17 March 2023

Momentum For Streamlining And Subsidizing Office-to-Residential Conversion Projects Builds In Sacramento And San Francisco

Sheppard Mullin Richter & Hampton


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As cities across California grapple with an ongoing housing crisis and stubbornly high office vacancy rates, policymakers at the state and local levels are beginning to explore ways to encourage...
United States Real Estate and Construction
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As cities across California grapple with an ongoing housing crisis and stubbornly high office vacancy rates, policymakers at the state and local levels are beginning to explore ways to encourage projects that convert vacant office space into housing. Downtown San Francisco has experienced particularly high office vacancy rates as it recovers from the pandemic, and it is unsurprising that two of the City's political leaders—Assemblymember Matt Haney and Mayor London Breed—recently took steps to facilitate office-to-residential conversions.

On February 17, Assemblymember Haney introduced AB 1532. The bill, entitled the Office to Housing Conversion Act, would make office conversion projects a use by right at any location regardless of the site's zoning designation. The bill broadly defines "office conversion project" to mean the conversion of a building used for office purposes or a vacant office building into residential dwelling units. Use "by right" would mean that a city or county's review of the office conversion project may not require a conditional use permit, planned unit development permit, or other discretionary city or county review or approval that would constitute a "project" under the California Environmental Quality Act.

Cities and counties would also be prohibited from imposing new parking or open space requirements not imposed on the original office use, enabling adaptive reuse of existing parking and open space amenities. Importantly, eligible conversion projects would also be exempt from all impact fees not directly related to converting an office building to housing as well as any fees relating to the cost of code enforcement or inspection services. Project applicants would be entitled to pay any fees on a conversion project over a 10-year period.

In order to qualify for streamlining, the conversion project would need to restrict at least 10 percent of the total amount of housing units to low or moderate income households. Additionally, projects would be required to utilize a skilled and trained workforce.

Additionally, on February 7, Mayor Breed issued Executive Directive 23-01, entitled Housing for All. The Directive generally requires various City agencies to propose new policies and legislation to accelerate housing development throughout the City. One such directive is to remove barriers to office-to-residential conversions. To that end, by April 1, 2023, the City's Planning Department and Department of Building Inspection must propose legislation to "amend code requirements to facilitate the conversion of existing office uses to residential uses in Downtown San Francisco to spur Downtown recovery efforts." While it is too early to predict what such legislation might look like, it may dovetail with several other mandates contained in the Directive.

For example, the Directive also requires the Planning Department to propose legislation that will "remove unnecessary fees and procedural constraints that obstruct the development of housing, including, but not limited to, eliminating Conditional Use Authorizations for certain types of housing developments." In response to this mandate, the Planning Department may propose legislation streamlining approvals required for office-to-residential conversions, including applications for discretionary exceptions to various cumbersome development standards.

Additionally, the Directive requires the Office of Economic and Workforce Development and the Controller's office to propose legislation creating new financing opportunities for pipeline projects that have not advanced due to financing constraints. Given the high cost of converting large office buildings, the City may propose legislation creating subsidies, incentives, or other financial assistance to certain categories of office-to-residential projects to help them pencil.

Taken together, AB 1532 and Mayor Breed's Directive bode well for office-to-residential conversion projects in San Francisco and the rest of the state. Developers and other interested parties should seek opportunities to provide feedback on both AB 1532 and forthcoming legislation drafted pursuant to the Directive. Combining entitlements streamlining and local- and state-level funding assistance could make conversion projects more feasible and, over time, help revitalize downtowns across California.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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