1. Executive Summary

• The state government substantially reduced funding for affordable housing a decade ago during the Great Recession and funding has never been reinstated.
• Some state legislators, ignoring the lack of funding, have pursued local zoning practices as the cause of the affordable housing crisis. Numerous bills with state-wide incentives and exemptions have been passed to stimulate affordable housing production. It hasn't worked to date.
• The most recent housing bills charting their way through the California Assembly and Senate have switched focus from affordable to moderate and higher-income housing brackets. The state sets affordable housing production targets for cities, but meanwhile produces bills that undermine affordable housing efforts.
• The most egregious bill enables developers to pay a much-reduced fee in lieu of building affordable housing while still granting the developer the upzoning opportunity. 
• Only two bills address the current economic reality of stretched city budgets: Senator Portantino's SB-1299 and Senators Caballero's and Rubio's SB-1385. 

2. State Funding For Affordable Housing: Anemic for a Decade

During the Great Recession, the state terminated most of its funding for affordable housing when it shut down the local Redevelopment Agencies (RDAs). At the time, RDAs were providing 80% of the state funding for affordable housing through the redeployment of local property taxes. Facing a budget deficit, Governor Brown froze local redevelopment activities in 2011 then shuttered the agencies in 2012, diverting their property tax resources to schools and local services to backfill the state funding shortfall (see Fig. 1).

3. Federal Funding Has Proven More Reliable 

Fortunately, and perhaps surprisingly, the federal government's commitment to California’s affordable housing crisis has remained robust (see Fig. 3).

Ignoring the decline of state funding, some state legislators have blamed local zoning practices for the affordable housing crisis and have introduced state-mandated density bonuses and incentives to spur affordable housing development. SB-330 (2019), AB-1763 (2019), SB-35 (2017), SB-375 (2008) as well as recent amendments to the Housing Density Bonus Law (Orig 1979), all now law, were designed to stimulate affordable housing production through the:

1) streamlining of approval processes

2) provision of additional density bonuses as incentives

3) creation of CEQA exemption tracks  

4. New Construction of Affordable Housing Still Languishes

In a new twist, the current raft of bills appears to step away from the lower-income housing challenge in favor of housing for higher earning brackets. Development incentives that were in place to encourage low-income housing are now being extended to the market-rate housing segment. This, despite the fact that the state is on track to exceed its market-rate housing targets for the 5th housing element cycle.*

The Housing Bills: Legislation in an Age of Uncertainty
With so much economic uncertainty, new work-from-home trends, and a wariness of public transit-use that comes on the heels of years of declining ridership and will likely jeopardize billions of dollars of transit capital, this isn't the time to defund affordable housing and focus on market-rate housing. Unfortunately, many of the current housing bills do just that.

The good news is that while most of the bills making their way through the legislature seem inured to current economic realities, there are two bills that distinguish themselves: SB-1299 (Portantino) and SB-1385 (Caballero and Rubio). Both of these bills acknowledge the pressure on retail/commercial real estate and the housing opportunity it presents for cities. Portantino’s bill, in particular, stands out as the only bill that addresses local funding challenges, offering an innovative economic incentive for cities to create workforce housing (see bill highlights below)
 

5. Incentives in the Latest Housing Bills: But Not for Low Income

Streamlining and incentives originally put in place to encourage low-income housing are now on offer for higher income brackets in the current bills. These new incentives add further complexity to an already complex system of incentives and have the effect of overriding current law and pitting the production of higher-income housing against lower-income housing—an unfair fight. 

The bills are color-coded RED, YELLOW or GREEN based on our analysis. 
For more in-depth analysis of the bills go to Legislation in an Age of Uncertainty

SB-995 (Atkins, Wiener, Caballero, Rubio) 

Existing law

SB-995

• ISSUE 1: SB-995 lowers the percentage of affordable units a developer must include to qualify for CEQA fast-track — this, even as the state comes up short on affordable housing. Lowering the state’s requirement for moderate-income units to 15% is at odds with state affordable housing goals set by the Department of Housing and Community Development (HCD) at 60% (40% low and very low-income housing units + 20% moderate-income units). SB-995 erodes inclusionary standards for affordable yet without a rationale. If legislators believe incentives are the path to building sustainable affordable housing, and they believe in the targets set by the HCD they should align incentives with those targets. 

