, 2024.  AB 648 adds Civil Code Section 4926 to the Davis-Stirling Act.  Prior to passage of AB 648, Civil Code Section 4090 required meetings of an HOA board of directors (“Board”) to be held in-person at a physical location, or by teleconference only in certain situations. Newly added Civil Code Section 4926 allows a meeting of the HOA members or meeting of the Board to be conducted entirely by teleconference (including video conference), without any physical location being held open for the attendance of any HOA member or director on the Board (“Director”) if specified conditions are satisfied. These conditions include, among others, a requirement that the notice for the meeting provide clear instructions on how to participate by teleconference, and each HOA member and Director must have the same ability to participate that would exist if the meeting were held in person.  Also, the telephone number and email address of a person who can provide technical assistance with the teleconference process, both before and during the meeting, must be provided in the meeting notice. These teleconference provisions do not apply to an HOA meeting at which ballots are counted and tabulated pursuant to Civil Code Section 5120. Assembly Bill 1458 – Reduced Quorum for HOA Board Elections. In order to streamline the process for election of Directors to HOA Boards, the Davis-Stirling Act was amended to allow for reduced quorums in certain situations. HOAs are required to periodically hold elections for the Board of Directors.  The governing documents of many HOAs include a quorum requirement for any election of Directors.  A quorum is the minimum number of HOA members that must be “present” – either in person or via mailed ballots – in order to make the election valid.  An HOA’s governing documents may require a majority (at least 51%) of HOA members to participate for the election to be valid. A number of HOAs report having trouble meeting quorum requirements for Board elections due to lack of participation by the HOA members.  This inability to reach a quorum can prevent an HOA from electing Directors to its Board in a timely manner.  An HOA may have to hold multiple elections in an attempt to reach the required quorum of its members. Assembly Bill 1458 was signed into law and became effective on January 1, 2024.  AB 1458 amends Civil Code Section 5115 of the Davis-Stirling Act and Section 7512 of the Government Code. Civil Code Section 5115 as amended provides that if an HOA fails to reach a quorum required by its governing documents for an election of Directors, then unless a lower quorum is authorized by the HOA’s governing documents, the HOA may at a subsequent election reduce the required quorum to 20% of the HOA members voting in person, by proxy, or by secret ballot.  This means that only 20% of the HOA members will have to participate in an election of Directors for the election to be valid.  This reduced quorum requirement should allow Directors to be elected in a timely manner notwithstanding a lack of participation by many HOA members.  The HOA must provide specified notices to its members before reducing the quorum.  Similar amendments were made to Section 7512 of the Government Code. Managing an HOA can be challenging given that HOA members and Directors often lead busy lives and may find it difficult to fully participate in the HOA.  These new State laws should facilitate greater participation in and efficient operation of HOAs for the benefit of all members.   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.

