A Tale of Two Studies: Proposals to Solve California’s Housing Crisis

Written by Apartment Management Magazine on April 2, 2019. Posted in Blog

By Daniel M. Yukelson, Executive Director

You have heard it before, but it is worth repeating: There is no denying it, we have a housing crisis here in the Golden State of California.

Since the 1970’s, California has been experiencing an ever-increasing housing shortage, and by 2018, California had the 49th lowest ratio of housing units per resident. Our current housing shortage has been estimated at 3 to 4 million housing units, or roughly 20% to 30% of California’s current housing stock. The cause of this shortage is the imbalance between supply and demand resulting from strong economic growth that has led to the creation of hundreds of thousands of new jobs, and that in turn has led to increased housing demand. However, while the economic “boom” continues, we have failed to construct enough new housing units to meet the demand. To give you an idea of how bad the shortage is, for California as a whole, from 2011 to 2016, our state added only one new housing unit for every five new residents.

Some of California’s failure to keep up supply with growing housing demand lies in failed housing policies and over-regulation. Laws such as rent control, the California Environmental Quality Act (C.E.Q.A.), zoning laws and others have discouraged or slowed down developers from constructing new housing units. Local jurisdictions and “not in my backyard” (a/k/a, NIMBY) residents have slowed down or stopped entirely construction of new housing units in many areas. The truth is that California does not currently have enough quantities of land that is zoned for housing to meet future demand. Something has got to give!

Two Studies, Multiple Housing Proposals

This past year, two studies were published that attempt to solve the California Housing Crisis by offering a variety of solutions meant to thwart homelessness, provide more housing units particularly affordable housing, and to help stabilize the population of California renters. These studies are “Finding Common Ground on Rent Control” published by the Termer Center for Innovative Housing at the University of California at Berkeley (May 2018) and the “CASA Compact” published by The Committee to House the Bay Area (January 2019).

Why should you care? Well, we believe that many of the elements contained in these studies may shape the 2019 and 2020 State legislative agendas on housing policy and may result in the proposal and passage of numerous State housing bills and local housing ordinances. It is imperative that housing providers become familiar with the studies and become part of the inevitable debate that is certain to take place as our elected officials search for ideas to address the California housing crisis.

Terner Center for Housing Innovation: Finding Common Ground on Rent Control

The introduction to the Terner Center study starts out by citing grim details on our current housing crisis:

“California is in the throes of a serious housing crisis, with rising rents and displacement pressures touching a growing number of individuals and families throughout the state…more than half of California renter households (three million) are ‘rent-burdened,’ paying more than 30 percent of their income on housing. Of those, 1.5 million pay more than 50 percent…Punctuating these sobering statistics are the seemingly endless daily anecdotes of families receiving exorbitant rent increases and being forced to choose between their homes and their other daily needs.”

The study cites a need for State and local policymakers to act to provide immediate rent relief. The study then discusses the need to increase housing supply. As a result, the Terner Center study makes two global recommendations to be adopted by California:

“Broad anti-gouging” rent control to be applied to units State wide, that would make it illegal to raise rents above a maximum threshold; and
Developer incentives to construct new and rehabilitate existing rental housing units that include a certain quantity of below market rent units.

While the Terner Center study acknowledges the many “drawbacks” of rent control, including providing benefits to those that do not necessarily need it, loss of rental housing units (e.g., the recent San Francisco study concluding that 15% of rental units were lost due to the implementation of rent control laws), and constraining new housing construction, it finds rent control as the only reliable “tool” to stabilize renters and keep them in place. Accordingly, the Terner Center study proposes a Statewide “Anti-Gouging Cap” on annual rent increases equal to the regional Consumer Price Index plus 5%. Now for those of us in already rent controlled jurisdictions, this sounds like a “dream come true,” but for those of us that are so fortunate, this represents only the beginning of the end. The study does caveat that its proposed Statewide rent control limitation would not supersede more strict, local ordinance and that any violations of the Statewide rent control would be subject to both up to a $10,000 fine and up to one year in prison.

