Podcast - Exploring California's Housing Project Entitlement Landscape

Kevin Ashe: Hello, and thank you for listening to the latest episode of the "Real Estate Law Unlocked Podcast." My name is Kevin Ashe. I'm a partner with Holland & Knight, and I'm based in our Newport Beach office. And I'm in our West Coast Land Use and Environmental Practice Group. My practice is focused on land use and entitlement work for housing developers across the state. And we have a very interesting podcast that we'd like to share with you all today. I'll be moderating today's episode, and I'll be joined by my Partners Dan Golub, who's based in San Francisco, and Ryan Leaderman, who's based in Los Angeles. Dan and Ryan, can you please introduce yourselves?

Daniel Golub: Sure, Kevin, thanks. My name is Dan Golub. I'm a partner with the West Coast Land Use and Environmental Practice Group at Holland & Knight and head of West Coast Litigation for the firm.

Ryan Leaderman: And I'm Ryan Leaderman. I'm one of Kevin's and Dan's partners at Holland & Knight as well. And I practice in land use and real estate and love fighting with different cities and jurisdictions all across California.

Kevin Ashe: Great, so we're going to cover a few topics today, with the overarching theme being what's going on with state housing laws and land use and entitlement processes for new projects in California. But I'd like to kick off with setting the stage a little bit, Dan and Ryan, for our listeners that may not be based in California or may not be as familiar with the typical process for approving a project. Dan, maybe you take this one first, can you describe what the process generally looks like and the types of approvals that a new housing project might typically require?

Daniel Golub: Well, Kevin, no, I can't because there's no general process as it turns out. I say that tongue-in-cheek. There's such a wide variety of different ways in which different localities might regulate land use and development, and my background was that I worked in land use planning before I was a lawyer in New York, and I've tried to take a little bit of a broader view of what kinds of processes each locality might come up with, and they really do run the gamut. And one of the important things to understand about our area of law is it's an especially local governmental practice. So if you go back to the foundational cases, it was local governments that began regulating land use. You know, the United States Congress doesn't regulate what you can do with your property except within certain limitations. Your local state legislature doesn't really do that either. If you want to look up your property and say, what am I allowed to build and what will be the process? It's probably some decision that your local city council or town council or county board of supervisors has adopted. So that's the most important thing to understand about our practice. And those local governments could regulate your land use very differently depending upon the politics and their priorities.

So almost every local government has a plan of some sort, either a general plan or a zoning code that tells you what you can build. And then what's especially important is that they then would have a process for reviewing a proposal to develop your land. And that again could run the gamut. Certain kinds of uses and developments might be considered completely permitted and by right. And that means you really don't even have to talk to anybody about what you want to do with the land because you're permitted to do that by right. Or what you're asking to do with your land could be considered completely at the discretion of your local government, especially if you want to change your zoning from something to another. And then there's all sorts of middle grounds where permits have to go through a conditional use permit process or a site review process, but it really is wholly dependent. And I think this is true across the United States, where your local government has some level of control from completely by right to completely forbidden or something in between. And that's the background really broadly of how we see land use regulated across the country.

Ryan Leaderman: And if I can add about by right, and you said it's such a great term because I've had so many clients say, hey, my project is by right, I conform to the zoning, and I conformed to the general plan. And I'm like, well, guess what, you still need a discretionary permit from the jurisdiction, and good luck, you're going to be subject to the California Environmental Quality Act review because you actually have a discretionary permit with your by-right project. And I can't tell you how many developers have not been happy when I've had to tell them that there's a discretionary component. But generally speaking, the projects that we typically see involve larger projects, discretionary projects, or at least historically, until some of the recent changes in the law. And that's because it's expensive to hire some attorneys to go ahead and argue with the city or try to do that permitting. So if a project is somewhat smaller and ministerial, a truly by right with no discretionary actions, we oftentimes don't see those, but oftentimes when there are larger projects, we will see them. Or now that the state laws have changed, there may be more ministerial processes that we advise on, because there's a different path that could be discretionary, or depending on how you structure the project, it could be ministerial.

