Cities beware: California is bringing the hammer down on affordable housing noncompliance.
This comes as a consequence of the California Surplus Land Act, which requires a percentage of units developed in a sale of surplus public land to be offered for low-income housing. [Calif. Government Code §54222.5]
Local agencies such as cities and counties that violate the requirements are subject to penalties, and the California Department of Housing and Community Development (HCD), which oversees the process, is beginning to issue warnings to some jurisdictions.
The Act was established in 1968 and prioritizes the use of surplus public land for public parks, schools and housing. Surplus land includes land owned by any local agency that is determined to be no longer necessary for the agency’s use. [Gov C §54221]
Several amendments were recently added to the Act, including Assembly Bill (AB) 2135 in 2014, followed by AB 1486 in 2019.
These amendments focused on:
- prioritizing surplus public land for low-income housing above all other uses;
- introducing penalties for local agencies who side-step the requirements; and
- adopting an inventory of surplus land available which local agencies need to submit annually to the HCD.
The HCD is tasked with enforcing the Act. So far, no penalties have been processed. However, some currently pending investigations may result in penalties of 30% of the final sale price of the land. Most notably, Anaheim, Alameda County and Santa Monica are involved in Surplus Land Act disputes.
Anaheim
In April 2021, the HCD sent a letter to the Anaheim city attorney informing him that the city may have violated the Act and might face the 30% sale price penalty.
The HCD’s claim refers to a December 2019 sale of Anaheim’s city-owned Angel Stadium, originally priced at $325 million.
The HCD maintains that even though the sale occurred prior to the January 2020 effective date of AB 1486, the sale is still subject to the most recent version of the Act. The HCD’s argument hinges on a section of the Act which states the effective date for the application of the law runs between September 30, 2019 and December 31, 2019 before being fully implemented by statute. [Gov C §54234(a)(1)]
The HCD also disputes the city’s classification of the land. The City of Anaheim classified the stadium as exempt surplus land because the property is subject to a restriction in the form of a lease between the city and Angels Baseball. The HCD argues the city cannot claim the stadium as exempt surplus land since they voluntarily agreed to Angels Baseball’s restrictions — so the Act applies to the sale.
The City of Anaheim refuted the HCD’s claims in a June 2021 response letter. The city reasserts that the 2019 amendments to the Act are unenforceable because the city was involved in exclusive negotiations for the sale of the stadium prior to September 30, 2019.
When the HCD determines a local agency has violated the Act, the 30% penalty against the land sale is deposited into a local housing trust fund to finance new construction of low-income housing. [Gov C §54230.5(a)(2)]
If the HCD decides the City of Anaheim broke state law with its sale of Angel Stadium, Anaheim taxpayers will foot the bill — at least $96 million, according to CalMatters.
Alameda County
The HCD also sent a letter to Alameda County demanding proof that the county followed the Act when it sold a portion of its Oakland Coliseum in October 2020 for $85 million.
The county has until October 18, 2021 to produce evidence that it followed the newly amended law or the HCD will pursue legal action, according to a letter obtained by The Chronicle.
The August 19, 2021 letter from the HCD states the department did not receive a record from the county declaring the public land as surplus land or exempt surplus land as the Act requires.
The HCD also requested proof from the county that it followed proper notification protocols on the sale.
If the county’s response does not satisfy the HCD and the county is found to be in violation of the Act, the 30% penalty will be levied, and the county will be fined up to $25.5 million.
Santa Monica
A third dispute surrounding the application of the newly amended Act involves a lawsuit from a local nonprofit against the City of Santa Monica.
In 2015, Santa Monica entered into an exclusive negotiating agreement with a commercial developer for a three-acre project, The Plaza at Santa Monica.
Santa Monica’s city council halted negotiations on the project over concerns that it might not meet the requirements of the Act in February 2020. City officials sought guidance from the HCD on whether the Act will be violated.
The HCD stated in a letter to the developer’s attorney that because the exclusive negotiation agreement was orally conducted before September 30, 2019, the effective date set by the amended law, the city qualifies for an exemption. With the HCD’s approval, the city moved forward with negotiations.
But a local nonprofit group is challenging the sale in court. On September 25, 2020, the Santa Monica Coalition for a Livable City (SMCLC) filed a lawsuit against the City of Santa Monica for violating the Act by not offering at least 25% of the property to low-income housing developers, parks or other open space purposes.
In May 2021, the city council of Santa Monica voted to award $100,000 in attorney fees to the SMCLC, according to the Santa Monica Lookout. Though the city does not admit fault or even agree that the attorney fees are merited, the council members nevertheless voted six to one to cover the legal fees in a historical and unusual decision. The SMCLC stated they will use the funds for future campaigns.
Tackling the housing crisis
The Act’s newest amendment is an effort to address the state’s housing crisis where supply has not kept up with demand for housing.
California is short 1.4 million housing units to accommodate its 2.1 million very-low- and extremely-low income population. Residential construction levels have been a fraction of what is needed to meet demand. Homelessness is on the rise.
AB 1486 works to address low-income housing needs, but the Golden State’s application of the newest amendment is still in its infancy.
Barriers to California’s execution of the new amendment include:
- existing agreements that span years or decades;
- limited flexibility for local agencies;
- confusion over how the amendment interacts with other statutes; and
- burdening local agencies’ workload to ensure compliance.
Despite these complications, further amendments to the Act are pending, including:
- AB 1271, which includes an exemption for military bases;
- SB 719, which provides a limited exemption for the former Tustin Air Force Base;
- SB 791, which establishes the California Surplus Land Unit within the HCD to help develop and construct housing on surplus land; and
- AB 1180, which alters the definition of exempt surplus land to include land transferred by a local agency to a federally recognized California Indian tribe.
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The applicability and real-world implications of the Act are being realized as some cities and counties might have to face hefty fines for violating it. If a local agency is found to have violated the Act, subsequent violations will be even more expensive — 50% of the sales price.
Such substantial penalties have the potential to impact the way local agencies operate and greatly incentivizes them to prioritize low-income housing in public land negotiations.
Incentives to build housing for low-income households are needed in California, where the housing shortage impacts all price tiers of properties — high, mid and low. But because higher tiers provide more generous profits for builders, there is a natural incentive to build housing in the high and mid tiers, and less of an incentive to build properties priced in the low tier.
But these low-tier properties are precisely the category most feasible for first-time homebuyers and prospective buyers with low incomes to purchase. Yet, the inventory of low-tier homes falls short of meeting homebuyer demand.
When only high-income earners are able to break through to homeownership, agents are wedged into a free-for-all for meager listings. A state capable of housing a healthy supply of first-time homebuyers and homebuyers purchasing in the lower price tier gives agents greater access to fees for representing those clients.
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