​Revamp of Transit Impact Development Fee (TIDF) Proposed Significant changes to the Transit Impact Development Fee (“TIDF”) may be coming our way soon.  The TIDF is a per-square-foot impact fee that applies to non-residential developments proposing new construction and changes in use of existing buildings.  A broad coalition including Mayor Lee, Supervisor Wiener and Supervisor Olague have introduced the amendments, which gives the legislation good odds of passing at this point.  Note, however, that the previously-proposed expansion of the TIDF to apply to residential uses is not proposed as part of this legislation (nor is the broader Transportation Sustainability Fee (“TSF”), which we reported on back in May 2012 and would add the benefit of eliminating the need for CEQA transportation studies). Among the changes proposed, we see two as having the most impact on development in the city. First, the threshold for triggering the TIDF would be reduced from 3,000 square feet to 800 square feet.  It was not uncommon for projects to avoid the TIDF by limiting non-residential uses – say a ground floor retail space in a residential building – to below 3,000 square feet.  Now, with an 800 square foot trigger, most non-residential projects, or components of projects, will trigger the fee. The other major change is that the fee rates are being changed.  This is not unique in itself – the fee rates increase on an annual basis – but the legislation increases the disparity between the office fee rate and the industrial fee rate significantly.  The office fee rate will increase from $12.06 to $12.64 and the industrial fee rate will be reduced from $9.65 to $6.80.  The real impact of this will be felt in projects converting old industrial buildings into office.  Since the TIDF provides for a fee credit based on the fee rate of the current use and the fee rate of the proposed use, the credit for a change from industrial to office would decrease from roughly 80% to 54%.  Essentially, a reduction in the industrial fee rate helps few projects (as there are few industrial developments these days in the city) but will significantly decrease the credit available for an industrial to office conversion. There are some other goodies in the legislation, including additional fee credits for policy reasons, such as a reduction in the fee for businesses occupying a space of less than 5,000 square feet and for projects that do not maximize the amount of parking permitted.  However, in the end, the legislation ends up making the TIDF a larger exaction on projects – especially those office conversions that are so popular these days. Residential Parking Tax Reform Measure Proposed A new residential parking tax reform measure has also been introduced by Supervisor Wiener that could bring residential parking operators into the light – but there’s a catch! Currently, the same parking tax collection and registration rules apply to owners of major commercial parking garages downtown and to owners of parking spaces at a residential building being rented out to residents who do not live in the building.  These significant rules include obtaining an annual parking permit, making monthly tax prepayments, paying associated fees, and maintaining certain levels of insurance.  According to the city itself, these rules have led to likely thousands of owners of residential parking spaces who are not complying with the parking tax ordinance. Taxes due even on a single space can add up over time, and including penalties for failure to pay the tax on time, and can create a major cost that hang over many residential parking space owners’ heads.   Supervisor Wiener’s legislation would create a “carve out” for certain residential parking operations. For parking operations consisting of 5 or less spaces rented to non-residents may be eligible for a significantly streamlined parking tax.  The spaces must be rented on at least a monthly basis and the total gross receipts must not exceed $4,000 quarterly and $15,000 annually.  If eligible, a residential parking operation would be exempted from the commercial parking permit requirement, from the monthly prepayment requirement, and from the revenue control equipment fee.  The residential parking owner must still file quarterly parking tax returns.  While the first part of the legislation will be important for new owners of residential parking spaces, those who have owned residential parking spaces for many years without paying the parking tax face significant tax liability and penalties, and would have little incentive to come clean now.  For these owners, the legislation attempts to entice them into the new program by providing amnesty for taxes, fees, and penalties not paid up until April 1, 2011.  That may not be enough to bring existing residential parking owners into the open.  First, the amnesty does not provide protection for unpaid taxes between April 1, 2011 and today – which could be significant when penalties are added.  Also, as we have seen with the Planning Department’s legitimization program, the “amnesty” provision may not be as forgiving as it sounds, and residential parking owners could run the risk of exposing themselves to the city, and subsequently being denied eligibility for the amnesty program. Supervisor Wiener’s legislation is a common sense attempt to distinguish residential owners who rent a small amount of parking spaces from major downtown commercial parking garage owners.  While the “amnesty” provisions may not be enough to bring the thousands of existing residential parking owners into the light, it will certainly make the parking tax work better moving forward. 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, 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. Copyright 2012

​Mayor Ed Lee has proposed an ordinance to initiate amendments to the Planning Code’s Affordable Housing Requirements for new residential construction to apply only to projects of 10 units or more, in place of the existing trigger of 5 units. The Affordable Housing Program requires housing developers to provide a fixed amount of subsidized housing at each project, or to pay an in-lieu fee to the City. The purpose of the Mayor’s proposal is to stimulate production of smaller scale residential projects on infill sites.  Construction of new housing from 5 to 9 units has waned in recent years, partially as a result of the high burden of the affordable housing program, also known as the below market rate housing program, on smaller scale projects.  Mayor Lee’s proposed ordinance will take effect on January 1, 2013 if adopted by the Board of Supervisors.  Pre-Condition for Operation of the Proposed Ordinance The increase in the threshold for application of the affordable housing requirements to projects of 10 units or more, rather than 5 units or more, would be dependent on the voters’ adoption of the Housing Trust Fund Charter Amendment that will appear on the November 6, 2012 election ballot.  