Legislators clear the path for more commercial-to-residential conversions

While California’s housing dilemma continues, long-term vacancies now persist across many commercial property sectors, especially in office and retail.

To make better use of these properties’ outdated uses, local ordinances in conflict with these projects will soon be preempted, permitting owners and developers to quickly get into the adaptive reuse game. Conversions of buildings featuring now obsolete interiors already have most of the expensive parts in place. This cuts costs for owners and developers since the allowed residential units will result from renovation of space within an existing building’s present footprint.

Thus, the existence of “fill-in” lot infrastructure and any retention of exterior walls of a building eliminates much of the risk inherent in building from the ground up. Most everything is in place, except for the retrofitting and renovation of the structure’s innards and cosmetic exterior enhancement.

Legislators have taken notice of the opportunity for developing a higher and better use of existing buildings — often located in desirable locations within job centers. As motivation, the path has been smoothed to encourage more predictable profits for developers, a necessity for construction to happen.

Beginning January 1, 2024, a housing development classified as an “extremely affordable adaptive reuse project” located on an infill parcel qualifies as an allowable use. [Calif. Government Code §65913.12(b)]

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However, a local agency may deny the project when it is proposed to be located on a site or adjoins a site where any of the square footage on the site remains dedicated to industrial use. However, for the local agency to do so they must prepare written findings providing evidence that approving the development will have an adverse effect on public health and safety.

What type of conversion qualifies

A conversion of a building is classified as an adaptive reuse project when the resulting housing development:

is a multi-family housing development;
involves the retrofitting and repurposing of a residential or commercial building that currently allows temporary occupancy to create new residential units; and
will be entirely within the envelope of the existing building. [Gov C 65913.12(a)(3)]

The project is considered extremely affordable when:

the units are subject to a recorded deed restriction for 55 years as rental units and 45 years as owner-occupied units; and
- consists entirely of units dedicated to lower income households at a rent amount no more than 30% of 70% (equals 21%) of the area’s median income; or
- consists of at least 50% of the units dedicated to very-low-income households at a rent amount no more than 30% of 50% (equals 15%) of the area’s median income. [Gov C 65913.12(a)(3)(D)]

An infill parcel for adaptive reuse is either:

located within a half-mile of public transit; or
a property with at least 75 percent of adjoining parcels on its perimeter developed with urban uses, including parcels across a street or highway. [Gov C 65913.12(a)(6)]

In this case, an industrial use on an adjoining site which precludes the development includes:

utilities;
manufacturing;
transportation storage and maintenance facilities; or
[Gov C §65913.12(a)(5)]

Looking ahead, expect to see commercial-to-residential conversions become more common. The 2020 recession caused many businesses to go remote, with many never returning to occupy center city properties as working space used to shelter a business.

Owners and their brokers better position themselves for the years ahead when they consider various types of flexible space arrangements, such as a multi-purpose floor plan allowing for use as an office one year and residential the next. Both residential and commercial tenants appreciate the cosmopolitan aspect of mixed-use property, including retail, restaurant, office and residential units all in the same building.

Thus, conversions and flex space can be an easy sell to owners faced with shifting demand. Remember, our state population always thins during recessions, then takes on greater growth in a recovery.

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