Earlier this year, our article in the Spring 2024 issue of NAIOP Commercial Real Estate Development Magazine touched on some of the challenges of and tools for adapting underutilized commercial spaces and property for residential redevelopment, including California state laws such as Senate Bill (SB) 6, the “Middle Class Housing Act of 2022” and Assembly Bill (AB) 2011, the “Affordable Housing and High Road Jobs Act of 2022.”
As we noted, there are many benefits of reusing existing structures in urban areas, including reductions in emissions from demolition and new construction and revitalization of existing underutilized commercial properties. In light of the ongoing housing crisis, reuse of existing nonresidential structures for residential development can be more cost- and environmentally- efficient, with a quicker development timeline and less community opposition. On the other hand, depending on the design and condition of the existing structure, some adaptive conversions can be more challenging and expensive than new construction, particularly where retrofitting is needed. Given that underused commercial properties present significant opportunities for adaptation to address current needs, we identified a need for more state-level legislative support for conversions.
In the 2024 session, the California Legislature adopted two bills to expand conversion opportunities: AB 3068 and AB 2243. AB 3068 would have created a ministerial approval process for adaptive reuse projects, aimed at converting nonresidential buildings less than 50 years old (or those that meet historic preservation standards) into residential or mixed-use developments, but was vetoed by the Governor. The Governor’s veto message expressed “strong” support for “efforts to address California's housing crisis by promoting adaptive reuse projects” but cited concerns with the bill’s proposed compliance and enforcement mechanisms for labor standards. Meanwhile, development industry insiders expressed concerns about AB 3068’s requirement to meet current Building Code requirements (except for historic structures eligible for the historic building code) and are looking to findings from a forthcoming task force report (expected by December 31, 2025) on the “challenges to, and opportunities that help support, the creation and promotion of adaptive reuse residential projects statewide while not reducing minimum health and safety standards, including identifying and recommending amendments to state building standards” as required by another bill adopted in 2022, AB 529.
AB 2243, on the other hand, was signed by the Governor on September 29 and enacts refinements primarily to AB 2011 with some changes to SB 6, building on the previous legislation’s foundation to add incremental opportunities to increase the impact of reuse and conversion projects on housing supply. One such opportunity relates to underutilized malls. While AB 2011 and SB 6 focused on smaller (20 acres and under) sites, AB 2243 adds “regional mall”[1] sites (up to 100 acres) to both, recognizing potential opportunities to redevelop a larger footprint from underutilized retail to residential use. For AB 2011 projects in particular, which (unlike SB 6 projects) are subject to streamlined ministerial approval but require a minimum of 13% (8% very low plus 5% extremely low, or 15% lower income[2]) of base[3] residential units[4] to be affordable, the inclusion of larger mall sites could present a more realistic option for ministerial redevelopment of commercial sites on a larger scale, given that projects that include deed-restricted affordable units often require more total units to offset costs.[5]
AB 2243 also provides some relief from the strict minimum density requirements of AB 2011, instead designating the “allowable” density- but still requires projects to meet at least 50% of the allowable density (75% for sites within ½ mile of an existing rail or bus rapid transit station) through 2026; after January 1, 2027, 75% is the minimum. AB 2243 also increases the allowable density for sites in a “very low vehicle travel area” to as much as 80 dwelling units per acre, adding them to sites within ½ mile of a major transit stop as allowed by AB 2011. For projects to convert an existing nonresidential structure to residential uses, AB 2243 provides that there is no density limit,[6] recognizing that conversion projects have both benefits and challenges warranting this additional flexibility. However, AB 2243 does not amend the minimum density requirements under SB 6.
With respect to conversions, AB 2243 addresses one particular limitation on the reuse of existing nonresidential structures for residential use under AB 2011’s ministerial process, prohibiting local governments from requiring additional common open space (as might otherwise be required for new residential development) beyond that already existing on the site. This change recognizes that such physical limitations can make adaptive reuse challenging. For both conversion and redevelopment projects, AB 2243 also limits mitigation fees to the incremental impact of the development, in recognition that the existing use likely already contributed to mitigating some development impacts.
