Hollywood Community Plan Overturned: What Does It Mean for Property Value?

In December a shocking decision was made that will have strong implications to future development and growth in Hollywood, CA that will be seen in the years to come. The Hollywood Community Plan was overturned, leaving City planners and real estate developers alike in disarray.

In June of 2012, the Los Angeles Department of City Planning completed their update to the Hollywood Community Plan, which was in turn adopted by the City Council. Like many, the City saw, and still sees, Hollywood as a community that is making a comeback. Reminiscent of the “Tinseltown” we all know of at the turn of the 20th century, the original movie capital of the world has seen a strong gentrification process over the last 10-15 years. Although this historic entertainment district still remains at the center of downtown Hollywood, other unique districts have also emerged; including newer media and entertainment uses down by Santa Monica Boulevard, major medical in East Hollywood near the 101 freeway, creative office and tech in Central Hollywood and a mix of multi-family and single-family residential scattered throughout. Hollywood also has a very high concentration of historic buildings, specifically in its downtown core. Many of these were dilapidated and often vacant commercial buildings that were recently converted by developers into new apartments or condos through the City’s Adaptive Reuse process. Some examples of these include The Broadway Hollywood, The Lofts @ Hollywood & Vine and the Sunset/Vine tower. There have also been a handful of ground-up mixed-use projects that have gone up (e.g. 1600 Vine, Sunset & Vine Windsor, Blvd6200) turning Hollywood into an attractive residential and commercial center where residents can live, work, play and shop. New hotels and destination lifestyle centers have emerged, which have boosted both tourism and business to the community (e.g. W Hotel, Hollywood & Highland, Redbury Hotel).

The purpose of the Hollywood Community Plan update was to help ensure the continued economic growth and revitalization of the area. According to the plan itself, the City’s vision for Hollywood by the year 2030 through the implementation of the Hollywood Community Plan is “a compact city that is growing vertically, mixing residential, commercial and industrial uses in new and interesting ways. With core industries in entertainment, tourism and health care, this is a Hollywood which supports a strong local and regional economy. A rich, multimodal transit system, an inviting walking environment, and mixed-use housing along transit corridors to promote a livable community and enable many Hollywood residents to reduce their use of cars. The balanced growth of commercial and residential uses provides a jobs-housing balance, enabling an increasing number of residents and visitors to live, work, play and shop in Hollywood. Implementation of mixed-income housing incentives creates opportunities for people who work in Hollywood to find affordable housing nearby. A successful growth plan must be a sustainable plan. Therefore, the Hollywood Community Plan promotes building, landscape, transportation and land use policies that take the long view towards protecting the environment. Recognizing the value of Hollywood’s impressive historic architecture and cultural resources, the Community Plan seeks to protect these assets, as well.” The Hollywood Community Plan update ended up changing a lot of the antiquated zoning that had been in place in Hollywood since the last zone change update in 1988. The latest changes were made to help protect historic and single-family neighborhood and on the flipside, others changes were made to allow more height and density near core areas and along transit corridors in an attempt to promote new development in the vehicle of Smart Growth.

Even though the Hollywood Community Plan update was adopted by the City in 2012, there was a case brought on late during the CEQA (California Environmental Quality Act) appeal period of the Community Plan’s EIR (Environmental Impact Report). This Superior Court case against the City of Los Angeles was brought on together by three (3) plaintiffs, who were all local community and preservation groups (Fix the City, La Mirada Avenue Neighborhood Association of Hollywood, and SaveHollywood.org). The plaintiffs’ main reason for filing suit was that they believed that City Planners and City Council relied on inaccurate population data for Hollywood, which was in turn used as the basis for some of the areas that were “up-zoned” to allow increased height and density for new projects. They claimed that the City’s EIR for this Hollywood Community Plan update showed a false population increase in the area due to previous revitalization.