The Housing Trust Fund would dedicate a certain portion of the General Fund each year, for the next 30 years, to provide financing for affordable housing.  The Housing Trust Fund Charter Amendment also proposes to lower the requirements for the provision of on-site below market rate units.  The Housing Trust Fund is intended to replace the former Redevelopment Agency, which was recently eliminated by the Legislature, as a source of financing for affordable housing in San Francisco.  The proposal for the Housing Trust Fund was placed on the ballot for the November 6, 2012 elections by the Board of Supervisors on July 24, 2012.  The Housing Trust Fund is comprised of three major components, as follows:  1.     Dedicate an annual contribution from the General Fund to the Housing Trust Fund for the next 30 years.  The first year contribution would be $20 million, plus an additional $2.8 million each year, until $50.8 million per year is reached.  2.     Lower the existing on-site inclusionary housing requirement by 20%, with a minimum of 12% of units in any project provided for below market rate, or payment of a corresponding in-lieu fee to the City.  This would represent a reduction from the current requirement of 15% of the total number of units in any project.  3.     Prohibit future increases to the Planning Code’s inclusionary housing requirements with certain exceptions.   In essence, the proposed ordinance would revert the threshold for inclusionary housing requirements to that which was in place before the Board of Supervisors’ legislative amendments in 2006.  It is projected that over the next 30 years, the Housing Trust Fund would provide approximately $1.2 billion for affordable housing production in San Francisco. 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, 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. Copyright 2012 Reuben & Junius, LLP. All rights reserved.

​Failed Land Use Bills at State Legislature Provide Insight into Future Planning Policies Today marks the last day of the California Legislature’s session.  It also marks the end of the biennial rush of last minute legislating:  flurries of bills – not of insignificant importance – being passed in the waning days of the session by a legislature that can never be sure about the result of the upcoming election season.  While the major public pension and workers’ compensation reform measures – expected for passage today – have been getting most of the headlines, a pair of significant land use reform measures that did not ultimately get passed provide a window into potential future reforms. California’s landmark environmental law, CEQA, has been pelted with criticism and ripe for reform for decades now.  We in the Bay Area are well aware of CEQA’s many ironies.  You can’t get a “greener” land use and planning policy than high-density, urban infill projects near public transit.  To have these projects be held up with countless studies, unsubstantiated CEQA appeals from neighbors, and potential litigation, seems to be in direct conflict with promoting environmental protection.  The most egregious example of CEQA’s unintended consequences were the air quality guidelines handed down by the Bay Area Air Quality Management District a few years back that triggered full EIRs for mid-sized housing developments in San Francisco. Last week, in a bit of legislative sleight-of-hand, Senator Michael Rubio was considering amending a bill he had already introduced by removing all of its text, and inserting his CEQA reform measure in its place.  Language of the CEQA reform measure was never released, but a two-page overview was released by the CEQA working group (a group of industry leaders working to modernize the 40-year-old law).  Mainly, the reform measure would improve CEQA by coordinating and integrating various environmental and planning laws.  CEQA lawsuits would be barred to challenge new measures that would enhance environmental standards.  Lawsuits would be limited when a project is consistent with a general plan or area plan, so long as the project is incorporating mitigation measures from the adopted plan.  Public disclosure and reporting would be enhanced, by requiring projects to issue annual reports of compliance with mitigation measures on a new public website.   While the State Senate ultimately decided not to take up the reform measure in this term, citing the lack of public hearings and outreach, Senate President Darrell Steinberg did state his commitment to future CEQA reform similar to the Rubio measure:  “We’re going to take it on, and we’re going to take it on in a big way, [but]…in the only way good things really get done around here – and that is to sit down over the course of weeks and months and grind through the tough issues and make the fair compromises.” Another measure that was expected to pass but was ultimately killed was Berkeley Assemblywoman Nancy Skinner’s bill that would restrict the ability of localities to require parking in high-transit areas.  Considering the fact that San Francisco no longer requires parking downtown and in other public transit neighborhoods, the impacts of the bill would have been limited here.  But the bill would have established a statewide maximum required parking standard in these areas of two spaces per 1,000 square feet for smaller non-residential projects and one space per unit in market-rate housing developments.  The bill was championed by the California Infill Builders Federation, but was ultimately killed by a coalition of Central Valley cities and the American Planning Association, which believed the bill did not provide cities enough discretion to account for unique circumstances.   While these reform measures did not make the cut in the 2011/2012 legislative session, they are likely beacons of what is to come in the near future with respect to land use reform in California.  We will especially be keeping our eyes on CEQA reform – both locally and in Sacramento – as changes are likely on their way. Real Estate Tax Appeal Deadlines are Looming Property owners in San Francisco, Alameda, and Santa Clara Counties have only until September 15, 2012 to file real estate tax appeals concerning the 2012-2013 assessed property value.   Contra Costa County’s deadline is November 30, 2012.  These deadlines are absolute.  If missed, the taxpayer waives any right to file an appeal for this tax year.  If you need any assistance filing an appeal, please contact Kevin Rose at krose@reubenlaw.com.  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, 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. Copyright 2012 Reuben & Junius, LLP. All rights reserved.

