March 14, 2024 - From the March, 2024 issue

David Waite on How California is Trying to Legislate Housing

With numerous bills, executive orders, and local measures all stirring the pot of how, when, and where housing in the State of California should happen -amongst those Mayor Bass’ own Executive Directive 1- the answer of just how successful the legislative efforts have been continues to be elusive, especially with similar attempts in Vancouver, Chicago, and Syndey having appeared to miss the mark. TPR, to inform the debate, spoke with David Waite, partner and real estate guru at Cox Castle, about how the many legislative efforts are aiming to change how housing in California is done. In the interview, Waite talks about ED1, California’s supply-demand paradox, and UCLA’s exciting acquisition of the Westside Pavilion shopping mall.

David Waite

“…while we are beginning to streamline approvals the question of whether any of this will actually reduce the cost of housing remains a fair question. It may not, but reducing the permitting time remains an important goal. It will incentivize the development community.” – David Waite

TPR: David, on LA Mayor Bass’ first day in office, she issued Executive Directive 1 (ED 1) to accelerate the pace and lower the cost of building affordable and temporary housing.   What’s been the result to date?

David Waite: From a land use and permitting perspective, by an objective measure, it has gone well.

For those who are willing to do 100% affordable housing, and those developers and housing providers that already have expertise in the 100% affordable housing space, because they know tax credit “LIHTC” financing, opportunities--and the challenges of doing those projects--, have substantially taken advantage of ED1, to the extent that it is providing a ministerial streamlined approval pathway for new affordable housing projects. It has been robust in terms of not only the number of units that have been approved but also the number of units that are currently in the pipeline for approval. At last count, I think there are approximately 16,000 new affordable units that have been applied for under ED1. Of course, Mayor Bass and the City Council now want to codify ED1 to make permanent provisions in the city code so that it doesn't have an expiration date. By way of comparison, since the inception of ED1 in late 2022, throughout 2023 the city doubled the number of approved affordable units from the preceding year. All of this is very positive from an entitlement perspective.

The program is not without some challenges in terms of implementation and execution. For example, projects that require a subdivision or parcel map don't qualify for ED1. There could be some fixes and refinements to the qualification requirements, which would make the program even more robust. The city has learned a great deal over the past 14 months and “fixes” and refinements to the program seem both predictable and inevitable.

For example, could there be some opportunity to have ED-1 include mixed-income as well as the 100% affordable projects? That could also be a positive change down the road.

Generally speaking, I think the program has been well received. The City and Mayor have posted some positive results and with the planned codification of ED1, that trend will likely continue, so long as the city does not create too many qualification and restrictive hurdles for the program.

One legal response was that YIMBY lawyers sued the City of Los Angeles for stalling affordable housing and single-family home zones.  What is your reaction to this lawsuit’s challenge, filed in concert with national efforts to expand enforcement of Pro-Housing laws?

The codification of ED1, it is specifically intended to exempt residentially zoned property in the R1 zones along with other exemptions that may narrow the projects that can qualify. What the administration is likely trying to do is to balance the locations where these projects should be built and can be built without adversely impacting single-family residentially zoned neighborhoods. I assume that again, the overriding expectation is looking at commercial corridors where we can use the commercially zoned land for higher-density, 100% affordable housing projects. They would also be reasonably located close to transit; maybe within a half mile from a major transit stop. It all seems to make sense from a planning and land use perspective.

At the same time, I understand the theory of YIMBY, which lies in the cutting out of such a large swath of opportunity sites for ED1 in and adjacent to single-family residential zones. There will of course need to be a compromise to balance where those sites adjacent to single family neighborhoods that are eligible for ED1.

David, some argue the acronym “YIMBY” ought more accurately be, “YIHBY”: “Yes/ In/ His/ Back/ Yard”. But moving on; your law firm, Cox Castle, produced a 2023 California Legislation Update on the impact of the State’s land use laws on housing production.  Please summarize and assess whether these new housing laws, usurping local control of planning, are having the impact forecast?

