Part II: 2023 Legislative Changes Affecting California Commercial Real Property

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Dear Clients and Friends,

Below is Part II of our Ninth Annual Update on California legislation affecting commercial real estate. This edition is particularly special as we dive into two pivotal and comprehensive bills that became effective July 1, 2023. The bills address the conversion to housing of properties zoned for office, retail, or parking, a significant developing trend in our industry that presents both challenges and opportunities that we are excited to discuss with you.

On a personal note, I am honored to share a milestone in my career – being recognized as the Outstanding Real Estate Lawyer by the Real Property Section of the Los Angeles County Bar Association. I invite you to view the highlights from the May 2023 Award event here.



Best wishes for a happy holiday season and a prosperous New Year. We look forward to connecting with you in the New Year with more legal developments and firm practice developments.

Warm Regards,

Norma

Norma J. Williams, Esq.

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Part II: 2023 Legislative Changes Affecting California Commercial Real Property

©Norma J. Williams 2023

Part I of our 2023 Legislative Updates article, published in March 2023 (www.willassoc.com/publications) looked at general legislation affecting commercial real estate that became effective January 1, 2023.

This Part II looks at two broad-reaching pieces of legislation that became effective July 1, 2023, that permit residential development on properties currently zoned for office, retail or parking use, thus overriding local zoning laws. The bills, 2022 AB 2011 and 2022 SB 6, approach the topic in different ways.

AB 2011

AB 2011 (the Affordable Housing and High Road Jobs Act of 2022) sets forth a ministerial process that requires a local government to act on multi-family projects subject to the law within designated periods of time to a) identify inconsistencies with qualification which, if not timely identified, will cause the project to be deemed to comply; and b) complete design review. Different time periods are required depending on whether the project has more or less than 150 units. The projects are exempt from California Environmental Quality Act ("CEQA") review if they are otherwise consistent with the jurisdiction’s objective planning standards.

In order to qualify for AB 2011 treatment, the projects must meet specified affordability requirements. Below Market Rent ("BMR”) targets within rental projects must contain either: 1) 100% BMR for lower-income households (“100% Affordable Projects”); or 2) either have have a) 15% BMR for lower-income housing; or b) 8% BMR for very low-income households and 5% for extremely low-income households, and meet other criteria ("Mixed Income Housing Projects”). Other BMR requirements apply to for sale projects. Local affordable housing requirements must also be considered.

The AB 2011 projects must pay prevailing wages to construction workers and, if the project contains 50 units or more, must require contractors to implement certain apprenticeship and health insurance programs. There are other site and project criteria including as to site size, location on vacant land or within neighborhood plan areas, effect on existing housing, urban use and adjacency to urban use, and adjacency to freeways or oil or natural gas facilities. A Phase I environmental assessment must be completed and, depending on the findings, it may be necessary to complete a preliminary endangerment assessment or to mitigate any releases of hazardous substances.

Different methods of determining allowable density apply depending on whether the project is a 100% Affordable Project or is a Mixed-Income Housing Project. In a Mixed-Income Housing Project, further distinctions are made depending on whether the project is in a metropolitan jurisdiction versus a non-metropolitan jurisdiction, is one or more acres in size, on a 100-foot or wider commercial corridor, or within one-half mile of a major transit stop. For Mixed Income Housing Projects, there are also standards set forth for height and setbacks. Parking is not required in Mixed-Income Housing Projects, but the bill does not preclude the enforcement of requirements for bicycle parking, EV charging equipment and handicapped parking.

For 100% Affordable Projects, the density must meet or exceed the default density under the jurisdiction’s housing element law that is applicable to lower-income households. 

SB 6

SB 6 (The Middle-Class Housing Act of 2022) does not provide for a ministerial approval process of projects or for an exemption from CEQA but it also does not require the developer to include affordable housing units. The project may be either 100% residential or may be a mixed-use project where at least 50% of the square footage is dedicated to residential uses. SB 6 also requires applicants to commit to detailed “skilled and trained workforce requirements” with certain exceptions, as well as to pay prevailing wages.

Other provisions of SB 6 relate to site size, required location within an urban area and consistency with existing sustainable community strategies. The same measure of allowable density that applies to AB 2011 100% Affordable Projects applies to SB 6 projects.

SB 6 projects may include affordable housing if they are required by local inclusionary requirements or if the developer invokes SB 35. SB 35 is California legislation passed in 2017 which allows the production of certain types of affordable housing when a city has not met its state-mandated Regional Housing Need Allocation targets. SB 35 provides for a streamlined ministerial approach of projects, removing the requirements for CEQA analysis and for Conditional Use Permits or other similar discretionary entitlements. Such an affordable project must also meet all of the other requirements of both SB 6 and SB 35. SB 35 expires on July 1, 2026.  

Provisions Applicable to Both Pieces of Legislation

Major provisions applicable under both AB 2011 and SB 6 include: 1)  CEQA exemption for the adoption of the ordinance implementing the bills; 2) requirement that the sites not be on or adjacent to a site where more than 1/3 of the land is dedicated to industrial use; 3) extensive (but different) reporting, certification, monitoring, enforcement and penalty provisions for non-compliance with the labor provisions; 4) requirement to meet stated objective standards for zoning, subdivision and design review based on the standards that apply in nearby or in other designated zones or parcels; 5) for SB6 projects and for AB2011 Mixed Income Housing Projects (but not AB 2011 100% Affordable Projects), a requirement to send notice to existing commercial tenants and to provide relocation assistance to certain qualifying independently owned commercial tenants; 6) criteria for parcels to be declared exempt from the requirements; 7) the completion by the California Department of Housing and Community Development of two studies on the outcomes of each of the bills, one to be completed by January 1, 2027 and the other to be completed by January 1, 2031; and 8) a January 1, 2033 expiration date, after which the bills are repealed.

Conclusion

Both bills have highly detailed criteria for qualification. Anyone considering making use of them should carefully review the legislation, local ordinances implementing the bills, other state and local requirements, and other applicable material.

Preview of Coming Legislation

While this article deals with 2022 bills AB 2011 and SB 6, legislation effective July 1, 2023, it is noted that on October 11, 2023, California’s Governor signed 2023 Assembly Bill 529 – “Commercial to Residential Conversion Projects,” which will become effective January 1, 2024. That bill amends California’s adaptive reuse law to add as a “prohousing policy,” the “facilitation of the conversion or redevelopment of commercial properties into housing, including the adoption of adaptive reuse ordinances or other mechanisms that reduce barriers for these conversions.” Such designation results in additional points in the scoring of program applications for certain of the Department's housing and infrastructure programs. The legislation also directs the Department to convene a working group comprised of certain state agencies to “identify challenges to, and opportunities to help support, the creation and promotion of adaptive reuse residential projects.”



Disclaimer: Nothing in this article shall be construed as giving legal advice. Practitioners are advised to consult with their individual legal advisers as to the legal effect of any item described in this article.