​This month’s SPUR (San Francisco Planning + Urban Research) newsletter looked at what San Francisco can learn from Los Angeles’ success in growing or reinvigorating walkable, transit-oriented districts in a city known for its auto-centric sprawl.  Since SPUR has already interrupted our San Francisco navel gazing, we’ll expand on the theme to look at Los Angeles’ recent “Multiple Approvals Ordinance”, which streamlines the approval process for projects requiring multiple development approvals.   Like San Francisco’s Planning Code, Los Angeles’ Zoning Code started as a slender document, with 67 pages and “only a handful of discretionary approval processes…with simple and clear decision-maker and appeal hierarchies.”  Over time, the Zoning Code swelled to 600 pages.  The number of required approvals grew and authority to grant them diffused among multiple city bodies and officials.  The requirement to seek multiple, independent approvals, each with its own appeal process created an unnecessarily protracted review process that was burdensome for applicants, confusing to the public, and a drain on staff resources.   The Multiple Approvals Ordinance’s remedies for the situation are modest:  they do not lower the bar for approvals, reduce public notice requirements, or cut off opportunities for appeal.  Instead, they streamline the process by consolidating approvals with the highest-level official or body with authority over a project.  For example, if a project requires approval by the Zoning Administrator and the Planning Commission, the Planning Commission is empowered to grant all approvals at a single hearing.  This change greatly simplifies the appeal process as well.  With project approvals granted on one date, appeal periods can run concurrently and appeal hearings can similarly be consolidated for hearing before a single authority.   Because new regulations are often adopted piecemeal, reforms such as the Multiple Approvals Ordinance seem like a logical bit of housekeeping that cities should undertake now and then.  They create a safer and more transparent process for all participants in the development process and allow planners to spend less time pushing paper and more time focused on project merits and planning goals.  They also save cities money.   In San Francisco, even small projects can face the possibility of six or more approval and appeal hearings before all is said and done.  A project requiring a variance from the Zoning Administrator, a conditional use from the Planning Commission, and an approval from the Historic Preservation Commission would have to go to at least two and possibly three hearings.  These, in turn, could be followed by three separate appeals, one at the Board of Supervisors and the other two at the Board of Appeals.  There could also be independent CEQA or subdivision map appeals at the Planning Commission and the Board of Supervisors.   With such a notoriously convoluted approval process and a Planning Code that numbers some 1,900 pages, San Francisco seems ripe for reform.  However, reform is hard to achieve over the opposition of those who relish the power to inflict death by a thousand hearings, or who perceive a plot at work behind even the most commonsense reform.  For example, former supervisor Fiona Ma’s efforts to establish clear time frames for CEQA appeals died on the vine.  Years later, there is still no meaningful time limit for categorical exemption appeals. They can come shortly after a Commission approval, which is when they should be decided.  Then again, they can be delayed until a building permit is issued, when the consequences for builders can be dire.   Change certainly did not come easily in LA.  The Multiple Approvals Ordinance was the product of a multiple-years-long effort, with numerous stakeholder meetings and compromises along the way.  It is but one component of a more far-reaching effort to streamline, modernize and make sense of regulations that have accreted over time.  These types of changes do not come cheaply: the price tag for the Multiple Approvals Ordinance and other zoning reforms will run into the millions.  But LA’s leaders have been willing to invest public funds and political capital to, in the words of LA’s Planning Department, make their city a place where people “are not afraid to invest in new development to better the built environment and grow the local economy.”   In San Francisco, past efforts to improve process have generally been piecemealed, i.e., they have been focused on single issues brought to the fore by individual supervisors or the Planning Department.  Some have been successful:  Supervisor Wiener’s recent amendments to the City’s preservation rules are an example.  The Planning Department’s efforts to streamline CEQA in certain master-planned areas are another.  Other initiatives, notably discretionary review and CEQA reform, have fallen short of the mark.   If there is a lesson to be learned from Los Angeles—or from past experience here—it is this:  Delivering meaningful reform of the development process is an all-hands-on-deck exercise that requires an investment of public funds and political leadership that clearly understands and articulates the benefit of curtailing excessive bureaucracy.  Mayor Lee and the Board of Supervisors have been much more focused on economic growth than in the recent past, but for the time being, it seems that development rules are still the third rail of San Francisco politics. 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, 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. Copyright 2012 Reuben & Junius, LLP. All rights reserved.

