The Secret Sauce (Maybe) of California's Zoning Reform

Image via Flickr.

The gathering snowball of residential zoning reform has picked up impressive speed around the U.S. in just the past few years. It’s now scooped up the nation's most populous state—and with an interesting twist that makes this reform worth watching and unlike laws that have passed in other places, like Oregon. 

It was just earlier this year that we were praising the local leadership of Sacramento and Berkeley for passing reforms to eliminate exclusive single-family zoning and parking minimums. In a state with a punishingly high cost of living, these regulations tend to lock wealthy and desirable neighborhoods under glass. This pushes growth outward toward costly exurban expansion (in California's case, increasingly in deserts or wildfire zones). And it contributes to the state's extreme economic divisions and exodus of the working class.

Now, statewide reform, which faltered in the Golden State for several years running, has passed in the form of Senate Bill 9 (SB 9), which effectively ends single-family zoning in California. The new law allows up to four homes on most single-family lots statewide. In general, an owner may build one additional home, or—here's the interesting twist—split their lot in two and have two homes on each. Fire zones and historic districts (and a few other conditions) are exempted, and you cannot demolish or alter a home that has had a rental tenant in the past 3 years. 

Governor Gavin Newsom signed SB 9 on September 16th, along with a couple other housing bills: Senate Bill 10 (SB 10), which allows local governments exemption from a costly environmental review process if they choose to upzone lots for up to 10 homes, and SB 8, which extends the provisions of an existing housing streamlining law that does a bunch of things (it's complicated).

The passage of SB 9 and SB 10, combined with a statewide law in Oregon, add to a growing body of evidence that there is more political momentum behind broad-but-incremental reforms like this, than highly technocratic approaches which seek to more precisely target certain locations for larger changes.

The open question is, "What now?" Will anything actually change?

Don’t Expect an Overnight Revolution

A July 2021 analysis from the Terner Center at UC Berkeley underlines that the challenge of transforming a broken housing system in California goes far beyond zoning. Researchers analyzed 7.5 million single-family lots throughout the state and concluded that, while over 80% of such lots are eligible under the provisions of SB 9, fewer than 6% of them (410,000) would actually be candidates for new housing. And a lot fewer than those will be built any time soon, because the homeowner has to choose to develop their land. Ultimately, the Terner Center estimates 97% of existing single-family homes will remain so.

The reason: market feasibility. The Terner Center evaluated the potential return on these lots using a simplified version of what a developer would do: ask "Will it pencil?" Put simply, it's very hard to redevelop an existing lot with only a modest jump in intensity, like from one unit to two, and not lose money. Construction costs are extremely high in California, with even nonprofit, low-income housing units costing upwards of $500,000 to build. (Not to buy. To build.) In cheaper areas of the state like the Central Valley, potential proceeds are not high enough to make many SB 9 units market-feasible; meanwhile, in some of the costliest cities, like San Francisco, single-family lots are already very small, and so the physical task of accommodating a new unit or a lot split is more complex. Bottom line: The relentless math of development is often going to be prohibitive until the whole housing market adjusts.

The promise of laws like this is that they could begin to set California on that path, not that they will lead to instant transformation. Land prices, so prohibitive for small-scale development, are high in part because zoning has ensured an extreme scarcity of buildable sites for housing in California cities, and extreme demand for the homes that exist. Unlock a whole lot more sites for incremental housing development, and you hopefully create downward pressure on those land values, smoothing the market's speculative peaks. 

To begin to unwind this, though, is going to require a lot more to change besides zoning. And it won't be a sudden change, though it will hopefully be an accelerating one (as ADU production in California, which now comprises nearly 40% of housing permits in Los Angeles, has proven to be).

Fortunately, SB 9 has one feature that is novel thus far in the single-family zoning wars, and may well prove worth emulating by other cities and states.

Image via Flickr.

The Secret Sauce: Lot Splits

Tearing down a single-family home to replace it is often uneconomical, in California and almost anywhere else, for that matter. The cost of the teardown eats up any potential profit margin and kills the project. And many houses are simply not suited, because of their layout or other structural features, to be renovated into plexes. 

This is where SB 9's lot split provision comes in. It provides a simple alternative to teardowns or complex retrofits. The owner of a single-family home can now subdivide their lot into two, as long as the original lot is not under 2,400 square feet, and as long as the split is relatively even, with the smaller of the two resulting lots occupying no less than 40% of the total area. They can then build up to two homes on each lot, or four total. 

Crucially, while cities can still apply their existing rules around building height, setbacks, and so forth, they cannot use these rules to completely prohibit housing on a site. The way this works is that if the combination of other rules would prohibit the owner from building a house of at least 800 square feet on each divided lot, the city must make exceptions to allow such a building.

Hard to follow? Check out this explainer of how you can use SB 9 as a California homeowner, by the brilliant graphic designer Alfred Twu. Berkeley-based Twu has been creating vivid illustrations of housing and zoning proposals in California for several years, helping demystify the intimidating legal language of the state's flurry of housing bills and illustrate what, exactly, they would allow. 

Why Lot Splits Have Potential

The lot split approach amounts to a hack on our existing financing and building culture and institutions. We Americans have spent decades getting really efficient at building detached single-family homes each on their own separate lot. As the Sightline Institute says in their analysis of SB 9, "Many banks and credit unions struggle to figure out how to value a lot with an extra rental on site, and therefore can’t always offer good loan terms to people looking to build a backyard cottage or remodel into a duplex. But every lender knows exactly how to value a little lot with a new house on it. This would make mortgage financing easier, which would let more property owners with a bit less wealth take advantage of the law."

This will be easier from the outset to create loan products and templates for. And this is important, since most homeowners, even if they would like to put an additional home on their lot and might be willing to sell off the backyard, are likely to be reluctant to become full-on small-scale developers themselves. And SB 9 is designed to prevent large-scale developers from applying it in a cookie cutter fashion, through a rule that the same owner cannot apply its lot-split provisions to two adjacent properties.

There is precedent both in the U.S. and abroad for the development pattern lot-splitting enables. Domestically, we need only look to Houston, where a 1999 reform reduced the minimum lot size in much of the core city from 5,000 to 1,400 square feet. The result has been an explosion of skinny townhomes. Houston is one of the few American cities building small-scale infill housing at a significant rate, and it has helped to keep prices down.

Internationally, we can find plenty of examples where small homes on small lots make fee-simple homeownership compatible with the increased intensity that is the natural progression of a financially productive place. The suburbs of Tokyo are a good example of what this ends up looking like. 

A Tokyo suburb. (Image via Flickr.)

A certain concentration of people will, if allowed, support improved transit service and more local shops and services at walkable distance. Combine this with the ability to have your own home, roof, and walls, and own the land underneath it, and you've got a model that can scale. It's not the only development pattern appropriate for California by a long shot, but it is one that provides a natural next increment, or next evolution, for many suburban places. 

This Isn’t a Panacea, but It Matters

LA Times columnist George Skelton argues that SB 9 meets a pressing need to change a broken status quo, in which Californians endure mega-commutes, spend half their incomes on rent, and watch their children move out of state.

Cities, particularly in an America where four out of five households are now something other than a nuclear family, need diverse neighborhoods in which lower-cost rental homes coexist with more expensive and/or owner-occupied houses. Accepting this means we all have to tolerate a little bit more chaos, recognizing that the imposed artificial order of suburban-style zoning has resulted in a deeply broken economy. Or, in other words, says Skelton, we've got to have our priorities straight:

“I just don’t want a fourplex next door to me. But I also want my grandkids to be able to afford to live in California. Newsom and the Legislature showed courage in siding with my grandkids.”

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