Law \ Legal

Cities in the San Francisco Bay Area are frantically working to finalize their state-mandated “housing elements” in their General Plans by the January 31, 2023, deadline imposed by the California Department of Housing and Community Development (HCD). For Bay Area cities like San Francisco, Oakland, San Jose and Berkeley, the plans must be approved by HCD on or before January 31, 2023. California municipalities have extra incentive to get their housing elements approved this year, because the failure to meet the deadline may subject them to a remedy known as the “builder’s remedy.”

The failure of cities in California to adopt and implement adequate housing elements as part of their General Plans has contributed to the state’s serious housing affordability crisis. The “builder’s remedy” incentivizes cities to meet housing element deadlines, because failure to do so could cause cities to lose control over certain land use entitlement decisions for projects that include housing under the state’s Housing Accountability Act (HAA).

The concept of a housing element is not novel. California’s housing element law, in effect since 1969, has required California cities to produce a plan to meet the housing needs of all individuals at all income levels within the city. According to the LA Times, however, only two of 539 cities and counties met their housing production goals during the eight-year period ending in 2014.

In 2019, only 33 cities or counties in California out of 539 issued enough permits to meet housing targets. The city of Los Angeles was a particularly egregious offender, issuing fewer than half as many permits as recommended for very low, low and moderate-income housing.

Under the HAA, passed in 1982 and most recently amended in 2017 by Senate Bill 167, cities or counties whose housing elements are not compliant with state requirements lose authority to approve or deny projects which involve affordable housing as defined in the HAA (i.e., very low, low or moderate-income housing). Low-income households include persons or families whose incomes do not exceed 80% of the median income in the area. Moderate-income households include “persons and families of low or moderate income whose income exceeds the income limit for lower income households” or “persons and families whose income does not exceed 150[%] of the median income for the county in which the persons or families reside.” In other words, affordable housing may extend to housing for individuals and families whose income is not more than 150% of the median income for the county where they live.

The HAA provides that a city must not disapprove housing development projects for very low, low or moderate-income households, or an emergency shelter, unless the city proves one of the following conditions exists:

• The city’s housing element is substantially compliant with the Housing Accountability Act, as determined by HCD, and has met or exceeded its regional housing needs for the housing type provided by the project.
• The project may result in significant, unavoidable, quantifiable and direct impact on public health or safety.
• The project cannot feasibly comply with state or federal law without the project losing its status as affordable housing.
• The site for the project is zoned for resource preservation or agriculture or does not have adequate services for water or wastewater.
• The city’s zoning and designation for land use does not allow the project, and a housing element has been adopted by the city in accordance with statutory deadlines.

Prior to 2017, there was limited means of enforcement in the HAA. However, in 2017, the state of California passed Senate Bill 72, which granted HCD authority to determine if a city or county’s housing element is out of compliance and to refer violator cities to the California attorney general. The bill conferred authority onto HCD to enforce the housing element law by reviewing housing elements presented by local jurisdictions and taking action. Also in 2017, Senate Bill 35 was passed to streamline local agencies’ approval of multi-unit housing projects. Senate Bill 35 amended Government Code Section 65913.4 to require local entities to streamline approval of certain affordable housing projects by providing a process of ministerial approval.

Additionally, Senate Bill 828, passed in 2018, now requires the inventory of land for local governments to meet 125% of housing needs for all income levels. The bill achieved this through requiring cities and counties to rezone land in their communities to permit substantially more homes than previously planned. Together, these changes put pressure on cities to either meet state requirements or become subject to the Housing Accountability Act’s builder’s remedy.

If deadlines have passed and HCD deems the cities not “substantially compliant” with the housing requirements set by the state, cities will not be able to use their general plan or zoning standards to disapprove a housing project, so long as the housing project meets certain affordability requirements as defined in the HAA. Specifically, for the project to qualify, either 20% or more of the units must be affordable to low-income residents, or 100% of the units must be affordable to moderate-income residents.

The “builder’s remedy,” therefore, allows developers of affordable housing-related projects to bypass existing zoning codes and general city plans that are not in compliance with the state’s housing element law. Developers taking advantage of the builder’s remedy would thus have the opportunity to build larger and denser projects than would otherwise be allowed under normal city planning rules.

