How Will SB-9 & SB-10 Affect South Bay Real Estate?

As promised, this week’s blog will cover newly passed SB-9 and SB-10 California laws.

The bills are highly detailed and will vary depending on interpretation and the location of your property in the state. Furthermore, anyone pursuing the use of these new laws will want to hire the services of a qualified local architect and real estate attorney.

I am doing my best to summarize these new laws and give my opinion on how it will affect South Bay real estate. But please, much more due diligence must be done beyond this blog post if you want to fully understand these laws and how they apply to a specific property.

Senate Bill 9

The intentions of SB-9 are to help alleviate the affordable housing crisis throughout the state, much like the intentions of the ADU laws passed a few years ago. Essentially, the bill works to streamline the production of additional housing and avoid red tape caused by the California Environmental Quality Act (known as CEQA).

In a nutshell, SB-9 makes it legal to split a lot and develop two units on what used to be reserved for a one unit development.

It does not specifically allow for four units, but once the lot split is complete, four units can be achieved by invoking the state ADU laws to add additional residences via Accessory Dwelling Units.

There are loads of restrictions, exceptions, and items open for interpretation.

Below are a few highlights:

1. The laws allow for an “Urban” lot split. Basically, the property must fall in an urbanized area or urban cluster.
2. Properties are not eligible if they are in prime farmland, wetlands, high fire zones, historic districts, or 100-year floodplain.
3. Lot splits are also prohibited if they affect rent-restricted housing or a unit that has an Ellis Act eviction within the past 15 years.
4. Also prohibited is anything that requires demolition of more than 25% of existing structures (unless the local city/county allows for more).

You can see how confusing this can get!

A pro-density city, like the city of Los Angeles, might allow for demolition of greater than 25%, but you have to navigate rent control and Ellis Act rules within that jurisdiction.

An anti-density city, like the city of Rolling Hills, might claim they are not “Urban” or that they sit in a high fire zone…or even argue it is prime farmland in the future.

Expect lawsuits and many owners/local jurisdictions trying to work out how they approach the new law. SB-9 attempts to define some of these terms but it is not that simple.

Additionally, an applicant for a lot split under SB-9 must sign an affidavit stating they intend to occupy one of the housing units as their principal residence for a minimum of three years from the date the split is approved.

The fact that almost all professional real estate investors will be excluded (except for their primary residence) will greatly slow the use of this new law.

It reminds me much of the first iteration of the ADU laws passed by the state. It allowed for the state to dip their toe in the water with ADUs and then further define investor-friendly laws with updated legislation two years later.

See the first iteration blog on ADUs here: A Can’t Miss South Bay Real Estate Investment

See the second iteration blog on ADUs here: ADUs Likely Coming En Masse to South Bay Real Estate

Unless one intends to scrape their entire lot in the South Bay and be an owner-occupant for three years, this law will not have much use for South Bay real estate holders. The 25% demolition restriction is going to be tough to get around and it is likely that our local South Bay cities will do whatever they can to limit the impacts of SB-9.

That does not mean the law will not be used by savvy owners and buyers, it will just not be a mass usage like the potential with ADUs throughout our local area.

Expect to see very light usage of SB-9.

If lot-split developments are deemed a success, then you could see a relaxation of the laws from the state level. If they were relaxed for investors to utilize, then it could be a massive shift for all California real estate markets. The state and local cities will work together to see if the current legislation should stay as-is or be improved over time.

Right now, much ado about nothing and only applicable to a few owner and buyers…and it will not be cheap to execute once it becomes law.

Senate Bill 10

The intention of SB-10 is to give local governments tools to increase density in “transit-rich areas” or “urban infill sites.” It allows for governments to easily re-zone any property for up to 10 residential units per parcel.

What does it take to qualify?

A “transit rich area” is defined as a parcel being within one half mile of a major transit stop or qualifying bus corridor.

An “urban infill site” has various qualifications:

1. A parcel located in a city that is an urban area or urban cluster, per the U.S. Census Bureau.
2. A parcel in an unincorporated area within boundaries of an urban cluster, etc.
3. A parcel where 7% of the perimeter had developments with urban uses.

These are just a few examples of the qualifications. I will not get into restrictions, but in a nutshell, the use of this ordinance is only optional for local jurisdictions.

As a result of this optionality, I do not expect our local South Bay cities covered in this blog to use it unless a property has overwhelming support to add density…which is rare.

Conclusion

All in all, both new laws are very powerful if put to use.

While SB-9 is an intriguing option, you will only see it used by a few brave investors who must also happen to live at the property for multiple years. That is a big hurdle.

And SB-10 is optional so expect it to be picked up by cities that are pro-density and not given the time of day by anti-density cities, which is a majority of our South Bay cities.

I believe SB-9 is a great opportunity, but it will require a lot of study with the proper professionals, not to mention a long runway of planning, time, money, and primary ownership to make it a reality.

Hope this has been helpful and have a great weekend!

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