California’s Townhome Bill, Prop 45, and the Cost of Buying | Jennifer Hernandez

California wants a lot more housing. Right now we're building only 100 to 120,000 units a year. The state wants two to three times that. At the same time, a lot of communities and neighborhoods don't want more density. They're happy with what they have right now. This buy right process really unleashes a tremendous amount of land for building homes that people can afford to buy. Today we sit down with Jennifer Hernandez, who has been involved with all of this. She will tell us what these laws mean for the future of California housing. What do people need and what can they afford? And what's going to be acceptable in a democracy, in a neighborhood? Where's the space that we can find that will work? And this was that solution. Jennifer, it's great to have you back on. Welcome back. It is so nice to be here. Thanks again for your invitation. I love your show. Thank you so much. We want to talk to you about housing and this is a big topic for you and for us and for California. We are trying to build a lot more housing and there are a lot of initiatives, but despite all of that, we're still around 100, 110, 120,000 homes that we build every year. And there are new sets of laws that are passing, that have passed in the state right now that is making housing a lot easier. There's a few that you wanted to highlight. Can you tell us? Sure. What this change is about? So I think the biggest housing bill that was actually enacted this past year is going to be one of the most important. And that is, we call it townhome by right. So a townhome is usually attached on the side, although there can be an air gap. It's usually two or three stories, three bedrooms, two baths, and it's a for sale unit. And it costs about a third less than a traditional single family home on a big lot. And it usually has a private backyard, but a shared driveway arrangement. And so smaller lots, less land. This is absolutely fabulous. What we call missing middle homeownership because many homeowners now are older and for younger people to buy homes, it seems impossible. Why does it seem impossible? Because it costs $900,000 to buy a home, which means a down payment of two, three, $400,000. And then you've got insurance and interest rates and the rest of it. It's really out of reach for median income families, which 100, 120 a year is a median income household, typically two working parents. So homeownership is so important on so many levels. It's the way you build equity for yourself because part of what you would be paying in rent when you're an owner goes into your own account as equity. It allows for much more stability in terms of keeping the kids in the same school. You get to be more active in your community. It's a long-term commitment to a neighborhood and then your neighbors. So there's terrific, terrific reasons for supporting homeownership, but California policies until this year really focused on rentals, which are important as well, and granny flats, accessory dwelling units. And both of those products were supported through legislation from prior years that made it easier to get approvals. Homeownership products, on the other hand, didn't get to benefit from the same streamlining. And by streamlining, I mean, these are benign uses. We're not gonna pollute anyone by having a home next door. That's not a pollution source. They're benign uses. If they're in existing communities in what we call infill locations, it's not gonna kill a mountain lion. They're environmentally benign, but environmental review, which is limitless in terms of the amount of time an agency can take, was one big problem. Another big problem was just the fact that many people don't like change in their own neighborhood and so they would sue or appeal or put up political obstacles to creating this kind of home product. And for a long time, all we wanted to do or focus on were these granny flats or these big apartment buildings. And they're big because of a lot of different reasons we don't need to get into. But what we call gentle density, a townhome, two, three, four, five, on a couple lots or on a site, a parcel that's actually already zoned for multifamily, that blends into the community. Very aesthetically pleasing. Before about 1970, all of the historic neighborhoods in Los Angeles, for example, have a mix of three stack flats, triplex flats, which is a classic style in Boston and other ones, townhomes, duplexes, sometimes row houses, more than two homes together, triplexes. And they're beautiful neighborhoods. And we didn't need to go all the way to single family only. So this townhome by right bill follows the model of other housing laws that streamlined approvals for granny flats and apartments and says it's a by right use to build townhomes in infill locations, zoned for multifamily or zoned for single family, but not developed. So there's no standing single family home. So this will not affect single family homes. So it won't be that in the middle of a single family neighborhood, somebody can have a bunch of townhomes. It won't be unless there's three vacant lots in the middle of that street. I see, okay, if it's a vacant lot. But if it's not a vacant lot, no. So, and then this is family housing. So there are a couple of things. So the townhomes have