Understanding the Recently Enacted 2017 State Legislative Housing Package

California’s housing affordability crisis was a primary focus of the California Legislature in 2017, culminating with Governor Brown signing into law a historic “housing package” of 15 bills, passed on the last day before the legislative session adjourned. This new set of bills represents the most significant state-level action addressing housing since the elimination of redevelopment agencies in 2011. Though in recent years state policymakers have frequently discussed the urgent problem of rising housing costs, they had previously failed to reach agreement on how the state should respond, making this year’s success noteworthy.

All of the bills in the housing package are designed to increase the supply of housing in California, including the number of affordable homes. The bills fall into five groupings based on how they aim to address the state’s housing shortfall — whether by:

  • directly financing affordable housing production,
  • facilitating private-market housing production by streamlining local review processes,
  • increasing local accountability for accommodating a fair share of new housing development,
  • harnessing private funding to pay for affordable housing development through inclusionary zoning, or
  • preserving the affordability of existing subsidized housing.

This blog post summarizes the new policies put in place by each of the 15 bills in the housing package and follows our earlier analysis of key strategies included in the package, as well as our analyses of housing costs and housing cost-burden throughout California.

Directly Financing Affordable Housing Production

Two of the bills in the housing package are designed to provide new sources of state funding to directly invest in the production or rehabilitation of homes that are affordable to households with low incomes. This public funding is important to encourage production of housing with particularly low rents or purchase prices, accessible to households with very limited incomes — housing that the private market is unlikely to produce because it is not profitable.

  • Senate Bill 2 (Atkins), the Building Homes and Jobs Act, establishes a new $75 recording fee on real estate transactions (excluding new home purchases) to create a permanent source of state funding for affordable housing, a long-time goal of California housing advocates. The fee is projected to generate roughly $200 million to $300 million per year. Over the long-term most funds will be distributed to local governments to fund affordable housing development, while the first year of funding will primarily support homelessness services and capacity building in local government to improve housing planning.
  • Senate Bill 3 (Beall), the Affordable Housing Bond Act of 2018, places a measure on the November 2018 statewide ballot to raise $4 billion in bonds, with $3 billion going to fund affordable housing development through existing state programs and $1 billion to support affordable homeownership opportunities for veterans (with these funds paid back to the state through veterans’ mortgage payments).

The number of affordable homes ultimately created or preserved through this new direct state funding will depend on many factors, including where projects are developed; what other federal, state, and private funding they are able to leverage; what specific populations they serve (e.g. families, single adults, older adults, formerly homeless individuals, or individuals with significant need for supportive services); and whether they involve new construction, rehabilitation, or preservation of homes in danger of losing affordability protections. The California Housing Partnership calculates that state-supported new housing construction projects have received roughly $70,000 in state subsidies per unit on average in recent years, while the Legislative Analyst’s Office has estimated that $165,000 is a typical per-unit public subsidy in California’s coastal urban areas. Veterans’ home loans issued through the existing CalVet program have averaged about $300,000 per loan in recent years. These estimates suggest that the housing bond might support production of roughly 18,000 to 43,000 homes in total, along with providing home loans for more than 3,300 veterans, and that revenues from the recording fee might support production of roughly 1,200 to 4,300 homes per year.

A third bill included in the housing package is designed to improve the utilization of an existing state funding source for affordable housing developers, the state Low Income Housing Tax Credit (LIHTC). Specifically, this bill applies to the portion of state tax credits set aside for farmworker housing.

  • Assembly Bill 571 (Garcia) modifies the criteria for projects eligible for the state LIHTC set-aside for farmworker housing, which has been under-utilized in prior years (and has approximately $5.5 million currently available for qualified projects). AB 571 allows individual farmworker housing projects to qualify for more public funding and allows projects with 50 percent of units for farmworkers (instead of 100 percent) to qualify, making these types of projects more financially viable.

Facilitating Private-Market Housing Production by Streamlining Local Review Processes

Other bills in the housing package take a different approach to increasing the supply of housing, by facilitating privately-funded housing development rather than directly funding housing production with public dollars. Involving private-market housing developers in addressing the state’s housing crisis is important. The state faces such a large shortfall of housing affordable at all income levels that public funds cannot directly support development of enough units to fill the gap.