We seem to be at a transformative point in terms of increasing the supply of housing in the state of California. With the number of bills that the legislature has adopted and the Governor has signed in the last three years, it’s difficult to keep track of everything.

In terms of a historical perspective, we should go back to 1982. When the Housing Accountability Act became the law in California, the legislature clearly articulated that the goal was to significantly increase the approval and construction of new housing for all economic segments of California. Since 1982, the results have been substantially less than what the legislature intended through enactment of the HAA.

We are now seeing an aggressive legislative response with, among other laws, the adoption of  the Housing Crisis Act (2018), SB 330 including the right to vest projects based upon existing development standards, SB 35 f streamlining provisions, the new amendments to SB 35 under SB 423 -- all of these pieces of legislation, and many more, including the ADU legislation under SB 9, are creating pathways to permit and develop more housing throughout the state.…I often feel like I'm a tax lawyer trying to keep up with the volume of new housing legislation. Harmonizing all of the new legislative enactments and prioritizing these legislative enactments presents a unique challenge in and of itself, and the court’s will be grappling with those challenges in the coming years.

At the root of it, we are seeing positive developments with the enforcement and expansion of the Housing Accountability Act and legislative declarations to support housing at all levels. Now, there are more procedural mechanisms for ministerial approvals on housing projects, mostly at the affordable level. Some might characterize this as CEQA reform through the back door. I think the legislature has tried to strike sort of a grand bargain if you will, between affordable housing advocates, labor, environmentalists, and ultimately, managing local agencies in terms of their political unwillingness yielding to community opposition to approve more housing projects. That is what we now see in the proliferation of the exercise of the Builder's Remedy under the Housing Accountability Act.

Please elaborate on the intent of the “Builder's Remedy” provision within the California Housing Accountability Act, and how it's being employed?

The Housing Accountability Act provides the so-called “Builder's Remedy”, to be exercised against cities throughout the state that are out of compliance with the required updates to their housing elements. When a city is out of compliance, the Housing Accountability Act affords a developer the right to file a so-called “Builder’s Remedy” application with the city. The Builder’s Remedy voids the general plan and zoning controls over the property.  Under the Builder’s Remedy an applicant can apply it for greater densities which would otherwise be allowable under the general plan or the specific zoning designation for the property.

We're seeing applicants utilizing the Builder's Remedy in non-compliant jurisdictions to push projects forward. In some cases, these projects have been in the development pipeline for some time, and the city has been unwilling to move them forward. In other cases, these are new projects that have been filed by applicants who seek to take advantage of Builder's Remedy. We are also starting to see litigation involving the application of Builder's Remedy. For example, there is pending Builder’s Remedy litigation against the cities of La Canada and Redondo Beach. There are at least two important trial court rulings from both cases that validate the exercise of the Builder’s Remedy. We are likely to continue seeing more court cases coming out of the developers' exercise of the Builder's Remedy, including one or more appellate decisions in the future that will interpret the statute.

Is it fair to assume that two policy assumptions underly what has driven the many California legislature housing bills these last three years:

1)    That local governments have been a serious impediment to building adequate and affordable housing in California;

2)    That up-zoning cities and especially R1 zones will result in more affordable housing being built to meet market demand?

Is there any evidence to confirm that’s what is happening in California? In any high demand metro area?

It is difficult to paint with a broad brush on this question. Some cities have not stayed current with updating their housing elements to meet their RHNA allocations—either by intention or by poor planning and a degree of dereliction. These regional allocations refer to the amount of housing needed to be planned for, and the creation of entitlement pathways for the development of that housing at all levels; affordable housing, mixed-income housing, and market-rate housing. Some cities have not played by the rules, so to speak, while other cities have clearly been playing by the rules as they commit their best efforts to developing housing at all levels.