to be at a density that is by the acre set by state law, but they're easy to achieve densities. And what's great is it's 75% of the density that even state law says is affordable housing. And so it's a terrific and flexible product type. It is a very flexible product type. You can have a townhome with a ground floor ADU for your aging parent or your rebellious teen, however you wanna use the space. And so a townhome can have two units or it can just be one, which is gonna be, I think, the norm. But this buy right process really unleashes a tremendous amount of land for building homes that people can afford to buy. Why are they so affordable? Not just less land per unit, but they're simple to build. It's wood, it's normal appliances. You can get the same kind of insurance and mortgage. Anybody in the construction trades who's had experience, this is the kind of stuff they know about. They're not the specialized elevator system operators. There's a bigger labor force. And we hope to have more people join that labor force because these are good jobs. So it's just a sort of terrific option. And there are many people who wanna stay in their community who can't stay now. And all of our polling suggests, not suggests, confirms that people can't afford housing in California and they're thinking about leaving. Majorities of Californians are thinking they're gonna have to move because they can't afford it anymore. And housing is the top cost concern. So this, we think, will help really hit the target of people who are really priced out, especially young families. Like first-time homebuyers. First-time homebuyers. People can pool resources. And if they get a townhome that has a granny flat on the ground floor, they can go in with another family member. It's just an easy, more affordable product type. Now, that doesn't mean it's gonna be cheap. This kind of townhome in Beverly Hills or Palo Alto is still gonna be a lot of money, but it's gonna be a lot less than single-family home. And it's home ownership. Build your own equity. Use the schools. Access the public services, the parks that are in that community, rather than rent. And pay all your money to rent and then probably end up moving at some point. How much is the density? So how many can you build? Is there a certain requirement? Sure, so in state law, defines affordable by design. So we have a couple different kinds of affordable housing in California, the way we use that term. It's most commonly used to mean deed-restricted, almost always rental, to low-income households. Those are almost always fully built with taxpayer funds and sometimes land donations or other sources. And then only low-income families meeting those eligibility criteria or individuals can usually, by lottery, get one of those units and then they spend just a third of their income on rent. That's affordable, capital A-H, affordable housing. But there's a different and very powerful additional concept of affordable housing in California, which is housing that is dense enough, there are enough units per acre, that the cost to the future occupants should be lower because it's on less land. It's that simple. So that's called mullin density. And it differs if you're rural, suburban, or urban. So in a rural community, 10 homes per acre counts as affordable by design. And this bill says 75%, so that would be seven units for that particular product type, is what you need. Seven units to the acre is easy. Suburban and urban are the real important categories here because of the infill requirement. So in suburbs, it's 20 to the acre is affordable by design. And this bill says- So if you build 20 of these townhomes in an acre? Better yet, 20 townhomes is hard to build. That's more like garden apartments. 75% of 20, which is what you do with this townhome bill. So 15. And then for cities, it's 30. 30 to the acre. So for 30, we need 23 of these townhome products, 23 units, housing units, including townhome products. I think for some of those, we're gonna see more townhomes that have an ADU attached. But again, they can be attached on the side or even separated with air gaps. And they have parking, they can do what they want. Another great thing about this bill is it doesn't do any top-down planning or usurp local government authority on things like architectural standards, affordable unit requirements. So local requirements in place already and continue to apply. But you get out of the how much have you done for me lately kind of trading. You don't have to go through the environmental lawsuits. Housing continues to be the top target of these environmental lawsuits brought under the California Environmental Quality Act. So you mentioned that they would have parking. Is there enough space to? Yeah, absolutely. Isn't 15 a lot per acre or is that okay? No, we've got examples all over the state. And sometimes the parking is on the bottom floor of a townhome. And then you have the living room. Yeah, exactly. When you get to lower densities, then you can have surface parking, but there's no reason why parking can't be accommodated. Now, just like every other urban space in say a city like Los Angeles, probably the parking is gonna be tucked under, but under the same unit. And you mentioned the cost, it will cost less. So it will cost less than an apartment building because of the construction