In rejecting a California Environmental Quality Act challenge to a mitigated negative declaration for conversion of a vacant apartment building into a 24-room boutique hotel (the “Project”), the Second District Court of Appeal affirmed the City of Los Angeles’s use of an existing conditions baseline when assessing housing and population impacts. The decision in Hollywoodians Encouraging Rental Opportunities (HERO) v. City of Los Angeles et al. (2019) ___ Cal.App.5th ____ indicates that the time for courts to address population displacement, and more specifically affordable housing, as a CEQA-cognizable impact is fast approaching.

 The Project site, located in the Hollywood area, housed a vacant 18-unit apartment building originally built in 1939. This building, which was subject to the City’s Rent Stabilization Ordinance (Los Angeles Municipal Code §§ 151.00 et seq.), was also the subject of a 2009-approved mitigated negative declaration for demolition and replacement with a 39-unit residential condominium project.

In July 2013, the applicant filed a notice of intent to withdraw all 18 units in the building from rental housing use pursuant to the Ellis Act (Govt. Code §§ 7060 et seq.).[1] The City approved the building demolition after the units were vacated in October 2013. In early 2014, the applicant halted its demolition due to a lack of financing, thereby terminating the condominium project.

In July 2015, the applicant submitted application materials for the Project. Pursuant to CEQA, the City prepared an initial study, which determined the Project would not displace housing units or residents because the apartment units were withdrawn from the rental market in 2013. Additionally, the initial study found that the Project did not meet the City-adopted minimum significance threshold of 25 multi-family units. Ultimately, the initial study concluded that no additional analysis was required for the Project’s impacts on population and housing.

HERO filed a writ petition against the City Council’s July 2016 final Project approval. The gravamen of the action, among other claims, was that the City failed to prepare an environmental impact report (“EIR”) that analyzed the direct, indirect and cumulative impacts of the Project on housing and population. Specifically, the petition alleged the environmental documentation did not address the impact of the Project and similar projects on the supply of rent-stabilized housing and the dislocation of tenants from such housing.

Following the trial court’s ruling in favor of the City, the Court of Appeal held the City was not required to address the Project’s alleged impact on the loss of rent-stabilized housing units or the displacement of tenants. The crux of this holding was premised on the fact that the property had previously been withdrawn from the rental market pursuant to the Ellis Act. Moreover, the court found that, under CEQA, the City selected an appropriate baseline because it properly applied the general rule that the baseline consists of conditions as they exist at the time the environmental analysis commences.

The court determined that HERO’s argument posited a “purely speculative” and “unproven hypothetical” theory that the Project applicant could return the units to the rent-stabilized market in the future, and the City was not required to implement a baseline that reflected a pre-2013 Ellis Act withdrawal. The court additionally found that there was no substantial evidence the Project would have an individual potentially significant impact. Therefore, pursuant to well-established law, the City was permitted to conclude the Project would not have cumulative impacts on the supply of rent-stabilized housing in the Hollywood area.

The court’s holdings were not without limitations, however. The decision declined to directly address the trial court’s determination that HERO failed to identify physical impacts – as opposed to socioeconomic impacts – related to the alleged tenant displacement. While stating it was “mindful of the shortage of affordable housing in the City,” the court recognized that the CEQA baseline issue was dispositive and acknowledged that this case was the “confluence of two statutory schemes.” The decision hinted that, while the Project did not have housing and population impacts, future discretionary actions would likely result in physical CEQA-cognizable impacts related to loss of affordable housing and displacement of persons from available shelters.

[1] The Ellis Act “prohibits local governments from ‘compel[ling] the owner of any residential real property offer, or to continue to offer, accommodations in the property for rent or lease.” See also Small Property Owners of San Francisco Institute v. City and County of San Francisco (2018) 2 Cal.App.5th 77, 85. The statutory scheme provides real property owners “the absolute right to exit the residential rental business. San Francisco Apartment Ass’n v. City and County of San Francisco (2016) 3 Cal.App.5th 463, 477.