This isn’t just theoretical—builder’s remedy projects have already been pushed through in cities elsewhere in California, where the deadline for an HCD approved housing element has already passed. For example, Santa Monica missed its deadline to update its housing element to meet HAA requirements. Developers took advantage of this opening and applied for 16 housing projects. These projects involve 4,562 housing units in buildings up to 15 stories tall. The projects were allowed to proceed. Similarly, when Redondo Beach missed its deadline for a HCD-approved housing element, Next Century Power submitted a proposal to replace a former beachside powerplant in Redondo Beach with 2,300 homes, and more than 450 units qualifying as affordable housing.

The builder’s remedy window in Santa Monica, which was open for nearly a year after its October 15, 2021, deadline, closed on October 14, 2022, when HCD approved the city’s housing element. However, the remedy may still present an opportunity for developers in northern California cities like San Francisco, Berkeley, Oakland and San Jose. If cities in the Bay Area miss their January 31, 2023, deadlines to approve new, compliant housing elements approved by the HCD, the builder’s remedy could require the city to approve building permits for a qualified housing development project larger than would otherwise be allowed under the existing zoning laws of the city, provided a developer submits an application for such a project before the city updates its housing element to the satisfaction of the HCD.

Some cities have started pushing harder to meet their housing element deadlines. San Francisco’s Planning Commission, for example, had to make amendments to their housing element in real time to address issues raised by the HCD before unanimously approving it on December 15, 2022, in a race to meet the January 31 deadline. The San Francisco Board of Supervisors unanimously approved that updated housing element at its first reading on January 24, 2023, and is thus potentially on track to adopt it at second reading at its January 31 meeting, with approval by the Mayor to follow. Prior to the January 24 approval, HCD gave a preliminary approval to the San Francisco Board of Supervisors, indicating that this housing element is likely to be approved on January 31. So San Francisco just might have an HCD-approved housing element in place by its HAA-mandated deadline.

The San Francisco Board of Supervisors is scheduled for a final vote on the proposal on January 31, but whether it will be approved on time remains to be seen given ongoing investigation and discussion regarding the current draft.

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This week’s round-up explores new artificial intelligence tools and their projected impact on real estate agents, key trends driving proptech innovation, barriers to adopting drones in the construction industry, and more.

• Artificial intelligence (AI) has the potential to become an invaluable tool to streamline the selling journey of a property, empower buyers to make informed decisions, and enhance the work of real estate agents. (Alexandra Cain, The Urban Developer)
• Miami real estate agents experiment with the new artificial intelligence tool, ChatGPT, which can generate text based on simple prompts, to write house listings, communicate with developers, and produce content. (Martin Vassolo, Axios)
• Asset owners in Asia and Europe turn to artificial intelligence to collect ESG information across public and private markets, including from residential buildings in Japan. (Hugo Cox, Asian Investor)
• 3 key trends drive proptech innovation as it continues to impact how commercial real estate owners navigate an industry that’s becoming more technology reliant. (Will Moxley, Forbes)
• The use of drones in the construction industry has been increasing by more than 200% annually in recent years, but 6 key barriers slow its adoption rates. (Scott Howe, Commercial UAV News)
• The construction industry faces an increasing problem of slow payment collection due to lack of digital processes, which is negatively impacting cash flow stability and business growth. (PYMNTS)

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This week’s round-up dives into projections on construction inventory in the housing market, the first 3D-printed house, a replica of South Korea’s Seoul in the Metaverse, and more.

• Shifts that occurred last year and at the peak of pandemic have transformed the real estate industry, with 2023 emerging as something of a barometer in the manifestations of those changes. (Tony Cantu, Mortgage Professional America (MPA))
• Total new construction of homes across the country is expected to drop by 200,000 dwellings per year until 2026 as skill shortages and supply issues continue to bite. (Sowaibah Hanifie, 7 News)
• Almost all economists and contractors expect some sort of an economic slowdown this year. (Sebastian Obando, Construction Dive)
• From electric and autonomous equipment to AI-powered tracking solutions and cargo-carrying dirigibles, the construction industry’s future was on display in Las Vegas last week. (Robyn Griggs Lawrence, Construction Dive)
• Construction has started on the first 3D-printed, two-story house in Houston, TX. (Stephanie Whiteside, News Nation)
• As part of a three-year effort to expand its public services, Metaverse Seoul will allow users to take their avatars to tax offices, access youth counseling and read e-books. (Cam Thompson, CoinDesk)

To kick of 2023, this week’s news round-up dives into contech inventions projected to impact the industry, shifting home prices and buyer confidence, investors prioritizing decarbonization efforts, and more.

