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Workforce Housing: A Work In Progress

Presented by: Kelly M. Rem

SEPTEMBER 26, 2024

SAN MATEO-FOSTER CITY SCHOOL DISTRICT

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Presenter

Kelly M. Rem

krem@lozanosmith.com

925.953.1620

CONNECT

AT LOZANO SMITH

Kelly M. Rem is the Office Managing Partner of Lozano Smith's Walnut Creek Office. Ms. Rem specializes in Facilities and Business law and Litigation for public agency clients throughout California.

Ms. Rem has extensive experience advising clients throughout the state on real property issues, ranging from school closures to asset management to the complicated process associated with sale or lease of school district real property. During her career, she has handled tens of millions of dollars’ worth of real property sales, acquisitions, and leases, as well as property exchanges. She greatly enjoys helping school districts and other local agencies capitalize on their assets for the benefit of their students and the community.

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What is Educator Workforce Housing?

Low or below market rate housing units provided for district employees

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Why Educator Workforce Housing?

Nationally, 35% of educators are “rent-burdened” (paying more than 30% of their income in rent) but problem is especially pronounced in California with rapidly rising housing costs.

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Recent Legislation

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“A school district may establish and implement programs that address the housing needs of…employees who face challenges in securing affordable housing.”

Teacher Housing Act of 2016

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(Health & Safety Code, § 53573.)

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Assembly Bill 1157

Effective January 1, 2018, Assembly Bill (AB) 1157 exempted school districts from the requirement that they establish a 7-11 Committee to consider declaring property surplus if the district intends to use the surplus property for employee rental housing.
The expressed legislative intent behind AB 1157 was to exempt school district property to be used for district workforce housing from the surplus property process, but the law stops short of a broad exemption beyond removing the 7-11 Committee process

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Assembly Bill (AB) 2295

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Effective Jan. 1, 2024

A local agency may use any of its real property for a housing development but must satisfy statutory criteria.

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AB 2295 Criteria

At least 10 housing units
Recorded deed restrictions that for 55 years a majority of the unites shall be affordable to lower or moderate-income households. (30% affordable housing)
100% of the units rented to LEA employees, local public employees, or general members of the public as a last resort.
Property is adjacent to residential
Located on an infill site

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AB 2295 Criteria

Residential density shall be the greater of: Residential density allowed on the parcel by city or county, or the applicable density deemed appropriate to accommodate housing for lower income households.
Height limit shall be the greater of the following: height limit allowed on parcel by City or County or 35 feet.

Housing development shall satisfy other objective zoning, subdivision, and design review standards.
Property is located within any applicable urban limit line or urban growth boundary.
Housing development complies with all infrastructure related requirements, including impact fees.

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Options for Workforce Housing

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Build or Acquire?

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Build:

Considerations

Surplus property issues
Land use and zoning issues
Delivery methods
Financing

Acquire:

Financing

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Surplus Property

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If the District uses its own property for workforce housing, portions of the Education Code containing surplus property requirements may apply.

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Process

California Education Code requires specific procedures in relation to selling or leasing surplus school district property. (See generally Ed. Code, §§ 17387-91, 17455, et seq.)
School district workforce housing projects are generally exempt from the 7-11 Committee requirement. (Ed. Code, §17391(b).)
Surplus Land Act requires additional procedures, but school districts are typically exempt. (See generally Surplus Land Act (SLA), Gov. Code, §§ 54220-54234)

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Board Declaration

Board may declare the property as “surplus land.”
Board may also find that the property constitutes “exempt surplus land” within the meaning of the Government Code.

Can be used to trigger offers to other public agencies for negotiated sale.

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Naylor Act Notices

Offers must be made to certain public agencies for property previously used for playground, playing field, or for outdoor recreational purposes

Used for 8 prior years

No other publicly owned land in the vicinity to meet these needs

Price is limited

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Lease w/ No Option to Purchase

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No additional notices required beyond Naylor Act.

But leases over 15 years may be subject to SLA noticing requirements if not exempted

Sales or leases with an option to purchase require additional noticing.

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Resolution of Intention to Sell or Lease

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Board must adopt prior to sale or lease

2/3 vote requirement

Does not commit District to sell or lease

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Bidding/Waiver

Sale or lease to highest bidder in open session, with oral bids allowed
Most school districts seek and obtain State Board of Education waiver
Allows for an RFP process
Sale/lease does not have to go to the high bidder
No oral bids
Permits school district to choose a partner

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Land Use & Zoning Issues

Applicability of local zoning and building codes could limit development of the housing project and require local city approval.