​ In a long-awaited decision, the California Supreme Court issued its ruling yesterday in Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, S186149.  The Pinnacle case involves a condominium homeowners association’s claims against the project developer for construction defects.  The project CC&Rs require such claims to be submitted to binding arbitration, rather than jury trial.  The Court held that the arbitration provisions for construction defect claims against the developer are enforceable against the homeowners association, unless proven unreasonable.  The Court’s decision in Pinnacle reversed the Court of Appeal’s decision from 2010 which found such arbitration clauses to be invalid. The Court’s rationale for upholding the CC&Rs arbitration clause includes: ·        CC&Rs constitute a contract between the developer and the homeowners association and its members. ·        Under governing law in California for condominium projects, the Davis-Stirling Act, the homeowners association and its members have either expressly consented or are deemed by law to have agreed to the terms of the CC&Rs.  Justice Baxter, writing for the Court, explained that “…the covenants and terms in the recorded declaration…reflect written promises and agreements that are subject to enforcement against the Association.” ·        Notwithstanding previous appellate court decisions to the contrary, the CC&Rs arbitration clause is consistent with the Davis-Stirling Act and is not unconscionable. ·        The Federal Arbitration Act, the California Arbitration Act and the Davis-Stirling Act express a strong public policy favoring arbitration as a speedy and relatively inexpensive means of dispute resolution.   The Pinnacle decision is a victory for condominium project developers who desire to resolve such claims through the more streamlined and, in some cases, less expensive process of arbitration, rather than a jury trial.  Also important is that the Court’s decision provides some level of certainty concerning the enforceability of arbitration clauses in CC&Rs for construction defect claims, where trial and appellate courts have been issuing inconsistent decisions for several years.  The Supreme Court’s ruling in Pinnacle should serve to resolve such inconsistencies, and provide guidance to developers in drafting CC&Rs for condominium projects.   We expect that the California Department of Real Estate may issue updated arbitration guidelines in light of the Pinnacle decision.   Should you have any questions regarding the Pinnacle decision or alternative dispute resolution provisions in condominium project CC&Rs, please contact Kevin Rose or 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, 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. Copyright 2012 Reuben & Junius, LLP. All rights reserved.

​The recent California Court of Appeal decision William L. Lyon & Associates, Inc. v. Superior Court ((2102) 204 Cal.App.4th 1294) may have a large impact on the application of liability limitation provisions in broker agreements.   In Lyon, the buyers sued their residential broker (Lyon) almost three years after the closing for breach of contract, breach of fiduciary duty, negligence and fraud.  The buyer-broker agreement had a limitation provision requiring any related claim be brought within two years after representation.  The broker, who represented both seller and buyer in the transaction, argued that the claims were time-barred both by statute and the contract.  The Court of Appeal held that the statute of limitations for all of the claims had not expired despite the expiration of the agreement’s time limit of liability. The buyers’ claims arose because the broker allegedly failed to disclose that the sellers had intentionally covered up defects in the house.  Lyon argued that the claims were not timely raised pursuant to Civil Code Sections 2079 and 2079.4.  Those statutes provide that a seller’s broker can be held liable to the buyer for up to two years after the closing for failing to disclose facts related to a reasonably diligent inspection of residential property.  Since the claims were filed almost three years after the closing, Lyon argued that the claims were not timely.  The Court of Appeal decided that this statutory provision did not apply because these issues arose out of the broker’s obligation to buyer as its own broker, not as the seller’s broker. The breach of contract claim was based on the allegation that Lyon failed to conduct an adequate inspection prior to the sale.  The statute of limitations for a contract claim is normally four years, but parties may contract around this, provided the timeframe is deemed reasonable as a matter of law.  Although there was a reasonable two year timeframe in the agreement, the buyers argued that they did not discover this latent defect until later due to the other parties’ fraud so the two year term of liability should not be triggered until such discovery was made.  Generally, a cause of action arises when the wrongful act is committed, not when it is discovered by the plaintiff.  However, in certain cases the courts will apply the “discovery rule”, in which the statute of limitations does not start running until the breach is discovered.  In this case, the Court of Appeal held that because the buyers were unable to see or appreciate the breach when it occurred (as it was a latent defect), the two year time period was tolled until the discovery of the breach was made.  The court also mentioned that the application of the “discovery rule” was appropriate here as the relationship between the parties was that of a special trust. Finally, Lyon argued that the remaining “tort” claims like breach of fiduciary duty and negligence were not timely filed due to the two-year contractual limitation.  As the buyers’ broker, Lyon owed a fiduciary duty to the buyers requiring the highest good faith and undivided service and loyalty.  