• ISSUE 2: This bill is in conflict with HCD’s established Regional Housing Needs Allocations (RNHA) and is also in conflict with California's Public Resource Code.

• SUGGESTED FIX: The bill is unnecessary given existing law.

SB-1085 (Skinner and Caballero) 

Modifies existing density bonus law. Current law rewards developers with larger housing projects than zoning allows, if developers provide affordable units. Density bonuses are awarded on a sliding scale based on the percentage of affordable units in the development. SB-1085 lowers the affordability standard developers must meet to qualify for certain density bonuses.

Existing  law 

Grants density bonuses to developers, allowing them to enlarge a housing project by 20-35% depending on the percentage of affordable housing units in the project. The 35% density bonus is reserved for projects that include either 11% very-low-income units, 20% lower-income units, or 40% moderate-income units.  

SB-1085 

Awards the 35% density bonus to a developer when the development includes only 20% moderate-income units, as opposed to 40% moderate-income units under current law. 

• ISSUE: SB-1085 makes elements of the density bonus law obsolete. It discourages lower-income housing development, by pitting lower-income housing against moderate-income housing, rewarding them equally. If a developer can build 20% moderate-income housing or 20% low-income housing for the same incentive, the economics dictate only the former will be built. 

• SUGGESTED FIX: Remove “or moderate” from clause Govt Code 65915 (b)(H) “Twenty percent of i) the units is for households of low or moderate incomes”. 
   

6. Low In-Lieu Fees: A Boon for Market-Rate Housing 

Perhaps even more damaging to the cause of affordable housing are new in-lieu fees (fees developers can pay instead of building the required affordable housing). The fees suggested in-lieu of building affordable housing are far below the actual cost of building the units, creating an attractive arbitrage for developers of market-rate housing. Fees that are set far below the cost of on-site performance inherently result in little affordable housing. 

AB-1279 (Bloom)

This bill introduces “opportunity areas”, a term currently in use by the California Tax Credit Allocation Committee (TCAC). TCAC, part of the state treasury, awards tax credits to affordable housing projects and the maps are used to identify areas that are suitable for the construction of low-income housing based on resources available. Some of the factors that are considered are job proximity, high school graduation rates, unemployment rates, math, and reading proficiency. AB-1279 states “opportunity areas” will potentially align with the TCAC opportunity maps, but notes final definition of the areas will be made at a later date, after the passage of the bill, and by unspecified “academics”. The “opportunity maps used by TCAC are posted here: TCAC Affordability maps.

As with the failed bill SB-50, AB-1279 allows the development “by right” of up to 10 housing units in R1 zoning with the requirement that EITHER all 10 units are designated as moderate-income housing (affordable to a household earning 100% of Area Median Income — AMI). OR a developer can pay a fee and instead build 10 market-rate housing units. The fee calculation differs if the housing units are for ownership or rental

The fee to be paid in lieu of building rental housing is set at twice the difference between 12 months of market-rate rent and 12 months of affordable rent (where affordability is based on 30% of  60% Area Median Income (AMI) ). 

In real numbers: 

• In San Francisco, market-rate rent for a 2-bedroom apartment is $3,600/month (1).

•  Rent for an affordable apartment for a 4 person household at 60% of the Area Median Household Income is $1,921 (based on U.S. Dept of Housing and Urban Development (HUD) 2020 Maximum Income by Household Size by Metro Area Tables)

•  Thus a developer in San Francisco could pay a one-time fee for the right to build 10 market-rate units in R1 zoning in the amount:

  • Twice the difference between 12 months of market-rate and affordable rent:
    2 x 12 x ($3,600 - $1,921) = $40,296/unit

  • For a 10 unit development that’s $402,960

For a $400,000 fee, a developer can purchase the ability to upzone to 10 market-rate units. The present value (PV) of the difference between the market-rate and affordable income streams for 10 units is approximately $3 million (2). In this case, the city would give away $3 million of value in exchange for $0.4 million. In San Francisco, the in-lieu fee is less than the cost of construction of one affordable housing unit (3).

• The in-lieu fee in the case of ownership units is set at 10% of the difference in sales price between a market-rate unit sale and an affordable unit sale - affordable meaning it must be affordable to a household earning up to 100% of the Area Median Income and paying a maximum of 30% of income in housing costs. 

