Developers Prevail in Dispute Regarding Key Housing Legislation

California's First District Court of Appeal recently issued a lengthy and consequential decision reaffirming the State's ability to pass housing legislation limiting local governments' discretion to deny housing projects. In Ruegg & Ellsworth v. City of Berkeley (Case No. A159218, April 20, 2021), the court was specifically tasked with interpreting and applying – for the first time – SB 35 (codified at Gov. Code. § 65913.4). However, Ruegg & Ellsworth will likely have implications for developers seeking to benefit from other pro-housing statutes.

Background of SB 35

Enacted in 2017 and effective January 1, 2018, SB 35 is one of a number of bills passed in recent years which seek to address the ongoing housing crisis in California and penalize local governments that fail to meet their obligations to increase statewide housing supply. SB 35 provides a streamlined, ministerial approval process for certain residential projects in localities that fail to satisfy their share of the regional housing needs assessment (RHNA) under State Housing Element Law. To qualify for ministerial approval under SB 35, a proposed development must meet certain objective planning standards including:

• the development must be a multifamily housing development containing two or more residential units;
• the development must be located on an urban infill site;
• the development must be located on property zoned for residential or residential mixed-use development;
• the development must devote two-thirds of its square footage to residential use; and
• the development must contain a specified minimum percentage of affordable, below-market units.

The proposed development must also be consistent with all applicable objective zoning standards, subdivision standards, and design review standards. Under SB 35, "objective" standards are defined as "standards that involve no personal or subjective judgment by a public official and are uniformly verifiable by reference to an external and uniform benchmark or criterion available and knowable by both the development applicant or proponent and the public official before submittal."

In summary, SB 35 is targeted to increase housing production in jurisdictions that need it the most by allowing projects which satisfy objective planning standards to sidestep local discretionary review.

City Attempts to Derail SB 35 Project

Ruegg & Ellsworth involved one such SB 35 project. In 2015, Ruegg & Ellsworth and Frank Spenger Company (Applicants) applied to the City of Berkeley (City) for approval of a mixed-use development containing 135 apartments and 33,000 square feet of retail space and parking (Project). The Project site was part of a three-block area designated by the City as a historic landmark and listed in the California Register of Historic Resources as the location of the West Berkeley Shellmound (Shellmound). The Shellmound was an ancient burial site for native Californians which, at the time of the Project, consisted entirely of subterranean archeological artifacts.

After the Project ran into snags during the CEQA review process relating to potential significant impacts to the Shellmound, Applicants asked the City to suspend their application and submitted a new application in March 2018 for a redesigned Project in the same location. The redesigned Project contained 260 dwelling units (50 percent affordable) and 27,500 square feet of retail space and parking. The application was intended to take advantage of SB 35 and sought ministerial approval of the Project.

Facing public opposition, the City ultimately refused to grant the Project ministerial review under SB 35. In its denial letter, the City claimed that SB 35 could not constitutionally be applied to the Project because it interfered with the City's right, as a charter city, to govern its own municipal affairs. The letter also contended that even if SB 35 applied, the Project did not qualify for ministerial approval because it was inconsistent with local "objective" standards – specifically, the City's Affordable Housing Mitigation Fee requirements with respect to very low-income units, and the City's requirements regarding traffic impacts. The City also argued that the Project did not qualify for ministerial approval because it potentially required demolition of a historic structure (i.e., the Shellmound) that had been placed on a state and local historic register.

Applicants' Petition and Superior Court Decision

Applicants filed a petition for writ of mandate challenging the City's denial of the Project. The trial court reviewed the petition under the highly deferential "arbitrary and capricious" standard of review pursuant to Code of Civil Procedure section 1085. Under that standard, a City's decision will be upheld unless it is "arbitrary, capricious or entirely lacking in evidentiary support, contrary to established public policy, unlawful or procedurally unfair." Based on this deferential standard, the trial court found that the City's determination that the Project would require the demolition of a historic structure was "not entirely without evidentiary support." As a result, the trial court upheld the City's denial of the Project and denied Applicants' petition for writ of mandate. The second basis upon which the trial court denied the petition was a determination that Section 65913.4 does not apply to mixed-use developments.

Court of Appeal Reaffirms Pro-Housing Legislation

On appeal, the Court of Appeal reversed the trial court's decision and ordered that Appellant's petition for writ of mandate be granted. In its decision, the Court engaged in a detailed analysis of the legislative purpose behind many of California's pro-housing statutes, noting that its "primary task" was to "effectuate the Legislature's intent." Thereafter, the Court issued a number of holdings bolstering the State's authority to pass pro-housing legislation and limiting local governments' discretion to deny housing projects which comply with Statewide housing laws. Most notably:

• The Court held that that the "arbitrary and capricious" standard of review was "inappropriate" in SB 35 cases. Specifically, the Court found this deferential standard "nullifie[d] the legislative intent in [SB 35] by insulating from review the fact-finding underlying an agency's determination whether its ministerial duty to approve a project is triggered." The Court observed that the language of SB 35 was expressly tailored to "limit local governments' authority over applications for development of affordable housing projects meeting … specified criteria" and that the Legislature's obvious intent was to "constrain local governments' discretion" in order to encourage housing production. The Court concluded that the Legislative intent behind SB 35 would not be served by application of a deferential standard of review.
• The Court also rejected the City's arguments that SB 35 unconstitutionally interfered with its right, as a charter city, to govern its own municipal affairs. The Court explained that where a state statute addresses a matter of "statewide concern" and the statute is "reasonably related to … resolution of that concern" and "narrowly tailored to avoid unnecessary interference in local governance" the matter at issue ceases to be solely a municipal affair. Applying this test, the Court observed that SB 35 and other pro-housing legislation "patently" addressed a matter of statewide concern – i.e., the statewide housing shortage – "by encouraging and facilitating the construction of housing in general and affordable housing in particular." The Court then found that SB 35 was reasonably related to resolution of that concern because it "remov[ed] local governments' discretion to deny applications for affordable housing developments meeting specified objective criteria." The Court likewise found that SB 35 was narrowly tailored and that its intrusion into local authority was "not broader than necessary to achieve the purpose of the legislation." On these facts, the Court upheld SB 35 as a valid exercise of the State's power to legislate on matters of statewide concern.

Implications for Other Pro-Housing Laws

While the Court's decision in Ruegg & Ellsworth focused primarily on SB 35, the Court's reasoning similarly applies to other pro-housing laws, such as the Housing Accountability Act, the Density Bonus Law, and the recent Housing Crisis Act. The case provides an important signal to lower courts and local agencies that pro-housing laws should be construed broadly to encourage increased housing production and that denials of projects under such laws should be subjected to closer judicial scrutiny.