cost will be lower. You don't have to use cements and other things, right? That's exactly right. And then the cost of land would be lower, right? Per unit, land would be much lower, yeah. How much do you see these products be? I'm sure it depends on the location, but is there gonna be a significant discount to the single family homes? So far there is. I mean, there's nothing new about this idea other than making it easier to get it built. So we have clients in this space. I do environmental land use permitting for housing developers, both profit and nonprofit developer. These townhome products, they're sold before they're built. There's various reasons. You've named two of the biggest ones, right? They're much cheaper to build because they're not complicated with elevators and concrete and whatever. They're also on less land. So those are both excellent reasons why they're lower cost. But another just excellent reason why they're lower cost is when you build 100 apartments in one structure, that's a big risk that it's gonna be able to be rented, fully occupied. Usually the lenders wanna charge a higher price to the developer, because what if it doesn't work out? What if there's issues with nonpayment by renters? It's a big risk. A townhome product, you've got 20 you can build. There's a market crash tomorrow. You've only built three. Three can be used. You can meter how many you actually build and take into account fluctuations in the market. And so it's less of a risk. It finances like a single family home. And that brings down the cost by a lot. So the financing is a lot easier. A lot easier. What are HOA fees for them? How does that part of it work? Great question. So HOAs can get out of control. And I have my own views about HOAs. When neighbors get in disputes with each other or your Christmas decorations offend somebody or you didn't bring your garbage can in or whatever. This townhome by right bill does not require HOAs. You can do just something as simple as what's called a roadway association, which is just paying dues to maintain common driveways and roads, which you will have. And that should calm everybody down. You can also have restrictions in place and they commonly do that say you can't convert if you have a garage underneath your unit. You can't make that a storage space. You have to park there, right? So you can set up rules that are enforceable but you don't need an HOA to enforce them. So we don't need HOAs and dues for something as simple as road maintenance or common area landscaping are much less expensive. So that's another advantage. So essentially these will be like owning a single family home. Very much so. And you're responsible for your structure and your land. Exactly, exactly. Now it's gonna be tempting I think for some of the larger of these projects to do HOAs but it's not required. And so, but if you only wanna build three or four or five you don't have to do that. So it's a very common sense approach. It's actually the first housing bill that the new California coalition has sponsored which I'm on, I chair the housing committee for. And it's like, we call ourselves the radical middle. It's like, where's the common sense space here? You know, we don't need a bunch of really high density rental only apartments but we do need more than granny flats. What do people need and what can they afford? And what's gonna be acceptable in kind of a democracy and a neighborhood? Where's the space that we can find that will work? And this was that solution. So in terms of where we go from here do you see a lot of these develop? Do you think this is going to open up a big number of developments in this? Very much so. Based on our developer clients that do these kinds of products it's a fabulous business model. You can take an old Mervin store that's been now zoned for multifamily. And instead of waiting for market conditions that allow five story apartments which are then $4,000 a month apartments for people to rent. And usually they're rentals. Yeah, absolutely. But now you take that old Mervin's site that's zoned for multifamily and you put what, 50, 150 or it's maybe just a strip mall that's shut down. You can take irregular shaped parcels. It's okay to have a triangle shape. You can make a little park on the corner pocket. You can include if you want kind of some workspace on the ground floor not necessarily retail but if someone wants to operate a realtor's office or a beauty salon or something all of that flexibility and community character building and kind of response to market demand for normal people people who are working hard and just trying to achieve the dream of home ownership. And it's so much easier to build and cheaper. All of the financial products, insurance and mortgages and construction loans and the materials are simple. So just one more quick point about the town home by right bill is it got out of the Senate and the assembly with bipartisan support. It's fabulous. Quirk Silver and Buffy Wicks were the two authors which was fabulous. It's on the governor's desk and we have high hopes that it will get approved given its broad support. So this type of density is different than the arena type density where there's a lot of apartments. Yes. And the questionable part of those apartments is like they're usually rentals. That's correct. And they're