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CVP files Amicus Letter in CA Supreme Court requesting review of Appeal Court's Incentive Zoning Decision

Much has been written, recently, on the landslide of major housing legislation being proposed and signed into law in Sacramento. Community organizations such as Livable California and others have worked to educate the public about the consequences of AB 1487, SB 330, and SB 592. However, what tends to go unnoticed by all except those who follow the land-use and development business on a daily basis, are the decisions handed down in California courts, at the trail and appeal court levels.

Published decisions by the State Court Of Appeal establish "case law" that effectively becomes the law of the land without significant public or legislative involvement.

Once such decision was recently brought to our attention, prompting Community Venture Partners to file an Amicus Letter to the California Supreme Court, asking the high court to grant the Petition for Review in the case of Sacramentans for Fair Planning v. City of Sacramento (2019) 37 Cal. App. 5th 698).

To paraphrase the Sacramentans Appeal Court ruling, the Court upheld the City's claim that they can create a provision in their General Plan for "incentive zoning" that allows an adjudicatory body, such as a Planning Commission or City Council, to disregard all existing zoning law (e.g., FAR, height, setback, parking, unit counts) and grant bonuses and "incentives" for any development project they feel, in their sole opinion, constitutes a "public benefit," without including any definitions or parameters in that incentive zoning regulation, as to what constitutes a "public benefit" or what commensurate "incentives" can be granted. In other words, zoning and development bonus decisions are all up for grabs.

In our opinion, if allowed to stand, this single ruling will have more negative consequences than all of the previously noted legislation, combined.


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Here then is our Amicus Letter to the high court, submitted for their consideration.


Honorable Chief Justice Cantil-Sakauye and Associate Justices:

I am respectfully submitting this Amicus Letter in support of the Petitioner’s request for review of Sacramentans for Fair Planning v. City of Sacramento (2019) 37 Cal. App. 5th 698 (the “Opinion”).

Introduction

I am writing as president of Community Venture Partners, Inc., (“CVP”) a federally registered, community-based, 501 (c)(3) nonprofit organization founded in 2013, involved in local planning and development issues in the San Francisco Bay Area. Community Venture Partners facilitates and assists community-based projects, programs and initiatives that demonstrate the highest principles of economic, social and environmental sustainability. CVP is committed to the need for a transparent, "bottom-up" public process that protects and incorporates under-served community voices into government decision-making.

In my career, I have been extensively involved in all aspects of residential and commercial architectural design, construction, planning, land use, project management, and real estate development and finance. I am a licensed architect and formerly licensed real estate broker. In 1980, I founded Tiburon Group, which offered architecture, planning, and affordable housing development services, financial underwriting and real estate brokerage services, and participated in a variety of real estate partnerships and investments as managing partner. Tiburon Group helped develop approximately 2,000 units of Section 8 affordable housing using federal and state low-income housing tax credit financing. Tiburon Group also acted as a real estate development and investment advisor to private, corporate and institutional clients throughout the western United States (1986 to 2009).

General Comments

In my opinion, if the Sacramentans for Fair Planning v City of Sacramento (“Sacramentans”) decision (the “decision”) is allowed to stand, it will be an unprecedented expansion of government’s discretionary, adjudicatory powers that would undermine the fundamental premise and covenants of zoning law and city planning. The impacts of the decision cannot be underestimated.

The real estate development industry is wholly dependent upon the assurances set down in zoning laws, land use ordinances, general plans, and community-specific plans. It is literally all there is to count on. This is also true for the other laws that govern real estate development, including all state housing laws, the State Density Bonus law, and the California Environmental Quality Act.

Anything that potentially adds significant uncertainty about those assurances, particularly giving government agencies unfettered discretion in the entitlements approval process and allowing them to “tilt the playing field” arbitrarily, will prove to be extremely problematic and will paradoxically have a negative impact on real estate investment and development, overall. Even in the best of circumstances, it will likely have considerable unintended consequences that result in legal and planning chaos, higher development costs, and endless litigation.

Experience suggests that it is essential that incentive-based zoning regulations have specific qualitative, quantitative, and predetermined definitions of what constitutes a “public benefit” and what the commensurate incentive bonuses are offered for each of those benefits. It is essential that zoning regulations be consistent, reliable, and enforceable. Anything other than that will, at best, be unworkable for all but the largest real estate developers, and for cities and city agencies, and the general public, or at worst, will underwrite political corruption.

We must ask ourselves, how can an incentive-based zoning ordinance correlate positively with a city’s General Plan and other health, safety, and general welfare ordinances and ensure that such incentives and benefits are in the best interests of the public if those incentives are unpredictable and the benefits are undefined?

