Lay of the Land
In many cities throughout California, concerns about traffic have made the State Density Bonus Law (“DBL”) a four letter word. Developers who are otherwise willing to provide affordable units as a component of a market rate multifamily or mixed-use project are increasingly discouraged from doing so. And it’s not getting any easier. On September 27, 2014, Governor Brown signed AB 2222, amending the DBL in response to a growing perception that the DBL could be implemented in a manner that could result in a net loss of existing affordable housing units for new housing projects. The bill requires developers to identify and replace all of a property’s pre-existing affordable units to be eligible for a density bonus under the DBL. While that goal sounds reasonable, in practice, it may prove to be difficult to implement and will most likely not achieve the intended result of retaining and creating more affordable housing throughout California.
The DBL, enacted in 1979, is intended to encourage public agencies to offer density bonuses and other development “incentives” to housing developments that include affordable housing units. Community and political opposition to a developer’s right to obtain a density bonus under state law to offset the cost of providing affordable housing has discouraged many developers from including affordable housing in their projects. This is because the grant of a density bonus is a “ministerial” act, not a “discretionary” act. Therefore, a City’s approval of a density bonus application does not constitute a “project” under CEQA. The DBL rewards developers by promoting construction of housing for seniors and low-income families. Critics view the “right” to a density bonus as giving developers a “free pass” on CEQA compliance. Community opposition to the DBL has been fierce in many communities.
AB 2222 adds a new hurdle. It prohibits a developer from receiving a density bonus unless the proposed housing development or condominium project would, at a minimum, maintain the number and proportion of affordable housing units within the proposed development. As discussed below, AB 2222 defines affordable housing units very broadly, and includes, among others, any units subject to local rent control, even if currently rented at market rate, or, if not subject to rent control, occupied by low or very low income households currently or during the prior five years if the units have been vacated or demolished. AB 2222 also increases the required affordability period from 30 years to 55 years for all affordable rental units that qualified an applicant for a density bonus. The new density bonus law requires replacement rental units to be subject to a recorded affordability restriction for at least 55 years. The new density bonus law does not apply to density bonus applications submitted to, or processed by, a local government before January 1, 2015.
What does this mean? Let’s consider a hypothetical: If a developer chose to tear down an existing 15-unit building that contained 10 units that qualified as “affordable,” the developer would need to have at least 10 new affordable units included in the project. If the zoning permitted 20 units, the developer would need to retain 10 affordable units and would include 10 market rate units before adding the density bonus units. Assuming that the developer was entitled to 35% density bonus, that would result in 7 additional units. At the end of the day, the developer would have a 27 unit project containing 10 affordable units and 17 market rate units. If the developer can simply build a project of 20 market rate units, why invite community opposition and challenges associated with including affordable units and seeking a doing bonus for fewer market rate units?
The five-year look back for units that were “occupied” by low or very low income households is also problematic. Records are going to be difficult to obtain or perhaps non-existent. Even if the rent rolls exist, a developer may have difficulty determining income levels during the preceding five years. These requirements invite evidentiary disputes as to the number of qualifying units.
Equally problematic is the definition of what is “affordable” in the context of existing housing units. It includes a “recorded covenant, ordinance, or law that restricts rents to levels affordable to persons and families of lower or very low income” or “any other form of rent or price control through a public entity’s valid exercise of its police power” or “occupied by lower or very low income households.” Presumably, these restrictions will apply to all rent controlled units in Santa Monica, Los Angeles, West Hollywood, Berkeley and San Francisco. In these communities, there would be no density bonus allowed without 100% replacement of the dedicated affordable units. Applying the hypothetical 20 unit project in the City of Los Angeles, if the building is under rent control, it would yield 15 affordable units and 12 market rate units. This would seem to remove any economic incentive to seek a density bonus in rent control jurisdictions.
With the many impediments to creating affordable housing, the foregoing does not bode well for using the DBL as a tool to address California’s affordable housing crisis.