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Episode 4: The mystery of the missing condos
81 Plays7 months ago
I take a deep dive into Senate Bill 1470, that tries to get more new condos built by tinkering with details of how lawsuits against them work.
Quick hits introducing other legislation in the annual cavalcade: SB 1462 (condo deposits), SB 937 (impact fee delay), SB 1210 (utility fees), SB 1077 (ADUs in coastal zone), and AB 2560 (density bonus in coastal zone).
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Transcript
Introduction to California Housing Legislation
00:00:02
Speaker
Hello, welcome to John nerds out on California housing legislation. My name is John Meinert, and this is episode four, the mystery of the missing condos. I apologize for the delay in between episodes. Some personal issues came up between episode three and today. In addition, I tried to record an episode four and went through some embarrassing mishaps, but I will forge on ahead.
00:00:30
Speaker
Today, I'm going to do a shorter episode because a whole lot of bills have been submitted to the legislature, and I think I finally have a better grasp on what really is happening and which ones are worth covering.
00:00:48
Speaker
And this is certainly not going to be all
Importance and Structure of Condos
00:00:50
Speaker
of them today. What I'm going to try out is focus on one big bill or rather a package of bills that are both about condos. And I'm going to go into detail on that one.
00:01:02
Speaker
Then I will go into some quick hits for five or six other ones, and I'll just put a minute or two into each one of those. So hopefully you will get some depth and some breadth, and I will come back with some of the bills that I skipped in future episodes. So why are condos such a big deal for housing? So to back up to the very beginning, we often use the term luxury condo to just mean a new looking fancy looking apartment building.
00:01:32
Speaker
But a condo refers to when you own an apartment, specifically singly, as opposed to just renting it, as opposed to the ownership being of the whole building altogether. Condos didn't actually exist before the middle roughly of the 20th century when they created laws allowing there to be a legal framework for them.
00:01:56
Speaker
So they're a pretty new thing, and they allowed a lot more apartments to be built back in the day. Governing them is always a challenge. They need to be governed cooperatively by all the owners in the building, which has always been a challenge, getting owners to pay for all the needed repairs in particular. But one of the interesting things about condos in California is that right now, they are pretty hard to come by.
00:02:25
Speaker
I can say that when I was interested in buying a home in the East Bay, I was particularly interested in condos because I didn't want to have a lawn demo. And although they are still cheaper than your detached homes, they are not all over everywhere, much less luxury condos.
00:02:46
Speaker
And what it turns out when you research it is that of the apartment buildings that are being built these days, fewer than 10% in California are condos, which is interesting. Why would this be? You would think that the kind of people who buy homes would be interested sometimes in buying detached homes and sometimes in buying condos. And other places, plenty of condos are built. So what's different about California?
Challenges in Condo Construction
00:03:15
Speaker
Well, it turns out it's a liability. It's problems with condos, construction defects specifically, and how we handle them. So let's talk a little more about construction. Construction and getting construction right is really important, especially for big buildings. If you mess up, the building could need expensive repairs or could even become dangerous as we saw with that building in Florida a few years ago.
00:03:45
Speaker
So it's important for the builder to get it right. Well, with condos, the builder is planning to immediately, or as soon as they can, sell off all the units after they've been built, sell them to individuals. Those individuals, under regular old liability laws that have existed for some time, if they find that the builder did a shoddy job, they can go and sue the builder.
00:04:16
Speaker
There were a lot more condos built over the 70s and 80s in California. And as those buildings started to age, there were a lot of these lawsuits because, yeah, a lot of them were in fact built rather shoddily and because the builders were looking to save money or just to save time. So there were lawsuits for good reasons. So there were so many lawsuits that the legislature tried to create some kind of new system
00:04:46
Speaker
that would make it easier to fix the issues without a big lawsuit. And this was called the construction defects law, and it was around 2000, 2002, something like that. And the idea was it created a framework for the condo owners and the builder to figure out what repairs were needed and settle on that and do the repairs at the builder's expense without a lawsuit.
