BILL ANALYSIS Ó SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: ab 2222 SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: Nazarian VERSION: 6/17/14 Analysis by: Mark Stivers FISCAL: no Hearing date: June 24, 2014 SUBJECT: Density bonus law DESCRIPTION: This bill generally makes an applicant ineligible for a density bonus if the proposed housing development will displace units that are affordable to, or occupied by, lower income households. ANALYSIS: Given California's high land and construction costs for housing, it is extremely difficult for the private market to provide housing units that are affordable to low- and even moderate-income households. Public subsidy is often required to fill the financial gap on affordable units. Density bonus law (referred to below as the traditional density bonus) allows public entities to reduce or even eliminate subsidies for a particular project by allowing a developer to include more total units in a project than would otherwise be allowed by the local zoning in exchange for affordable units. Allowing more total units permits the developer to spread the cost of the affordable units more thinly over the market-rate units. The idea of density bonus law is to cover at least some of the financing gap of affordable housing with regulatory incentives rather than additional subsidy. Under existing law, if a developer proposes to construct a housing development with a specified percentage of affordable units, the city or county must provide all of the following benefits: A density bonus Incentives or concessions (hereafter referred to as incentives) Waiver of any development standards that prevent the developer AB 2222 (NAZARIAN) Page 2 from utilizing the density bonus or incentives Reduced parking standards To qualify for the benefits of this provision, a proposed housing development must meet one of the following criteria: 1) include at least 5% of the units affordable to very low-income households, 2) include at least 10% of the units affordable to low-income households, 3) include at least 10% of the units in a for-sale common-interest development affordable to moderate-income households, or 4) be a senior housing development. Units affordable to lower income households must remain affordable for 30 years, and for-sale units affordable to moderate-income households must be subject to an equity sharing agreement that returns a proportionate share of appreciation to the local governments upon resale of the home. If one of these four options is met, a developer is entitled to a base increase in density for the project as a whole (referred to as a density bonus) and one regulatory incentive. At higher levels of affordability, the developer is entitled to a sliding scale of density bonuses, up to a maximum of 35% of the maximum zoning density and up to three incentives. While a local government is not required to provide financial assistance or fee waivers, the incentives a local government must grant include any of the following: A reduction in site development standards A modification of zoning code requirements (including a reduction in setbacks, square footage requirements, or parking spaces, or architectural design requirements that exceed the minimum building standards) Approval of mixed use zoning in conjunction with the housing project if commercial, office, industrial, or other land uses will reduce the cost of the housing development, and if such non-residential uses are compatible with the project Other regulatory incentives or concessions that result in identifiable, financially sufficient, and actual cost reductions A local government may not apply development standards that preclude the density bonus or incentives from being used unless waiving such standards would have a significant, adverse impact upon public health, public safety, or the environment. In addition, parking requirements are capped for density bonus developments. A city or county may not require more than one AB 2222 (NAZARIAN) Page 3 parking space per studio or one-bedroom unit, two parking spaces per two- or three-bedroom unit, or two and one-half parking spaces per four-bedroom or larger unit. In addition, a developer may meet these standards with uncovered spaces or tandem parking. These parking caps are automatic. A developer may request further parking reductions by using one of the incentives to which the development is entitled. A similar section of law (referred to here as the conversion density bonus) requires a local government to grant a developer a density bonus of 25% or other incentives of equivalent financial value if the developer is converting apartments to condominiums and agrees to make at least 33% of the units affordable to low- or moderate-income households or 15% of the units affordable to low-income households. This bill , with respect to both the traditional density bonus and the conversion density bonus statutes, makes an applicant ineligible for a density bonus or the incentives described above if the proposed housing development is located on a parcel from which dwelling units have, at any time in the previous five years, been occupied by low-income households, been subject to a recorded covenant or law that restricts rents to levels affordable to low-income households, or been subject to any local rent-control ordinance, unless the proposed housing development replaces these units. At a minimum, the replacement units must be of equivalent size or type and affordable for 55 years to the same or lower income category as the units to be replaced. The replacement units do not count towards the qualifying percentages for the density bonus (i.e., the density bonus units are in addition to the replacement units), unless the proposed project will already be 100% affordable to low-income households. The number of units the developer must replace is calculated as follows: For developments occupied on the date of application, the developer must replace all units occupied by lower-income households at the same or lower level of affordability. Unoccupied units within the development are replaced in the same proportion as the occupied units. For developments vacated or demolished within the five-year period preceding the application, the developer must provide a number of units at the same or lower level of affordability that is equivalent to the highest number of units affordable AB 2222 (NAZARIAN) Page 4 to or occupied by low-income households as existed in that five-year period. If the incomes of the former residents were unknown, then one-half of the replacement units must be affordable to very low-income households and one-half to low-income households. The bill further provides that all affordable ownership units that qualify a development for a density bonus shall be subject to an equity sharing agreement, as opposed to a resale restriction. Lastly, the bill clarifies that, other than through the incentive or concession provisions described above, the granting of a density bonus does not require the waiver of a local ordinance or provisions of a local ordinance unrelated to development standards. COMMENTS: 1.Purpose of the bill . According to the author, density bonus law is intended to encourage private developers to increase the supply of affordable housing. Because the law does not require replacement of existing affordable units, however, a density bonus project may result in fewer affordable units than previously existed on the parcel. This bill seeks to correct this unintended consequence by requiring that density bonus projects start with the same number of affordable units before calculating the bonus. This will ensure an overall increase in affordable housing. 2.Equity sharing for homeownership units . Current law provides that lower-income homeownership units in a density bonus project must remain affordable to and occupied by lower income households for 30 years. As a result, a homebuyer who later seeks to resell is limited in whom he or she may sell to and in the price he or she may ask. This creates complicated sales and often results in the homebuyer seeing little to no price appreciation, except for whoever owns the property at year 30 and may sell the home at full market value for a windfall profit. Moreover, local governments rarely monitor these requirements, and many cases exist of the homeowner simply receiving a windfall profit at sale prior to year 30. Moderate-income density bonus units, on the other hand, are subject to an equity sharing agreement, whereby the homeowner may later sell the home at any price to any buyer, but must repay to the local government the initial price break he or she received as well as a proportionate share of appreciation. AB 2222 (NAZARIAN) Page 5 While the original unit is no longer affordable, the city must reuse these proceeds to assist another homeowner buy a home. As a result, the equity sharing model is administratively simpler and ensures perpetual affordability, as opposed to 30-year affordability. This bill places all density bonus homeownership units under the equity sharing model. 3.Technical amendments . On page 5, line 31, after "development" insert ", exclusive of a manager's unit or units," On page 6, lines 1-2, strike "this paragraph" and insert "subparagraph (A)" On page 6, line 25, after the period insert "All replacement calculations resulting in fractional units shall be rounded up to the next whole number." On page 18, line 4, after "development" insert ", exclusive of a manager's unit or units," Assembly Votes: Floor: 72-0 L Gov: 8-0 H&CD: 7-0 POSITIONS: (Communicated to the committee before noon on Wednesday, June 18, 2014.) SUPPORT: Association of Regional Center Agencies Western Center on Law and Poverty California Rural Legal Assistance Foundation Studio City Neighborhood Council Councilmember Mike Bonin, City of Los Angeles City of Los Angeles Coalition of Economic Survival Public Counsel Women Organizing Resources, Knowledge, and Services OPPOSED: None received. AB 2222 (NAZARIAN) Page 6