usually very expensive and result in three or $4,000 a month rent prices which- Nobody can afford. And that's for like a one bedroom, right? Without parking sometimes. So it's very hard to make those projects pencil but they're important parts of the housing solution that have their time and place. It's just, they're not really moving the needle in the way that some of the supporters want it. I should also say this town home bill doesn't apply where Sacramento has decided we want much higher density. So there's a bill SB 79 that says buy right high density like tower type density near transit. If you're on a location, if the property is designated for that very high density you couldn't use this bill because the idea is then you would remove housing units. And it doesn't apply in San Francisco either which has its own special status. Is that working much? Are people using that? Because it looks like- No, not yet. We'll see. Because there's a parking side of that and still like people want to use cars. Yeah. We don't have the public transportation. No, it's, I think the latest stats I've seen is 97% of the workforce still uses a car to get to work. You mentioned there's a lot of lawsuits happening with CEQA. Can you tell us more about that? Sure, so CEQA was enacted in 1970, bipartisan bill. We got to go back to 1970 which is before you and almost before me. What was happening? The Brady Bunch had just come out. The Beatles were still together. It was a long time ago. The world has changed. But the idea was as enacted before the government did big projects like new freeways or dams or whatever it needed to tell people what the environmental impacts were and try to avoid or minimize those, get public feedback and government could still approve their project but it couldn't just do it without considering and disclosing and taking public comment on environmental impacts. And the goal was to make sure we started working with the environment as a key policy priority. And many Californians, the vast majority bipartisan love the environment. Why are we here, right? So we want to preserve it. We want it to be clean and safe and save our natural spaces beautiful natural areas. So there's a lot of support which is why it was such a broadly supported bill. After that, it immediately took some unexpected turns in court. So in 1972, just two years after it was enacted the California Supreme Court decided it applied even to private projects. In a small condo project, 130 units for Mammoth Mountain. And the court said, oh, it applies to everything including government approvals of private projects. Well, the law was never set up to cope with the vast quantities of home remodel permits. What do you do about that, right? So then it's been catching up ever since with a bunch of court decisions that continue to be pretty unpredictable in terms of the way the court interprets CEQA. One of the state's experts on environmental law acknowledged in a sworn statement that judicial decisions about CEQA are completely unpredictable. Nobody knows how it's going to come out. Now, when you think about the rule of law that's not how it's supposed to work. You're actually supposed to know how to comply. And then you're responsible for complying. But if you don't know, then what do you do? Well, you kind of overdo it, right? We could get this argument and that argument and this issue and that issue. And before you know it, you're producing these reports that were supposed to originally be less than a hundred pages and now they're 20,000 pages. Because you're trying to take care of any argument that could come from any party and then hope the court agrees that you've done enough. That is a very unstable law. And it has been used and in my judgment abused for years and years, at least the last 25 years, where we get about 200 lawsuits a year. The biggest targets of these CEQA lawsuits is housing. They're no longer kind of about the environment as we would kind of commonly think about it. Maybe it's about my private view, whether I'm gonna have a harder time parking on my street. Sometimes it's that local. Sometimes it's just, we don't want new people. The second biggest target of CEQA lawsuits, the biggest in the public project space is water. So any kind of water project, recycled water, water treatment, water allocation, they get sued all the time. What's that about? Water allows growth. It allows economic activity. It allows housing growth. And so water is the big infrastructure target because dang it, we don't want more people. We don't want more of anything, right? And as the population, especially of voters has aged, look, we're boomers, we're cranky. We started out arrogant. We got cranky and arrogant. This is a prescription for filing lawsuits. And we file lawsuits, let me tell you. Then there's special interests who use CEQA to try to leverage economic gain. Competitors use it, as Governor Jerry Brown said, labor unions use it to sue, to try to get an economic concession from the developer. And here's what happens. Because court decisions are unknowable, once you get approval and 30 days later get sued, nobody wants to finance a project or start a project until you're through the litigation process. Because who knows? Because the most common remedy in CEQA decisions by judges is to rescind all project approvals