00:05:15
Speaker
Part of the framework they built up for that was that after 10 years, the owners could no longer sue the builder, or at least not as easily. Well, what seemed to happen is that they got the balance wrong. Reforming liability law requires you to go through a lot of steps. You have to know how the laws you pass are going to interact with the legal process and how lawyers do their work.
00:05:44
Speaker
So long story short, what it seems like now, what we hear is that whenever a new condo project is built, it has a ticking clock. It is almost guaranteed to get sued for something right before the 10 year mark because that's the last chance. So some of the problems include that it is possible to sue them for relatively small issues that may not affect habitability.
00:06:11
Speaker
you know, maybe the paint was done wrong. And sometimes it's just, it looks uglier than they thought. Sometimes the builder is not actually given a proper chance to repair. They may not even be allowed to come in and inspect and see how easy it would be for them to repair if they might be better at it than someone else they could pay for. And then as a knock on effect from that, a contractor is going to be very wary
00:06:40
Speaker
If a developer comes to them and says, hey, I want to build a condo building, they say, well, how do I know I'm not going to get sued? Because if you get sued, you might then turn around and sue me because I, the contractor, did the work. So basically, if you go to a contractor, a general contractor, and you want them to build a big apartment building, and maybe they say, OK, $300 or $500 per square foot,
00:07:08
Speaker
And then you say, oh, but I want it to be condos. They say, oh, well, in that case, 600. It may not be quite that much premium, might be like 10%, but it's still significant. And as a result, those who invest in this kind of thing have decided collectively that they are just going to build buildings for rental. Occasionally, they may be planning to convert them into condos after they hit the 10 year mark.
00:07:38
Speaker
That's happening on the quiet, if it's happening at all. I haven't heard specific examples. But of course, at that point, it doesn't have the new car sheen, so it's probably not going to command as much money.
Benefits of Condo Ownership and Liability Reform
00:07:51
Speaker
Now, do we necessarily want condos as opposed to for rent buildings?
00:07:57
Speaker
Well, basically, I think a lot of people want the stability of ownership alongside the density and convenience and, as I said earlier, no lawn mowing of an apartment. And it seems likely that if we made it easier to build condos well without as much threat of bogus lawsuits or trivial lawsuits, let's say,
00:08:24
Speaker
then it's not just a matter of, you know, instead of 60% or 80% rentals, it'll be 60% rentals, but the same number. Probably you're going to get more investment flowing in to condo construction and you'll have more homes being built in total. And in general, you create more housing. That's good for the whole market. Freeze up older units, freeze up rental units. It just gives people more choice.
00:08:51
Speaker
Now, here's the flip side. We talk about wanting to make it a little harder to make bogus or trivial lawsuits. Well, you have to be careful about that, obviously. I live in a condo myself, and I happen to know it was built in 1982, and there was a really big lawsuit against the builder in the late 90s before this reform happened. Some sort of repairs were made thanks to the lawsuit.
00:09:18
Speaker
So you really, really don't want to give a blank check to developers and to builders to just build whatever. Fortunately, I think that the people who are working on this bill are not just the developers. They include SPUR, which is a think tank in the Bay Area, the San Francisco Bay Area Planning and Urban Research Association. They did not officially write it. They were part of the discussions.
00:09:45
Speaker
California Yimbee is also endorsing it and working hard for it for this reform. I haven't talked about the reform.
Overview of SB 1470
00:09:57
Speaker
The bill number is Senate Bill 1470, and it's by Senator Steve Glazer from Orinda. That's Contra Costa County, the east of the East Bay, the suburban part. And he is not usually on the pro-housing side. In fact, he almost never is.
00:10:15
Speaker
But politics makes strange bedfellows. He has decided for whatever reason that he wants in this his last year to do something about condo liability. And so he went got together with different legislators and different experts and put together something that is supposed to help. So what do they put together and how?
