Recent Amendments to the Surplus Land Act

The following is a summary of (i) the general procedural requirements for the disposal of surplus land by a local agency under the Surplus Land Act (SLA) (Gov. Code § 54220 et. seq.) and (ii) recent key amendments to the SLA. The California Department of Housing and Community Development (HCD) has issued draft updated SLA Guidelines to address these and other recent amendments.

BACKGROUND

Originally enacted in 1968, the SLA requires local agencies to prioritize affordable housing, as well as parks and open space, when disposing of surplus land, which is defined as “land owned in fee simple by any local agency for which the local agency’s governing body takes formal action in a regular public meeting declaring that the land is surplus and is not necessary for the agency’s use.” (Gov. Code § 54221(b)(1).)

The SLA was significantly amended in 2020 by Assembly Bill No. 1486 (among other amendments) to specifically exclude property disposed for the generation of revenue: “Property disposed of for the sole purpose of investment or generation of revenue shall not be considered necessary for the agency’s use” ("2020 SLA Amendment"). (Gov. Code § 54221(c)(2)(A).) This makes it more likely that the property will be deemed surplus land under the SLA.

Surplus land owned by a local agency must be designated as “surplus land” or “exempt surplus land” before the property is disposed (i.e., the sale or lease of land for more than 15 years).

Non-Exempt Surplus Land

If property is declared (non-exempt) surplus land, the local agency is required to follow the notice and open bidding procedures in the SLA. To summarize:

• • The local agency must give written notice of the availability (NOA) of the surplus land to any local public entity with jurisdiction over the area where the surplus land is located, public agencies administering infill opportunity zones, and certified “housing sponsors” that have notified HCD of their interest in surplus land. (Gov. Code § 54222.)
  • Any qualified entity that wishes to purchase or lease the surplus land would have 60 days from the date of the NOA to notify the local agency in writing of its interest in the property. (Gov. Code § 54222(e).) After the local agency receives a notice of interest, it may begin negotiations to determine the sale price or lease (Gov. Code § 54223(a).)
  • If the local agency receives notice from more than one entity interested in purchasing or leasing the surplus land, it must give priority to any entity that agrees to use the surplus land for affordable housing (unless the property is designated for park and recreational uses). (Gov. Code § 54227(a), (b).) If more than one entity agrees to use the surplus land for affordable housing, the local agency must give priority to the entity that would provide the greatest number of affordable units. (Gov. Code § 54227(a).) If the same number of affordable units are proposed, priority must be given to the entity that proposes the deepest average level of affordability for the affordable units. (Ibid.)
  • If no agreement on terms or price is reached after a good faith negotiation period of (at least) 90 days (commencing on the first day after the end of the 60 day notice of availability period), the surplus land can generally be disposed of without further regard to the SLA’s (Gov. Code § 54223(a).) However, under such circumstances (or where no entity responds), an affordability covenant must still be recorded against the property requiring that at least 15% of the total number of residential units must be sold or rented as affordable housing if 10 or more residential units are constructed on the property. (Gov. Code § 54233.)

Exempt Surplus Land

“Exempt surplus land” is surplus land that is formally declared exempt from the procedural public notice and bidding requirements under the SLA because it meets one or more criteria under Government Code Section 54221(f)(1) to qualify for an exemption, which are limited in scope but have been expanded by the recent legislative amendments discussed below.

RECENT AMENDMENTS

The California legislature passed, and Governor Newsom approved, several bills (Senate Bill 747, Assembly Bill 480 and Assembly Bill 1734) amending the SLA during the 2023-2024 legislative session (“Recent Amendments”). The Recent Amendments clarify important definitions, include additional exemptions, amend procedural requirements, and strengthen oversight and enforcement by HCD. The key amendments to the SLA are summarized below.