as though you don't have any. You don't have any and start again. Wow. And so it's a really, really big and easy, cheap way to simply say, yeah, no, you're not building it. And for how long? It takes about four years to get through the court system. And does it include the appeal part of it? Four years includes the appeal part, four or five years includes the appeal part. Meanwhile, you have to have the land tied up. Is that how it works? Land is tied up, you're not building. A very famous case in Berkeley was for a single family home and a family bought it and wanted to remodel it. Just one home. One home, existing neighborhood. This remodel was supported by all neighbors, unanimously supported, approved by the Berkeley Planning Commission and City Council. One woman who lived some distance away didn't like it, didn't think it was keeping with the character of Berkeley and sued to block it and was in court for 11 years. Wow. And that, by the way, was an exempt project. So we try to say, oh, it's exempt from CEQA. No, people sue over exemptions. People sue all the time. And because you have to be prepared for these lawsuits, you have to prove the negative, right? There is no impact. This is fine. Well, how much proof do you need? So long and short of it is CEQA has become a black hole, not just for housing and water, but for carpool lanes, for hospital renovations, for managing forests so that we reduce forest fire risk. Anything that we would want to build and think we need, rural broadband, bringing people internet service to rural areas requires CEQA. Everything requires CEQA. It's gotten ridiculous. And all it takes is one person to decide to sue. Exactly. And then it would delay the project. Indefinitely. Five years is long enough for somebody to quit their job and do something else. Well, and many of these, we call them essential projects, they're taxpayer funded. And sometimes the money isn't available, right? The delay means you can't qualify for the grant. The grant program expires in two years. You don't spend it, you lose it. And so delay is death. And then people get so frustrated that congestion is bad, water costs too much, electricity costs too much, everything costs too much, in part because a whole bunch of people like me who charge by the hour, or people in government who have secure jobs, or other consultants, advocates, whatever, the whole kind of CEQA industrial complex, we typically have a home, we get our jobs, some of us get pensions, most of us don't. The process people keep the progress on building from happening. And the people who need stuff to be built, they're younger. They're not homeowners yet. They're dependent on government working and they're very frustrated. So all of that came together, especially around this affordability crisis, and prompted the drafting of a CEQA reform initiative, Prop 45, that's on the ballot. And it's another of these common sense, what do people need? Well, we need housing, and we call these essential projects. We need internet service. We need hospitals, medical facilities. We need schools, pre-K through adult ed. We shouldn't be suing using CEQA to block schools. What is not an essential project? No way for ports, refineries, mines, dams, the Bay Delta project, the high-speed rail. Controversial stuff that people are not seeing as part of the solution for their own lives, not included in Prop 45. But Prop 45 doesn't include any exemptions from CEQA. It absolutely retains CEQA in its present form. It just puts some boundaries around it. It restores the rule of law. So how did it work? Three steps. Step one, the first agency to approve a project, typically a city or a county, has a time limit for completing CEQA, which is just the same arrangement we have now for time limits for completing review of housing permit applications, like a year, right? It's not unreasonable. But they have to do it. They can't just say, oh, we're not ready, or somebody else is looking for it, or give us one more supplemental whatever because we've got this new idea of what needs to be. No, no, no, it's deadline. And what you need to do is written down. At the time you apply for a project, you know what you need to do because agencies can enforce what they've written as what they need. They can't keep inventing new stuff. Well, here, we think you should do this or whatever. So you have a new person or somebody changes and then they come up with new things. So you jump in, you know what you have to comply with, you know what the fees are, you think it's a good project, you have a time-limited process, and a year on the outside, you're done. That's step one. So it just holds everyone to account for timely performance based on disclosed standards. And if an agency wants to say, no, we want more elaborate studies or something before we'll review your application, fine, they can adopt that, but it has to be written down. It has to be clear. You can't make it up as you go or change it staff to staff. Step two is every project in California typically now requires multiple agencies to finally give approvals or departments within agencies. Those are called responsible agencies. Those guys typically go off on their own direction and may take more years or even require more CEQA. No, no, no, those guys, 90 days. Finish your job in 90 days. Still, we're gonna