By Matthew Cody, Of Counsel, Best Best & Krieger LLP
The Surplus Land Act (SLA) applies when a local public agency disposes of property that it no longer needs. In 2019, the SLA was significantly amended to encourage the disposition of property for housing projects. This year, the SLA was amended by Senate Bill 747 (Caballero) and Assembly Bill 480 (Ting), but Assembly Bill 480 contains the operative amendments because it was chaptered last. In general, the amendments change the scope of the SLA, what may be declared as “exempt surplus property,” and the process for compliance with the SLA. Additionally, Senate Bill 229 (Umberg) amended the SLA to increase oversight and enforcement if the Department of Housing and Community Development (“HCD”) issues a notice of violation.
The SLA applies to local agencies, including cities, counties, and all special districts, including school, sewer, water, utility, and park districts, joint powers authorities, successor agencies, housing authorities, and any “other political subdivision” of the state. Thus, all local agencies, including special districts, should carefully review the requirements of the SLA when seeking to sell or otherwise dispose of property.
Amended Definition of “Dispose”
Previously, under the SLA, the term “dispose” was not defined in statute, resulting in a lack of clarity as to what local agency actions triggered various SLA requirements. As amended, the SLA defines dispose as: (A) the sale of the surplus land; or (B) the entering of a lease for surplus land, which is for a term longer than 15 years, inclusive of any extension or renewal options included in the terms of the initial lease, entered into on or after January 1, 2024. As amended, the SLA now expressly states that a “dispose” does not include (A) the entering of a lease for surplus land, which is for a term of 15 years or less, inclusive of any extension or renewal options included in the terms of the initial lease, or (B) the entering of a lease for surplus land on which no development or demolition will occur, regardless of the term of the lease.
Clarification to What Qualifies as “Participating in Negotiations”
Prior to disposing of surplus land, or participating in negotiations to dispose of surplus land, the agency must issue a notice of availability. The SLA had already specified that certain activities did not constitute negotiations, such as commissioning appraisals, due diligence, discussions with brokers not representing buyers, issuing a request for qualifications, marketing materials, or internal agency discussions. This left open a wide range of other activities. As amended, the SLA clarifies that “participating in negotiations” also does not include: (i) issuing a request for proposals for certain exempt surplus land, (ii) negotiating a lease, exclusive negotiating agreement or option agreement for certain exempt surplus land, or (3) negotiating a lease that is exempt from the meaning of “dispose.”
Declaration of Exempt Surplus Land by Notice and Publication
Under the SLA, a declaration of “exempt surplus” land is ordinarily done by adopting a resolution at a public meeting. As amended, a declaration of exempt surplus may be done by notice and publication for certain properties, including land sold for affordable housing, smaller lots, former streets or right of way, land granted by the state in trust, land disposed of for specified educational purposes, and property owned by a public airport where residential use is prohibited.
To take advantage of this new process, the agency must identify the land in a notice that is (1) published, and (2) available for public comment. The statute does not provide guidance for how to publish the notice or accept public comment; those details may be provided by HCD in updated guidelines. After completing the notice and publication, the agency must wait 30 days for the exemption to take effect. Local agencies will want to consider what process should be required to authorize a declaration of exempt surplus under this authority.
Changes to the Definition of Exempt Surplus Land
As amended, the SLA generally broadens the meaning of “exempt surplus land” to provide greater flexibility for agencies disposing of certain surplus land. These changes include the following:
- The exemption for disposition of certain small properties was changed to include land that is less than one-half acre in area (or 21,780 square feet). The amendments also remove the requirement to dispose of property to a contiguous property owner.
- The exemption for transfer of property to another agency allows a transfer to a “third-party intermediary,” provided that the receiving agency’s use must be contained in a legally binding agreement at the time of transfer to the third-party intermediary.
- Exemptions for affordable housing are expanded, provided that the project meets specified criteria. For some projects, the requirement to make the property available pursuant to an open, competitive bid is removed. The amendments specify that qualifying projects may occur on multiple parcels. These exemptions should be reviewed carefully to evaluate the specific housing requirements.
