Newsom wants to take on key environmental law. How would it change housing in SLO County?

If you were to ask San Luis Obispo County developers what their biggest challenge in their business is, you’d likely get the same answer: CEQA.

The California Environmental Quality Act, originally written into law in 1970 under then-Gov. Ronald Reagan, has since been described by state Sen. Scott Wiener as “the law that swallowed California” — and you’d be hard-pressed to find a developer who doesn’t agree with him.

The law most recently came into the public eye for its role in killing a large UC Berkeley housing development that would have had room for 1,100 students and 125 formerly homeless individuals, which prompted Gov. Gavin Newsom to call the law “broken” in a statement posted to Twitter.

“California cannot afford to be held hostage by NIMBYs who weaponize CEQA to block student and affordable housing,” Newsom’s statement read. “This selfish mindset is driving up housing prices, and making our state less affordable.”

In that same Feb. 25 statement, Newsom said the law “needs to change,” and he said he would work with lawmakers to make adjustments to allow for more building.

Newsom isn’t the first governor to go head-to-head with the law — former Gov. Jerry Brown tried to make reforms to CEQA in 2012, and in that same year, former governors George Deukmejian, Pete Wilson and Gray Davis co-authored an op-ed in the San Diego Union-Tribune criticizing the law — which speaks to its longevity and deep ties to California’s legal status quo over the past 50 years.

But what would the housing market in the state of California — and, more specifically, its tightest housing market in San Luis Obispo County — look like without CEQA in place?

How is CEQA used to stop development?

Chris Guillen, a natural resources shareholder and environmental legal adviser at Los Angeles-based law firm Brownstein Hyatt Farber Schreck, said that while the law’s original intention of protecting the environment is good, its broad-yet-rigid legal status makes it difficult to circumvent when used to block development.

When a developer begins the planning process, Guillen said, they need to procure a land-use permit or a conditional use permit, which usually involves producing an environmental impact report.

The environmental impact report can receive a negative declaration, meaning the project will not have a significant environmental impact, or developers can make efforts to offset and mitigate the project’s impact, Guillen said.

This, Guillen said, is usually where the lawsuit comes in.

“One tactic that opponents use is they wait with the entitlement process until like the day before the hearing,” Guillen said. “You’ll have a mad scramble the day of the hearing to try to figure out how we can respond to these comments, these 50-page comment letters that come in.”

Guillen said that starts the long lawsuit and appeal process. The initial lawsuit will likely take at least a year or two at trial court, and the following appeal by a developer will typically take an additional one to two years.

Even with an aggressive approach to the litigation, a development could be tied up in legal holdups for “at least a couple of years,” Guillen said.

During the lawsuit, developers can still act on their permits and begin construction, but that presents two problems, Guillen said.

First, obtaining financing for the project can be extremely difficult if not impossible with a lawsuit hanging overhead, he said.

Second, the petitioners can go to court during the lawsuit to request a temporary restraining order or preliminary injunction, which would again bring development to a halt.

“The delay alone could be a nail in the coffin,” Guillen said.

Jim Moresco, chief operating officer of Atascadero residential construction company Midland Pacific Building Corp. said in development, time is money, meaning all a lawsuit must do to effectively kill a development is wait.

“The state always updates their CEQA guidelines, and they always get more stringent, more cost added on,” Moresco told The Tribune. “If you wait long enough, CEQA will make sure that a project does not pencil out.”

Exemptions come with strings attached

As CEQA has been used more and more to halt development over the past five decades, legislators have made attempts to rein in the legal power of the law and make working around it easier, Guillen said.

If CEQA can’t be repealed or meaningfully changed to lessen the frequency of housing lawsuits — which, Guillen said, is nearly impossible due to decades of pro-CEQA lobbying in the Legislature — then creating ways to streamline environmental reviews and provide exemptions to CEQA’s jurisdiction is one of the few options pro-building legislators have.

“Most of the time, what you’ll see is that in order to fall into one of these exemptions or streamlined review provisions, you have to pay prevailing wage,” Guillen said. “That’s how you get the labor unions to sign on to the legislative amendment.”

This raises its own problems, though, Moresco said. A project that qualifies for CEQA exemptions might be clear of the legal holdups, but paying prevailing wages or using union labor may not pencil out for the developer, especially on the Central Coast.

Engaging in a project labor agreement with unions may make sense in areas that support large union labor populations, such as Los Angeles or the Bay Area, Moresco said, but San Luis Obispo County has a relatively low construction union presence.

If a developer in an “insular market” such as SLO County wants to qualify for CEQA exemptions, they are left without many local construction labor options to choose from, Moresco said.

“From a single-family residential standpoint, if we’re looking at a project and it has a (project labor agreement) attached to it, that’s going to be an instant project killer,” Moresco told The Tribune. “Our margins are already razor thin. Our biggest cost is the physical construction of the home, and within that, the biggest cost is the labor.”