Complex and lengthy review and permitting processes at the local level can block or delay proposed housing developments or result in projects with fewer units overall or with fewer affordable units. The housing package includes three bills that require or facilitate streamlining of local environmental and planning reviews for certain types of high-priority proposed housing developments, in order to increase the number and speed of these types of projects that move forward.

  • Senate Bill 35 (Wiener) requires cities and counties to follow a streamlined local review process for some types of proposed housing projects if the city or county has failed to meet certain of its established goals for accommodating a fair share of new housing development. Proposed projects are eligible for streamlined review if they are multi-family developments, located in already-developed areas and not in especially environmentally sensitive areas, pay prevailing wages to construction workers, and include a certain percentage of affordable units.
  • Senate Bill 540 (Roth) allows local governments to create Workforce Housing Opportunity Zones, or areas within the city or county that are designated for expedited housing development, with at least half of the homes required to be affordable to households with low or moderate incomes. Within the zones, local governments complete environmental and planning reviews in advance so that individual housing projects subsequently proposed within the zones are not subject to lengthy project-specific reviews or environmental legal challenges. Qualified housing projects must also pay prevailing wages to construction workers. Local governments that create these zones may apply for state grants or zero-interest loans to cover the costs of completing the needed planning and environmental review processes.
  • Assembly Bill 73 (Chiu) allows cities and counties to create Housing Sustainability Districts, which function similarly to SB 540’s housing zones. Local jurisdictions complete environmental and planning reviews for the land within the districts in advance so that housing projects proposed within the districts, which must include at least 20 percent affordable units overall, can be approved through a streamlined review process and are not subject to project-specific legal challenges under the California Environmental Quality Act (CEQA). As with SB 540, projects must pay prevailing wages to construction workers. Local governments that create these housing districts become eligible for incentive payments from the state.

All three of these bills require or facilitate faster and simpler local review processes, and fewer opportunities for project-specific legal challenges, for multi-unit housing projects that include affordable units and pay prevailing construction wages. SB 540 and AB 73 take a “carrot” approach, incentivizing local governments to streamline review through eligibility for additional state funding, while SB 35 takes a “stick” approach, requiring local governments to streamline review if they have failed to accommodate housing production in the past.

Increasing Local Accountability for Accommodating a Fair Share of New Housing Development

A number of bills in the housing package are designed to improve the existing state process for ensuring that all local jurisdictions accommodate a fair share of the production of new housing that is needed to meet the increased statewide need for housing as California’s population and economy grow. More housing in all parts of California is needed to maintain a healthy state economy and to ensure that current and future residents at all income levels are able to find homes they can afford. However, some local jurisdictions are reluctant to accept additional housing because they are concerned about increased congestion, school crowding, or changes to the character of their communities. While these local concerns are often deeply felt, the needs of the broader state community and economy also must be considered, so an existing process in state law is designed to allocate responsibility for accommodating needed new housing development across local jurisdictions throughout the state.

Currently, the Department of Housing and Community Development regularly produces a Regional Housing Needs Allocation (RHNA) that identifies how much new housing at different income levels is projected to be needed in each region of the state, and then the regional councils of governments assign a specific number of units to each local jurisdiction as the fair share of housing development that needs to be accommodated within each city or county. At the local level, cities and counties are required to outline their plans for how they will meet these housing production goals through the “housing elements” of their General Plans. Historically, however, there were few mechanisms in place to ensure that the plans outlined in housing elements were actually adequate and implemented. The housing package includes several bills designed to ensure that local housing elements are realistic and that make it easier to hold jurisdictions accountable for achieving their assigned housing goals.

  • Assembly Bill 1397 (Low) specifies that housing elements can only list land as a potential site to accommodate new housing if that land has a realistic capacity for housing development.
  • Senate Bill 166 (Skinner) requires local jurisdictions to continually update their housing elements and General Plans, as new development permits are issued and land uses change, to ensure that their housing elements always identify enough sites for potential development to meet their assigned goals for housing of different income categories.
  • Assembly Bill 879 (Grayson) requires local jurisdictions to include in their housing elements an expanded analysis of constraints on housing development — specifically including requests to develop housing at lower densities than zoned, length of time to complete permitting, and local ordinances that impact the cost and supply of housing development — and to attempt to mitigate these constraints where possible.
  • Assembly Bill 72 (Santiago) requires the Department of Housing and Community Development to review local jurisdictions’ General Plans and housing actions to ensure that they comply with state law, with the possibility of reporting violations to the Attorney General.

