The city's new Transit-Oriented Communities Incentive is intended to promote more transit-oriented development. We sat down with Andrew Starrels, is a partner with Holland & Knight LLP and a member of the firm's West Coast Land Use and Environment Group, to talk about the new incentive and how it will impact development in the coming year.

GlobeSt.com: What is the Transit Oriented Communities Incentive?

Andrew Starrels: The Transit Oriented Communities Incentive, or TOC Program, is a relatively new set of guidelines adopted by the Los Angeles Department of City Planning as part of the implementation of Measure JJJ, passed by the voters in November 2016. Measure JJJ sought to trigger the construction of more affordable housing by requiring City officials to create incentives for building housing near transit resources. The implementation of the TOC Program represents the City's required response to the voter mandate to promote development of affordable housing near transit—essentially within one-half mile of major transit points (rail or bus stations, or the convergence of two or more major bus lines).
The TOC program establishes “tiers” by increasing the permitted density for projects as the affordable housing within the project increases. To some extent, the Program mirrors the statewide “density bonus” program, in which additional density, expressed as a percentage of the otherwise allowable number of units in a proposed development, is permitted if a developer includes a specified percentage of affordable units set aside for residents meeting certain income qualification requirements. At its basic level, the Program incentives echo the state density bonus, and provide a similar menu of additional incentives (setback relief, reduced yard requirements, additional height or density, etc.) for projects that provide more affordable housing. The TOC Program attempts to go further than the original statewide density bonus and the existing City density bonus program by providing additional incentives for greater density or building allowances if greater percentages or affordable housing are developed and when projects fulfill certain more onerous requirements, including paying “prevailing wage” for project labor. Some of the additional incentives afforded by the TOC Program are pretty significant, and increase the amount of density that will be allowed by a project that includes an affordable housing element located near transit.

GlobeSt.com: Do you expect this to fuel TOD activity in the coming year?

Starrels: It's been well documented that Los Angeles has a severe shortage of multifamily housing, and the shortage of affordable housing is particularly critical. In that light, any program to incentivize the production of affordable housing is a step in the right direction, and the TOC Program will likely fuel some new projects. The City reports that in the few weeks since the final guidelines were released, they have already taken several applications for TOC Program projects; however, I fear the step in the right direction may be a small one. There remain too many significant systemic impediments and barriers to the production of new housing, including affordable units in transit areas, to generate much optimism within the real estate community. And the TOC Program actually creates additional barriers. To begin with, land costs in areas with the greatest need for affordable housing remain high. So, a for-profit developer must be able to justify the provision of affordable units in a project as a “cost of entry” for getting a development project while otherwise keeping the project profitable. The rents that an owner can collect for an income-restricted affordable unit will fall substantially short of the costs of building and operating the unit so the developer will not build the development unless the additional density allowed by the affordable housing incentive generates sufficient income to offset the shortfall. For example, in a Westside neighborhood where a new 2-bedroom market rate apartment might rent for $3,500 per month, the rent for an income-restricted unit in that building (the “affordable rent” is tied to a qualifying tenant's income based upon the median income levels in the County) would probably be around $1,000 per month. So, if a developer received an incentive allowing them to build 20 additional units in a development, they might have to set aside 8 of those units for income-qualified tenants, meaning that only 12 of the additional units will generate market rents sufficient to pay for the additional development costs.

The “density bonus” program has been in existence for more than 30 years and over its lifetime has been hugely successful in spurring the development of mixed-income projects that have contributed significant amounts of affordable housing. These incentives and programs should continue. The problem is that land values in Los Angeles, especially in the areas in greatest need of affordable housing, are so inflated that the developer must pay huge amounts just to acquire the land. Construction costs in the current climate are skyrocketing, and at its highest levels of incentive, the TOC Program requires developers to pay higher labor costs in the form of “prevailing wage” in order to obtain the greatest development incentives. It remains to be seen at this point if the incentives being offered will prompt a developer to build significantly more affordable units, and some in the development community have suggested that developers may opt not to take advantage of all the incentives offered. With high land costs, high costs of labor and materials, and greater time required to complete permitting and construction, I fear that many developers will conclude that developments containing additional affordable housing units do not “pencil,” or generate sufficient returns to justify the additional costs.

There is still significant community opposition, as well as structural and political impediments, to the type of development posed by TOC Program projects. Many communities, and some elected officials, remain steadfastly opposed to increased building density, even in transit areas. Challenges and lawsuits seeking to stop development projects under the California Environmental Quality Act (CEQA) continue to be an effective for community groups, “NIMBY forces” and opponents of infill and higher density development to oppose new housing developments.

There are other changes that the City could adopt, which I believe would be effective in achieving the City's goals. Streamlined permitting, for example, for otherwise compliant projects that achieve these goals for affordability would be meaningful incentives that could cut time from costly development schedules and money from development budgets, thus offsetting some of the costs of the affordable housing. And, while it would require action in Sacramento, the provision of affordable housing and appropriate increased density in areas well-served by mass transit seem to me at least as deserving of CEQA relief (through streamlining or exemption) as professional sports stadia, which have benefitted repeatedly from such legislative largesse in recent years.

GlobeSt.com: Transit-oriented has been popular this year. What was the impetus for the city to develop an additional incentive?

Starrels: Actually, transit oriented development has been discussed for many years, and the City has several examples of successful and innovative high density projects near transit resources that have invigorated communities, prompted economic revitalization and provided affordable housing. As I said, the real impetus for the TOC Program guidelines introduced recently are the mandates set by Measure JJJ, through which voters overwhelmingly confirmed that they seek expanded opportunities for affordable housing near transit, want the City to create real incentives for these projects, and want to ensure that laborers working on these projects are paid a prevailing wage. These transformative projects are possible, and can be successful, but there are still many impediments.

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New City Incentive Encourages More Transit-Oriented Development

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