Moresco said adding another 20% to 30% to construction wages, would likely raise the cost of building a home by around $100,000, a margin the developer cannot sustain.

He added doing so would mean passing on the costs to home buyers, who in San Luis Obispo County already pay some of the highest prices in the state.

How has CEQA changed development in SLO?

The local impact of CEQA lawsuits can be hard to gauge, but statewide, the impact is easier to discern.

According to a 2022 report by the Center for Jobs & the Economy and Holland & Knight partner Jennifer Hernandez, CEQA lawsuits challenged the development of around 50% of all housing units built in California in 2020 — around 47,999 total.

One of Moresco’s projects in San Miguel has been sitting on the shelf since 2005 for a mix of reasons, he said, partly due to the obstacles presented by CEQA.

The project had just cleared the entitlement process when the housing market crash of 2008 hit, Moresco said, putting all further plans on hold for the next 15 years.

Home values eventually recovered, but construction costs rose alongside them, Moresco said, leaving the project without a clear path to completion while Midland Pacific waited for the price of homes to outpace the cost of building.

Eventually, Midland Pacific decided to maximize the density of the development because the cost per lot was not going to meet the cost of building, Moresco said, in an effort to achieve profit margins “that the bank could stomach.”

Restarting development would require a new, likely expensive CEQA analysis, Moresco said, and would require the project to comply with a newer state transit regulation, vehicle miles traveled or VMTs.

Senate Bill 743, which introduced VMTs, is designed to work with CEQA to make California less dependent on single-vehicle car commutes.

However, by adding VMTs to the CEQA review process, Moresco said the additional step of conducting environmental reviews on the greenhouse-gas levels produced by cars going to and from a new developments just raises the cost of the project.

It also makes it harder to justify building in less dense areas such as San Miguel, Moresco said, because more suburban, isolated developments will incur higher fees than more densely packed projects that are near major population centers.

That’s a problem for navigating the delicate balancing act between environmental analyses, costs of building and keeping housing affordable while maintaining a sustainable profit margin, he said.

“The truth of the matter is, when we build a home, we can only build the home and sell it for as much as the home next door sells for,” Moresco said. “If you want to build affordable by design, you need to build in places like San Miguel, Creston — build out in the outlying areas.”

Combined with VMTs, Moresco said modern abuses of CEQA have made it more expensive, risky and difficult to build in San Luis Obispo County’s already-challenging development scene.

What can be done to fix CEQA?

Kevin Buchanan, an organizer with SLOCo YIMBY — which stands for for “yes in my backyard ” — said although CEQA provides a “huge leverage point” for any party involved in the building process, most of all labor unions, projects should still have to adhere to good labor practices and wages.

Ideally, Buchanan said, these labor protections would exist without the constant misuse of the CEQA process.

“I agree with the intent there, but I think CEQA is just kind of too blunt of a tool to to get at those specific aims that we have for labor,” Buchanan told The Tribune.

Buchanan said though there’s “growing momentum” to reexamine CEQA’s impact on building — and more specifically, building housing — the reforms so far haven’t been enough.

That doesn’t mean a change is going to come, however, regardless of Gov. Newsom’s willingness to take on the law.

Buchanan said recent laws such as 2019’s AB 881 and AB 68, which circumvent some of the lengthy approval processes for accessory dwelling units, are a good example of what can be done without the daunting and politically unlikely goal of making substantial changes to CEQA itself.

Krista Jeffries, lead organizer for SLOCo YIMBY, said CEQA’s fundamental flaw is that it “assumes the status quo is the best option.”

“There are always growing pains and temporary inconveniences with new development, but the end goal is better than what exists today,” Jeffries told The Tribune in an email. “CEQA doesn’t care about that. It forces new projects that are dramatically better than what currently exists to perform questionable accounting methods of all potential impacts, even temporary or minor ones, and identify ways to mitigate them (i.e., change the entire project). ”

Jeffries said the public misunderstands CEQA: The purpose of the law is to account for and offset the environmental changes brought on by building projects, but is not supposed to be a “pass/fail mechanism.”

One way local governments can combat this aspect of CEQA misuse is by simplifying their development standards and allowing more projects to be approved over the counter, as only projects that get public hearings can be sued under CEQA, Jeffries said.

Doing so would save time and money, along with lowering construction and legal costs associated with development, Jeffries said.

“I don’t think CEQA is going to fully leave us, nor should it,” Jeffries said. “It does need very specific reforms, though. We should judge it on its outcome, not its intents.”

Moresco echoed that sentiment.

“Obviously, we’re never gonna get rid of CEQA and nor should we — it’s a very good environmental law for California,” Moresco said. “It’s just abused by outside parties that use it to block housing; they want their slice of the pie.”