  • The average sale price for a 2-bedroom unit in SF in March 2020 was about $1.4M

  • 30% of 100% Area Median Income is $3,200/month (per 2020 HUD charts mentioned above). That’s the allowable monthly cost for housing and would include property tax and utilities. That monthly housing cost translates to an affordable home of approximately $430,000 to $450,000. 

  • The difference between the sale of a market rate unit and an affordable unit would be $1.4M - $0.45M = $0.95M

  • So a developer would pay 10% of that which is  $95,000 per unit or $0.95M in fees to build 10 market-rate units. 

  • The market value of 10 units would be around $14M but the developer pays less than $1M in in-lieu fees. In San Francisco, that would cover the construction costs of two affordable housing units.

• ISSUE 1. ”Opportunity Areas” need to be defined upfront before the bill can be considered. The impact cannot be properly assessed if the areas are not defined. A larger issue is that the state should settle on the map of choice for land-use. Cities are required by Gov. Code 65583(a)(3) to develop site inventories as part of the RHNA process. There are now three competing definitions - local site inventories, opportunity areas, and last year's "transit-rich".  The state cannot expect cities and local planning agencies to participate in the development of their RHNA targets and then sideline their planning efforts. Everyone needs to be working towards a common goal.

• ISSUE 2. The sale of upzoning opportunities to developers for market-rate housing in areas deemed “Opportunity Areas” by TCAC undermines affordable housing efforts. The in-lieu fees are set so low that the clause in the bill that pertains to 10 or fewer units seems designed to produce market-rate housing under the guise of incentivizing affordable housing. The economics of the deal also incentivizes the construction of ownership units over rental units at a time when the rental market is particularly tight. "Opportunity areas" were identified as suitable sites for affordable housing but AB-1279 instead encourages the development of market-rate housing in these areas, undermining the original purpose of the map.

SUGGESTED FIX: Opportunity areas should be clarified upfront and should be consistent with areas identified for housing development in the RHNA process. All possibility of paying in-lieu fees instead of building affordable housing should be struck from the text. If upzoning to 10 units is allowed it should only be allowed for developments that reflect the state-mandated RHNA affordable housing targets: 40% low and very low-income units, 20% moderate units, 40% market-rate units. 

AB-2345 (Gonzalez and Chiu)
This bill increases the density bonus available to affordable housing projects. 

Existing  law 
Grants density bonuses to developers on a sliding scale allowing them to enlarge a housing project by 20-35% depending on the percentage of affordable housing units in the project. The 35% density bonus is reserved for projects that include either 11% very-low-income units, 20% lower-income units, or 40% moderate-income units.  

SB-2345
Alters the bonus scale. Projects that currently qualify for 35% are now eligible for a 50% density bonus. A “density bonus” allows an increase in the total number of units as a reward for having a certain percentage of affordable housing units. On the surface that seems like a good thing, however, the extra housing units are typically market-rate, and that’s where the issue lies.

• ISSUE: Under current law, a 100-unit project, where 25% of the units are low-income, would qualify for a 35% density bonus. It would create 110 market-rate units and 25 low-income units. AB-2345 would increase that density bonus from 35% to 50%, which would instead create 125 market-rate units and 25 low-income units - the same number of affordable units but more market-rate housing units.  The bill effectively incentivizes market-rate, not low-income housing. For every one low-income housing unit, it would create five market-rate housing units (1:5). This ratio sits in stark contrast to the housing need determined by the HCD that claims the state needs to build six affordable housing units for every four market-rate units (6:4). 

7. Up-Zoning: Pits Market-Rate Against  Affordable Housing  

Other housing bills in this legislative session that fall into the up-zoning category are

SB-902 (Wiener) 

Allows 10 units of market-rate housing to be developed on almost any parcel (areas remain undefined) with the support of the local city council. 

Enables city councils to roll back voter-approved land-use initiatives.

• ISSUE: Antithetical to democratic principles. The bill grants city councils the right to override general plans that are the culmination of community outreach, public hearings, and debate. Granting the ability to override voter-approved initiatives to a city council raises the specter of future legal challenges for the state.  The bill will likely have the effect of further politicizing local elections as city council seats become a path to upzoning. The bill accomplishes nothing for low-income housing, focusing as it does, solely on market-rate housing.

• SUGGESTED FIX: Since the state’s Regional Housing Needs Assessment has set targets of 40% market-rate, 20% moderate, and 40% low-income, upzoning should be favored only if developments reflect those percentages. This bill favors market rate over affordable housing, undermining the ability of any city that might adopt this law, to reach their state-required RHNA affordable housing quotas. Cities, as seen in Figure 1, are not struggling with their market-rate RHNA quotas.

