In late July, the Board of Supervisors finally passed—and the Mayor signed—the compromise inclusionary affordable housing ordinance. We discussed the near-final legislation in our June 23 update, which you can access here. The broad strokes of that legislation are now law: partially grandfathered rates passed in June 2016 remain in place but most if not all will eventually sunset; new projects are subject to higher rates across the board but with tranches of affordability levels for BMR units; and on-site and off-site percentages will increase each calendar year until they reach a cap. The final legislation also includes a minimum citywide dwelling unit mix requirement for new projects.

Coming in at 46 pages, it surely sets a record for word count in a city or county’s inclusionary ordinance. This week’s update is going to focus on some of the details buried deep in the ordinance that could be important to housing projects, starting with the new minimum dwelling unit mix.

New citywide dwelling unit mix

Before this legislation, a number of zoning districts had minimum unit mix requirements, the most common being the 40% 2-bedroom and 30% 3-bedroom unit mix in Eastern Neighborhoods mixed use districts such as UMU. The new requirement applies to all projects adding 10 or more units anywhere residential use is allowed that did not previously have a minimum unit mix. At least 25% of units must be 2-bedroom and at least 10% 3-bedroom.

Some kinds of projects are exempt, including group housing, some student housing, SRO housing, HOME-SF projects, and affordable projects. Projects proposed before January 12, 2016 or approved before June 15, 2017 also do not need to comply. And the Planning Commission can grant an exception if the project will serve a “unique population” or there are physical constraints that make compliance unreasonable.

Rate frozen in year “complete” environmental application is submitted

To some, one of the most frustrating aspects of recent changes to the inclusionary program since last year was ongoing uncertainty: projects were proposed (and often financed) under one set of rules and assumptions, but by the time a project was up for entitlements or ready to start construction the rules had changed—sometimes more than once.

The new legislation addresses this problem by freezing a proposed non-grandfathered project’s inclusionary rates on the day a complete environmental evaluation application is submitted. But there is a catch: a building permit or site permit to construct the project needs to be pulled within two and a half years of the project’s approval. If not, the project is subject to the inclusionary rates in place when the permit is pulled.

Increased interim rates for Mission, North of Market SUD, and SOMA NCT

In the Mission planning area, the North of Market Special Use District Subareas 1 and 2, and SOMA NCT zoning district, the city is studying affordability requirements on a neighborhood level. Until those studies are finalized and new affordability requirements adopted, the fee and off-site percentage is set at 30%, and onsite is set at 25% for rental and 27% for ownership.

Additional fee on density bonus units

California’s density bonus law allows qualifying projects to receive up to a 35% density bonus on top of a principally-permitted project. In the past, the City has not applied the inclusionary housing program to the density bonus aspect of the project. The compromise legislation requires density bonus projects proposed after January 1, 2016 to pay the inclusionary fee on all density bonus units.

Interestingly, California State Assemblymember Phil Ting is trying to get a bill passed that amends the density bonus law to essentially do the same thing. Specific to San Francisco, the bill would apply the City’s inclusionary housing ordinance to the total number of units in a project—including the density bonus units. But San Francisco’s default method of compliance with its local inclusionary requirement—the fee—now already applies to the density bonus aspect of a project. To be fair, Assemblymember Ting’s bill was proposed before City’s ordinance was finalized, so maybe he will not pursue it any longer if he thinks the compromise ordinance’s additional fee on density bonus units can stand on its own. And his bill would also allow sponsors to do additional on-site or off-site units instead of just paying the fee. But the fact that he proposed the bill at all makes the additional fee on density bonus units a noteworthy requirement to follow.

Fee or replacements for eliminated BMR or rent-controlled units

Taking a page from the density bonus law, in addition to minimum affordability requirements, San Francisco now requires projects that demolish rent-controlled units or deed-restricted below market rate units to replace the eliminated units for projects doing on-site or off-site BMRs, or pay a fee on the replacement units for projects that are feeing out. For example, a 50-unit rental project doing on-site affordable units that demolishes two rent-controlled units will need to provide 11 affordable units in total, 9 for the 18% affordability requirement and 2 replacement BMRs.

This update contains just a brief discussion of some of the details in the new program; it is not meant to be comprehensive. There are other aspects of the program that will inevitably raise questions as a project makes its way through the entitlement and approval process. We will continue to engage with city stakeholders to ensure that the inclusionary program is as clear and understandable for our clients as possible.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.