MAY 2024 NEWSLETTER

Happy New Year, and welcome to our first edition of the Selna Partners Quarterly Newsletter. In this issue, we focus on two of our practice specialties, real estate/land use and cannabis, highlighting political, legislative and governmental developments likely to impact these industries in 2022.

REAL ESTATE AND LAND USE

2021 HOUSING BILLS

Gov. Gavin Newsom signed 31 housing bills in the 2021 legislative session, demonstrating the State Legislature’s focus on the housing supply and affordability. The bills covered three broad areas, including local government accountability for housing production, incentivizing residential construction and addressing housing discrimination.
We highlight three important bills related to housing production.

SB 9

This bill received the most media attention of any 2021 housing legislation, because it effectively ended single-family zoning in urban and suburban areas statewide. The bill requires over-the-counter approval (meaning no public hearing) for property owners who 1) apply to split their single-family lot in two to build housing; and 2) apply to construct two homes on one lot. This means that four dwelling units could be built on property that previously allowed just one.
While the legislation, authored by State Senator Toni Atkins (D-San Diego), has some homeowners wringing their hands over the possible densification of the state’s ranch-style suburbs, it includes significant limitations and is not expected to put a huge dent in the state’s severe housing shortage. The requirements include:

Each new lot is at least 1,200 square feet and the split results in 2 parcels of approximately equal lot area.
Any unit created will not be used for short-term rentals, and must be rented for a term longer than 30 days.
Neither the owner nor anyone acting in concert with the owner may have previously subdivided an adjacent parcel through an SB 9 lot split.
The applicant must sign an affidavit indicating that they intend to occupy one of the housing units as a principal residence for a minimum of three years from the date of the approval of the lot split.

SB 10

This bill allows local governments to rezone housing density up to 10 units per parcel in certain neighborhoods without the zoning change undergoing a time-consuming and expensive environmental review under the California Environmental Quality Act (“CEQA”). To be eligible for the increased housing density, a parcel must be located in an area designated as urban infill or near public transit. To be clear, while the bill allows the neighborhood zoning change to avoid CEQA review, any individual development project will still need to comply with the environmental law.
For the purposes of the bill, “urban infill” means that at least 75 percent of the perimeter of the site must adjoin parcels that are developed with urban uses. Urban uses are residential, commercial, public institutional, transit or transportation passenger facility, or retail use, or any combination. Parcels that are separated by a street or highway are considered adjoined.

The law, authored by Senator Scott Wiener (D-San Francisco), also allows local agencies (City Councils or Boards of Supervisors) to override voter-approved zoning with a two-thirds vote. This controversial component has already been challenged by the AIDS Healthcare Foundation, which filed a lawsuit on September 30 in Los Angeles County Superior Court.

AB 1174

Authored by Assemblymember Tim Grayson (D-Concord), the legislation removed a loophole in SB 35, the 2017 bill that accelerates housing project approvals, which meet objective zoning and planning requirements. The problem was that SB 35 included a provision that unless construction began within three years of approval, the project applicant had to start over.
The three-year timeframe did not take into account delays caused by project opponents, including those filing frivolous lawsuits. AB 1174 provides shelter for such projects.

The bill was designated as “urgency” legislation and went into effect upon Governor Newsom’s signature on September 16, 2021. It was expected to have an immediate impact on the housing/commercial Vallco project in Cupertino. Vallco, planned for a near-vacant and outdated shopping mall, expects to add 2,400 new housing units, half of which would be affordably priced. But, the project is the subject of a lawsuit attempting to set aside its approval. The approval was due to expire on September 21, 2021.

STATE INVESTIGATES CITIES THAT REJECT NEW HOUSING

San Francisco and Oakland are just two examples of cities under investigation by California’s new Housing Accountability Unit for failing to approve housing projects supported by local planning commissions and confirmed to be legally compliant. Elected bodies in both cities upheld or paused projects based on appeals claiming the projects had environmental problems.
In San Francisco, the Board of Supervisors rejected a housing project that included 495 units on a parking lot near the Powell Street BART station. The project had been appealed by an affordable housing group.

In Oakland, the City Council indicated that a housing project on a parking lot near the West Oakland BART station might need an additional layer of environmental review. A final decision is pending on the 222-unit development appealed by five labor unions. The project has already undergone several environmental studies, including one conducted by the City that covered all of West Oakland.

The Housing Accountability Unit is the new enforcement arm of the California Department of Housing and Community Development. Gustavo Velasquez, the agency’s director told the San Francisco Chronicle that “Oakland and San Francisco are cities where the housing supply gap is felt the most. You would expect these elected officials to be a little more liberal in their analysis.”

The five unions have long held sway with East Bay politicians, where they go by the benign-sounding name East Bay Residents for Responsible Development. Their members make campaign contributions, file dubious CEQA appeals and have their lawyers meet with elected officials the day before project appeal votes. The unions typically inform developers that the CEQA appeal can be resolved if union contracts are signed.