Without preset definitions of what is or is not a “public benefit’ and which exact “incentives” are appropriate, local zoning becomes meaningless and subject to the whims and personal desires of government officials. This invites a system based on personal bias, political influence, favoritism, and enables generally arbitrary practices. Human history and basic common sense tells us this.

In my opinion, the Sacramentans decision is an invitation to the kind of government self-dealing and political influence-peddling that similarly contributed to the dissolution of redevelopment agencies in California, in 2013.[1] If a government agency can approve projects and grant incentive bonuses based on subjective judgments of what does or does not constitutes a public benefit, then they can also deny project approvals based on similar subjective reasoning.

However, there is even more than this at stake. It’s important to keep in mind that the most important stakeholders in all communities are the residents who invest in that community and pay taxes - having made what is likely to be the biggest investment decision of their lives – buying a home and raising a family. Their decision was inherently based on their belief that they could rely on the stability of neighborhoods and therefore local land-use rules.

As much as people have come to expect that politics and the influence of wealth is a given in our system, the loss of faith in a sense of fairness that would result from no longer being able to rely on that stability will serve to further corrode trust in our system of governance from within, and is something we should avoid enabling at all cost.

Predetermined definitions of public benefits and incentives are essential

The court held that the phrase “significant community benefit” is not unconstitutionally vague (Opinion, at 713, page 19). However, as a practical matter, in the context of actual land-use and development zoning decisions, regulations must be based on specific and defined public benefits and commensurate incentives. Without this how, for example, would someone sitting on an adjudicating board or commission of a local agency quantitatively or qualitatively evaluate a developer’s claim that a proposed project will “significantly” help “combat climate change” or that it will “revitalize” the community?

These types of phrases, without definitions, can have a strong emotional pull for some government officials and members of the public. But, how does one calculate how those words are to be translated into buildable square footage or building height or the numbers of parking spaces required, in a way that is fair and equitable and assures an actual public benefit? That is obviously impossible to do. Without prescribed definitions, the entire process becomes subjective and arbitrary.

More importantly, the overall financial framework that enables all real estate development is fundamentally based on the assurances of and is reliant upon local zoning laws, land use ordinances, general plans, community-specific plans, and other such regulations. If vague and undefined provisions with incalculable financial / property valuation impacts are allowed to infect that framework, then the institutions that underwrite all property transactions and the “markets” that set property values, which facilitate development, will be unable to accurately determine the risks and rewards that are very necessary to assess with some certainty, for our financial system to participate properly.

The importance of this should not be under-estimated. The professions and institutions included in this under-pinning framework include real estate property insurers, appraisers of land values, existing structures, and newly proposed development, and public and private lenders of long-term and short-term debt financing. Reliable zoning law is paramount to the enablement of all real estate transactions.

The assessment of financial risks by both lenders and developers is highly dependent on the fact that rules prescribing benefits and limitations exist with some certainty, otherwise the system becomes inherently unfair and unreasonable. Without certainty, the public perception and actual experience is that the granting of property entitlements is capricious and essentially a popularity contest.

The business climate that Sacramentans would create would categorically benefit big, well-funded, well-connected development and financial interests, advocacy groups, and lobbyists, to the detriment of small and mid-sized developers, simply because well-heeled developers can spend more on lobbying officials, marketing to sway public opinion, expert consultants’ reports, and elaborate presentations, and they can endure the financial costs of prolonged entitlement battles, which often defeat smaller developers. The trend toward the big getting bigger and smaller developers disappearing is already noticeable in California and across the country.[2] Sacramentans risks exacerbating that trend.

Potential for negative consequences

Making a bad situation worse

The real estate development entitlement process in California is already so onerous and unpredictable that many developer and investors are fleeing the state. The primary reason for this is that nothing involving zoning rights can be assumed. It is not uncommon for planning, zoning, and permit approvals to drag on for years and at times more than a decade. The time and money cost of this incalculable.

Positions on city councils and planning commissions in most small to medium-sized cities in California are typically held by individuals from widely, varied backgrounds, who are generally all well-intended but who are often, professionally unqualified to make equitable, “on the fly” zoning and planning policy decisions. In many cases, even staff are presently struggling to keep abreast of the myriad of rapid-fire housing, planning, and zoning laws streaming out of Sacramento. As a result, the project approval process in California is already fraught with long delays, favoritism, political influence, and insupportable subjectivity. The confusion around and interpretation of existing laws surrounding real estate development project approvals are already difficult and arbitrary enough as things are, but the Sacramentans decision, if allowed to stand, will be the equivalent of throwing gasoline on the fire.

Impacts on property values

If a high-rise building is suddenly approved in close proximity to existing single-family residential zoning, based on an arbitrary decision that it will provide a “social benefit,” it will introduce uncertainty about what will be developed on similar parcels in that area, in the future. As a result, the appraised property values of the impacted single-family homes may fall because of loss of views, change in neighborhood character, increased street traffic, etc., or there may be a different kind of valuation adjustment as other developers consider “assemblages” -- buying several single-family homes and tearing them down to build high-density, high-rise.