Kevin Ashe: Great, thanks for setting the foundation. So eventually we're going to get into some new housing laws and streamlining laws and how they've had a profound effect on expediting the process or laws that have existed for a long time but have been popularized more recently. But can you tell us a little bit about what the housing approval process or entitlement process looked like before these laws really started taking off in around 2017, 2018? I won't call them the quote-on-quote "dark days," but can you just give our audience members a little bit of insight into what it used to take and how long it used to take to get complex projects approved?

Ryan Leaderman: Sure, I'll take this one. At least I'll do the first response. And it was ugly. It's highly discretionary, where you have to be very, very nice to your jurisdictions because you need their approval in order to get your project its permits. And you still have to be nice, you still have to cooperate, although some of my colleagues disagree about how nice you need to be to a jurisdiction. But generally speaking, in 2017, before the Housing Accountability Act had any teeth, it was very discretionary. You're subject to the mercy of your planning commission, your planners at staff, your city council person. And it was a rough go. And sometimes it invites corruption as well when different pressure points are trying to squeeze a developer for different components, different project changes, or you may not get your hearing unless you do certain things.

And it was a horrible situation for many developers. And I won't reveal which horrible projects I worked on, I mean, they were wonderful projects, but treated really horribly by various different jurisdictions in Southern California and it was very challenging. Now, some of that pre-2017 guide, just dated myself, how old I am, but some of those pre-2017 rules are still in place depending on the discretionary actions that you have. So for example, if a project still needs legislative action, like a general plan amendment or a zone change in order to allow the project to go forward, you're still stuck with some of these old rules that really require cooperation between the developer and the jurisdiction. Dan, what do you think about this?

Daniel Golub: Yeah, it's interesting, Ryan. You said you love mixing it up with these cities when you introduced it, I'm not positive I love it. I was very honored to have been introduced by a leading attorney for municipalities at a conference recently who introduced me as one of her "frenemies." And that's the way I look at it. So look, our land use group is an aggressive advocate for the rights of people who are looking to develop their properties. I particularly focus on housing development. I do occasionally represent localities and am sympathetic to the concern, which is, you know, you're proposing to develop something in an area where all the constituents are saying they don't want to see it there. It's understandable politically that they disinclined to approve something that all the people who vote for them don't like. The problem we've had in California is that the interests of the people who aren't at all those planning commission meetings, because they can't afford to live in the jurisdiction, don't get represented in the local political process.

So, you know, what I think is the most important thing about the before times – and I guess in the next question we'll talk about the current law – in the before times, and this is probably the second time in as many weeks that I've had to quote my partner Tamsen Plume, who coined the term "creative groveling," but that was our process. There was nothing we could really do for your project, you know, absent our takings claim or something really egregious, if the locality didn't want to permit your project. And if the locality did permit your project, the litigation we did was to defend the project approval from not-in-my-backyard opponents (NIMBY) or other interest groups who were trying to stop the project. So our best result was usually, OK, you're approved, and if it's a controversial project, we'll spend the next couple of years in court defending your approval. But there was usually very little that we could help you with if you had a project that the local planning commission didn't necessarily want to see built. And again, for me in California, the difference is, that was not unusual when you proposed a legislative change, as Ryan talked about. If you're proposing to rezone a site that currently only allows commercial and you want to build a big residential project, everywhere in the United States, that would be subject to very rigorous legislative review and discretion. What was different about California in the last couple decades is, most California localities would require you to go through a fully discretionary process to build multifamily housing, even if you were completely zoned for that. And I think that was the critical distinction between California practice of the past several decades and the way it works in other jurisdictions.

Kevin Ashe: Right. So pre-2017 or for a long time, you could have a project consistent with a city zone and general plan and be relatively benign in terms of environmental impacts but still be caught in a two- to three- to four-year process, which was highly uncertain. So let's talk about how it is today. How are things different today? Dan, let's have you take this first one. What sort of tools are you seeing developer clients and housing lawyers use at their disposal to create a more streamlined or certain process when developing new projects?