00:10:39
Speaker
So this is the embarrassing part, which is now fortunately buried a little bit into the podcast. I spoke at length to Michael Lane, who's a policy guy at SPUR. And we had a really great conversation about what is in this bill and how do they know that these are the right reforms and how do they know that this is not simply giving builders a blank check?
00:11:06
Speaker
to just do shoddy work and move on to the next one. Well, we walked through the provisions and at the end, I was personally pretty satisfied. They actually look on the outside like fairly small changes, but I think they have a significant cumulative impact and all of them come down to making certain, they come down to making lawsuits against builders
00:11:34
Speaker
need to stand on firmer ground, as well as giving them a somewhat better shot at doing the repairs themselves, rather than simply be sued and negotiate a settlement. So you can actually go through the bill. If you go to legenfo.legislature.ca.gov, that's L-E-G-I-N-F-O.legislature.ca.gov, not only can you look up the bill,
00:12:04
Speaker
but you can hit the button that says, today's law as amended. And what that does is it creates a red line where you can see the current law and then you can see what the law would change to if the bill were passed, which is a really good way. If you want to get past the fact sheets and the advocates, whoever is telling you how great the bill is, if you want to see exactly what the bill is doing, you go in and you look at the comparison.
00:12:33
Speaker
Now, that doesn't always tell you everything you need to know. You need to know how the bill currently operates, how the law currently operates. And sometimes just striking one word does something that you would have no idea unless you were an expert. But in this case, it was possible to get a good idea of what the law did. So this included giving the builder a chance in court to say that they exercised an ordinary standard of care.
00:13:03
Speaker
meaning that even if there are some problems with how the building turned out, they did everything they could have reasonably done. And they get experts to testify. Maybe the plaintiffs, the owners can get their own experts. It all gets played out in court. The builder can also argue in court that the changes do not affect habitability.
00:13:26
Speaker
So again, that they're just cosmetic. It also creates an avenue for the builder to get more sign off for the repairs that they might be able to make. Specifically, it allows the builder, if allowed by the owners, to go to the city or county or whoever has jurisdiction and get a building permit for the repairs they want to do.
00:13:53
Speaker
And the building permit means that the building inspectors of the city or county are going to review all the plans and decide if they are all up to code. Some cities require that anyway. My understanding is that most do not require such a thing to happen. So when you have the building permits authorized by the local jurisdiction,
00:14:15
Speaker
then that would allow a jury later to say, we can trust these experts because they are impartial city employees. We are going to trust them that these were the right repairs to do. And then the builder is explicitly allowed to argue as a defense in court that they completed the repairs just as they said they would in the permit.
00:14:39
Speaker
It also allows the builder to inspect the property to see how to repair it. Again, they can only do this with permission of the owners because it's the owner's property, but it allows them to inspect it along with an independent special inspector, a third party. If the owners allow them to do that, then when
00:15:04
Speaker
If and when a lawsuit comes, they can say, look, it wasn't just us who went in and tried to figure out what repairs were needed. It was also this expert that we brought in who was tasked with making an independent evaluation. Finally, if the builder offers to repair and if the owners then reject that offer, that is admissible in court as evidence in the trial.
00:15:31
Speaker
So it's not to say that you can't reject their offer to repair. Who knows? Maybe the owners don't trust the builder. Maybe they really have good reasons not to trust the builder and want the builder to just pay them to get someone else. But it is still something that the jury is going to hear.
00:15:53
Speaker
and the jury can make up its mind as to whether that was reasonable. So how do we know that all of this is the right direction? The interesting thing I got from Michael Lane was that they actually went to a lot of other states that do this a lot better. Washington state, for example, I believe he said that maybe 30% of their new multifamily housing is condos. They have a different liability system.
00:16:17
Speaker
So theirs is clearly more productive, similar with Hawaii, similar, I believe, with New Jersey. So this is perhaps the best case of states being the laboratories of policy where you can say, what state does this better? Let's do what they do.
Complementary Legislation: SB 1462 and SB 937
00:16:33
Speaker
So at the end of that conversation, I felt pretty good about this bill and went on to advocate for it at the legislature.