Proposed New Business Tax Structure in San Francisco

| Kevin Rose

On May 6, 2024, a new San Francisco business tax initiative was filed in order to qualify for the November 2024 ballot.  The purpose of the initiative is to remedy Covid-19’s major impact on the San Francisco economy, including remote work.  According to the San Francisco Tax Collector’s website, the initiative was proposed by  Controller Greg Wagner, former Controller Ben Rosenfield, Chief Economist Ted Egan, and San Francisco Treasurer Jose Cisneros.  San Francisco Leaders Support Business Tax Reform Proposal to Strengthen City Economy | San Francisco (sf.gov).  The San Francisco Chronicle states the proposal was filed by two “business leaders” but is supported by Mayor Breed and Board of Supervisors President Aaron Peskin. https://www.sfchronicle.com/sf/article/s-f-economy-tax-plan-19444049.php. According to the Tax Collector, the key elements of the proposal are: Exempting more than 2,500 small businesses from the tax by expanding the Small Business Exemption to $5 million dollars Lowering taxes for hotels, arts, entertainment, and recreation Reducing volatility by ensuring taxes are not overconcentrated Reducing disincentives for bringing workers back or locating in San Francisco Simplifying the overall tax structure to be more predictable According to the San Francisco Chronicle, post-pandemic, the five largest taxpayers in the City accounted for 24% of all business taxes, and remote work reduced the City’s business tax revenue by $484 million in 2021. https://www.sfchronicle.com/sf/article/remote-work-reduced-s-f-s-taxes-484-million-18193946.php   The loss of tourists and workers in the City has devastated the retail, restaurant and hotel industries. For some businesses, the proposed tax initiative would be a welcome shift from the ever increasing taxes and fees imposed by the City.  However, the decreased income would be made up by increase on other types of commercial activities. The measure keys on some of the businesses most impacted by the loss of workers in San Francisco, including retail, restaurants, and hospitality.  Unfortunately for the owners of empty office buildings, there would be no reduction in the commercial rents tax. If passed by the voters, the 2024 tax ordinance would result in a significant change in the business tax structure, including revised gross receipts tax rates, short term decreases in the Homelessness Gross Receipts Tax and Overpaid Executive Tax, and a temporary reduction in business registration fees.  The measure would also provide key incentives for small businesses, certain new office building occupants, and grocery stores. Finally, the new tax plan would shift the calculation of business taxes away from the partial reliance on San Francisco based payroll (i.e., lower because of remote work), and focus more on gross receipts, in an effort to more evenly allocate the tax burden and lure workers back to San Francisco. The proposal is quite detailed and technical in nature.  The Tax Collector’s office has issued a summary of the key changes and expected impacts of the ordinance, and a link to that summary is attached here.  PowerPoint Presentation (sf.gov) The following are a few additional components of the proposal (some of which are from the Tax Collector’s analysis): Enacts a new small business exemption from the Gross Receipts Tax for businesses that make less than $5 million per year (with annual CPI adjustments). Importantly, residential landlords do not qualify for this exemption. Tax credits of up to $1M for those that open a new business in the City (that person or combined group cannot have operated in the City for the past three years) in certain “Designated Areas” Tax credits for companies that lease all or a portion of a “Qualified Building” for office purposes (“Qualified Building” means that construction must have started between Nov. 4, 2024 and Nov. 4, 2029 and be at least 450,000 square feet, among other requirements), and house at least 100 employees in such building. Gross Receipts tax rates would be reduced for certain industries, including retail, recreation, food service, and hotels. Gross Receipts tax rates would increase significantly (almost double for firms making over $5M per year) for financial and legal services (i.e., attorneys and accountants), and these businesses would lose the ability to reduce the tax due to non-San Francisco employees. The construction industry would be hit with increased tax rates for income above $2.5 million. No significant change in gross receipts tax rates for real estate leasing activities. Tax credits for supermarkets and other grocery retailers (excluding convenience stores) of 0.5% of these company’s taxable gross receipts, up to a maximum credit of $4 million. Reduces the tax rate on Administrative offices based on payroll expenses in San Francisco from 1.54% in 2024 to 1.47% in 2025 and 2026. Reduce the Overpaid Executive Tax by 80%. The Homelessness Gross Receipts Tax, previously charged only to companies making $50 million annually, would be modified to reduce the income threshold to $25 million starting in 2025 (except for the real estate category, where the threshold remains at $50 million). If the proposed tax plan qualifies for the ballot and passes, it would be a strong signal that San Francisco has turned away from the theory that higher taxes do not impact San Francisco businesses, and recognition that a reasonable tax structure is necessary to attract at least certain types of companies.  However, some industries would still be subject to the more aggressive tax structure, and taxes would still increase in later years. It will be interesting to see if this plan is enough to attract more business to San Francisco.   Authored by Reuben, Junius & Rose, LLP Partner 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.

HCD Letter Could Complicate Builder’s Remedy Approvals

| Chloe Angelis

On March 28, 2024, the Department of Housing and Community Development (“HCD”) issued a Letter of Technical Assistance[1] to the City of Compton that potentially creates a new complication to the approval of Builder’s Remedy projects. The Builder’s Remedy allows developments that meet certain affordability thresholds to bypass local zoning when a city or county is out of compliance with housing element requirements. As Reuben, Junius, and Rose partners Melinda Sarjapur and Matthew Visick explained in their April 24 update (State Law Could Overhaul “Builder’s Remedy”), some cities have pushed back on the validity of the Builder’s Remedy as a tool to overcome burdensome zoning controls, and there are numerous Builder’s Remedy cases making their way through the courts. The Builder’s Remedy is part of the Housing Accountability Act (“HAA”)—which provides that cities and counties must make one of five findings in order to deny a project that would create very low, low, or moderate income housing. One such finding states that a project’s inconsistency with a city or county’s zoning ordinance or general plan can only be used to reject the project if the city or county has adopted a compliant Housing Element. HCD’s March letter to the City of Compton confirms that when a city or county does not have a compliant Housing Element, it cannot deny a project that meets the requisite affordability thresholds because of the project’s inconsistency with the applicable zoning or general plan land use designation. However, HCD’s letter explains that the Builder’s Remedy does not prohibit a city or county from requiring Builder’s Remedy projects to obtain discretionary permits or zoning or general plan amendments that would be required for similar non-Builder’s Remedy projects. The letter notes that in this case, the City of Compton intended only for the required general plan amendment and zoning change “to remedy the inconsistencies between the project and applicable regulatory documents that will result when the project is approved.” Even so, the guidance cuts directly against the benefit that the Builder’s Remedy is arguably meant to provide—an open door for projects with sufficient affordability in jurisdictions that have failed to adopt a valid housing element. Significantly, the HCD letter goes on to explain that if a city or county’s insistence on a general plan amendment or zoning change makes a project infeasible, then that jurisdiction would be in violation of the HAA. The letter specifically notes that “if insisting on a GPA or Zoning Change delays project approval or increases the cost of the approval process, a violation of the HAA would result.” It is almost impossible to imagine how a requirement to pursue a zoning or general plan amendment wouldn’t delay a project or increase costs. Zoning and general plan amendments are legislative actions requiring approval by a city council or board of supervisors. Adding a legislative component to Builder’s Remedy projects automatically politicizes these approvals. The March letter to the City of Compton is a bit contradictory:  on the one hand, the HAA does not prohibit cities from requiring discretionary permits or legislative actions as part of Builder’s Remedy entitlements; but on the other hand, anything that delays project approval or increases costs would amount to an HAA violation. With numerous Builder’s Remedy cases making their way through the courts, and pending state legislation to revise the Builder’s Remedy, this HCD letter potentially muddies the water for Builder’s Remedy projects in the meantime. Authored by Reuben, Junius & Rose, LLP Attorney Chloe Angelis. The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work. [1] HCD RE: 1601 W. El Segundo Blvd., Compton – Letter of Technical Assistance (March 28, 2024).