Daniel Golub: Yeah. So especially in 2017, there are a number of other laws, but we really do mark that as a real watershed year for the California legislature. You know, I said that most land use regulation is local and that's certainly true, but I've litigated cases that have affirmed the principle that the state can get involved when it wants to in the land use approval process. Because the dynamic is such that everyone wants local control to a certain extent. You want to have your local neighborhood and your local city run in a way that the people who live there like. But if each locality gets to decide whether it wants to have doors open to new housing opportunities, it creates what the political scientists call a collective action problem, which is everybody wants the new housing to be built, but they'd prefer it to be built somewhere else. And that's how we've ended up in what the statistics show is a massive housing crisis in California, which is primarily a housing supply crisis. You know, I think we're 49th of 50 states in per capita homes, according to the statistics the last time I looked at it. And that's just not enough homes for our population. And our population keeps increasing and we're absolutely not building enough homes to keep pace. And the legislature took a look and said, well, we really can't allow this to continue if each locality just continues to say, sure, we like the commercial development, that makes money for us, but we really don't want any new homes built in this area, we'd like them to be built somewhere else – we just won't see production. So a couple of really important laws were reformed and revised.

The Housing Element Law is a law that requires each locality to come up with a plan for where it is going to meet the regional need for housing. For decades, those plans were ignored because they were worthless, and that law was given significantly new teeth. There were reforms to the law that I probably spend most of my time practicing. We here at Holland & Knight have litigated the leading cases under this law, it's called the Housing Accountability Act, and that law tries to do something about the problem of completely zoning-compliant projects being denied because the local approval process is highly discretionary. It tries to limit the city's ability to disapprove zoning and general plan-compliant projects to cases in which there's a very severe public health or safety impact, which would really rarely occur if you're building to the zoning.

And then there's laws like the State Density Bonus Law, which have aimed to have particular protections for projects that include below-market-rate housing for lower-income or other households. These laws really – almost none of them were enacted the first time in 2017 – but they were significantly improved. And one of the dynamics that turned out to be valuable for those of us who litigate for at least part of our living, is, it made it more plausible that you could enforce these laws, that you could go to a locality and say, no, this is a real requirement imposed by state law and if you don't follow it, we're willing to see you in court. And while I don't entitle most of my projects through a Superior Court courtroom, the fact that I'm able to do that if necessary has really started to change the game with respect to what kind of rights we can enforce for a housing developer who's looking to build in a particular locality.

Ryan Leaderman: I would agree completely that we have these new leverage points and new tools that are extraordinarily helpful. In addition to the laws that are helpful, we do have a changed political environment as well. We rely on YIMBY (Yes in My Back Yard) support and on some of the advocates that just never came out before. It used to be a bunch of really old people just saying no, no, no, we don't want any change, we don't want this project, we don't want the traffic, we don't want the housing, we don't need the housing. And there has been a very big change in the number of people and the amount of people and the voice people have to support housing projects. And I do think that that is extremely important because it does give political cover to our decision-makers who may be confronted by an audience of pitchforks that is not just pitchforks against a project. And of course, not everything is rosy and sunny in our legal landscape. We do have replacement housing requirements that are very, very tricky and very complicated and do substantially drive up the cost and do impact the amount of development.

And it is somewhat sad if someone has, let's say, a duplex and they are not quite sure as to the income level of the tenants or someone buys a property that had a duplex, but it was vacated in the past few years, that all of a sudden there could be affordable requirements on the new project that would substantially exceed, the size and scope of what would be expected for the affordable requirement on that new development. And that really does chill development, and so that is somewhat scary. But as a whole, having that ability to use leverage against a city and potentially threaten to sue a city, and then also to have the state government with HCD (California Department of Housing & Community Development) coming in and sending in some very supportive letters or even the AG (attorney general) litigating cases. Kevin, we litigated a project in La Cañada and the AG's office and the HCD, they were amazing. And they were extraordinarily helpful to get a very positive result to have housing that eventually was approved. And so those are really big changes and differences that we didn't see. And this whole notion of builder's remedy, where a developer could say, suck it, everyone, I can build what I want, and you, jurisdiction, have no control or ability to say no. That's pretty amazing. And that just did not exist before 2017. Even if someone can make an argument that it was in the law before, you didn't see it, you didn't see it succeed. And that is a giant difference right now in the law.