So, it is difficult to generalize. When you analyze the directives coming out of HCD in Sacramento, many are highly critical of cities that are failing to update their housing elements to comply with the requirements of the Housing Accountability Act. Those are pretty strident indictments, as some cities are literally not complying with the legal requirements to update their housing element. Yet again, it's too much to generalize and say that this applies to every local government that is out of compliance. Clearly, this has resulted in a very “public” conflict between local governments jealously guarding their land use controls and their purview over permitting and entitlements, with the state of California coming down with a heavy hand under the Housing Accountability Act, to mandate cities get their act together and start approving these projects. Right now, this “home rule” conflict is being played out across the state, and in many jurisdictions between the state and local government. I don't think it's going to go away anytime soon.

Again, is there any evidence that the State actions you’ve mentioned- including the RHNA metrics and LA’s ED1 have produced more affordable housing in the jurisdictions they apply to?

You know, if you look at the City of Los Angeles, and you look at ED1, it’s too soon to say how many of the permitted projects are going to be constructed and then offered at the affordable levels required by ED1.  Financing and constructing the projects remains complicated and difficult.  It remains to be seen now many units will actually be built and there is a healthy amount of skepticism as to how many affordable units will actually get built.

Mayor Bass’ defense of ED1 would likely be: We can't wait years to house people currently on the street-- we need immediate solutions and that ED1 is providing immediate and interim shelter.

But the question was whether the policy assumptions underlying current State action on housing are actually producing more affordable urban housing. The evidence drawn from Chicago, Vancouver, and Sydney Housing Forums suggest that is not happened or happening. More and more housing has been produced and housing prices continue to rise & rise.

I don't disagree with that statement. The jury is still out. Look, we have a supply-demand problem in the state of California, right? We have too few units being developed at all income levels. Hence, we have more demand for those developing units as the supply allows for it. Hence, prices remain exorbitantly high.

The question is whether we can increase housing supply to the degree that the equilibrium between supply and demand will cause the prices to go down. Even when we're talking about 50% to 80% of area median income in Los Angeles, affordable housing remains expensive and out of reach for far too many Angelenos. Because of the supply/demand disequilibrium, we have an expensive environment to acquire, develop and build projects in the City of Los Angeles, and while we are beginning to streamline approvals the question of whether any of this will actually reduce the cost of housing remains a fair question. It may not, but reducing the permitting time remains an important goal. It will incentivize the development community.

Market rate housing is a different animal. I'll say one other thing on this point which is the cost of labor and building materials. Labor is not getting any cheaper. The land cost is also not decreasing—at least not yet. With those two fundamental factors, even if we shorten the timelines and streamline the approval process, we still have other fixed cost components that remain challenging. Labor and land costs are likely not going to decrease anytime soon, which constrains the ability to develop more housing.

Did not California’s Prop 13 (1978) undercut local government’s ability to fund both necessary infrastructure and comprehensive municipal services (fire, safety, library, water, sanitation, and other public services) to support new housing growth? If true, has the California legislature make a horrible policy miscalculation assuming local democracy is the chief impediment to producing more affordable housing demand?

No, I don't think so. Ultimately, if you look at the tax increment and the property taxes to be generated from the redevelopment of the site or developing on new sites, the expectation is that there will be revenues that will flow to local governments to support infrastructure and further development. That's seemingly very positive from the standpoint of all boats rising with a rising tide.

Having said that, in the short term, the question of whether or not we're going to have the adequate infrastructure and capacity to support the amount of housing needed to be developed in California, that's an open question and needs to be addressed by each community.

Ultimately, it's going to flow down to the local government in terms of how they're going to implement and develop the infrastructure needed to support more housing. While it’s an open question, in many communities, the basic infrastructure that already exists including water, sewer capacity and transportation infrastructure can support additional housing. The issue comes when you reach a tipping point where the infrastructure doesn't exist, and you don't have the infrastructure funding to support those projects. We have seen this in the ADU discussion on inadequate parking, and inadequate sewer capacity; how are we supporting the infrastructure? Even with those small-scale projects, that debate has been waged by many local governments as well.