Either way, the important consideration is that a high degree of uncertainty has been introduced that will cause banks and private lenders to be more cautious about financing single-family or small multifamily (duplex, etc.) development in the area. This, in turn can, over time, change the entire character of neighborhoods as home buyers look for certainty about where they want to raise a family.

Impacts on future investment

The Appellate Court listed the alleged benefits claimed by City staff, none of which were quantified or subject to objective analysis. With regard to the discretionary powers sought by the City, it quotes staff as saying, “[o]verall, this proposed project would create an active and engaging prominent corner that showcases the possibilities of signature Sacramento architecture.” (Opinion at 711, page 18). Unfortunately, the staff’s opinion can change for the next developer, without restriction.

In my opinion, based on my experience, the negative financial impacts of allowing the Sacramentans decision to stand will be impossible to control in the future and will most certainly negatively disrupt city planning and the businesses of real estate development and real estate finance. Let me provide a real-life example of why I make this claim.

Consider a case where a developer makes a multi-million dollar investment in building a multifamily rental, housing project. At the time of the project's approval, the city did not consider the "public benefits" offered (some affordable housing units, a public plaza and public art) significant enough to provide the project with extra units and increased height that the developer desired.

The developer decides to proceed without the incentives because the revenue losses from the affordable units can be offset by the higher rental rates of the luxury, top floor units that enjoy incredible views of the San Francisco Bay.

After that project is up and running, another developer buys the adjacent lot and offers the exact same public benefits in exchange for the same height and units increases that the first developer had sought. But this time, even though there have been no subsequent, formal changes in the city’s zoning ordinance, a newly seated group on the Planning Commission and City Council "determines" that, in their sole opinion, those benefits are now sufficient to grant incentives. In addition, because the second building is now classified as “infill development,” another discretionary term, which the Council now considers an additional benefit, they allow the second building to have two additional stories of units.

The result is that the second building now blocks the first developer’s building’s views, which significantly reduces the first developer’s rental income and jeopardizes that project’s financial future.

I can assure you that under these circumstances it is unlikely that any other reasonable developer would make another significant real estate investment in that city. No one can make rational business decisions in a city where zoning is arbitrary or based on a popularity contest. And no lender can provide short-term or long-term financing if zoning rules are up for grabs. Risk is anticipated, but gambling is not good business.

The potential for pay to play approvals

The Appellate Court stated that “An unconstitutional delegation of authority occurs only when a legislative body… (2)fails to provide adequate direction for the implementation of that policy” (Opinion at 715, page 21) and that significant community benefit was adequate “direction.” However, again as a practical matter, with the enormous latitude this would allow and without pre-defined guidelines and incentives, what stops developers from “buying” their way to get what they want?

For example, let’s say a city agency has surplus land it can sell. And a well-heeled developer proposes to build high-rise, mixed-use office, retail, and luxury housing, without any open space or meeting the parking requirements of the existing zoning, on a site that is presently zoned for multifamily residential up to 36’ height limit and further restricted by provisions that include parking requirements, open space, and other amenities.

But by the developer’s calculations, the profits of his preferred scheme are 3 times more than the existing zoning would allow: $4.5 million in profit versus $1.5 million. So, the developer offers to write a check for $1 million to fund the city’s pet public project (a park, soccer fields, etc.) or to pay in an “in-lieu” fees to avoid building any affordable units, or simply asking what is the city’s favorite charity. For the developer, the $1 million is the cost of doing business and he’s still ahead $2 million on the deal.

This sounds like a lot of money to the cash strapped city, so they agree. They make what is essentially an arbitrary decision that the $1 million constitutes an adequate public benefit.

How is this equitable to competing developers, who may be smaller and local, who want to build the much needed affordable, multifamily housing within the guidelines, but who lacks the wherewithal to “pay to play”?

Properly functioning markets require clear and enforceable regulations

In my experience, the default position of some real estate developers is that their proposals are not “financially feasible” unless they get everything they want and that there are too many restrictions, though this is not always the case. This is particularly true of larger statewide and national developers who do not live with the negative consequences of their projects. However, cities generally accept their arguments at face value and in my career, I’ve never seen a city ask for the developer’s actual return on investment or profit and loss calculations. This is how the game is played. It can be self-serving and short-sighted.

Ironically, the truth is that in real estate markets, just as in securities trading markets, a healthy and robust “free market” is only made possible within a framework of clear, dependable regulations and enforcement. One need look no further than the collapse of the unregulated, real estate derivatives markets in 2008, to be convinced of that.