• From holograms to robots, these 6 contech innovations are projected to tackle some of construction’s toughest issues. (Robyn Griggs Lawrence, Construction Dive)
• Manufacturing and data center projects will support the U.S. construction industry as work begins to slow on retail projects, warehouses and offices. (Sebastian Obando, Construction Dive)
• Despite macroeconomic headwinds, doubling down on decarbonization efforts is projected to be top-of-mind for investors and occupiers in 2023. (JLL)
• A monthly housing sentiment index showed confidence in the housing market improving, as home prices have been falling since June 2022. (Diana Olick, CNBC)
• Real estate sales of $10 million-plus in New York and South Florida show signs of significantly decreasing in 2023, according to a new report. (James Tarmy, Bloomberg)
• China plans to relax restrictions on developer borrowing, easing back the “three red lines” policy, which was unveiled in August 2020 to tackle property developers’ borrowing by restricting the amount of new borrowing they can raise each year. (Bloomberg News)

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Starting January 1, 2023, real estate developers in Oregon and California will no longer be required to build off-street parking facilities for certain projects located near public transit. Both states enacted new rules during the course of 2022 which are effective as of the beginning of 2023, and which seek to reduce the costs of building at least some new projects in major population centers.

In California, A.B. 2097 was signed by Governor Gavin Newsom in September, and prohibits city governments throughout the state (including in charter cities) from enforcing any local land use provisions which would require the developer to build parking spaces as part of their project if the project is located within one half-mile of a major public transit stop. The law applies to both residential and commercial projects. Cities can continue mandating parking for individual projects if they find that doing so is important to support the development of affordable housing—this exception was added to allay concerns that the bill would undermine “density bonus” programs which have become an important tool for the promotion of new affordable housing development around the state.

In Oregon, following a 2020 executive order by Governor Kate Brown, the state Land Conservation and Development Commission (the body responsible for land use and planning regulation in Oregon) embarked on a two-year rulemaking process which culminated in July of 2022 with the approval of a set of “Climate Friendly and Equitable Communities Rules.” Like the California legislation, these rules (in part) limit the ability of Oregon’s most populous cities to enforce parking minimums for new development projects. Unlike the California law, the Oregon rules encourage cities simply to repeal their parking mandates entirely. Cities subject the new rules which choose not to repeal their parking mandates in full must, as an alternative, adopt new local policies to reduce the amount of land dedicated to parking in certain geographies or in connection with certain uses.

The city of Tigard, Oregon, a suburb of Portland, has already chosen to repeal its parking minimums completely, making it the first city in Oregon to do so. Some affected cities have been less welcoming of the new state mandates, and have brought a lawsuit against the state to prevent the rules from taking effect, but for now the rules remain on the books.

Affordable housing and climate change advocates have long sought to repeal “parking minimums” in local jurisdictions around the country, arguing that building more parking comes at the expense of additional habitable area in a project and encourages people to continue driving their personal vehicles, even in urban settings where walking and mass transit are good options. And because off-street parking adds to the cost of developing a project, parking minimums ultimately result in higher rents for residential tenants, whose monthly payments cover the cost of adding parking to the development.

Parking minimums have also occasionally frustrated developers around the country. Building off-street parking is expensive—building a parking structure can cost between $15,000 and $30,000 per parking space—and takes up valuable square footage which the developer might have wished to design for a more profitable use. A Los Angeles study concluded that the cost of each square foot of parking area was about $21 higher than the marginal value of that parking area, suggesting that developers could realize higher profits if they were not always required to meet strict off-street parking quotas.