00:16:46
Speaker
And unfortunately, when I was done talking with Michael Lane about it, I went to hit the stop recording button on my software. And then where I was about to click, I saw the button start recording. A very dad move, as you can imagine, and very embarrassing. And Michael, if you're listening to this, I apologize for wasting your time. But I hope I have conveyed the stuff you told me about.
00:17:12
Speaker
So that's again, Senate Bill 1470 by Stephen Glaser is about reforming condo liability and trying to get to a happy medium where condos and rental buildings will be built to reasonable standards. They will stay up. They will not need major repairs. And it will be not as risky to build them. SB 1470 has a companion bill, SB 1462.
00:17:39
Speaker
And I'm only going to discuss that briefly. It has to do with not how condos are built, but with how condos are financed. It is basically another barrier to condo construction that Steve Glazer and others are trying to help lift. And once again, it is based on better practices in more effective states, what presumably are better practices because the states are more effective. And that is often when you're building a condo project,
00:18:10
Speaker
You're going to get money from investors, obviously, but you can also collect deposits from regular people who think, yeah, I want to be part of this project. I want my own condo. I am willing to pay, maybe it's $40,000, $60,000, $80,000. And then when the condo is complete, then that will be my deposit to purchase it fully with a mortgage.
00:18:35
Speaker
Well, at the moment in California, when you pay that deposit, it goes into some sort of account and it can't really be used. It is just put up there as good faith, as prepaying. What some states do and what SB 1462 would allow is for some, not all of that deposit, to actually be used to pay for construction.
00:18:57
Speaker
There would need to be a lot of notification so that the people putting up the deposits know what's happening and have a good idea of the risk involved. But in an environment when it can be hard to raise capital, this is another way for them to do that with people who hopefully are going to get a good deal there. There is always an element of risk. Projects can be half complete. And if it's half complete and not going to be completed, then it's basically dead. So people can lose their deposit.
00:19:26
Speaker
But that is the point of having the disclosure, having the consumer protections so that people know what they're getting into. Those two bills are still moving through the legislature. 1470 already passed through the Housing Committee. 1462 passed the Business Professions and Economic Development Committee.
00:19:47
Speaker
by a vote of seven in favor, two opposed, four not voting on just yesterday, and is now going to the Judiciary Committee. So those are the condos. So now let's go to our quick hits.
00:20:03
Speaker
Senate Bill 937 is by Scott Wiener and it has to do with impact fees. A lot of cities charge fees on new apartment construction or house construction that have to do with the impacts that they have on the need for infrastructure in the community at large. Sometimes it's for affordable housing. Sometimes it's for transportation. Sometimes it's even for parks. It can be for a range of things.
00:20:27
Speaker
Unfortunately, they can be really high. And there's a big debate going on on how justified they really are. And I'm not going to get into that today. What Senate Bill 937 does is it does not reduce how much the fees are. It allows cities to set them on their own as they can now. They have to justify them in a legal process. What it changes is the timing, which is interesting. It has to do once again with the construction process.
00:20:53
Speaker
Right now, cities can charge their impact fees around the time that the developer pulls the permits. I think usually the building permits, but maybe even the zoning permits, which are the first part. That means that if you have to pay $50,000 per apartment and you're building 100, then that's $5 million you have to fork out pretty quickly while you're still building or even before you've started building.
00:21:20
Speaker
Where's that money come from? Well, you borrow it with all the rest of the money. And then you have to pay interest on that money until you are starting to rent the building out or until you can sell it to someone who will rent it out. So the clever thing with 937 is it says,
00:21:36
Speaker
You don't need to pay the impact fee until the building is done and you are ready to move in. The technical term is until it receives the certificate of occupancy. That's where the city says, you've built the building, as you said you would, we've inspected it, you can start moving people in.
00:21:54
Speaker
So then you still pay the 5 million. There's no change to the amount in that case, but that's 12, 24 months that you didn't have to be borrowing that 5 million that you didn't have to be paying interest on it.