The court highlighted that even if the buyer-broker agreement had not been signed, Lyon would still owe such a common law duty to the buyers.  As a result, the Court of Appeal held that the contractual limitations time period in the buyer-broker agreement did not apply to the breach of fiduciary duty claims, like fraud, negligence and negligent misrepresentation.  As those remaining claims have longer statute of limitation periods (for example, breach of fiduciary duty not amounting to fraud is four years) the statute of limitations had also not elapsed on those claims. Lyon illustrates that although parties may contract around statute of limitation periods for certain claims, the courts will consider the type of breach in determining whether the “discovery rule” should be applied to possibly extend the timeframe.  Further, buyers, sellers and brokers should be aware that claims based on fiduciary duties are not usually governed by contractual limitations set forth in a contract.  Therefore, all parties should be cognizant of statute of limitation timeframes for those particular causes of action. 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, 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. Copyright 2012 Reuben & Junius, LLP. All rights reserved.

The Central Market neighborhood of San Francisco, roughly defined as the stretch of MarketStreet between 5th Street and Van Ness Avenue, is considered a vital segment ofthe urban core of the San Francisco Bay Area. Central Market is unique because it is centrally located in the City,has long served as a regional center for arts, entertainment, and retail, andis directly adjacent to the Civic Center.  But Central Market also has long suffered from high poverty and crime rates, high vacancies, physical blight, lack of private investment, and other social problems. Eighteen months ago, making the recovery of Central Market one of the central policy priorities of his administration, Mayor Lee launched the Central Market Partnership.  Many were dubious.  It seemed yet another ambitious and well-intentioned attempt to create change where change had stubbornly and persistently refused to take hold over the years.  Yet at a recent “lunchtime forum” on rental housing hosted by San Francisco Planning and Urban Research, Meg Spriggs of Avalon Bay called Mayor’s Lee’s efforts to revitalize San Francisco’s  Central Market area the “role model for neighborhood revitalization.”  That’s high praise from one of the earliest believers in the potential of Central Market, and raises the question, is Central Market becoming a reality? The Central Market Partnership is a public/private initiative to renew and coordinate efforts to revitalize the Central Market neighborhood. The City’s goal is to restore Central Market as San Francisco’s downtown arts district while incentivizing new residential development, retail, restaurants, services and employers to take advantage of the transit and downtown location, and serve the adjacent Tenderloin and SOMA neighborhoods.  The Mayor’s Office of Economic and Workforce Development is leading this multi-agency effort. One of the central components of the Central Market strategy has been the Central Market/Tenderloin Payroll Tax Exclusion.  Dubbed the “Twitter Tax” by skeptics, the Tax Exclusion originally was perceived as a financial giveaway to keep Twitter in San Francisco.  Yet, over a year after Twitter made its decision to move to the Furniture Mart building at Market and Tenth Streets, numerous other milestones in Central Market suggest that revitalization efforts may be taking hold: ·       Two weeks ago, Dolby Laboratories, which has been headquartered in San Francisco since the 1970s, announced its purchase of 1275 Market St. for $109.8 million and plans to renovate and occupy the entire 385,000 square foot building;  ·       The Kor Group, which purchased the Renoir Hotel earlier this year, recently opened “A Temporary Offering” on the ground floor of the hotel, a collection of pop-up concepts that occupies virtually the entire block (tenants include FoodLab, the Rio Grande bar, and Trailhead, which is itself a retail collaboration);  ·       Trinity has begun construction of the second residential tower in its Trinity Plaza project, which will add over 400 dwelling units at Mission and Eighth Streets.  The entire Trinity Plaza project will occupy the blocks bounded by Market, Mission, and Eighth Streets, and the Stevenson Street terminus. Trinity Plaza includes 60,000 square feet of ground-floor retail space, with renovated street frontages along Market, Mission, and portions of Eighth Street;  ·       CityPlace, a stalled retail project on Market between Fifth and Sixth Streets, was recently purchased by Cypress Equities, a Dallas-based firm that plans to move forward with a sleek, glass-fronted, five-story mall; and  ·       Other technology companies following Twitter to Central Market include Yammer, One King’s Lane, ZenDesk, Zoosk, and CallSocket.  Not only is technology coming to Central Market, but their financiers are coming as well.  Sand Hill Road venture capital firm Benchmark Capital recently signed a lease to take two floors at 998 Market, the famously crime-ridden corner of Sixth and Market.  And venture capital firms have shown interest in the 70,000 square-foot building at 1161 Mission Street.  Michael McCarthy, who leases the building for the owner of 1161 Mission, recently told the Business Times, “If I had told you six months ago that the 1100 block of Mission Street would be seeing love from VCs, you would have had me committed.  I thought it would take Twitter moving in and more gentrification of the neighborhood before people would start to follow.  I missed it by about six months.  All of a sudden, it’s real.” Another issue is that Central Market needs residential development to complement its growing commercial segment.  