According to the plaintiffs, the City allegedly used outdated census data from the Southern California Association of Governments (SCAG), which showed approximately 225,000 people in Hollywood. Using this figure, the City assumed a future population of 250,000 people by the year 2030, a projected increase of 25,000. The problem is that the US 2010 Census came out showing roughly 200,000 people, which was slightly less than the 225,000 people shown in the City’s EIR. So, instead of an increase of 25,000 people by 2030, in reality, it really meant an increase of 50,000 people. Critics state that by using higher-than-actual population figures as the basis for the additional height and density allowed in the Community Plan, real estate developers can now build larger, higher and denser buildings based on the new zoning that was a result of accommodating this demand, in turn meaning that traffic will become worse, views of existing residents will be impacted and infrastructure will be inadequate. I’m not sure if I am buying into that logic as it would be worse if the City “underestimated” the population data, rather than using a higher, or in other words, a more conservative set of population data. One could argue that it is better to error on the side of a higher future population, because what if it actually happens? If would be better to have the flexibility and ability to build a sufficient amount of housing, office space and infrastructure as opposed to having our hands tied and not be able to accommodate a higher-than-projected surge in Hollywood residents if it were to occur. This author will not speculate on what happened during the compilation of census data in the EIR or why the discrepancy was not fixed by the City prior to releasing the Final EIR, but in not doing so, a chink was left in the armor for local NIMBY’s and advocacy groups to penetrate in a Community Plan, that for the most part, from an urban planning prospective, made a lot of sense for the future of Hollywood as a whole.

After reviewing the evidence, Superior Court Judge Allan J. Goodman ruled in favor of the Plaintiffs, stating that the population data shown in the Hollywood Community Plan update’s EIR was “fatally flawed” and should be repealed as it failed to comply with the State of California’s environmental laws when it was adopted. So, what does this mean now for the City? No doubt the City will fight this ruling. This was a document that the City and its supporters viewed as the key to transforming Hollywood up through the year 2030 “from a hotspot of criminal activity into a vibrant center of jobs, residential towers and public transportation,” according to the LA Times. It looks like the City is going to have to start ‘from scratch’ with its entitlement process and revise their EIR for the Hollywood Community Plan in order to reflect more accurate population data and translate that into a whole new set of zoning requirements and design guidelines. This will likely take a minimum of 1-2 years to prepare and eventually get re-adopted. A timeline of 1-2 years is probably the best case scenario considering that the previous iteration took the City over seven (7) years to get adopted. This ruling also means that the City will not be able to approve or issue permits for any future projects that relied on the zoning changes from this Hollywood Community Plan update that was overturned. So, what does this all mean?

For one, it means that all Hollywood projects that were or are currently in the planning stages that were predicated on this Hollywood Community Plan update are in a very precarious situation. There were many real estate development deals and projects, large and small, which were ‘on the boards,’ so to speak, when this event occurred. Major projects such as The Millennium Hollywood by Millennium Partners, Columbia Square by Kilroy Realty, Hollywood Palladium by Crescent Heights, Selma & Vine by Camden Development and several mixed-use projects by Champion Real Estate; each having several hundred much-needed rental units apiece, may have relied, either partially or fully, on the new zoning of the now defunct Hollywood Community Plan update to make their projects possible. Since the overturning of the Community Plan reverts the zoning in the area back to its previous iteration, which is more stringent in terms of height and density, some of these projects may no longer pencil financially for these developers. The larger projects may be large enough to absorb the hit, but the medium and small-size projects are likely in ‘dire straits.’ These developers are now holding the bag, owning a piece of property that one can build fewer units on that one could a year or two ago. The ruling has effectively decreased the land value and development potential of their properties.