00:22:09
Speaker
And very possibly now the developer is going to sell it to someone else. And because the building is there, it's not just a dream, it's there and it's ready for people to live in. It's easier to get that money. So 937 would effectively reduce costs of building by a lot, by as much as 1%, because
00:22:34
Speaker
of the cost of money, while still not changing the amount of money a city gets. Because when you think about it, the city only needs that impact fee if the building is built. If it's half built, no one's going to come, no impacts, nothing to charge a fee on. So why should you be getting it anyway?
00:22:50
Speaker
937 also tries to do something to sort of unstick projects. And this is in the context where right now, multifamily construction has a lot of problems mounting that are not related to zoning. And those are two things. One was already happening. One was rising construction costs.
00:23:12
Speaker
And that's happening for a lot of reasons that again, I don't have time to go into now that are not even fully understood in every respect. But now the new thing for the last couple of years is rising interest rates, much higher interest rates. The Fed has not started dropping yet. And that affects how much you can borrow for how long for the same building.
00:23:36
Speaker
Many buildings, they got approvals for, and then they can't get the loan to start building, so they've just been sitting undone. So what 937 does is it gives permits that have already been issued an extension. If it was issued before 2024, and it's going to expire before the end of 2025,
00:23:58
Speaker
then the state says they automatically get an 18-month extension from when they were going to expire. So possibly at the end of this year, the Fed has started to reduce interest rates. People can start to get loans on easier terms. If they've got their building permit extended,
00:24:15
Speaker
and they don't have to apply for an extension, they just have it, then hopefully that unlocks some more housing. You may start to see a pattern here, which is why I picked some of these bills together, is that because a number of the zoning and streamlining and upzoning bills make it a lot easier to get buildings approved now,
00:24:39
Speaker
I still think not nearly enough, but significantly more. And we're noticing the ways that other factors besides zoning
00:24:49
Speaker
are keeping the buildings from being built. And we're trying to look at the ways that the government has, the tools the government has to mitigate those costs and to make it more feasible to keep building. All of these are probably going to be a drop in the bucket compared to interest rates, which are the 900 pound gorilla, but every little bit helps. Another quick hit.
Utility Fee Reforms: SB 1210
00:25:11
Speaker
Senate Bill 1210 is by Nancy Skinner from Berkeley.
00:25:16
Speaker
And that was about utility fees and how much they could be. And here we have an example of
00:25:26
Speaker
the sausage being made because this has already been amended to a much less impactful version. What this would have done when it was submitted was look at all the utility fees. When you consider the hookup charges, the cost of installation, the cost of getting a new pipe for water, for electricity, whatever it is, all those government agencies or monopolies, in the case of PG&E,
00:25:52
Speaker
They can charge fees that add up to a whole lot on new housing. Originally, SB1210 would have limited all those fees they can charge to 1% of construction costs. So if you're building an ADU and it costs $300,000, your utility company cannot charge you more than $3,000 to get connected to utilities.
00:26:16
Speaker
What seems to have happened is that the utilities cried foul. They said, how dare you? You're going to bankrupt us. This is so ill-conceived. And whether rightly or wrongly, this was amended so that it is no longer reducing fees. Right now, it is a transparency bill.
00:26:32
Speaker
And it is simply saying that each utility shall ensure that its internet website allows an applicant for a service connection to track where they are in the line for connection and to receive a reasonable estimate of the cost of the fees, connections they need, all the different things that the utility needs to do. They can get estimates upfront of what the cost will be and of when it will actually happen.
00:26:58
Speaker
So now it is just a transparency bill. It is not reducing the cost of construction as much. Maybe it will make it easier to start out and know that you won't be interrupted by discovering that, oh, actually, they forgot to tell you about this ten thousand dollar fee. It's still not as it's not as impactful. However, there is something I heard about. It may be amended back to allow the utility to charge the fees at once.
