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Why Build Houses in Shopping Centers?

Missed Opportunities in Applying California's Housing Law

By Tyler P. Berding, Esq.
Published: Jan 2024

Legislation in California since 1969 requires cities and counties to meet specific minimum requirements for new housing construction. The California Department of Housing and Community Development oversees these requirements. The department's website explains: 

"California's Housing Element Law acknowledges that, in order for the private market to adequately address the housing needs and demand of Californians, local governments must adopt plans and regulatory systems that provide opportunities for...housing development. As a result, housing policy in California rests largely on the effective implementation of local general plans and, in particular, local housing elements."

Multiple California state funding programs require compliance with this housing development law. The law requires each of the 532 local jurisdictions to inventory potential housing sites and submit a detailed "housing element" every five or eight years. The submissions must include a "land inventory" identifying vacant or underutilized land suitable for new housing, even if the site requires re-zoning for residential construction.

Because vacant land is rare in most cities, sites that now include commercial, governmental, and even religious buildings are identified as "potential" sites for re-zoning to residential uses. This has brought massive pushback from residents who object to zoning changes and the loss of local amenities. As a result, most California jurisdictions subject to the law remain out of compliance.

We reviewed the housing element prepared by one California county and were surprised to see sites with existing shopping centers, churches, and even school properties included in the "land inventory." The law does not require that the existing owners of these sites convert them to residential uses, nor could it without the exercise of eminent domain. So, the conversion of these non-residential sites into housing remains largely theoretical. This makes the goals of the legislation suspect since, at its base, it relies on the assumption that property owners will agree to convert existing uses to housing. The law has teeth only so far as forcing local jurisdictions to identify sites that would be "nice" to convert to housing. Nothing more.

What's needed is the identification of sites that will more realistically produce a greater supply of housing, especially low to moderate-income housing. A shopping center owner isn't likely to tear down stores and build apartments just because the state would like that, not to mention the loss of valuable neighborhood amenities. So, what sites could realistically provide more housing, and what would it take to make that happen?

As noted above, California Government Code Section 65583 requires cities and counties to designate parcels of land within their jurisdiction suitable for new housing. Complying with the statute requires that the local government prepare a “land inventory” not limited to properties already zoned for residential use. Instead, it requires looking at all parcels within that jurisdiction that could be used for housing despite present zoning. Land inventories include parcels presently designated for commercial and other non-residential uses. This is an unnecessary reach. There is a better idea, or at least an idea with a better chance of producing new housing, than waiting for a shopping center owner to convert stores into apartments.

Over a million condominium units are distributed among thousands of condominium buildings throughout California. Many are old, built in the Sixties and Seventies, and condos converted from even older apartment buildings. Many, perhaps a majority, have not been maintained well. Good maintenance costs money, and the owners of these units notoriously resist paying higher assessments for maintenance or anything else. Assessments are set by the Board of Directors, which, in turn, is comprised of unit owners. Most condominium owners do not see themselves as long-term residents. For many reasons, the average turnover rate in condominiums is about 5-7 years. This means that the current residents are less concerned about the future maintenance needs of their building, especially when projected ten or twenty years into the future.

With current owners resisting any meaningful increase in reserve assessments, the funding for long-term maintenance and repairs is left to future owners. But the cost of many future repairs will be known only when they become necessary. Damage hidden from the view of inspectors or managers is typical but only becomes evident once the parts of the building hiding it are disturbed during routine maintenance or minor repairs. If so, reserves are not funded for these unexpected repairs. Even if the damage is known, owners will resist the cost, instead performing patchwork repairs or deferring them for years or decades. This leads to condominium buildings that gradually deteriorate until renovating them becomes prohibitive.

Once the cost to repair damage such as dry rot to wood parts, corrosion of water supply pipes and sewer drains, or foundations that can no longer adequately support the building becomes untenable to the owners, the building may have reached a state of obsolescence from which it cannot return. Building collapses are becoming more frequent. Balconies rot and fail. Whole buildings like Champlain Towers South in Florida can collapse and, in each case, result in death or severe injury to occupants. City and county building departments are becoming attuned to those threats. Legislation recently passed in California requires owners to inspect structural components comprehensively. Insurance companies have also begun to inquire about the physical state of the buildings they insure, and private lenders and agencies like Fannie Mae have tightened their scrutiny of the condition of condominium buildings.

The result of all this attention will be that some buildings will have reached the end of their service life because the owners cannot afford the massive repairs needed to keep them insurable, habitable, or meet lenders' requirements. What then? This is where Cities and counties doing land inventories need to catch up. These sites are already zoned for residential use. They are usually close to downtown and transit. They only need an incentive for owners to sell to developers and zoning that permits greater density on the same site. Many of these thousands of older condominium buildings can be redeveloped or repurposed to provide affordable housing in densities greater than those sites now.

Municipal land inventories focusing on non-residential uses miss an obvious opportunity to encourage more housing on sites already providing that use. All that's needed for these aging and damaged buildings is for someone with the foresight to identify them and for state and local governments to provide modest subsidies to owners or developers so the existing owners can sell their interests without taking a significant hit to their equity. The same land with higher density zoning would increase the property's value and incentivize developers to purchase the site from the present owners. Instead of identifying shopping centers, churches, and used car lots that owners do not intend to turn into housing soon, cities and counties should look carefully at older condominium buildings.

There might be a win-win in there for everyone.

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