How California Makes New Cities Nearly Impossible

Earlier this year the investment firm Flannery Associates announced that over the past five years it had quietly spent over $800 million to acquire over 50,000 acres of rural land in east Solano County with the intention of building a new city. Less than 60 miles from downtown San Francisco, and close to major interstates, building this proposed city makes a lot of sense. But it will probably never happen.

It isn’t as if new housing isn’t desperately needed in California. By 2020 due to a combination of population growth and a slow response by the home building industry, California had fallen to an estimated 3.5 million units short of what was needed to bring supply into balance with demand. Since that time, the gap has narrowed by half, with the state logging a net population loss of 800,000 at the same time as roughly the same number of new housing units have been built. But that still leaves the state 1.5 million units short.

According to a 2021 housing-affordability survey conducted by Demographia International, which ranked housing affordability in major metropolitan areas around the world, California had three cities in the top 10. Measuring median home price divided by median household income, San Jose’s ratio was 11.5, Los Angeles had 11.3, and San Francisco’s was 10.7. The No. 11 spot was San Diego at 9.4. Every one of California’s major cities is among the worst places in the world to try to purchase a home.

The conventional wisdom used to be that a home was affordable if it cost no more than three times the purchaser’s household income. California has managed to triple that ratio, and higher interest rates have only pushed its home prices down by a paltry 0.8 percent over the past year. According to Zillow, today the average home in California costs $747,352, compared to $348,539 in the rest of the U.S.

To cope with an ongoing and severe housing shortage, California’s state legislature has passed laws that override local zoning laws to make it easier for developers to construct high density “infill” projects within existing cities. The legislature has also made it easier for developers to build affordable housing. But dense, multifamily housing carries higher costs per square foot, and runs contrary to the prevailing sentiment of homebuyers, which is to live in a detached, single family home. And for every subsidized affordable unit of housing, purchasers of unsubsidized homes in the same project pay more, along with taxpayers.

What California’s policymakers have not done, however, is to encourage the development of new cities on raw land. The extreme environmentalist ethos that prevails in the capitol, as well as in countless courtrooms across the state, guarantees that most housing developments will be high density projects inside the footprint of existing cities. Single family homes, and developers willing to brave the gauntlet of disincentives to build them, will remain in short supply and out of reach for the average working family in California.

One such developer is the Tejon Ranch Company, which has fought for over two decades to construct homes in Southern California. Their travails against environmentalist extremists, while mostly behind them, offer a cautionary note to developers such as Flannery Associates. The Tejon Ranch is a unique property. At 270,000 acres, it is the largest privately owned parcel of land in the state, with a fascinating history. Originally consisting of four Mexican land grants, they were purchased and consolidated in the 1865 by Edward Fitzgerald Beale, an explorer and surveyor who, among other things, was the first person to bring news of the discovery of gold in California to the east coast in 1848. In 1912 Beale’s descendants sold the massive property to a group of Los Angeles businessmen and developers headed by Harry Chandler, who later became publisher of the Los Angeles Times. In 1936 this ownership group incorporated as the Tejon Ranch Company which since 1999 has been listed on the New York Stock Exchange.

When the Tejon Ranch Company decided to develop their property, after extensive negotiations with environmentalist organizations, in 2008 the company agreed to leave 90 percent of the property undeveloped. Evidence of the agreement being consistent with the environmentalist’s initial demands is documented in a 2006 letter sent to then Governor Schwarzenegger and other prominent politicians, signed by representatives of the Sierra Club, the NRDC, and several other environmentalist organizations. In the letter, the primary conditions of a compromise are noted as follows: “conservation biologists have recommended that approximately 90 percent (245,000 acres) of the Tejon Ranch be preserved to ensure that ecosystem processes are maintained.”

According to a spokesperson for Tejon Ranch, the mutually agreed upon conservation and land use agreement was reached in 2008 after several years of scientific study to identify the appropriate parts of the ranch for development and which parts should be conserved as habitat. But then something happened to nearly derail the entire project. One of the environmental groups that had all agreed to the Tejon Ranch conservation and land use plan, dropped out and sued the company under the California Environmental Quality Act, otherwise known as CEQA.

More than any other single piece of state legislfdeation, CEQA is the law that has stopped countless housing project applications from ever getting approved and built, and deterred countless developers from even trying to build projects in the state. It began innocently enough.

Signed into law by then Governor Ronald Reagan in 1970 to ensure that state projects anticipated and mitigated “significant environmental impacts,” CEQA at that time was a reasonable response to rapid growth across the state, and complying with CEQA typically required a manageable amount of time and expense. But in 1972 state judges determined that “state projects” meant any construction project that required government approval – and ever since, CEQA applies to all construction in the state of California.