SB-1120 (Atkins, Caballero, Wiener) 

• ISSUE: Per Figure 1, above, the state is on track to exceed its market-rate housing quotas for the 5th housing element cycle. There is no need to incentivize market-rate housing with a reduced parking requirement or a streamlined approval process. Reduced parking requirements should be exclusive to low-income housing developments. Parking for market-rate housing should follow local zoning rules. Currently, the state has an average of over two registered cars per household, a number that has only increased over the last several years, despite previous forecasts of peak car. It remains to be seen how the current decline in public transit ridership and the recession will affect vehicle ownership, but in the majority of the state, it is unlikely to fall below two cars per household anytime soon. As such the removal of parking minimums should once again be kept for low-income developments. In addition, urban lot splits should still be open to local discretionary review and local subdivision ordinances. There are many considerations that factor into a subdivision and it should follow the standard local approval processes.

• SUGGESTED FIX: Upzoning in of itself is an enormous incentive for market-rate housing. California is on track with its market-rate housing. No additional incentives are required. Remove language that reduces parking requirements and remove the designation of these projects as “ministerially approved”. Require these market-rate projects to follow the standard local approval processes. Also to clarify the intention of the bill and avoid the misinterpretation that the bill enables duplexes on both lots, it should say that the lot split is only for the purpose of supporting the development of a 2 unit housing project.
  On a positive note, the 30-day minimum rental restriction discourages the creation of units for short-term Airbnb stays, although, in reality, the rule may be difficult to enforce.

SB-1385 (Caballero, Rubio) 

Allows residential development as an authorized use on sites zoned for commercial and office if 50% of the square footage has been without a tenant for three years or more.  

• ISSUE: No issues. This is one of two bills that acknowledge current economic realities. No affordable housing is created but it does create more housing without giving away the farm. Seems to be a win/win. 

• SUGGESTED FIX: None

SB-1299 (Portantino) 

Creates an incentive to convert idle big-box retail to moderate-income work-force housing by providing grants to cities that are tied to the average sale use tax generated by the idle property over the past 7 years.

• ISSUE: NONE. This is the only bill that addresses funding challenges for cities. It creates an innovative economic incentive for cities to convert big-box to housing. The carrot versus the stick approach.

• SUGGESTED FIX: None. Unfortunately, this bill will likely struggle in the legislature because it requires state funding and the state has proved remarkably reluctant to meaningfully support affordable housing, which state leaders cite as a top priority

8. Notes and Sources

*The Dept of Housing and Community Development (HCD) is responsible for determining regional housing needs (segmented by income levels). The regional housing need is determined using demographics projections from California’s Dept of Finance and a formula that takes into account household formation rates, demographics, income, and jobs etc. Local planning bodies separately calculate their housing needs and then conferring with HCD their regional housing need is finalized. The local planning body then allocates that housing need by jurisdiction. These final allocations are referred to as the Regional Housing Need Allocation (RHNA) plan. These plans are then reflected in the housing element of a local government’s general plan. In some cases, access to state and federal funding for affordable housing requires a compliant housing element. As such, there is an incentive for local jurisdictions to comply with these state processes. 

The cycle to update the housing element happens on a 5 or 8-year cycle, the cycle length chosen by the local planning body. Typically, larger urban areas are on an 8-year cycle.  California is currently in its 5th housing element cycle. The smaller regions on a 5-year plan completed their cycle at the end of 2019, the larger urban regions are due to complete in the 2021 to 2023 timeframe.

Note: Statewide, approx 40% of the housing need in the 5th housing element cycle has been determined to be very low and low income, 20 % moderate-income, and 40% market-rate. 

Sources: All source data are available on the website

Figure 1. Sharp Decline in State Funding for Affordable Housing

Note: Affordable Funding totals do not include mortgage revenue bond financing for affordable housing.