Modified Exemptions

The Recent Amendments modify the following SLA exemptions:

• • There is a pre-existing exemption for “land subject to valid legal restrictions” not imposed by the local agency (e.g., not a non-residential land use restriction) that makes housing prohibited, unless there is a feasible method to satisfactorily mitigate or avoid the prohibition on the site. The Recent Amendments specify that valid legal restrictions include, but are not limited to: (i) existing contracts, including leases, agreed to prior to September 30, 2019; (ii) easements; (iii) source of funding restrictions (as specified); (iv) federal or state statutes or regulations; and (v) local voter-approved initiatives. A valid legal restriction must be supported by documentary evidence. (Gov. Code § 54221(f)(1)(J).)
  • There is a pre-existing exemption for “small parcels” which has been modified by the Recent Amendments to apply to land that is less than one-half acre and is not contiguous to public land used for open-space or low- or moderate-income housing purposes. Pursuant to the draft updated HCD SLA Guidelines, contiguous parcels that are disposed of simultaneously to the same receiving entity (or any entity working in concert with another receiving entity) will be treated as a single unit of land. (Gov. Code § 54221(f)(1)(B).)
  • There is a pre-existing exemption for the “exchange of surplus land” where the property is necessary for the local agency’s use. That exemption has been extended by the Recent Amendments to also apply to easements. (Gov. Code § 54221(f)(1)(C).)
  • There is a pre-existing exemption for “local agency to agency surplus land transfer” where the property is necessary for the transferee agency’s use. That exemption has been extended by the Recent Amendments to also apply to (i) federally recognized California Indian tribes and (ii) where the surplus land is transferred to a third party if that third party agrees to use the property for an agency use, as specified, and that third party is required (pursuant to a legally binding document) to transfer the property to the local agency by a specified date that is (per HCD) “within a reasonable time period.” (Gov. Code § 54221(f)(1)(D).)
  • There is a pre-existing exemption for “land for affordable housing.” The Recent Amendments remove the requirement that the land be put out to an open, competitive bid for qualifying 100% affordable housing projects (only), as specified. (Gov. Code § 54221(f)(1)(F).)
  • The pre-existing exemption for “land for affordable housing” also includes an exemption for qualifying mixed- income projects where at least 300 residential units are proposed and at least 25% of the units are reserved for lower-income households, among other specified requirements. The Recent Amendments modify the project requirements depending on the size of the property, and clarify that for larger properties (over 10 acres and consisting of either one or multiple parcels combined for disposition), the number of residential units must equal the greater of (i) 300 units or (ii) 10 times the number of acres of the surplus land or 10,000 residential units, whichever is less. (Gov. Code § 54221(f)(1)(G), (H).)

New Exemptions

The Recent Amendments create new categories of “exempt” surplus land, including:

• • Land for mixed-use development in a non-urbanized area (as defined) where at least 50% of the square footage of new construction is dedicated to residential use and at least 25% of the units are reserved for lower-income households, among other specified requirements. The land must nonetheless be put out for an open, competitive bid. (Gov. Code § 54221(f)(1)(I).)
  • Land owned by a local agency whose primary mission or purpose is to supply the public with a transportation system that is used to develop a mixed-use project, including for commercial or industrial uses, including nongovernmental retail, entertainment or office development or for the sole purpose of investment or generation of revenue. The agency must meet specified criteria, including the requirement that a specified number of residential units are also proposed at a specified level of affordability. (Gov. Code § 54221(f)(1)(S).)
  • Land that is transferred to a community trust that is to be developed or rehabilitated as specified types of housing and meets specified conditions. (Gov. Code § 54221(f)(1)(R).)
  • Land that is owned by a California public-use airport on which residential uses are prohibited pursuant to Federal Aviation Administration standards. (Gov. Code § 54221(f)(1)(Q).)
  • Land being disposed by a city with a population exceeding 2,500,000 for specified housing uses if the jurisdiction has a compliant housing element and has been designated “pro-housing” by HCD. (Gov. Code § 54222.3.1.) The City of Los Angeles is the only local agency that currently meets these requirements. The following types of housing projects qualify for this new exemption, subject to the payment of prevailing wages for the construction of the project:

• • • • • Affordable housing projects where 100% of the units in the project, exclusive of a manager’s unit(s), are sold or rented to lower-income households (as defined), except that up to 20% of the units may be sold or rented to moderate-income housings (as defined)
        • Supportive housing, as defined
        • Transitional housing, as defined, for youth and young adults between 12 and 24 years of age
        • Low barrier navigation centers, as defined

Modified Definitions

• • The SLA requires a local agency disposing of (non-exempt) surplus land to send a written NOA, as summarized above, before disposing of the property or “participating in negotiations.” The Recent Amendments provide that the following actions do not constitute “participating in negotiations”: (i) issuing a request for proposals or request for qualifications to the entities eligible to receive the notice of availability in order to comply with the terms of specified exemptions; (ii) negotiating a lease, exclusive negotiating agreement, or option agreement with entities eligible to receive the notice of availability in order to comply with the terms of specified exemptions; and (iii) negotiating with a developer to determine if the local agency can satisfy the disposal exemption requirements. (Gov. Code § 54222(f).)
  • The Recent Amendments clarify the definition of “dispose” to mean either the sale of surplus land or the lease (after January 1, 2024) of surplus land for a term longer than 15 years (previously five years), including any extension or renewal options. (Gov. Code § 54221(d)(1).) The Recent Amendments also provide that “dispose” does not include entering into a lease for surplus land on which no development or demolition will occur, regardless of the term of the lease. (Gov. Code § 54221(d)(2).)
  • The Recent Amendments revise the definition of “agency’s use” (meaning that the property is not surplus land) to include property owned by a port that is used to support logistics uses, sites for broadband equipment or wireless facilities, and waste disposal sites. (Gov. Code § 54221(c)(1).)

Extended Deadline for “Grandfathered” Agreements

The 2020 SLA Amendment provides that an exclusive negotiating agreement (ENA) or legally binding agreement to dispose of property entered into on or before September 30, 2019 is not subject to the 2020 version of the SLA, provided the disposition of property was completed by December 31, 2022. In other words, under that circumstance, surplus land disposed of for the sole purpose of investment or generation of revenue would still be considered necessary for the “agency’s use” and therefore, the property could be deemed non-surplus land. The Recent Amendments (Gov. Code § 54234(a), (d)):

• • Extend the foregoing 2022 disposition deadline to December 31, 2027
  • Extend the deadline for specified mixed-income or affordable housing projects where a competitive request for proposals (RFP) was issued by the local agency by September 30, 2019 and the local agency enters into a disposition and development agreement (DDA) by December 31, 2027
  • Allow for the “revival” of a prior ENA, DDA or legally binding agreement, as applicable, if the disposition was not completed by the prior 2022 deadline, so long as (per HCD), the agreement has “substantially similar terms”

Declaration of Exempt Surplus Land by Notice

The Recent Amendments provide that a local agency may declare certain exemptions without a public hearing, if it instead publishes a notice and makes it available for public comment at least 30 days before the exemption takes effect. (Gov. Code § 54221(b)(4).)

Affordability Period

Under the SLA, an entity proposing to use surplus land for affordable housing must record a covenant on the property agreeing to make available at least 25% of the total number of units available at an affordable cost to lower income households for a specified period. The Recent Amendments vary the affordability period based on the type of housing. The affordable housing units must be made available at an affordable housing cost for a period of 55 years for rental housing, 45 years for ownership housing, and 50 years for rental or ownership housing on tribal trust lands. (Gov. Code § 54222.5.)

Please note that in addition to the new exemptions summarized above, there are pre-existing surplus land exemptions for 100% affordable housing projects with other specified affordability requirements.