Superior Court Invalidates SB9 in Charter Cities

| Tara Sullivan

On April 22, 2024, the Superior Court issued a decision in City of Redondo Beach et. all, vs. Rob Bonta, et. all.  This case centered on the legality of SB 9, which the state legislature passed in 2021.  The court held that the legislation was “not reasonably related to ensuring access to affordable housing nor narrowly tailored to avoid unnecessary interference with local government,” thus was in violation of the “home rule” doctrine prohibiting interference with municipal affairs [of charter cities]. At the crux of the argument was whether the legislature’s stated intent of SB 9 – “ensuring access to affordable housing” – was effectuated in the legislation.  The court held that it was not. As a reminder, SB 9 requires that a proposed housing development containing no more than 2 units in a Single-Family residential zoning district be approved ministerially, and that an associated lot split be approved ministerially as well.  This legislation was one of many that the state legislature has passed in the last several years to require local municipalities to approve new housing projects. A key issue in the case was whether SB 9 violated charter cities’ authority to manage “municipal affairs.” The Court noted that under California jurisprudence a state law may overcome the home rule doctrine if it is reasonably related to the resolution of a matter of statewide concern. The Court then applied the four-part test from California Fed. Savings & Loan Assn. v. City of Los Angeles to resolve the issue of whether SB 9 superseded local land use authority.  At the end of this test, if “the court is persuaded that the subject of the statute is reasonably related to its resolution [and not unduly board in its sweep] then the conflicting charter city law is no longer a municipal affair and the state law applies. The Court found, and the parties conceded, that land use and zoning regulations are traditionally local affairs and that SB 9 did indeed interfere with those powers.  On the third prong, whether SB 9 dealt with a matter of statewide concern, the parties sought to define what exactly the statewide concern at issue was. Petitioners sought to define the statewide concern as ensuring affordable housing, whereas respondents argued that the matter of statewide concern was addressing the state’s overall housing shortage. Here, the Court looked at the plain language of the law – SB 9’s legislative intent and purpose was simply “ensuring access to affordable housing is a matter of statewide concern and not a municipal affair” – and adopted a narrow reading of the Legislature’s intention.  It held that SB 9 was just about ensuring access to affordable housing, not about the shortfall of housing generally. When respondents argued that specific identification of affordable housing did not necessarily preclude a shortfall in housing from being a matter of statewide concern, the Court was unpersuaded. On the fourth prong of the inquiry (i.e. whether SB 9 is reasonably related to ensuring access to affordable housing and narrowly tailored to avoid unnecessary interference), the Court first turned to the definition of “affordable” within the context of SB 9.  The Court held that the legislatures’ use of “affordable” in SB 9 was in the context of below market-rate housing.  It did not agree with the respondents that it meant housing affordability at all levels. The Court then held that the “broad requirement of ministerial approval of duplexes and urban lot splits does not contain any connection to affordable housing” (as defined as below market-rate units).  Therefore, since SB 9 does not contain any below market-rate requirements, there was no evidence that SB 9 would result in the creation of “affordable housing,” basically dashing the argument that SB 9 could satisfy the reasonably related/narrowly tailored prong. It is important to note that the Court went out of its way to distinguish SB 9 from SB 35 and SB 423, which have specific requirements for below-market rate housing units, and therefore were not subject to this ruling. Where does this leave SB 9?  There are 121 charter cities in California, many of them opposing not only SB 9 but other laws that force ministerial approval of housing projects.  However, many jurisdictions have approved SB 9 projects, including San Francisco.  Whether the Attorney General’s Office will appeal the ruling is not yet known, however, it is doubtful that this is the last we will hear about SB 9. Authored by Reuben, Junius & Rose, LLP Attorney Tara Sullivan. 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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