Assessing SB 35—Success or Failure?

In September 2017, the California legislature and Gov. Jerry Brown enacted Senate Bill 35 (SB 35) to streamline housing development in cities that are not meeting their housing needs. SB 35 is aimed at easing California’s severe housing shortage and affordability crisis but was highly controversial due to concerns about loss of local control over housing development. In the year since SB 35 was enacted, several development projects in the San Francisco Bay Area have invoked SB 35 to bypass local opposition or cumbersome permitting timelines.

Has SB 35 proven to be a powerful tool for developers, or does it require too much in order to obtain streamlining? Are local governments and angry neighbors still able to block projects that invoke SB 35? As explained below, the results so far are mixed. SB 35 has allowed several 100% affordable housing projects to advance more quickly to construction in San Francisco, and it has given a crucial boost to a large-scale development planned in the Silicon Valley. However, a housing proposal in Berkeley currently embroiled in litigation shows that SB 35 has important limits that may allow local governments to block SB 35 projects.

The Motivation Behind SB 35
Owning a home in California has long been expensive, but California currently faces an unprecedented housing shortage. The state ranks 49th among the 50 states in housing units per capita, with a deficit of roughly two million units. The median California home is 2.5 times more expensive than the national median. Despite low mortgage interest rates, only about half of California households own their homes—the third lowest rate in the country, and the lowest rate within California since World War II.

In 2017, the California legislature passed a fifteen-bill package to help address the housing shortage. SB 35, authored by San Francisco’s State Senator Scott Wiener, is one key component of the legislative package. Specifically, SB 35 forces many cities which do not meet their Regional Housing Needs Assessment (RHNA) goals to provide streamlined, ministerial review of qualifying infill housing projects. Without the mandated ministerial review process, these projects could be subject to local conditional use permit requirements, environmental review under the California Environmental Quality Act (CEQA), and other discretionary governmental review. Because SB 35 caps the amount of times local governments have to review projects and exempts qualified projects from CEQA, the legislation offers developers a shorter and cheaper process than what was previously available.

SB 35 was the subject of much debate in Sacramento. Opponents decried the legislation as pro-gentrification, pro-displacement, pro-developer profits, and anti-local democratic control. Proponents argued that encouraging developers to build denser, transit-oriented housing was key to addressing California’s affordability crisis and the state’s 2030 climate goals.

However, the requirements to qualify for SB 35 streamlining can be onerous, leading many to question whether SB 35 will have an actual impact on California’s housing shortage. SB 35 took effect almost a year ago on January 1, 2018—how has the legislation been implemented at the state and local level, and have developers actually been able to take advantage of the new law?

SB 35 in Action
The projects that have invoked SB 35 to date illustrate both the strengths and limitations of SB 35 as a tool for developers. Three Bay Area projects have garnered the most media coverage: Vallco Mall in Cupertino, 681 Florida Street in San Francisco, and 1900 Fourth Street in Berkeley. In Cupertino, the developer utilized SB 35 to fast-track a project that had been stalled for years. In San Francisco, an affordable housing developer—initially opposed to SB 35—leveraged the law to build a large 100% affordable project. In Berkeley, a developer invoked SB 35, but the city rejected the project, highlighting some of the challenges of using SB 35 in its current form.

Cupertino’s Vallco Mall
The highest profile SB 35 test case thus far is the ongoing Vallco Mall saga, taking place in Silicon Valley’s Cupertino. For years, Sand Hill Property Company attempted to replace the mostly abandoned Vallco Mall with a mixed-use housing, retail and office complex. In March, Sand Hill proposed an affordable, housing-rich alternative to their existing project to qualify for fast-tracking under SB 35. The SB 35-compliant proposal includes 2,402 housing units, 1.8 million square feet of office space and 400,000 square feet of retail in addition to a 30-acre rooftop park.

In October, under the pressure of the impending SB 35 deadline, the Cupertino City Council voted 3-2 to approve the previous, community-driven proposal. The approved project called for 2,923 housing units, 1.75 million square feet of office space and 400,000 square feet of additional retail, plus a new city hall for Cupertino. Then, a community group gathered enough signatures to put a referendum before voters in 2020 to halt the community proposal. The referendum spurred the developer to again pursue the city-approved SB 35 project, potentially costing Cupertino many benefits only included in the community plan, such as a new city hall, a new performing arts center, over $11 million for adjacent bike paths, and over $14 million to benefit Cupertino schools.

Vallco Mall is now the largest project to utilize SB 35 to date. Sand Hill leveraged SB 35 to incentivize the Cupertino City Council to approve the project. However, while project opponents cannot use a referendum to stop the “by right” SB 35 proposal, they have filed a lawsuit alleging that the Vallco does not qualify for SB 35 because it is built on a hazardous waste site, among other objections. (The City denies that any portion of Vallco is a hazardous waste site, and the developer has proceeded with demolition work.)