require you to issue permits or get permits before you're allowed to build. You can't build without water, so make sure you got water supply, right? Very common sense, but time limited. And then finally, courts. So I call these buddy bills, but Sacramento every year decides for some favorite category of bills, we're gonna make the courts work faster. And there's a ruling court for these projects called environmental leadership projects where instead of four years, these lawsuits have to be resolved in 270 days, trial plus appellate with one 90-day extension possible. So you take a four-year court schedule and it's now less than one. And courts, the goal is enforcing CEQA. And so you enforce CEQA if you think there's something wrong by saying you gotta do this to comply with CEQA, but you don't rescind project approvals. You just go back and do whatever the court says wasn't done right in CEQA. And you gotta do it right. And so no more rescissions. And then finally, we gotta stop with the who knows what the heck is going on in terms of these court decisions. So we clarify that the role of courts, which is already in CEQA, they just ignore it a lot, is to enforce what's really expressly required. That's what the law already says. Not invent new stuff, right? We don't wanna invent. One of my latest examples is neighbors for high schools are often unhappy about night lighting in the field, right? Who likes it? So then it's Friday night football. But then now we got girls playing. Somebody might've noticed, right? So we can't just have Friday nights. Now we need Thursday and Friday or even Saturday or whatever. You do more lighting, neighbors sue. Okay, it's a school, there's already lights, but now there's gonna be more lights, right? Or at least more nights with lights and neighbors sue. And there was a court decision that says, oh no, no, no, you have to do a photoelectric study of the lights. And it's like, what is a photoelectric? It was an invented thing, right? I mean, people come up with new ideas all the time. And if that's what it's required, then write it down so we'll do it. But it's not for a court to decide it's required. It's for the law, lawmakers to make it clear. And the most famous example of this is of course, the People's Park case, which was a dorm in Berkeley where the courts decided that the fact that student make noise on the street some weekend nights is an impact that was not sufficiently studied. By neighbors of California's oldest college who darn well know that's Stephanie, come on. That's not unusual. We've seen lawsuits against some churches, some mosques where there's like rockets music. Well, really, really is out there. Why not, if this housing is gonna have teenagers, well, my God, teenagers, they have their own cluster of environmental impacts. That's just crazy making, right? Why infants cry, what are we gonna do? So if somebody wants to make a law that says we should do something about that, let them make the law. But it's not for a court to interpret CEQA broadly. It's for a court to recognize we need to build essential projects. These are environmentally benign, no exceptions, still gotta get all the permits, still have to be protective of the environment. But let's not allow CEQA to be this limitless, unpredictable litigation morass where a whole bunch of the CEQA industrial complex people make money, and the real people of California don't get what they need built. Or they end up paying for it. They end up paying a lot for it. Yeah. The projects. Yeah. So Jennifer, with all that you're seeing, and it's very hard for people to afford, especially new home buyers. We have some team members that are looking, and it's very hard, especially the rates are going up. Do you see this type of housing will make California affordable? Or do you see this type of housing will put the limit on how much the prices are going up? I don't know that there's anything that would truly limit prices other than more supply, and more supply that actually is affordable in the market. We have tens of thousands, probably now more than 100,000 apartment units that have been permitted that are not being built because how many families can really afford the three or $4,000 a month for a one bedroom? So we can't legislate our way out of what people can afford. What I am confident about is that this is a product type for what people want, home ownership, that is much, much less expensive, and doesn't have the condo defect issues, the insurability issues, the other issues that happen when you try to do high density home ownership products. It's a proven model. It's working anywhere it's tried in California. For our clients, it's been a fabulous, fabulous model, and is getting new people into homes. It's great. So let's see what happens. Please come back and share with us your insights. Jennifer Hernandez, it was great to have you back on California Insider. Thank you. Vote for Prop 45 and let's stop this nonsense. Thank you. Tell us what do you think about this conversation with Jennifer? Do you think more townhomes will help California's affordability? Also, what do you think about Prop 45? Make sure to tell us in the comments or email us at siamak.californiasider.com. We read all of your emails and comments. I'm Siamak Khorrami. This is California Insider. We'll see you next time.