Attention: If You Want to Develop California Multifamily Projects in Areas Zoned for Office, Retail, or Parking Uses, then Continue Reading . . .

Overview

Governor Gavin Newsom signed California Senate Bill 6 (“SB 6”) and California Assembly Bill 2011 (“AB 2011”) on September 28, 2022, with the goal of making it easier to develop new multifamily housing in areas currently zoned for office, retail, or parking uses.  SB 6 and AB 2011 (collectively, the “Laws”) will allow developers whose projects meet certain criteria (related to affordability, workforce compensation, etc.) to bypass certain local restrictions (and in some cases, bypass CEQA).  Given the ongoing housing shortage that has plagued California for decades, we would expect developers to give the Laws serious consideration.

While both Laws allow developers to develop residential projects in areas not zoned for residential uses (and both are generally focused on decreasing the transaction costs involved in developing new housing), the two Laws take decidedly different approaches.

AB 2011 -- The Not-So-Faustian Bargain: Affordable Housing Requirements for CEQA Exemptions

AB 2011 presents a relatively straightforward exchange for multifamily developers: in return for developing all (or a portion) of the housing units in a project as affordable housing (rather than market rate housing), the project is exempted from CEQA.  There are a variety of other benefits associated with developing a project under AB 2011 (including specified timelines for obtaining approvals, limitations on design review, and potential density bonuses), but the headline benefit is the CEQA exemption.

In return for these benefits, there are numerous construction and development requirements that the project must meet.  We would expect that most developers will focus on the following major items:

• The project site must be zoned for office, retail, or parking as a principal permitted use (and for mixed income projects, the project site must also abut a commercial corridor with at least 50 feet of frontage).
• Between 13% and 100% of the units must constitute affordable housing for a period of 45 to 55 years (the duration and specified percentage of units can vary, depending on the income brackets selected and whether the project will be owner-occupied).
• The developer must pay prevailing wage (and for projects with more than 50 units, there are additional requirements with respect to craft employees, apprenticeship programs, and healthcare costs).

SB 6 -- The Universal Solvent: A Market Rate Housing Pure Play

In contrast to AB 2011, SB 6 sets its sights on smaller and more attainable goals: it simply permits a developer whose project meets all other applicable development requirements to build a residential project in an area zoned for office, retail, or parking uses.  While it does not provide for a CEQA exemption, SB 6 does allow the developer to develop 100% market rate housing.  The project may also be mixed use (rather than residential only), and in some cases, density reallocation to the project may be available as well.  Accordingly, although it would seem to have fewer benefits than AB 2011, SB 6 may be available to a wider variety of developers in a wider variety of circumstances.

However, much like AB 2011, SB 6 also includes numerous (though less voluminous) development and construction requirements.  We would expect that most developers will focus on the following major items:

• The project site must be zoned for office, retail, or parking as a principal permitted use.
• With respect to mixed use projects, at least 50% of the square footage to be developed must be for residential uses.
• The developer must pay prevailing wage.
• The use of a skilled and trained workforce (typically union labor) is also required (though there are limited exceptions in circumstances where an insufficient number of contractors bid on the project).

Conclusion

While the Laws are scheduled to come into effect on July 1, 2023, there remain many unanswered questions regarding their implementation, as well as the practical realities of aligning state-level programs with hundreds of local development regimes.  Our California Real Estate Group is monitoring the Laws’ rollout, and is available to help with project applications, analysis, and any questions that may arise.  We are happy to see this latest move from Sacramento to offer some assistance to developers to help end California’s longstanding housing shortage.