Dept of Housing and Community Development (HCD): Annual Reports (2005 to 2019)

Redevelopment Housing Activities Financial Reports (2005 to 2011), HCD public request under the FOIA

California Tax Credit Allocation Committee (CTAC) Annual Reports (2008 to 2019)

California Business Community and Housing Agency, HEAP annual report (2018-2019)

California Dept of Social Services CDSS: CalWORKS Annual Reports (2008 to 2019) and CDSS public request under the FOIA

California Office of Emergency Services (CalOES): Joint Legislative Budget Committee Report (2005 to 2019) (CalOES public request under the FOIA)

Dept. Health Care Services (DHCS): Mental Health Care Act Expenditure Reports (2005 to 2019)

California Housing Finance Agency (CalHFA): Comprehensive Annual Reports (2008 to 2019), 

Figure 2. State Income Tax Revenue Doubles While Its Spending on Affordable Housing Stagnates

Note: Affordable Funding totals do not include mortgage revenue bond financing for affordable housing.

Sources as in Figure 1 and in addition

California State Controller’s Office: State of California Comprehensive Annual Financial Reports (2005 to 2019)

Figure 3. Return on Income Tax Dollars for Affordable Housing - Federal vs State

Sources as in Figures 1& 2  and in addition

U.S. Dept. of Housing and Urban Development (HUD): 

Source: HUD Exchange: State Grants from 2005 to 2019

Community Development Block Grant (CDBG) including Economic Development and Disaster Recovery Initiative (CDBG-ED, CDBG-DRI); Federal Emergency Shelter Grant Program/ Emergency Solutions Grant Program (ESG); Home Investment Partnerships Program (HOME) including Drought Tenant based Rental Assistance (HOME-DRI); Housing Assistance Program (HAP); Housing Trust Program (HTP); Neighborhood Stabilization Program (NSP)

Source: HUD portal datasets on rental assistance covering the following programs

Public Housing, Housing Choice Vouchers, Project-Based Section 8, Mod Rehab, S236/BMIR, 202/PRAC, 811/PRAC, MF/Other

U.S. Dept. of Health and Human Services (HHS)

Source: SAMHSA State Summaries 2014 to 2019, Public Request under FOIA SAMHSA 2000 to 2014 data (pending), FYSB State Allocation Tables – Basic Center and TLP; SMHS Supplement to the Medi-Cal Estimate November Reports 2000 to 2019, SAMHSA – Projects for Assistance in Transition from Homelessness (PATH); Family and Youth Services Bureau – Basic Center Program and Transitional Living Programs; Medi-Cal Specialty Mental Health Services Program 

U.S. Dept of Agriculture (USDA) 

Source: USDA Rural Housing Program Funding Activity Year-End Report (2008 to 2019)

521 Rental Assistance; 523 Self Help TA Grants; 504 Repair and Rehab Grants; MFH Tenant Vouchers; 533 Housing Preservations Grants; 516 Farm Labor Housing grants

Dept Of Housing and Community Development (HCD) – Federal grants to HCD 

Source: HCD Annual Reports (2004 to 2019) cross-referenced with HUD Exchange reporting

Community Development Block Grant (CDBG), Emergency Solution Grants (ESG), Home Intervention Partnerships (HOME), Homelessness Prevention Re-Housing Program (HPRP), Housing Assistance Programs (HAP) until 2012, National Housing Trust Fund (HTF), Neighborhood Stabilization Program (NSP)

California Tax Credit Allocation Committee (CTAC)

Source: CTAC Annual Reports (2000 to 2019); 4% and 9%  Federal Low Income Housing Tax Credits for Affordable Housing 

State Controller’s Office

Source: State of California Comprehensive Annual Financial Reports; State of Revenues, Expenditures and Changes in Fund Balances 20015 to 2019

Internal Revenue Service

Source: IRS Tax Statistics: Historical Table State Tax - California 2005 to 2017

Figure 4. New Construction of Affordable Housing Has Been Sluggish For Over a Decade

California Tax Credit Committee:(CTAC) Annual Report data on project awards by type of construction type  - includes 4% and 9%  tax credit projects

Figure 5. Affordable Housing Languishes While Market-Rate Presses Full steam Ahead

Source: Regional Housing Need Assessments as determined and reported by the Dept of Housing and Community Development (HCD). The cycles last between 5 and 8 years so targets have been prorated based on the percent of the cycle completed at the time of the most recent HCD progress reports (2019). Permit Progress data is from  HCD’s 5th cycle Annual Progress Report Summary.

1.Data from Rent Cafe
2.City of Pasadena: Affordable Housing: In-lieu Fee Study, Pasadena (2018)
3.Terner Center:The Cost of Affordable Housing Production ,March 2020