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Density bonus law changes could challenge developers

Changes to the state’s density bonus law that go into effect in January will make it more difficult -- and perhaps less likely -- for developers to pursue housing projects under the statute, say industry experts.

The revisions to the law, which permits developers to build more units on a property than allowed by local regulations for agreeing to make a percentage of the units affordable, were approved by the state Legislature earlier this fall.

The most significant change is that developers seeking density bonuses for sites that already feature affordable housing will have to at least maintain the prior number of affordable units within the proposed development.

This requirement includes having to replace affordable units that have been demolished or vacated on a project site within the five-year period prior to a developer’s application.

The affordable housing also must match the size or type of previous units and be occupied by tenants in the same or lower-income category as those formerly occupying the units.

A second major update to the law, which is designed to spur the creation of affordable housing, is the units that qualified a developer for a density bonus must remain affordable for at least 55 years, rather than at least 30 years.

The legislation, AB 2222, was filed by Assemblyman Adrin Nazarian, D-Van Nuys.

His bill was prompted by density bonus projects in the Los Angeles area resulting in fewer affordable units than recently existed on project sites.

David Blackwell, a San Francisco-based partner at Allen Matkins Leck Gamble Mallory & Natsis LLP, said having to replace a development’s affordable units will be the most challenging new rule for developers to address.

The regulation, he said, will create a lot of additional work for developers considering filing density-bonus applications, especially in cases where proposed project sites were demolished or vacant for several years.

“I think the new law is going to make the due diligence particularly difficult for developers,” said Blackwell, head of Allen Matkins’ Land Use Practice Group.

The increase in the length of the required affordability restrictions, said Blackwell, could affect a developer’s decision on whether a project would be financially feasible.

He is encouraging developers who think they will be adversely affected by the new law to consider filing a density bonus application by the end of 2014.

Michael McSweeney of the Building Industry Association of San Diego said he believes the new regulations will lead to a reduction in the number of density bonus projects because they will make the law even less user friendly.

He also pointed to the requirement that previous affordable units at a project site be identified and replaced as likely to make undertaking such projects tougher for developers.

“Like many laws, it is a reaction to something, and in an attempt to try to fix it they ended up making it worse,” said McSweeney, the BIA’s senior public policy adviser. “When you have to go through a whole rigmarole to do one of these projects, nine times out of 10 the applicant is going to say it is not worth the headache.”

Blackwell said time will tell whether fewer developers take on density bonus projects in the new year.

“If there becomes a track record of density bonus applications getting hung up because of this, you could see people shying away," he said.

In response to a question about whether the law will make it more difficult for developers to pursue density bonus projects, Nazarian released a prepared statement saying the final version of his bill was a compromise that closes the “loophole” in the law.

Nazarian said the loophole is that developers have not been required to preserve or expand existing affordable units, which has resulted in developments producing fewer affordable units than existed on the site.

“While the compromise version continues to require replacement of existing affordable units, (the law) allows those units to be counted toward the required set-aside to qualify for a density bonus,” Nazarian said. “Developers will still be provided incentives for adding or preserving affordable housing.”

The more affordable units a developer proposes building, the larger the density bonus, which is also increased when projects are slated to include units for very low-income tenants.

Laura Nunn, policy director at the San Diego Housing Federation, said her organization backs the changes made to the law.

“We absolutely support the concept that if a density bonus is utilized, the existing affordable housing stock should at least be upheld,” said Nunn, whose group advocates for affordable housing.

But she also said it will be important for communities to provide clarity about how they will enforce the new rules.

“We don’t want the law to result in policies that lead to people not using the density bonus program, which we see as part of the tool kit to create affordable housing,” Nunn said.

Timothy Hutter, a San Diego-based real estate litigator at Allen Matkins, said he fears that in addition to the law being more difficult for developers to navigate, implementing the changes will create a lot of additional work for cities and counties.

“It puts a strong burden on cities and counties, which are already overburdened, to review a lot more material than they have in the past,” said Hutter, one of the attorneys representing the BIA in its lawsuit challenging Encinitas’ policies for enforcing the density bonus law.

Dan Normandin, a senior planner in the city of San Diego’s Development Services Department, said his office is working with the city attorney’s office on how the city will implement the revised density bonus law.

There have been five density bonus projects in San Diego in the last two years, resulting in 12 affordable units, according to the San Diego Housing Commission.

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