State level Affordable Housing legislation aims to override local control

How will increased potential for ‘up-zoning’ impact HOA-governed communities?

By Deborah Goonan, Independent American Communities deborahgoonan@gmail.com

In an attempt to increase the supply of affordable housing in some of America’s most expensive housing markets, state and city policymakers are rolling back ‘single family only’ zoning restrictions.

Most recently, the Governor of California signed a highly controversial piece of legislation onSeptember 28, 2021. Filed with Secretary of State  September 28, 2021. California Chapter 349,entitled An act to add Section 714.6 to the Civil Code, relating to real property, spells out a number of key limitations on local control of new housing development.

California law now prohibits enforcement of local government, private landowner, or HOA restrictions limit the number, size, or location of the residences that may be built on the property, or that restrict the number of persons or families who may reside on the property. Supporters of the law agree that restricting land use to single family detached residences on relatively large lots effectively excludes California residents in need of smaller housing units, often in the form of multifamily dwellings.

Potentially, an affordable housing organization can acquire lots or existing housing units in HOA-governed communities, then proceed with the legal process of amending land use restrictions to allow for additional housing units on that property. For example, an owner might choose to convert a single family home into a duplex with two rental units, keeping rents within the legal definition of affordable housing.

Pending the inevitable legal challenges of the provisions of Chapter 349, it appears thatlong-standing HOA restrictions that permit only single family dwellings may prove to be unenforceable.

Upzoning laws are not new. California’s Legislature follows the lead of Oregon and several cities in Washington state, where similar laws have been enacted in the past few years. Relaxation of zoning laws represents a growing trend — justified by supporters as a path to increase the supply of affordable housing.

Will rolling back restrictive local zoning work?

Whether or not relaxing zoning restrictions will lead to more affordable housing depends on how this new state law is both applied and enforced,

Understand that the intended purpose of this bill is to allow for smaller homes on smaller lots. Think missing middle housing, which includes duplexes, Accessory Dwelling Units (ADUs), garage or basement apartments, etc.

If individual homeowners choose to expand living quarters in their own homes or on their own lot, either for family members or for potential rental income, it will reduce demand for more expensive corporate-owned rental housing, and should help moderate the rise in monthly rents throughout the housing market.

However, what if corporate landlords and institutional investors use the new law to buy up and converts single family homes en masse — or built blocks of built to rent duplexes with backyard tiny homes? That could reduce the supply of homes for sale to buyers seeking to own a primary home, thus creating even higher inflation of housing prices. People who cannot afford to buy are then forced to rent from the very cash investors that are outbidding them in their house hunt.

Another potential consideration: as states push local governments ease zoning restrictions and increase housing density (the number of dwellings per square mile), local governments will need to ensure that growing their residential population does not stress or exceed the capacity of essential infrastructure and public services.

As neighborhoods and urban areas become more densely populated, they require greater capacities for water supply, wastewater treatment, stormwater management and flood mitigation, and local and regional transportation networks. Schools, hospitals, and law enforcement organizations must also increase their staff, equipment, and financial resources to serve more people. When communities grow organically, or at least at a reasonably-controlled pace, government and private sector organizations are better able to gradually adjust their service levels. But when investors move aggressively to rapidly increase the number of housing units, existing residents and taxpayers tend to feel the squeeze — a reduction in quality of services, despite rising taxes and housing costs.

Perhaps state Legislators should have considered two stronger housing policies:

1. The gradual expiration and abolition of Covenants and Restrictions, and HOA-governed housing.

2. Amending state and federal tax and lending policies to favor owner-occupants vs. investor-landlords.

Radical change vs. incremental change

Experts in the real estate industry will insist that housing advocates take an incremental approach to housing reform legislation. But there is a reason for that. When true consumer advocates move in small increments, it’s a heck of a lot easier for real estate industry trade groups to counteract and reverse our incremental changes!

I have personally observed the swinging pendulum of legislative change across the nation over the years. End result: due to efforts of HOA and real estate developer so/called advocacy efforts, very little meaningful reform occurs. Worse yet, sometimes the outcome is ultimately worse than before. The current housing and property rights crises call for bold reform that gets at the heart of our problems, the kind of change that prevents reversal of progress in one or two legislative sessions.

So far, it has been difficult to sway legislators’ thinking. Legislators will be easier to sway when they have personally been burned by their HOAs, and when their own town is adversely affected by decades of poorly maintained and managed subdivisions and condominium housing projects.

The Breaking Point?

There are obvious indicators that many HOA-governed communities are reaching their breaking points. We are now seeing that financial institutions and insurance companies are increasing costs and/or showing reluctance to serve the HOA sector, especially for condominium housing with shared infrastructure. In the wake of this summer’s sudden collapse of a 1980s-era condo building in Surfside, Florida, Fannie Mae and Freddie Mac tightened lending rules for condominium associations.

The HOA industry’s most influential management trade group, CAI, has tried to get around these economic barriers. HOA mega-management companies have integrated financial services, creating their own subsidiary insurance companies and lender ‘banc’ entities to serve the customers they manage. It’s an incestuous business model that reeks of conflict of interest.

Despite this alarming anti-consumer business trend, over the long term, management agents and companies will ultimately end their contracts with HOAs that can no longer afford to pay them! The same holds true for real estate developers: they will shy away from building or renovating common interest housing communities burdened with high liabilities, and a relatively low potential for return on investment.

As the trend of overall deterioration of common property continues (and it will), the management industry will run out of viable condo and homeowners associations to manage. Perhaps this is why we see the industry moving toward more condo terminations and deconversion, as well as new construction of rental housing. When HOA financing dries up, so will the HOA industry, along with local government support for it.

The pending collapse of condominium and homeowner associations

One thing is becoming clear. Affordable housing will ultimately rely on ever-increasing amounts public funding, paid for by taxpayers in middle and upper income brackets. Recent federal policies have, for example, imposed and extended rent and foreclosure moratoria in the past year and a half. This policy alone threatens to devastate the already limited affordable housing market, disproportionately wreaking economic havoc on ‘mom and pop’ landlords and HOA-governed communities with a high ratio of renters to owner occupants.

Private organizations in the real estate industry cannot be expected to end our affordable housing problem. For starters, the big players in the industry lack the will and desire to do so. Their goal is to maximize the highest and best use of property, not to stabilize rents or purchase prices of housing units. Additionally, investors and developers know that most HOA-governed regimes lack sufficient economic resources, and, at the same time, suffer from irreconcilable social discord. That reality is abundantly clear. As a result, distressed HOA-governed communities, especially condominium associations, are often prime investor targets for condo termination.

For all of these reasons, in my view, a maturing common interest housing industry in the U.S. will continue to collapse, both literally and figuratively, just as the Champlain Towers South — a condo building in Surfside, FL — collapsed in June. And when that happens, real estate vultures will swoop in to consume the carnage, buying out unit owners and picking up vacant lots. Their goals: either to demolish and rebuild or rent out condos and homes at hefty rates to maximize their profits ( a process known as deconversion).

With increased opportunities to upzone, however, institutional investors and real estate developers need not limit their opportunistic purchases to stacked condominiums. They can now target distressed homeowners in single family home neighborhoods, with an eye toward converting them to rental properties. Within a few years, many investor-owner are likely to carve out one or more additional apartments in the home or on the lot.

HOA-governed townhouse and planned communities will be part of this gradual — or not so gradual — conversion of single family homes to multifamily properties.