Kevin Ashe: You guys covered some great examples, and I think we'd all agree there's work to be done still, but I'm at least encouraged that the state legislature is looking at different tools and viewing multiple housing options and product types to each mitigate the housing crisis in their own way. We have refinements to state density bonus law, new statutory CEQA (California Environmental Quality Act) exemptions for infill projects, but there's also new laws that are coming out that focus on smaller housing, right guys? Like the ADU (Accessory Dwelling Units) laws, lot splits and then SB-1123, which is making it ministerial by right for 10-lot, 10-unit subdivisions in certain cases. So I think that at least the legislature is looking at multiple avenues of helping.

So we've talked about the past, we've talked about where we're at, and I'd like to just use the last bit of the podcast to focus on where we are going. I mentioned earlier, there's still a fight to be had. According to 2026 figures, prices for mid-tier homes in California are averaging around $775,000, which is more than twice the U.S. average. HCD, our state agency, has stated that we need to produce, as a state, 180,000 new homes each year just to keep pace with mitigating our housing crisis. Yet, over the past decade, we've produced, as a state, far fewer than that. With the backdrop that there's still work to be done, Dan and Ryan, what sort of developments or solutions do you see on the horizon of things that might be coming down the pike?

Ryan Leaderman: We do have a lot of these new ministerial laws. We're seeing a lot of opposition to ministerial laws where really there isn't an opportunity to litigate them or to oppose these ministerial approvals. And yet we're still seeing challenges right now. And I think that's a very big risk and it's a very big problem because even though these laws are designed to expedite and approve projects, they still get, sometimes, tied down. We still see prevailing wages and social policies just keep on coming up again and again and again and I think that's going to be a constant battle, as well as the limits of state density bonus law with incentives and waivers. And challenges to incentives and waivers that even though I think the law is pretty clear on them, there still are more battles that are happening and that will happen in the future.

Daniel Golub: Yeah, I'm keeping an eye on when the legislature and our next governor, whoever it might be, wants to take a look at constraints upon housing supply other than the permitting process. And I say this even though I've spent about the last decade of my life primarily working on laws that attempt to get through the local permitting process, but that is not, as my friends who represent the localities are probably sure to point out, the only cause of the high cost of housing. So a couple of the things I'm looking at is, are we ever going to move towards a true homeownership model, where we're creating more homeownership opportunities. I'm doing a lot of work on multifamily, primarily rental, developments. I think those are a critically important part, especially at infill locations, but they are not the only thing people want to live in. People are looking for a home, and I do think the streamlining laws haven't done enough for true affordable homeownership opportunity, which involves creating a lot more for-sale homes than we currently have on the market. And then there are other cost reductions that people need to look at that are beyond the delay and cost of going through permitting and CEQA, like the extremely high cost of construction. A lot of that is not just in the hands of the state or even at the hands of the federal government, though the federal government could probably be doing more. Those are internationally cost of labor requirements that have to start coming down.

And then there's things like excessive fees that are imposed. It seems like a great idea to have a traffic impact fee on every single project until you get to the point where the developers throw up their hands and say, I can't pay that fee. And the locality says, well, that was kind of the point. Someone has to take a look at all those. And then there's things like condo defect liability. Again, with the homeownership model, a lot of folks say that it's too easy to sue under a condo defect law. And that's part of the reason that condo and homeownership developers say that they can't afford to put money into the project, because they're paying too high a rate for insurance coverage of those kinds of claims. All of those things go beyond the permitting process, which I'm probably going to keep working on for another couple of decades, but homeowners, builders and investors in housing say that there are a lot of other things on the checklist that the state legislature needs to be working on if we're truly going to get the cost of construction down.

Kevin Ashe: Great. Thanks, Dan and Ryan. I think that concludes this latest episode of "Real Estate Law Unlocked." You should feel free to get involved with us at Holland & Knight. To the extent you have any questions or issues regarding new projects in California, we'd be happy to talk to you.