00:27:26
Speaker
but to allow the applicant to pay them over time. So instead of $10,000 upfront, $1,000 a year for 10 years.
00:27:36
Speaker
And a lot of those connection fees are, in fact, in order to pay the utility for maintaining its capacity into the long term rather than for things they are doing right now. So it kind of makes sense, even if you think the utility fees are precisely what they need to be, it kind of makes sense to say, well, we need new housing, so just let them pay it over time. That is 1210.
Coastal Housing Challenges: SB 1077 and AB 1260
00:28:00
Speaker
The last two bills in the quick hits both deal with the coastal zone, the California coastal zone. And that is always a big deal. There is an area in the vicinity of the California coast. There is no specific number of miles away from the coast, but it is a lot of area, including a lot of San Diego, a good chunk of built up greater L.A. area.
00:28:25
Speaker
is in the coastal zone. And the idea of the coastal zone is that the Coastal Commission has authority to protect the coast. And they do a lot of good stuff to protect the coast, like maintain public access to it, make sure that no one's going to close off a path and keep people from getting to the beach, which is always public. Almost always. Unfortunately, the Coastal Commission does more than that. The Coastal Commission is more or less an indie organization at this point.
00:28:54
Speaker
They do not think new housing is good. They think it's especially bad around the coast. They think that protecting the coast means preventing housing from being built there. And that even extends to accessory dwelling units, which you may recall was originally the most slam dunk of all the initial up zonings that the legislature thought, well, of course people should be able to build ADUs. It's their own homes. Well, the Coastal Commission doesn't think so.
00:29:20
Speaker
They have a lot of ways to stick their ore in and make it a lot harder to build ADUs a little like before all the state laws came into place. And Senate Bill 1077 by Senator Blake Spear, who I believe is in the San Diego area, would essentially make it as easy to build an ADU in the coastal zone as anywhere else.
00:29:44
Speaker
So fairly simple. Then another problem is we have the state density bonus law, which is another tool that's been around for a while that is very muscular in making it easier to build housing at mixed incomes, meaning that some of it is guaranteed to low income renters and some of it is market rate.
00:30:07
Speaker
The density bonus law says that you can apply for something that meets the zoning, and then you add some affordable units to it, and then you can add more market rate units to it as your bonus. So you can go over and above the zoning in order to put in more affordable housing and to get more market rate units to pay for that affordable housing, ideally without any government subsidy, just the subsidy of those extra units. When you apply for a density bonus project,
00:30:37
Speaker
That puts the city in a bind usually because the city only has limited discretion to deny it. They can only deny your project if it is really obviously against the zoning or other applicable standards. You cannot deny it for any subjective reasons. You cannot deny a density bonus project because it quote, doesn't fit with the neighborhood, even if you wrote that into your zoning code.
00:31:01
Speaker
So the density bonus law has been around for a few decades, I believe since the early eighties, maybe the late seventies. And guess what? The coastal zone throws its wrench in once again. Technically, the density bonus law applies, but the commission has a way to
00:31:18
Speaker
not reject, but defer the approval an indefinite amount of time. So Assembly Bill 1260 by Assemblymember, I believe Alvarez, would make the density bonus law apply in the coastal zones only in the built up areas. It would make the density bonus law apply in built up coastal areas just as much and as easily as it does outside the coast.
00:31:42
Speaker
So all of these are pretty straightforward, but we know the coastal zone will fight them tooth and nail. Some of them may already have been amended down, but that is one of the directions that legislators are pushing this year is to look for some of the things that they have not tackled yet, including construction costs, including the coastal zone, and to start to tackle them.
Conclusion and Future Updates
00:32:05
Speaker
Those are all my quick hits.
00:32:07
Speaker
So this has been a shorter episode and I hope by that token, it has been a little more accessible. I will continue to be bringing on guests sometimes and doing this episodes on my own sometimes, but I should be back before too long because I have a lot more bills on my list to tell everyone about and perhaps to update you on how the different ones are faring. So I will see you then. And until next time, keep on learning.