SLA Violations

The Recent Amendments impose an additional requirement on a local agency that has received a notification of violation (NOV) from HCD regarding the disposal of surplus land. A local agency must hold an open public meeting to evaluate the NOV and is prohibited from approving the proposed disposal of surplus land until the meeting has occurred. (Gov. Code § 54230.7.) In Orange County jurisdictions specifically, a local agency having received a NOV cannot dispose of the surplus land until HCD affirmatively determines compliance with the SLA. (Gov. Code § 54230.8.)

The Recent Amendments revise the penalty fee for SLA violations to 30% of the applicable “disposition value” (versus final sale price) for a first-time violation and 50% for subsequent violations. In the case of a sale, the applicable disposition value is defined as the greater of the final sale price of the land or the fair market value of the surplus land at the time of sale. In the case of a lease, the applicable disposition value is the discounted net present value of the fair market value of the lease as of the date the lease was entered into. The Recent Amendments also prohibit penalty fees for non-substantive violations (e.g., clerical errors) that do not impact the availability or construction of housing affordable to lower income households or the ultimate disposition of the land, as specified. (Gov. Code § 54230.5(a).)

HCD SLA GUIDELINES

The following are a few key changes in the draft updated HCD SLA Guidelines:

Hybrid Projects

Only land used in “its entirety” by a local agency for an “agency’s use” will qualify as non-surplus land, even if revenue generated on the portion of land not being used according to that definition would support the development on the qualifying portion of land. Under that scenario, it will be important to factor in the type of local agency.

Recall that for most local agencies, pursuant to the 2020 SLA Amendment, property disposed of for the purpose of investment or generation of revenue shall not be considered necessary for the “agency’s use.” However, there is a carve-out for a local agency that is a non-transportation district, in which case “agency’s use” may include commercial or industrial uses or activities, including nongovernmental retail, entertainment, or office development, or may be used for the sole purpose of investment or generation of revenue, so long as specified requirements are met.

As discussed above, the Recent Amendments add the same carve-out for transportation agencies. However, that is technically an “exemption” versus a basis for finding that the land is not surplus land in the first instance.

Reporting Requirements

A local agency that plans to dispose of land for “agency’s use” must provide documentation that the land meets that definition to HCD at least 30 days prior to disposition. This requirement would provide for additional oversight by HCD where a local agency has determined that the land is not surplus land in the first instance.

Good Faith Negotiations

HCD has clarified what constitutes “good faith negotiations” during the required 90-day good faith negotiation period for (non-exempt) surplus land, as applicable. The local agency must: (i) make serious efforts to meet at reasonable times to attempt to reach an agreement, (ii) respond to letters of interest, (iii) respond to and consider reasonable offers to purchase or lease, (iv) not require that development proposals significantly deviate from the NOA, and (v) not arbitrarily end active negotiations after the 90-day good faith negotiation period.

Environmentally Sensitive Land

If the surplus land is located in one of the following four locations, the NOA must be for open space purposes and the local agency is permitted, but not required, to send the NOA to affordable housing providers: (i) the coastal zone; (ii) adjacent to a historical unit of the State Parks System; (iii) listed on, or determined to be eligible for listing on, the National Register of Historic Places; and (iv) within the Lake Tahoe region. The NOA must be sent to the following agencies: (i) any park or recreation department of any city or county, as applicable, within which the surplus land is located, (ii) any regional park authority having jurisdiction within the area, and (iii) the State Resources Agency. (Gov. Code § 54222(b).)

HCD Enforcement

The SLA provides: “The failure by a local agency to comply with this article shall not invalidate the transfer or conveyance of real property to a purchaser or encumbrancer for value.” (Gov. Code § 54230.6.) However, HCD has clarified that it may seek to enforce the SLA and pursue all applicable legal and equitable remedies, including, but not limited to, injunctive or declaratory relief, if a local agency disposes of land, or attempts to dispose of land, in violation of the SLA.