The District may not be able to exempt itself from local zoning ordinances, as workforce housing likely constitutes a “nonclassroom facility.”
Coordination is likely needed with city and/or county authorities.
This can lead to pressure to include other public employees as tenants (e.g., fire and police)

AB 2295 Criteria – property must satisfy other objective zoning, subdivision, and design review standards.
Community support

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Construction Issues

Public Works Project – Prevailing Wages and Labor Code
DSA Oversight?

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Purchase Considerations - Financing

The viability of using local bond funds for workforce housing is unclear.
Certificates of Participation (COPs) —require the District to put up property as collateral.
Public-Private Partnerships
The sale of surplus property may also be a workable source of funding.

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We are aware of one school district that has passed a bond for this purpose, and others are attempting to follow suit, but the legality of this practice remains untested.
If the District incurs debt through a COP or otherwise and the District is later, for whatever reason, unable to rent all of the units, vacancies may make it difficult to retire the debt.
A PPP allows school districts to solicit proposals from, and enter into agreements with, private entities for the design, construction, and lease of fee-producing infrastructure projects. (School districts are expressly included under section 5956.3(a).) The PPP approach has not been fully tested in the workforce housing context, and was written more literally for infrastructure projects such as toll roads or bridges.
Funds obtained from the sale of surplus property must be used for only capital outlay, but a recent amendment to the Education Code indicates that workforce housing can qualify as a capital outlay expenditure.

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Option to sell or leverage Knolls Property �for workforce housing?

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Workforce Housing Delivery Methods

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Lease to a Private Partner

Subject to the surplus property process

Award the lease to the highest responsible bidder or seek a state waiver

Private partner develops the housing

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Lease to Nonprofit Public Benefit Corporation

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Ed. Code, §§ 17418, et seq.

Corporation constructs the project for use by the District
Lease awarded to low bidder
District approves members and/or directors of corporation
Corporation’s earnings benefit the District
Max lease term of 99 years
No express limit on project revenue use

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Joint Occupancy

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Ed. Code, §§ 17515, et seq.

School district leases real property to a private entity or local governmental agency
Lease agreement requires private entity to construct a building for the joint use of both parties
Exempt from surplus property requirements

The District would enter into a joint occupancy agreement for the Site with a private entity. The agreement would require that the entity construct the Project for joint use by the entity and the District. Such a joint occupancy agreement would fall outside the requirements of the surplus property procedures.

Title to the portion of the Project to be used by the private entity would remain exclusively with that entity for the duration of the lease. Title to the portion of the Project to be used by the District would vest upon acceptance by the District.

The term of the lease would be up to 99 years.

Contractors must be selected pursuant to a request for proposals process. The District may select the contractor that best meets the District’s needs; there is no requirement to accept the high bidder.

Unlike P3 (discussed above), the joint occupancy statutes do not address how the District may use or appropriate Project revenues.

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Public-Private Partnership (“P3”)

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Gov. Code, §§ 5956, et seq.

Allows for solicitation of proposals from private entities for design and construction of a revenue-generating project
Site leased to private entity for up to 35 years
Private entity to construct
During lease term, private entity collects revenue generated by project
Reverts to District when lease expires
Private entity selected via competitive negotiation process
Excess revenues go to an “appropriate government account”

This model would allow the District to solicit proposals from private entities for the design and construction of the Project.

The District would lease the site to a private entity for up to 35 years, during which time the entity would demolish some or all of the site’s existing buildings and would construct, operate, and maintain the Project. During the lease term, the entity would collect the revenue generated by the Project to recover its costs and extract a reasonable return on its investment. When the lease expires, the Site would revert to the District.

The private entity must be selected via a competitive negotiations process that is prescribed by law.

Private vendors typically only agree to this arrangement when they are assured an adequate income stream from lease revenues to make the venture profitable even after paying for the construction. This could limit the District’s ability to reduce rents significantly below market rates and also caps the Project’s profitability.

The Government Code provides that, if the lease payments exceed operational costs and other required expenditures, the excess revenues “shall either be applied to any indebtedness incurred by the private entity with respect to the project, be paid into a reserve account in order to offset future operation costs, be paid into the appropriate government account, be used to reduce the user fee or service charge creating the excess, or a combination of these sources.” (Gov. Code, § 5956.6, subd. (b)(6) (emphasis added).)

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Additional Options

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District handles independently, or

Partner with another public agency?

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Questions

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For more information, questions and comments about the presentation, please feel free to contact:

Kelly M. Rem

Partner

Tel: 925.953.1620

krem@lozanosmith.com

Or any of the attorneys in one of our 8 offices.

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Disclaimer: These materials and all discussions of these materials are for instructional purposes only and do not constitute legal advice. If you need legal advice, you should contact your local counsel or an attorney at Lozano Smith. If you are interested in having other in-service programs presented, please contact clientservices@lozanosmith.com or call (559) 431-5600.

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