AB 2243 also opens up more sites to potential reuse by striking AB 2011’s prohibition on residential reuse of properties within 500 feet of a freeway and replacing it with development standards designed to protect future residents from adverse air quality impacts, and amending the definitions of freeway to exclude certain on- and off-ramps (to address a contrary interpretation by the California Department of Housing and Community Development). AB 2243 also refines the definition of “commercial corridor” (a primary site requirement under AB 2011) to mean a “street” (but not a “freeway”) rather than a “highway” and includes sidewalks within the 70- to 150-foot right-of-way required to qualify. AB 2243 also clarifies AB 2011’s base zoning requirements to capture more sites (especially parking lots), defining “principally permitted” uses as a use that may occupy more than 1/3 of the site and does not require a conditional use permit, except that sites that allow parking uses with a conditional use permit still qualify.
As for surrounding uses, AB 2243 adds certain public parks as qualifying surrounding “urban uses” and excludes certain uses from the definition of “industrial uses” (for purposes of AB 2011’s prohibition on sites on or adjacent to property “dedicated to industrial use”), including power substations and utility conveyances, an emergency backup generator, and self-storage for residents of the building. AB 2243 also provides that the term “dedicated to industrial use” now means that the square footage is either currently being used for “industrial uses”, the most current permitted use of the square footage is an “industrial use” and the site has been occupied within the past 3 years, or the site was designated for “industrial use” in the latest version of the general plan adopted before 2022 and residential uses are not principally permitted on the site. This amendment recognizes that some local industrial use classifications actually permit residential mixed use, and will no longer be excluded from AB 2011’s ministerial process.
AB 2243 also takes aim at AB 2011’s exclusion for sites in a “neighborhood plan”, which can work against a project in an outdated community plan area or a jurisdiction with few areas outside such planning boundaries. Specifically, AB 2243 provides that sites are no longer excluded due to being in a “neighborhood plan” where the plan was adopted more than 25 years before the development application, or where the cumulative area covered by community plans in the jurisdiction is more than one-half the area of the jurisdiction. Finally, AB 2243 also provides that AB 2011 projects are now allowed on sites in the Coastal Zone meeting certain SB 35 requirements, with a Coastal Development Permit that “shall” be approved if consistent with objective standards.
In terms of procedure, AB 2243 adds clarifications to require the local government to identify any specific conflicts with objective development standards in writing and to ensure the local government’s comment and resubmittal requirements do not undermine streamlining under AB 2011. Although the local government may still apply objective development standards, the applicable standards are those for the closest zone that allows multifamily uses at the density proposed by the project (rather than the “minimum required” under AB 2011) and cannot preclude the development from being built at the required residential density or require the development to reduce unit size. Design review, while permitted, expressly may not “inhibit, chill or preclude” ministerial approval and AB 2011 projects are now expressly subject to the provisions of the Housing Accountability Act, Government Code section 65589.5. The requirement to complete a Phase 1 environmental site assessment and mitigate for potential hazardous materials is also deferred until project approval, with mitigation required prior to occupancy rather than at application. Finally, if a local government elects to exclude any otherwise eligible parcels from AB 2011, it is required to designate them on its zoning maps available through its website.
Although AB 2243 is not the broad-based approach AB 3068 would have been, it builds on the foundation of previous legislative actions to further support adaptive reuse and conversion projects, addressing some challenges specific to conversion, opening up more sites to reuse and providing more flexibility in density and accountability in the local government process. Additionally, opening up regional mall sites could allow for larger redevelopment projects under both SB 6 and AB 2011. As with all nonresidential conversions, however, these projects are often challenging to implement, especially where private restrictions (as are common within mall properties) also limit use of the site. As the law continues to evolve with the forthcoming AB 529 task force report, we continue to look for more opportunities to streamline residential reuse of underutilized nonresidential sites.
FOOTNOTES
[1] Defined as sites that include at least 250,000 square feet of retail uses, at least 2/3 of permitted uses on site are retail and at least two of the retail uses are at least 10,000 square feet.
[2] For rental projects, restricted for 55 years. Owner-occupied units can satisfy the minimum affordable units with 15% lower income or 30% moderate income affordable units, restricted for 45 years.
[3] AB 2243 added the defined term “base” to mean “total units” as defined in the State Density Bonus Law, Government Code § 65915(o), which “[e]xcludes a unit added by a density bonus”.
[4] AB 2243 clarifies this requirement applies to “new” units.
[5] Note, however, that AB 2243 does include some development standards specific to regional mall redevelopment under the bill.
[6] Conversion projects may include no more than 20% additional new square footage.