Senate Bill 35 (Wiener), described earlier, also requires local jurisdictions to report more complete information about their progress in meeting housing goals to the Department of Housing and Community Development. All of these bills are designed to put teeth into the existing housing element law, so that it will better function to ensure that local jurisdictions in all parts of the state share the responsibility of accommodating new housing.

Two additional bills in the housing package place limits on the ability of local governments to reject or reduce the size of proposed housing developments that meet existing zoning requirements, particularly for developments that include affordable units. These bills build on the existing Housing Accountability Act and can be considered explicitly anti-NIMBY (Not In My Back Yard) provisions.

  • Senate Bill 167 (Skinner) and the identical Assembly Bill 678 (Bocanegra) increase the burden of proof required for a local government to reject or require downsizing of a housing project that includes affordable units. These bills also require written documentation to justify decisions to reject this type of housing project, and impose fines on jurisdictions that improperly reject or require downsizing of housing projects or fail to comply with required timelines for making approval decisions.
  • Assembly Bill 1515 (Daly) requires courts to give less deference to evidence presented by local governments, and more consideration of alternative reasonable evidence, when a housing developer legally challenges a local jurisdiction’s decision to reject a proposed housing project based on inconsistency with local plans or policies.

Harnessing Private Funding to Pay for Affordable Housing Development Through Inclusionary Zoning

Another bill included in the housing package reaffirms the authority of local governments to apply “inclusionary zoning” policies to proposed rental housing developments. These policies require developers of market-rate housing to include a set percentage of units of affordable housing within their projects, or support development of affordable housing units elsewhere through fees in lieu or other means.

  • Assembly Bill 1505 (Bloom) was written to overrule a 2009 appellate court decision (Palmer/Sixth Street Properties LP vs City of Los Angeles) that stipulated that inclusionary zoning policies could not be applied to rental housing developments. Many California jurisdictions have inclusionary zoning policies in place for ownership housing, and many applied these policies to rental housing prior to 2009, so the “Palmer Fix” restores this local planning mechanism as a tool to regulate the production of rental housing as well.

By requiring market-rate housing developers to incorporate or provide funding for affordable homes, inclusionary zoning policies harness a portion of the private revenues generated by market-rate housing production to fund production of homes affordable to lower-income households. Given that the need for affordable housing greatly exceeds the state’s ability to directly fund construction of new affordable homes, inclusionary zoning can be a useful strategy to involve market-rate housing developers in addressing the affordable housing shortfall. Such policies need to be well-calibrated to the local housing market, however, so that their requirements do not discourage housing developers from building at all. AB 1505 allows the state to review local inclusionary policies when circumstances suggest the policies might be overly inhibiting housing development needed to meet a community’s fair share housing goals.

Preserving Existing Subsidized Housing

A final bill in the housing package seeks to preserve the affordability of rental housing with below-market rents, specifically in housing developments that received state or federal funding for construction or rehabilitation and consequently are required to charge below-market rents for a certain number of years, after which the owners may increase rents up to market rates.

  • Assembly Bill 1521 (Bloom) strengthens the existing Preservation Notice Law that applies to housing developments whose affordability requirements are set to expire (so that rents will no longer be required to be maintained at below-market rates). The bill requires longer advance notice to tenants in these units to let them know when rents are scheduled to increase. The bill also requires the owners to preferentially sell to qualified buyers who intend to maintain the properties as below-market rental housing and who make a fair-market-value purchase offer.

An Important Set of First Steps

The 15 bills in the 2017 housing package tackle the problem of California’s inadequate supply of housing, particularly affordable homes, from a variety of different angles. These bills will not solve the state’s housing affordability crisis, but they represent an important set of first steps to stimulate increased housing production through direct state investment, regulatory reform, increased accountability, inclusionary tools, and preservation. More work will be needed, at both the state and local levels, to implement and build on these new policies in order to bring California’s housing supply into better alignment with the needs of current and future residents for homes they can afford.

— Sara Kimberlin