I was personally affected by the overturning of the Hollywood Community Plan update. In December, my firm was in the process of tying up a piece of property in Hollywood near Franklin and Wilcox to develop a new ground-up market-rate apartment complex. We would have been able to build 58 units pursuant to the zoning adopted in the Hollywood Community Plan update and everything was moving forward. We had a signed LOI, an equity partner on board and a jump-start on engaging consultants for design, engineering and entitlements. Less than 24 hours from executing a Purchase and Sales Agreement, Superior Court Judge Allan J. Goodman made his monumental ruling and our deal imploded overnight. Now, instead of a 58-unit apartment deal, the judgment dropped ours down to a 38-unit deal. The amount of money that we were planning to pay for the property no longer worked since we lost 20 units instantaneously. Where the proposed purchase price worked for a 58-unit complex, it was simply too much for a 38-unit complex, so we had to bow out of the transaction. Unfortunate as it was, in hindsight, it was good that this news came to light at the time that it did, rather that after we were to Close on and own the property like some of the aforementioned developers.

This ruling is going to throw the ‘proverbial’ wrench in the City’s goal to continue revitalization of Hollywood and promote future development and economic growth in the area. Keep in the mind that newly-elected Los Angeles Mayor, Eric Garcetti, was previously the Councilman for District 13 (CD13), which covers Hollywood, Silver Lake, Atwater Village and parts of Echo Park. Since the Hollywood Community Plan update was a work in progress for over seven (7) years, these zoning changes were a brain child of Garcetti’s. One would expect that the City’s fight against this ruling will be fueled by Garcetti’s personal investment into the vision. Will the City prevail? This author believes so, although it is just going to be a matter of time, as I stated before. However, as any savvy developer or investor knows, real estate is all about timing, and one has to wonder if the current multi-family cycle may be nearing an end by the time this is all straightened out.

Lastly, this change is going to have major implications on the broker community, residual land values and any transactions over the next several years. Developers will not be allowed to build as many units on a particular piece of land as they could have before the ruling. For example, a piece of property that is 40,000 square feet (just under one acre) in the heart of Hollywood could have had a zoned density of 400 lot square feet per dwelling unit, allowing a maximum unit count of 100 units (40,000 lot square feet / 400 lot square feet per dwelling unit = 100 dwelling units). Now, with the new ruling, the zoned density for that particular parcel might have dropped to 600 lot square feet per dwelling unit, allowing a maximum unit count of 66 units (40,000 lot square feet / 600 lot square feet per dwelling unit = 66.67 dwelling units ≈ 60 dwelling units). Let’s say a developer thinks they can get pretty healthy rents in this particular area of around $3.00/sf/month. Let’s also assume that the developer’s underwriting allows them to pay $100,000/door for land in this area for a new ground-up multi-family project to pencil at those rents. What this means is that their land basis for this 40,000 square foot property changed from $10.0M (100 units x $100,000/door) to $6.6M (66 units x $66,666/door) overnight. That’s a 33% reduction in land value. One can speculate on the effect that this ‘down-zoning’ is going to have on the real estate market in Hollywood.

The problem is that most property owners and real estate agents are not yet aware of the change that occurred in December or simply do not understand the implications that it carries. Unfortunately, it is going to take some time for this knowledge to sink in and our goal is that this article aids in that education process. Many property owners and real estate agents who do not intimately know the zoning code, are still going to be under the impression that property values are worth what they were in 2013, before the ruling. That is not the case, however, as one can see from the example given above. Residual land values could have dropped by 33% and in some cases even more, from the sole result of this ruling. There is a direct correlation between the comparable rents and allowable density (number of units) versus what developers can realistically pay for land. If a broker gets a new listing in Hollywood where there is an opportunistic play, it would be prudent for them to engage a knowledgeable Architect or consultant that clearly understands the new zoning in Hollywood to perform a density/feasibility study. If not, do not be shocked when offers come in much lower than listing and keep in mind that, for the most part, these are not lowball offers – they are the right offers. My only wish is that property owners and brokers eventually become educated on these changes so that development (even at the lower density) can continue in Hollywood so that the community can take a step forward rather than two steps back.

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