On the other hand, the Terner Center study attempts to throw our State’s developers a few “bones” by proposing to increase or preserve the State’s affordable housing stock through tax incentives. Specifically, owners would receive an ad valorem property tax abatement for multifamily properties by committing to set aside a specific percentage of units at below market rate rents. This tax incentive would be structured such that owners would be offered a 15-year (or more) tax abatement on the increased value of the sale and/or renovation of an existing multifamily property and on the new value of multifamily construction in exchange for setting aside a specified number of below market rent units. In other words, the abatement would be equal to a dollar-for-dollar amount of the increase in property taxes resulting from any new assessed value. The proposed eligibility for abatement is setting aside at least ten percent of units at below market rent for renters that fall into an affordability class of no more than 120% of the average median income for the area.

While the Terner Center study advocates the two previously mentioned recommendations for a Statewide rent control and developer incentives, it makes mention of two other, potential policies to expand rent control by amending the Costa-Hawkins Rental Housing Act. As you may recall, Proposition 10 on last November’s ballot sought to repeal the protections we as property owners continue to enjoy Costa-Hawkins Rental Housing Act. The Terner Center study, “as part of its efforts to stimulate new ideas for renter protections” suggests a “rolling inclusion” for Costa-Hawkins exemption from rent control (e.g., exempt new construction from rent control for 30 years) and allowing single family home rentals to be subject to rent control ordinances. It is ironic that the Terner Center would place these draconian concepts under the banner of “to stimulate new ideas.”

The Committee to House the Bay Area: CASA Compact

The CASA Compact study bills itself as “A 15-year Emergency Policy Package to Confront the Housing Crisis in the San Francisco Bay Area.” While specific to the San Francisco Bay Area, again we believe that many of the concepts cited in this study could find their way into new State housing laws and into local ordinances within other jurisdictions, including the Greater Los Angeles area.

The CASA Compact study cites several reasons the San Francisco Bay Area now finds itself in its current housing predicament starting with big business that has created jobs to developers that only build luxury housing; from local government officials who oppose new housing developments to environmental and labor interests that drive up construction costs; and of course, community groups that fear changes that new development might bring (a/k/a, the “NIMBYs”). In making their recommendations, the sponsor of the CASA Compact, The Committee to House the Bay Area, brought together varying interest groups both involved in the cause of and the solution to the San Francisco Bay Area’s housing challenges, including business leaders, government officials, builders, non-profit executives, economists and housing and transportation experts. Following its 18-month study, CASA Compact purports to deliver a “detailed, comprehensive and actionable” solutions to the San Francisco Bay Area’s housing crisis.

The “key” recommendations of the CASA Compact, each termed a “Compact Element,” are summarized below:

Compact Element	details
Just Cause eviction policy	*Purpose*. Ensure that renters are protected from arbitrary evictions by adopting a policy requiring specific “just causes” (both fault and no-fault) for termination of tenancy, such as failure to pay rent or violation of lease terms. Require housing providers to provide relocation assistance for covered “no fault” evictions.Exclusions. Excluded from coverage are certain government owned housing, transient hotel occupancy, dormitories, and single owner-occupied residences. Relocation benefits would not be applicable for owner move-ins.Waiting Period. The “just cause” protections and relocation benefits would apply only after one-year of tenancy.Local Ordinances Supersede. There would be no preemption of more restrictive local ordinances.
Rent Cap	*Purpose*. Establish a rent “cap” that limits annual increases in rent to a reasonable amount.Proposed “Cap” on Rent. For an emergency period (15 years), no increase to exceed the Consumer Price Index for a region plus 5%. The “cap” on rent increases would apply to the renter and not the unit (in other words, vacancy de-control would be permitted). Housing providers would be able to “bank” unused rent increases for 3 to 5 years up to a maximum of 10% to 15%.Pass-Throughs. Housing providers would be permitted to “pass-through” certain cost increases to renters, including water and other utilities through use of a Ratio Utility Billing System (R.U.B.S.).Local Ordinances Supersede. There would be no preemption of more restrictive local ordinances.
rent assistance and access to legal counsel	*Purpose. For low income renters facing eviction, provide access to legal counsel and emergency rent assistance.Exclusion. Tenants of property owners or master tenants residing in the same dwelling unit are not eligible for legal assistance. Emergency rental assistance is to be limited “Cap on Assistance”*. Assistance would not exceed $5,000 to $10,000.
Remove regulatory barriers to accessory dwelling units (Adu)	*Purpose*. Extend San Francisco Bay Area best practices regarding accessory dwelling units to every jurisdiction by removing regulatory barriers. Allow multiple ADUs on multifamily properties and “small” and “tiny” home building codes.
Miniumum zoning near transit	*Purpose*. Establishes minimum zoning standards in areas served by high quality transit services, including housing near jobs, and increases minimum building height within specified areas.Tenant Protections and Preservation. All sites rezoned under this element would be subject to tenant protections. Onsite affordable housing would be required at levels no less than current California bonus density laws or developers would have an option to contribute to an affordable housing fund as an “in-lieu” fee.
good governement Reforms to Housing Approval Process	*Purpose*. Establish government standards for streamlining the entitlement and permit process for residential development.Proposed Standards. Jurisdictions would not require more than three de novo public hearings on a zoning compliant residential project. Building permits would expire after 24-months in order to encourage more timely construction. Adoption of deferral programs that allow builders to pay some fees later in the development process.
Expedited approvals for Financial Incentives and Selct Housing	*Purpose*. Ensure timely approval of zoning-compliant housing projects and create financial incentives for enabling on-site affordability.Proposed Standards. Streamlined review process under state law for residential projects that meet certain criteria. These projects should be granted statutory exemptions to compliance under the California Environmental Quality Act (C.E.Q.A.) and would be subject to limited discretionary review process.Qualifying Projects. Among other qualifications, (1) Complies with existing zoning standards; (2) located in urbanized area; (3) restricts units to 20% middle income that may range from 80% to 150% average median income (AMI).Financial Incentives. (1) 15-years of property tax increment abatement; (2) “cap” on certain impact fees; (3) density bonus of 35%; (4) parking reduced to 50% of local standards at developer discretion; and (5) relief from strict liability standards for housing ownership.
Unlock Public Land for Affordable Housing	*Purpose*. Promote utilization of publicly owned land (surplus and/or underutilized) for affordable housing. Amend the State’s housing element to allow residential uses on developable public land regardless of zoning.
Funding and Financing the CASA Compact	*Purpose. Raise $1.5 Billion in new, annual revenue from a broad range of sources, including property owners, developers, local governments and taxpayers to fund implementation of the CASA Compact elements. (Note: annual goal to expand the implementation of these elements Statewide would be significantly greater.)Potential Funding Sources*. Sources include, among others: (1) tax on vacant homes; (2) parcel tax; (3) commercial linkage fees; (4) gross receipts tax; (5) employer (per head) taxes; (6) sales tax (e.g., additional ¼ cent); and (7) general obligation bonds.
Regional Housing Enterprise	*Purpose*. Establish a regional leadership entity to implement the CASA Compact. The entity must be governed by an independent board.

In addition to the ten elements outlined in the table above, the CASA Compact makes the following additional recommendations as “calls to action”: (1) Reestablishment of redevelopment agencies; (2) lower voter threshold for housing funding ballot measures; (3) increase incentives for cities to develop housing vs. commercial development, e.g., so-called “Fiscalization of Land Use;” (4) address homelessness through intervention policies that provide relief and housing; and (5) grow and stabilize the State’s construction labor force.

Implementation of the recommendations contained in the Terner Center study or of the CASA Compacts elements will take time and require many new State legislation and local ordinances be passed, and will take incredible leadership by our new governor, Gavin Newsom. There is no telling which of the recommendations or elements, or derivatives of them, will resonate with our State legislature or other elected officials to be carried forward. Some aspects suggested in the two studies are things we, as property owners, can live with and continue to be successful. Other aspects will be very challenging for our industry.

As Charles Dickens book and namesake for this article, “A Tale of Two Cities,” goes:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

I think so much of Charles Dickens’ sentiments ring true for California’s housing crisis, and for property owners and renters alike. Stay tuned!

Daniel Yukelson is currently the Executive Director of The Apartment Association of Greater Los Angeles (AAGLA). As Certified Public Accountant, Yukelson began his career at Ernst & Young, the global accounting firm, and had served in senior financial roles principally as Chief Financial Officer for various public, private and start-up companies. Prior to joining AAGLA, Yukelson served for 12 years as Chief Financial Officer for both Premiere Radio Networks, now a subsidiary of I-Heart Media, and 3 years for Oasis West Realty, the owner of the Beverly Hilton and Waldorf Astoria Beverly Hills where he was involved with the development and construction of the Waldorf.