But, as expressed at the SPUR lunchtime forum on rental housing, the traditional roadblocks to residential development in San Francisco are ever-present in Central Market.  Eric Tau of AGI Capital pointed out that in Oakland, a 200-unit apartment project generally would qualify for the in-fill exemption under CEQA, but that would never happen in San Francisco because of the threat of lawsuits.  This means that the more protracted environmental review of an EIR or a Mitigated Negative Declaration is required.  The additional time and costs that accompany such review makes apartments more expensive and more difficult to build. And Mr. Tau, Ms. Spriggs, and the third panelist, Amir Massih of Archstone Trust, all agreed that City policies requiring the development of larger apartments in order to keep families from leaving the City do not achieve their intended goals and hinder development because the larger units do not get rented.  Notwithstanding these challenges, the potential for a revitalized and thriving Central Market seems more and more likely, and is an intriguing opportunity for the development community.  We will continue to monitor the progress of Central Market and report with updates.  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, 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. Copyright 2012 Reuben & Junius, LLP. All rights reserved.

Like many other California municipalities, San Francisco continues to make efforts to increase its tax revenue while encouraging business growth. Unfortunately, these goals are not always compatible. In an effort to level the playing field between businesses with few employees and those with many, Mayor Lee and Supervisor Chiu have proposed a new gross receipts tax on businesses that would replace the current payroll tax. According to the draft legislation’s findings, the current payroll tax “discourages job creation and economic growth, lowers wages, and provides an unstable revenue stream.” The findings go on to state that by imposing a gross receipts tax, the tax burden will be better distributed “based on a business’s ability to pay.” While some of these concerns with the payroll tax may be legitimate, the proposed legislation is yet another financial burden on real estate development and ownership. The Mayor’s office has worked to make the gross receipts tax “revenue neutral”, so that there is no net increase in taxes on all San Francisco businesses compared to the payroll tax. (However, business license fees would increase under the legislation and raise an additional $13 Million in new revenue.) There is no question that certain industries, including real estate, will be hit harder than others. Many property owners are concerned that the additional expense could slow the recent recovery. Overview of Proposed Gross Receipts Tax The gross receipts tax would impose different tax rates based on the type of business. The rates would be progressive, determined by the total amount of gross receipts received. For the most part, “gross receipts” include all payments of cash and property of any kind received by the business. There are no deductions or exclusions for companies that receive payments for client costs, cost of materials, or other expenses. The tax would be imposed regardless of where the revenue is generated – which could have a major impact on companies that make their headquarters in San Francisco. To help alleviate this burden, certain industries (not real estate) are allowed to determine 50% of the tax based on the percentage of payroll that is located in the City. Deductions are allowed for taxes imposed on retail sales or taxes that are reimbursed by a separately stated charge (for example, sales taxes, parking taxes, or real estate taxes paid by a tenant). The new tax structure would be phased in over a five year period, based on a formula that allocates a portion of the tax to gross receipts, and a portion to payroll. The real estate industry would be subject to the following gross receipts tax rates: Amount of Gross Receipts / Rate $0-$1M / 0.3% $1M-$2.5M / 0.325% $2.5M-$25M / 0.325% Over $25M / 0.4% Amounts received for the sale of real estate are excluded from the gross receipts tax, assuming that a transfer tax is paid. Also, rental income is only part of gross receipts if derived from properties located in the City. Rent controlled properties may deduct 50% of their gross receipts. These rates are in the middle of the pack compared to other industries. For comparison, here is a brief overview of the other rates: Retail 0.075% to 0.175% Food and Manufacturing 0.125% to 0.45% Real Estate 0.3% to 0.4% Construction 0.3% to 0.45% Professional/Financial/Tech 0.4% to 0.55% Private Education/Health 0.525% to 0.65% Other industries will certainly have concerns about the real estate tax, but we will focus on some of the concerns raised by the real estate community. Real Estate Issues The reaction from many in the real estate industry is that property owners already bear a high burden of taxes and City fees, beginning with the development of a project. Developers are well aware of the many fees to build or renovate a project in San Francisco, not to mention the length of time and political uncertainty. Property owners are also subject to real estate taxes, transfer taxes on sales (which just increased in 2010), and complying with other state laws and local ordinances applicable to real property. While in some cases the gross receipts tax will be passed on to tenants as part of common area expenses, this will further burden businesses that are located in San Francisco, and these businesses will essentially be paying the gross receipts tax twice. In addition to the tax rate, the following are concerns and comments that have been raised by the industry: Gross receipts should