As a practical matter, there is no “democratic process” remedy

Arguments, in this case, involve claims that there is a democratic process to remedy any negative, unintended consequences of the Sacramentans decision. As someone who has been both a community activist as well as a real estate developer for many years, I find this “remedy” to be unrealistic.

Real estate development project entitlements approval processes often span multiple incarnations of city councilmembers, planning commissioners, and planning agency personal. In addition, most approval decisions are made by hired staff or political appointees (planning commissioners) who are not elected nor subject to voter recall. In addition, planning staff tend to remain in place throughout multiple administrations. This is particularly true in small to mid-sized cities, because their institutional knowledge is vital to the city’s operations. That considered, there is rarely a connection between political contests for office and the ongoing work of approving individual real estate development projects, unless a particular project is highly controversial.

Lack of public protections

In the past four years, my organization has been involved in many planning discussions in small cities and city agencies in Marin County, on behalf of the community. Most have involved interpretations of state housing laws and the city’s general plan and zoning ordinances. In each instance, our ability to look to the certainty of the prevailing law was crucial to our arguments. Had those provisions not existed or been completely discretionary, as the Sacramentans decision would allow, I have no doubt it would have been much more difficult to protect the community’s interests.

Equitable incentive-based zoning regulations

There are good examples of incentive zoning regulations that are fair and equitable and work to the public’s benefit. These laws work precisely because of the specificity of the predetermined definitions and incremental requirements in exchange for incremental rewards.

The California State Density Law

One example is the California State Density Bonus Law. This regulation carefully defines the percentages of increased density “incentives” available to a developer in return for providing housing for seniors and affordable housing. The incentives also correlate with a myriad of other laws and regulations by other agencies such as HUD. Its specificity enables both developers and government agencies to evaluate the outcome and impacts, and developers can literally “take it to the bank” when calculating the costs and returns, and seeking debt financing.

My organization is presently proposing such a project, which employs the State Density Bonus Law. The project includes multiple co-development partnerships for senior housing and affordable housing for residents with disabilities, in a coordinated effort by nonprofit and for-profit organizations. The project’s financial feasibility is dependent upon the State Density Bonus Law, and in fact, would not be possible to finance without the certainty of law’s outcomes.

Implementing Incentive-Based Ordinances

The Appellate Court cited the claim by City staff, that the project would “set a precedent for environmentally responsible development through the choice of materials and green design.” (Opinion at 712, page 18). I would argue that this type of claim, without supporting facts (e.g., the project’s points rating based on LEED building standards), is dubious.

My organization has been working with a small California city for more than 2 years on the crafting of an incentive-based zoning regulation for hotel development. The need for this ordinance resulted because the city tried to approve a hotel developer’s project with significant “discretionary” zoning bonuses, without any regulatory basis to do so, and the community objected. The City did this because they were desperate for the tax revenues the hotel would generate.

The new ordinance lays out a very clear and equitable “points” system of defined public benefits and incremental incentive bonuses. Each point earned by a developer’s proposal results in additional square footage, height limits, setback adjustments, Floor Area Ratio, parking, and other bonuses. Public benefits are clearly defined and include green building techniques (e.g., solar panels, water recapture, etc.), public open space, public meeting spaces, etc.

The entire process is fully transparent and fair to all participants and stakeholders. The developer knows in advance what is required to gain incentives, which saves time and money. The city staff, commissions, and council have a rule book to follow to help them make “fair” and “reasonable” decisions. And the public knows what they can expect the outcomes to be.

Conclusion

As I’ve stated, herein, it is my opinion that if the Sacramentans for Fair Planning v City of Sacramento decision is allowed to stand, it will enable an unprecedented expansion of government’s discretionary, adjudicatory powers that would undermine the fundamental premise and enforcement of zoning law and city planning regulations, and the protections they provide to residents, investors, and stakeholders.

For those and other reasoned noted above, I respectfully request that the California Supreme Court grant review of the Sacramentans for Fair Planning v City of Sacramento decision by the Court of Appeal.

DATED:October 10, 2019

By:/s/ Robert Silvestri - President, Community Venture Partners, Inc.



[1] As Los Angeles County Board of Supervisors Chairman Zev Yaroslavsky commented at the time, redevelopment [agencies] over the years “evolved into a honey pot that was tapped to underwrite billions of dollars’ worth of commercial and other for-profit projects.” The projects “had nothing to do with reversing blight, but everything to do with subsidizing private real estate ventures that otherwise made no economic sense.” LA Times, Dec. 29, 2011.

[2] The Kauffman Foundation, citing its own research and drawing on U.S. Census data, concluded that the number of companies less than a year old had declined as a share of all businesses by nearly 44 percent between 1978 and 2012.


Bob Silvestri is a Mill Valley resident and the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization funded only by individuals in Marin and the San Francisco Bay Area. Please consider DONATING TO CVP to enable us to continue to work on behalf of Marin residents.