Developers Seeking New Sources of Finance After Redevelopment Agencies Vanish

Daily Journal, October 19, 2012

In the wake of California’s elimination of redevelopment agencies, developers of affordable housing are searching for new ways to finance those projects. Builders of market rate homes are also on the lookout for methods to blunt the cost of complying with local inclusionary housing requirements. One mechanism receiving more scrutiny by both types of homebuilders today is California’s Density Bonus Law, which allows them to obtain more favorable local development requirements in exchange for offering to build affordable or senior units.

The Density Bonus Law (Government Code Sections 65915-65918) provides developers with powerful tools to encourage the development of affordable and senior housing, including up to a 35 percent increase in project densities, depending on the amount of affordable housing provided. The Density Bonus Law is about more than the density bonus itself, however. It is actually a larger package of incentives intended to help make the development of affordable and senior housing economically feasible. Other tools include reduced parking requirements, and reduced setback and minimum square footage requirements. Often these other tools are even more helpful to project economics than the density bonus itself, particularly the special parking benefits.  

The density bonus is particularly developer-friendly because it is a state mandate. A developer who meets the requirements of the state law is entitled to receive the density bonus and the other benefits as of right. As with any state mandate, some local governments will resent the state requirement and will attempt to resist. But many local governments like the density bonus as a helpful tool to cut through their own land use requirements and local political issues.

Here’s how the density bonus works. Cities and counties are required to grant a density bonus and other incentives or concessions to housing projects in which at least 5 percent of the housing units are restricted to very low income residents, at least 10 percent of the housing units are restricted to lower income residents, or at least 10 percent of the housing units in a for-sale development are restricted to moderate income residents. A density bonus is also required when the project donates at least one acre of land entitled for very low income units or the project is a senior citizen housing development (no affordable units required). The amount of the density bonus is set on a sliding scale, based upon the percentage of affordable units at each income level.

In addition to the density bonus, the locality is also required to provide one or more “incentives” or “concessions” to each qualifying project (except senior citizen projects with no affordable units, and land donated for very low income housing). A concession or incentive can be as varied as a reduction in setback or minimum square footage requirements, approval of mixed use zoning, or other regulatory incentives or concessions which reduce project costs. The number of required incentives or concessions is also based on a sliding scale determined by the percentage of affordable units in the project. Financial incentives, fee waivers and reductions in dedication requirements are permitted but not required.

A development qualifying for a density bonus also receives two additional and potentially important forms of assistance. First, if any other local development standard would physically prevent the project from being built at the permitted density and with the granted concessions/incentives, the developer may propose to have those standards waived or reduced, and the locality is not permitted to apply that development standard. Development standards which have been waived or reduced utilizing this section include setback requirements and lot coverage requirements. Second, at the developer’s request, the city or county may not require more than one onsite parking space for studio and one bedroom units, two onsite parking spaces for two and three bedroom units, and two and one-half onsite parking spaces for units with four or more bedrooms. Onsite spaces may be provided through tandem or uncovered parking, but not onstreet parking.  

Of course there is a price to pay for these benefits - the affordable units needed to earn the density bonus. Affordable rental units must be restricted by an agreement which sets maximum incomes and rents for those units for at least 30 years. Initial prices of affordable for-sale units are also restricted, and buyers must enter into an equity sharing agreement with the locality. The equity sharing agreement does not restrict the resale price, but requires the original owner to pay the government a portion of any appreciation received on resale, less original down payment and the value of any improvements made to the home.

The density bonus can be a helpful tool both in jurisdictions that support the housing project, and those more hostile to the development. In friendly jurisdictions, the density bonus can help increase the homes allowed to be built without requiring approval of general plan amendments and zoning changes. And in less hospitable jurisdictions, the density bonus statute can be used to force reductions in development standards or the granting of concessions or incentives that otherwise would not be granted in a discretionary process. Developers who nonetheless encounter hostility from local jurisdictions are provided several tools to ensure that a required density bonus is actually granted, including mandatory meetings and attorney fees awards for successfully challenging the disapproval of a density bonus.

Although there is no specific density bonus exemption from the California Environmental Quality Act, many density bonus projects are likely candidates for urban infill and affordable housing exemptions from CEQA. A recent case, [Wollmer v. City of Berkeley], rejected a challenge to a CEQA infill exemption granted to a density bonus project, finding that the infill exemption was applicable even when the city modified and waived development standards, as required under the Density Bonus Law.

Use of a density bonus may be particularly helpful in those jurisdictions that impose inclusionary housing requirements for new housing. Inclusionary housing ordinances typically require that a specified percentage of units in a new housing development be restricted as affordable units. In today’s housing market, compliance with inclusionary requirements may make many projects economically infeasible, but the density bonus provides one method for developers to improve the economics of their project. Inclusionary housing ordinances are currently in a state of uncertainty due to recent case law, especially [Palmer/Sixth Street Properties, L.P. v. City of Los Angeles], which held that inclusionary housing requirements violate the state’s rent control law. However, developers who receive a density bonus or direct financial assistance from a public agency can be subject to rent controls under [Palmer]. Localities may welcome a developer’s use of the Density Bonus Law because this will effectively prevent it from challenging the applicability of the inclusionary housing ordinance.

The Density Bonus Law can help to bring housing development costs into line by putting more homes on the land, reducing the per-unit land costs. Each developer will need to make its own cost-benefit determination, but the Density Bonus Law is unquestionably a useful option for today’s housing developers trying to make financial sense of their projects.

 

Jon Goetz is an attorney at Kronick, Moskovitz, Tiedemann & Girard in San Luis Obispo, with 25 years of experience in land use, real estate, affordable housing, redevelopment and municipal law. He can be reached at jgoetz@kmtg.com.