Other studies have confirmed that when local governments relax their parking minimums, developers will often choose to reduce how much parking they build, in some cases all the way to zero. One study examined the extent to which developers chose to include parking in their projects in Seattle after the city reduced parking minimums in many areas, and fully eliminated them in some others. The research found that developers rarely built more parking than they were required to, even after those requirements were decreased. And in parts of the city where no parking was required, nearly 30% of new projects were built without parking entirely. Similar results were observed in London: After its parking minimums were abandoned, the number of new parking spaces built declined dramatically.

This research suggests that absent a local parking mandate, developers are well-equipped to determine just how many parking spaces they should build to keep their projects profitable.

Abolishing parking minimums has become a trend in U.S. cities seeking to bolster development in their urban center, but so far only California and Oregon have enacted parking reform at a statewide level. San Francisco, Minneapolis, Anchorage, Buffalo and Hartford, to name several examples, have all done away with parking minimums citywide. Some cities have imposed parking maximums in certain geographies—i.e., caps on the total number of off-street parking spaces that can be included with new development projects. For instance, San Francisco caps parking in most residential districts at 1.5 spaces per unit (though in some cases the cap drops to 0.5), and Portland caps parking in certain residential zones at 1.35 spaces per unit. In January 2021, the City of Berkeley set a maximum of 0.5 parking spaces per unit in residential developments which are (i) within a quarter mile of a major transit stop, or (ii) along a transit corridor that receives services at 15-minute intervals during peak commute hours.

Policymakers around the country are increasingly turning to local land use regulation as a tool for battling climate change and addressing the nationwide housing affordability crisis. More cities and states may soon follow California and Oregon in pursuing parking reform as part of these larger initiatives. Whether these reforms have a long-term impact on how many parking spaces are built, the cost of housing, or how reliant people are on their personal cars, remains to be seen. For now, in these two states at least, these new rules may improve the equation for developers by allowing them to decide for themselves how much parking to provide in many urban areas on the West Coast.

As we close out the last remaining weeks of 2022, all eyes look ahead to 2023. Below is a quick snapshot highlighting three trends and predictions that may continue to shape the commercial real estate landscape in 2023.

1. Office space and the digital economy present attractive investment opportunities and potential. Even with all of the chatter about office vacancies during the last three years, according to Moody’s Analytics, “it’s important to note that none of the regions across the U.S. have seen office vacancy rates dip below their pre-pandemic Q4 2019 levels.” This might be due to creative and reimagined office spaces as the return to office continues. The hybrid work format and flexibility in spaces will continue in 2023.
2. Data analytics and Proptech will continue to play a larger role, allowing property owners and tenants to collaborate to provide more efficiency, whether to achieve sustainability goals or leverage technology like immersive experiences to entice tenants to new spaces. An increase in demand for technology to solve issues will most likely continue in commercial real estate.
3. ESG will continue to be a trending topic, particularly around regulatory and disclosure requirements. In 2022, we saw commercial real estate taking notice if increased ESG enforcement. In 2023, the industry will take specific and actionable steps to apply ESG (and leverage smart technology in commercial real estate) to reduce carbon footprint and greenhouse emissions in commercial buildings, collaboratively with tenants and retail locations.

As 2022 draws to a close, here is a brief description of recent environmental and regulatory law rulings, as well as new federal rulemaking proceedings.

United States Tax Court

Green Valley Investors, LLC et al, v. Commissioner of Internal Revenue
On November 9, 2022, the Tax Court agreed with the taxpayers that the IRS’s use of administrative Notice 2017-10 to impose substantial tax liabilities violated the Administrative Procedure Act (APA). The notice was the agency’s response to a provision in the American Jobs Creation Act of 2004 which increased the penalties for engaging in a reportable transaction understatement. Here, at issue was the value of charitable deductions generated by the creation of environmental easements made in connection with land transactions. These claimed deductions amounted to more than $60 million. The petitioners argued that IRS Notice 2017-10, which authorized such large penalties, was in fact a “legislative rule” whose promulgation should have complied with the notice and comment requirements of the APA. The agency contended that the Congress, by implication, absolved the IRS from the notice and comment requirements. The court agreed with the petitioners and set aside Notice 2017-10 and the imposition of penalties under Section 6662A of the Jobs Creation Act. On December 8, 2022, the IRS published a notice of proposed rulemaking that would correct the APA deficiencies noted by the courts. (See 87 FR 75185.)