Over the 50 years since then, CEQA has morphed into a beast that would be unrecognizable to its original proponents. Swollen beyond comprehension by decades of “clarifying” legislation, amendments, court precedents, and agency interpretations, CEQA is now a bottleneck that chokes and kills the good more than the bad, making California the worst place on earth for anyone to ever attempt to build anything.

More to the point, anyone can use CEQA to sue a developer. Consequently, just one group, the Center for Biological Diversity, decided to sue the Tejon Ranch Company to stop their projects. While at times joined by other environmentalist groups, this organization has been a consistent opponent of development plans on the Tejon Ranch.

There are four distinct Tejon Ranch development projects. All of them have been under assault In the south San Joaquin Valley, near the junction of Interstate 5 and the southernmost extremity of Highway 99 is the project that has progressed the furthest. This commerce center, called “The Oasis on I5,” already has gas stations, EV chargers, hotels, restaurants and retail outlets. The company is breaking ground as well on a mixed use community that will be located next to the outlets.

Moving south along I5, the next project is the Grapevine Master Planned Community, planned to include 12,000 homes and 5 million square feet of commercial space. This project was approved by Kern County in 2016, then sued by the Center for Biological Diversity in 2017. In the subsequent ruling the judge required the company to go back and make supplemental additions to their environmental impact statement regarding traffic impact. That was done and and approved in 2019, wherein the Center for Biological Diversity sued again over the reapproved project. That lawsuit was dismissed by the court in 2021.

According to Tejon Ranch representatives, to date the Center for Biological Diversity has either sued directly or filed lawsuits against other entities that are part of their development process a dozen times. They sued the expansion of the Tejon Ranch Commerce Center and lost, then appealed and lost again at the appellate court. As noted, they sued the Grapevine project and lost. CEQA was the basis for most all of these lawsuits.

The third project on the Tejon Ranch is Mountain Village, located in the mountains at the top of the pass navigated by I5 to connect the San Joaquin Valley to Los Angeles. The project is to include resort amenities up to 700 hotel rooms and a residential community of 3,450 homes. This project fought Center for Biological Diversity lawsuits until the last case finally made it through the appellate court. Currently litigation free, the mountain village is fully approved and a final tract map has been approved by Kern County. But amidst the legal travails described thus far, nothing compares to the company’s fourth and biggest project.

The planned community named “Centennial” could be a poster child for the difficulty in building homes in California. Located on the southernmost section of the Tejon Ranch and inside Los Angeles County, by 2019 the company had gotten their plans approved by the county, but were immediately hit with two lawsuits that relied on CEQA. In separate judgements in 2021, the court ruled against all counts brought in the Center for Biological Diversity’s case, and against all but two counts in the other case. The company agreed to mitigate the two issues where the court ruled against them, and in late 2021 the plaintiff in that case agreed to a negotiated settlement. But it wasn’t over.

The nuances involved in what happened next perfectly illustrate how CEQA lawsuits have created burdens on developers that are so expensive and time consuming that only those with very deep pockets and the ability to endure years if not decades of delays can stay in the game. Although the Center for Biological Diversity had lost their lawsuit, within their filing was a statement that they agreed with the complaints in the other lawsuit. As a result, they are arguing they have the right to also negotiate a settlement agreement with the company, insofar as they didn’t agree with the terms of the settlement that the other plaintiff had negotiated. The case remains unresolved at this time.

The Center for Biological Diversity, with reported revenue of $27 million in 2022, has been around for a long time. Back in 1999, the New Yorker had this to say about the organization, “What’s unusual about the center is not so much its agenda, which is shared by the rest of the so-called deep-ecology wing of the environmental movement, as its effectiveness.” The article quotes Robin Silver, who remains a principal officer at the center, as saying that in order to accomplish their goals, “we will have to inflict severe economic pain.”

It shouldn’t surprise anyone that CEQA, which grants standing to almost anyone to sue to stop a development project, has enabled organizations like the Center for Biological Diversity to tie developments like the Tejon Ranch projects up in knots. California’s state legislature, to its credit, has recognized CEQA has become a monster, and to its discredit, hasn’t done anything about it. An appropriate reform would be to limit standing for lawsuits to district attorneys for California’s counties. Critics may consider that an extreme solution, but as it is, extremists have hijacked CEQA, and the “economic pain” is felt across the state. Working families in California cannot afford homes, and CEQA is the reason why.

As long as CEQA exists in its current form, companies in California with the resources to navigate endless lawsuits will eventually build their projects, but the number of housing projects that will ever get built will be fatally limited, and the prices that homebuyers will have to pay will remain punitively high.

As the Tejon Ranch projects slowly take shape in Southern California, Flannery Associates and their billionaire investors in Northern California should take note. With endless patience and after paying stupefying legal expenses, their dream of building a new city in Solano County may come true, but maybe not in their lifetimes. Meanwhile, residents of California who want an affordable home for their families have to wait, and wonder why.

An edited version of this article was published by the Pacific Research Institute.

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