exclude payments made by tenants for particular expense reimbursements or services such as parking fees, direct repairs, and tenant improvement costs There should be an exception to avoid double taxing real estate receipts when distributions are made to partners or members of an LLC that also do business in San Francisco Gross receipts should exclude any amounts necessary to repay initial capital contributions and acquisition loans, since these expenses are unique to the real estate industry, and this expense is already taxed as part of transfer taxes Clarify that receipt of loan funds, equity contributions, and insurance proceeds are not part of the definition of gross receipts Clarify that real estate development work and real estate consulting are not subject to the higher tax rate applicable to “Professional Services” Tenant groups also are concerned that a tenant improvement allowance paid to the tenant could be caught up in the definition of gross receipts Status of the Ordinance Mayor Lee’s ordinance was scheduled to be heard today at the Budget and Finance Committee. In order to be included on the November 2012 ballot, the Board of Supervisors must approve the legislation by August 2, 2012. A potential competing measure, proposed by Supervisor Avalos, includes even higher tax rates and is also being considered by the Board. We will keep you updated as the legislation proceeds. 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 &

Mayor Lee Proposes Transformative Affordable Housing Reform You’ve got to give it Mayor Lee – he is thinking big.  For a guy who has spent his career working within the confines of local government, now in his new role as the City’s top policymaker, he has shown a bold willingness to make big changes to how local government is run.  The latest example of our Mayor’s big-thinking is his current proposal to completely restructure the way affordable housing is funded in San Francisco. It’s not hyperbole to state that affordable housing production in San Francisco is at a crisis point.  A number of major events – the global economic downturn, the end of California Redevelopment, significantly reduced state and federal funding – have conspired to make housing for middle- and lower-income families almost non-existent in the City.  Just last week, the Wall Street Journal published an article on the difficulty of renting an apartment in San Francisco, quoting one former New Yorker making the move here saying “finding a rental home in San Francisco is ‘so much more cutthroat’ than in Manhattan.”  Needless to say, this is not an area where we want to be beating New York. Enter Mayor Lee, whose common-sense, no-drama approach to governing has won him a large mandate from a public tired politicians bickering over irrelevancies.  His proposed Housing Trust Fund, and the various components of the “deal” to fund it, could in one swift action provide a mechanism for increased affordable housing production, while significantly reducing the burden felt by developers of new housing. The Trust Fund The core of the affordable housing reform is the creation of a new Housing Trust Fund.  This fund would be administered by the Mayor’s Office of Housing, and would be used to: create, acquire, and rehabilitate housing affordable to households earning up to 120% AMI; provide loans to households earning up to 120% AMI for the use of down payments for the purchase of a new home; provide loans to households earning up to 120% AMI for the use of avoiding a homeowner’s loss of their home or rehabilitating housing; fund infrastructure improvements that would support increased density in the City; secure public bonds to be used to create, acquire, and rehabilitate affordable housing. Funding for the Trust Fund would come from several sources.  The City will kick in general fund monies each year, beginning with $20 million in the first year, increasing each year up to $50 million.  The Mayor expects much of these monies to come from hotel tax revenue and leftover funds from the Redevelopment Agency.  The remaining amount will come from two new sources of revenue. Many of you have probably already heard that the Mayor and Supervisor Chiu will be introducing a ballot measure to change the payroll tax the City charges businesses into a gross receipts tax.  If passed, new business registration fees are expected to generate $13 million, to be put towards the Housing Trust Fund. Mayor Lee is also proposing a new transfer tax increase of 0.2% on transfers of real property sold for more than $1 million.  This will spread the burden of affordable housing costs beyond just new residential developments to include all sales of such properties.  Affordable housing funding is currently unstable, due to the fact that most funding comes from new residential development, which goes up and down depending on the development cycle and the economy.  Since existing property sells every year in San Francisco, this will provide a much more stable source of affordable housing funds.  As we’ve written before, this is also a more equitable way to pay for affordable housing – is there any reason why existing homeowners should not bear any of the affordable housing burden? Some may argue that limiting the transfer tax to just sales of over $1 million is not equitable in itself.  Indeed, roughly 19% of the residential property sales in San Francisco in May 2012 were for homes of $1 million or more, according to Pacific Union International.  Board of Supervisors progressives John Avalos, David Campos, Jane Kim and Eric Mar have put a competing transfer tax increase on the ballot for this November, but it would only increase the transfer tax on the sale of properties for more than $2.5 million. Relief for Residential Developers And now for the good stuff.  Mayor Lee’s Housing Trust Fund initiative would also reduce current affordable housing burdens on residential developers.  