The Vallco development also highlights an important advantage of the new legislation: up to 1/3 of the SB 35 project can be dedicated to non-residential uses. In other words, SB 35 can expedite mixed-use projects like Vallco. Commercial and retail uses might help developers to budget for the affordable housing portion of certain projects, and cities might be more inclined to add new housing if the housing is coupled with new retail or commercial tax revenues.

San Francisco’s 681 Florida Street
In April, the Mission Economic Development Agency, known as MEDA, became the first San Francisco builder to invoke SB 35 for approval of a 130-unit, 100% affordable development in San Francisco’s Mission District. Without the State Density Bonus and SB 35, 681 Florida would have been downgraded to an 86-unit property, losing one-third of its total units.

MEDA’s successful use of SB 35 is particularly significant given MEDA’s earlier opposition to SB 35 and their concerns that the legislation would exacerbate gentrification and displace low-income communities. Affordable housing advocates have warmed to SB 35, which could lead to their support of future legislative proposals to expedite or bypass local discretionary review.

According to San Francisco Planning Department staff, the city has other 100% affordable SB 35 projects in the works: 3001 24th Street, a five-story mixed-use building with 45 affordable senior housing units, 2340 San Jose Avenue, a nine-story mixed use building with 121 residential units, child care, community services and retail adjacent to the Balboa Park BART Station, and 1068 Mission, which includes two mid-rise buildings for housing for the formerly homeless.

Separately, San Francisco-based co-living company Starcity reportedly plans to add over 1,000 units in San Francisco and San Jose through two ground-up developments. Starcity plans to use SB 35 for “Minna,” a 270-unit building at 475 Minna Street in San Francisco’s SoMa neighborhood.

Berkeley’s 1900 Fourth Street
In March, West Berkeley Investors, a subsidiary of Blake Griggs Properties, became the first California developer to file an application under SB 35. Their 1900 Fourth Street mixed-use project includes 130 affordable units, and 260 units total, on an under-used parking lot. After 90 days, the City of Berkeley denied the application, explaining that the project was not eligible for SB 35 because the site is located within the boundaries of the West Berkeley Shellmound—a designated city historical landmark. Studies commissioned by the developer found no evidence of the shellmound at the proposed development site and suggested that the city’s understanding of the location of the underground landmark was inaccurate. The developer said they would abandon the project if evidence was uncovered that the shellmound is beneath the site, but to no avail.

Following denial of its SB 35 streamlining application in September, the developer relinquished its interest in 1900 Fourth Street, including the development application, and handed the project over to the property owners. In November, the property owners filed a lawsuit against the City of Berkeley over the denial, alleging that the proposal qualified for SB 35 treatment and was unlawfully rejected.

Berkley’s denial of the 1900 Fourth Street project highlights a potential shortcoming of SB 35. While SB 35 mandates expedited review, California cities and counties retain authority to determine whether a project ultimately qualifies. In denying the developer’s SB 35 application, Berkeley raised various concerns, ranging from SB 35’s state constitutionality to the project’s compliance with the city’s objective planning standards. Regardless of the merit of Berkeley’s arguments, the question becomes: what if cities simply choose to stymie SB 35 implementation?

The Road Forward
Developers have remedies, including pursing a writ of administrative mandamus in state court. The court might overturn the city’s decision and could require the city to pay the developer’s attorneys’ fees. However, this process can take years and poses a significant financial obstacle for SB 35 projects that already must abide by the law’s many requirements, including paying prevailing wages and meeting affordability goals. Furthermore, the government does not bear the burden of proof to show its SB 35 denial was justified, as distinguished from the Density Bonus Law where a city bears the burden of proof if it declines to grant a requested incentive or concession. Suing a city is also politically unpalatable for developers that wish to build multiple projects in the same jurisdiction.

If other cities follow Berkeley’s lead, further state involvement in implementing SB 35 might be warranted. The state could vest a state or regional agency, such as the Department of Housing and Community Development, with additional land use authority. California recently took a step toward taking land use approvals away from local government with AB 2923. The legislation requires BART, a special district, to adopt its own transit-oriented zoning standards for its estimated 250 acres of asphalt and to adopt a streamlined housing approval process. The law also limits cities’ ability to delay or obstruct development by requiring the cities to incorporate BART’s standards into their own land use regulations. AB 2923 could be a harbinger of what is to come in 2019, as the state expands its role to increase housing in California.

SB 35 has proven to be a useful tool for both nonprofit and for-profit developers, on a project-specific basis. Despite its limitations, we count roughly ten SB 35 projects totaling around 4,000 units currently underway in California. Time, and likely courts, will tell whether the law has staying power. In the meantime, however, regulatory streamlining and local control will continue to be the subject of contentious debate in California. State Senator Weiner recently introduced a new bill, Senate Bill 50, to encourage development in areas served by transit and with high numbers of jobs, after its predecessor SB 827 died in committee in early 2018.