Note: post Prop 13 local property tax revenue is allocated by the State, leaving cities with the responsibility to fund attendant infrastructure and the demand for increased essential services.

Pivoting to another controversial issue, what is your assessment of the citizen-sponsored initiative, Measure ULA. Is it working as advertised? Will it?

There are legitimate questions about whether voters understood what the measure was all about. It was promulgated as a so-called mansion tax.

Perhaps the voters may not have appreciated the fact that ULA, as a property transfer tax, was going to apply to all residential and commercial property transactions in the City of Los Angeles. Considering the scope, and implications of Measure ULA, it may not have been fully understood by Los Angeles voters.

It was approved by a significant margin of the voters in Los Angeles and it represents a major financial blow to residential and commercial real estate values in the City of Los Angeles... The transfer tax is 4% above $5 million, going up to 5.5% above $10 million.  Those are significant numbers. Most developers will say it wipes out a substantial portion of any potential profits they would realize on the sale or transfer of property. There is no question that Measure ULA has had a chilling effect on the market and investors, who are evaluating investing in our local markets, looking at the City Los Angeles and saying, on top of many other challenges that already exist, we need to think harder about our investments in the City of Los Angeles.

The legal challenges to Measure ULA lawsuits haven’t been successful to date at the trial level although appeals are pending. If we are going to accept the premise that ULA is going to stay, then the question becomes, how is this money going to be managed and spent? Who's going to be overseeing the funds generated from the tax?  Will the tax achieve the intended benefits of reducing homelessness and providing services to the unhoused?   

Another question to consider in terms of whether we will achieve the benefits that are intended by the measure. The city has collected only a fraction of the $900 million that it was expecting to collect from the tax. Now, maybe that's a function of the fact that several transactions were deferred. Maybe it’s a result of the transactional structuring in response to Measure ULA, where transactions are completed in a way not to meet the measure ULA thresholds. The point is that the revenue stream is not nearly what I think the city was expecting or projecting when the initiative was originally considered by Los Angeles voters. Whether that's going to change, time will tell.

There has been a significant stalling or “pausing” of not only the transactional velocity in the City of Los Angeles but also the investments from the capital markets. Does this mean that investors are going to look around the region to find other places to invest outside the City of Los Angeles? I don't know the answer to that, but I will tell you that in the commercial real estate circles, there is without question, a large amount of consternation about Measure ULA.

Excellent answer.

Before concluding this TPR interview, could you comment on UCLA’s recent acquisition of the former Westside Pavilion shopping mall. Is that a one-of-a-kind real estate deal? Or is it a signal of what’s happening in the marketplace?

This is one of the most exciting transactions in Los Angeles in recent years. We can point to it and say that it appears to have been a win for Google to extract itself from a long-term lease obligation. It's a win for Hudson Pacific and Macerich because they found an outstanding   buyer to develop an immunology life sciences and digital quantum science technology facility in the heart of West Los Angeles.

If you look at other cities like Boston that have invested in similar life science and technology hubs, perhaps this could become the anchor hub for that regional spillover investment into West Los Angeles. In addition, it’s a huge win for UCLA in terms of being at a proximity to the main campus, which in and of itself, wants to continue, grow, and invest and diversify its real estate holdings throughout the region. Perhaps the only entity that didn't win on this transaction from a short-term revenue standpoint was the City of Los Angeles because this transaction was exempt from having to pay the ULA tax. But over the long term, I think it's an incredibly exciting transaction for the city of Los Angeles, and one that we can all point to as holding the promise for something important and catalytic in regards to incoming life science, technology and investments in education throughout West Los Angeles.

Great way to end-- we have to end because of time and space. Thank you, David.


© 2024 The Planning Report | David Abel, Publisher, ABL, Inc.