Selna Partners has successfully helped clients facing union pressure and is encouraged that the State is making good on its promise to hold local jurisdictions accountable when they wrongly-reject housing projects. We have offered to help on the investigations and are eager to see their results.

CANNABIS

CANNABIS BUSINESSES SEEK TAX RELIEF

On December 17, 2021, more than two dozen representatives from leading California cannabis companies and industry organizations issued an open letter to State lawmakers and Governor Newson, warning that the state’s legal cannabis industry was on the verge of collapse due to excessive taxation and threatening to withhold tax payments unless state lawmakers commit to significant reforms.
Industry leaders seek an immediate lifting of the cultivation tax on growers; a three-year break from the imposition of excise taxes, and looser restrictions on the establishment of retail shops throughout much of the State. The group also posted an online petition, urging the Governor and State lawmakers to take immediate action. As of this writing, the Petition has garnered more than 3200 signatures.

Organizations and companies signing the letter included the California Cannabis Industry Association, CALNORML, Harborside, Inc., Flow Kana, Inc. and Canna Craft. The letter follows years of complaints that the heavily taxed and regulated cannabis industry is unable to compete with the illegal cannabis market. According to the letter, “Excessive taxation, which compounds across the supply chain, makes our product 50% more expensive at retail than the illicit market. This has created an illicit market that is currently three times the size of the legal market.”

This year, cannabis cultivation taxes are set to increase, to $10.08 per ounce of dried cannabis flower from the 2021 rate of $9.65. The state also imposes a 15% excise tax and 7.25% sales tax, and many local governments charge additional taxes, making California one of the nation’s highest taxed cannabis markets.

In response to the letter and petition, the Governor’s office issued a statement supporting cannabis tax reform and acknowledging that the State needs to expand enforcement against illegal sales and production.

On January 13, 2022, cannabis advocates, small farmers and business owners rallied outside the State Capitol, warning that the industry could collapse if steps aren’t taken soon. This was an effort to build on the momentum created by industry leaders and the petition demanding that California change the way it taxes cannabis. Assembly member Mia Bonta attended the rally and spoke on behalf of reforming current cannabis regulations.

We will continue to follow and report on reactions from State lawmakers to this emerging issue.

KEY CALIFORNIA CANNABIS LEGISLATIVE DEVELOPMENTS WITH IMPLICATIONS FOR 2022

AB 141 AND SB 160
DEADLINE FOR PROVISIONAL LICENSES EXTENDED

AB 141 and SB 160 extended the provisional licensing program, which otherwise would have expired on January 1, 2022. New provisional licenses may be issued for an additional 6 months, until June 30, 2022. Applications are due by March 31, 2022. The bills also permitted the renewal of existing provisional licenses for up to 4 more years if certain conditions are met. In addition, the bills called for the consolidated Department of Cannabis Control to establish a framework for the provision of business-to-business trade samples.

SB 166
SOCIAL EQUITY REFORM

This bill established technical reforms to address social equity issues in the cannabis industry. SB 166 clarified that all equity applicants may be issued a provisional license until June 30, 2023, and further established a state-level definition so all equity applicants may be considered for a State fee waiver or deferral even if they are licensed in a jurisdiction without a local social equity program.

AB 45
REGULATORY FRAMEWORK FOR MANUFACTURE/SALE OF HEMP PRODUCTS

AB 45 established a comprehensive regulatory framework for manufacture and sale of hemp products. It also established a pathway for incorporating hemp into the cannabis supply chain by 2024.

AB 1138
CIVIL PENALTY FOR ILLEGAL CANNABIS OPERATIONS

AB 1138 imposes a civil penalty of up to $30,000 on individuals who knowingly aid and abet unlicensed cannabis activity.

CEQA COMPLIANCE

CEQA compliance continues to be a highly challenging requirement for obtaining an annual cannabis license. The vast majority of California licenses are provisional; roughly only one quarter have transitioned to annual licenses, and the chief transition hurdle has been CEQA compliance. CEQA requirements are complicated and vary by jurisdiction. The state budget for 2022 includes $100 million in funding to increase local jurisdictions’ ability to complete CEQA reviews.
As noted previously, provisional licenses, which essentially give licensees more time to comply with CEQA, were set to expire at the end of 2021. With the extensions outlined above, there is additional time to comply with CEQA requirements, but it is limited. Further, as to the timeline for renewing an existing provisional license, renewals between July 1, 2022 and June 30, 2023 require evidence of streambed alteration agreements where relevant (for cultivators) and CEQA compliance (for all licensees).

Please don’t hesitate to contact us to discuss how these changes will impact your business operations. We hope you have enjoyed our inaugural newsletter and welcome your feedback!