These changes include: Reducing the citywide on-site below-market rate (“BMR”) requirement from 15% to 12% (off-site and affordable housing fee would not change); Prohibits the City from increasing the BMR percentages for on-site BMR, off-site BMR and the affordable housing fee; Prohibits the City from adopting any new exaction or fee to be used for affordable housing; Increases the unit count threshold subjecting residential projects to the Affordable Housing Program from 5 to 10 units. It goes without saying that this is a significant improvement on the current affordable housing burden on residential developers.  It’s not often in San Francisco that there is a serious discussion about reducing exactions and fees on new development.  If enacted, all of these improvements (except for the Affordable Housing Program threshold increase) would be written into the City Charter, meaning it would take another Charter amendment to change the on-site BMR rate or add any new affordable housing fees. The fate of the Housing Trust Fund is in no way secure at this point.  The reform package is made up of several different legislative vehicles – the Trust Fund, the payroll/gross-receipts tax reform and the transfer tax increase are all separate ballot measures to be voted on separately this November.  The Affordable Housing threshold increase is an ordinance that needs to be passed by the Board.  That said, the Mayor has already lined up significant support.  The Housing Trust Fund charter amendment is co-sponsored by Supervisors Wiener, Olague, Kim, Avalos and Mar.  The payroll/gross-receipts tax reform is co-sponsored by Supervisor Chiu. 

Under existing laws, housing units and SROs may be converted to student housing without special regulation by the Planning Code. The proposed ordinance would regulate the field for the first time. A significant goal of the proposed ordinance is to prevent existing forms of housing from being converted to student housing. Another goal of the ordinance is to enable the City to monitor student housing units to ensure that if the units return to unrestricted residential use, the City would be able to collect fees for the conversion. On June 21, 2012, the Planning Commission approved a revised draft ordinance regarding student housing. The proposal will now move on to the Board of Supervisors Land Use Committee for further consideration. The student housing proposal, in its current form, defines student housing as a dwelling unit, group housing, or an SRO that is occupied by students of an accredited post-secondary educational institution. In addition, the housing must be owned or controlled by the educational institution. Conversions from any existing form of housing to student housing would be prohibited with the exception of: (1) housing that was built by the post-secondary educational institution; (2) housing in a convent, monastery, or similar religious facility; or (3) is on a lot directly adjacent to a post-secondary educational institution that will own, operate, or control the student housing, so long as the lot has been owned by the post-secondary educational institution for at least 10 years. Projects that qualify for conversion of existing housing to student housing will be exempt from affordable housing requirements. Conversion in the other direction (from student housing to unrestricted residential use) can be accomplished only with approval from the Zoning Administrator, and only if the building owner has made an extensive and good faith effort to find another qualified educational institution to lease the space. Additional clarifications in the ordinance specify that student housing may be transferred from one qualified educational institution to another. Also, the definition of student housing has been revised to state that such housing may consist of all or a part of a building. Residential and SRO buildings that have been vacant for at least one year or underutilized for at least two years, and create blight, will be eligible for conversion to student housing with conditional use authorization. To be considered underutilized, a building would need to have an occupancy rate of 20% or less for at least 2 years prior to the application. The ordinance, as proposed, will apply to all residential buildings, including residential hotels. The goal of this provision is the rehabilitation of blighted residential hotel buildings in the Tenderloin neighborhood, although it is not restricted to that area. For construction of downtown student housing as additions for buildings in the C-3-G and C-3-S Districts that are not designated as historically significant, or contributory to a historic district, additional square footage above that otherwise permitted based on floor limits may be approved. Approval of bonus square footage above the floor area limit is subject to obtaining a conditional use authorization. Open space requirements for new student housing will be one third of the amount normally required for a dwelling unit. Finally, all new student housing in the South Park District will be subject to obtaining a conditional use authorization. The proposed student housing ordinance now goes back to the Board of Supervisors Land Use Committee for further consideration. Overall, it encourages construction of new student housing, and prohibits, except in very limited circumstances, the conversion of existing housing to student housing. We want to thank the San Francisco Housing Coalition who played a significant role working with the Planning Department and the sponsoring Supervisors on the proposed ordinance, and was successful in its efforts to encourage construction of new student housing. 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, 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. Copyright 2012 Reuben & Junius, LLP. All rights reserved.