- Clarification that an existing exemption for property subject to valid legal restrictions that prohibit housing, includes but is not limited to (1) existing constraints under ownership rights or contractual rights if the constraints were agreed to prior to September 30, 2019, (2) restrictions from conservation or other easements or encumbrances, existing leases, or other contractual obligations or restrictions, as specified, and (3) funding source restrictions, as specified. As amended, a declaration of exemption under this provision shall be supported by documentary evidence establishing the valid legal restriction, as specified.
- Land transferred to a community land trust that meets specified conditions.
When pursuing a disposition of exempt surplus land, the agency should conduct due diligence about the specific requirements for each exemption and prepare written findings that will support the declaration that the property is exempt surplus.
Revival of Expired Exclusive Negotiating Agreements
When the SLA was amended in 2019, there was an exemption for certain projects that were subject to an exclusive negotiating agreement (“ENA”). However, that exemption expired in 2022. As amended, the SLA will allow an agency to revive an ENA, if the agency and the other party execute a written agreement to revive the ENA prior to January 1, 2024. Thus, agencies should act quickly if they desire to revive any negotiations that were put on hold after the original grandfathering exemption expired.
Amendments to the Required Covenant for Affordable Housing
Prior to disposing of surplus property, an agency must issue a notice of availability and wait 60 days for interested parties to respond. If an interested party responds, then the agency must allow for a 90-day period to negotiate in good faith. As part of the negotiations, the prospective developer must agree to record a covenant against the property that not less than 25 percent of the residential units will be available to low-income households. The covenant for rental housing is generally required for 55 years. As amended, the SLA requires a covenant for 45 years for ownership housing, and 50 years for rental or ownership housing located on tribal trust lands.
The amended SLA does not change the requirement if there is no response to a notice of availability. In that event, if 10 or more units are constructed on the property, then 15 percent must be reserved for low-income households for a period of 55 years for rental housing, or 45 years for ownership projects.
Amendments to Penalties Provision of the SLA
The SLA contains a penalty provision if an agency disposes of property in violation of the SLA. As amended, the penalty is 30 percent of the “disposition value” for a first violation or 50 percent for a second violation, as specified. For a sale, the disposition value is the greater of the final sale price or the fair market value, as determined by an independent appraisal, whichever is greater. For a lease, the 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, as determined by an independent appraisal of the lease. Amendments also limit the circumstances when penalties may be imposed.
New Requirements After a Notice of Violation
Under SB 229, agencies must comply with new requirements if they receive a notice of violation from HCD. After receiving a notice of violation, the agency must hold an open and public meeting to review and consider the substance of the notice. The meeting must be noticed and published on the agency’s website, if one is maintained. Until this meeting is held, the agency is prohibited from disposing of the property. Thus, agencies should be cautious if they receive a notice of violation.
Senate Bill 34 (Umberg) mandates a different, stricter set of requirements for addressing notices of violation from HCD, but at this time those requirements are limited to the county and city governments in Orange County.
Conclusion
The new amendments to the SLA may create opportunities for the disposition of agency land, but they also require careful diligence and planning, which should start before any negotiations to dispose of the land. Local agencies should seek assistance with any questions about compliance with the process or opportunities available under the legislative changes.
Communication is provided for general information only and is not offered or intended as legal advice. Readers should seek the advice of an attorney when confronted with legal issues and attorneys should perform an independent evaluation of the issues raised in these communications.
Take a look back at previous parts of the 2024 New Laws Series in CSDA eNews for more in-depth overviews of new laws affecting special districts:
Missed Part 1? Read it now: California Supreme Court Sheds Some Light on California Voting Rights Act Litigation
Missed Part 2? Read it now: Zero Emissions Vehicle Mandate Kicks in January 1, 2024 – Reporting Due April 1
Missed Part 3? Read it now: Infrastructure Package Expands Progressive Design-Build and Design-Build, Streamlines CEQA for Select Projects
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