Dissecting San Francisco’s Housing Crisis: The Evolution of the City’s Discretionary Permit System

The median price of a home in San Francisco today is an astonishing $1.2 million. Those fortunate enough to afford such a home will struggle to find anything less than a century old. For renters, the typical monthly payment will likely be north of $3,000 for a one-bedroom apartment. The cost of housing in the City by the Bay has for decades risen at extraordinary rates. Even within California, San Francisco is simply unique, not only for the scale of its housing crisis, but also for one of the central policies driving it: specifically, discretionary permit review.

All major cities in the United States require real estate developers to obtain a building permit before they can legally embark on a construction project. In most cases, permits are issued automatically as long as the planned development complies with zoning and building regulations. These are known as “ministerial” or “by-right” permits, meaning that officials are obligated to approve code-compliant applications.

In some cases, however, local officials are allowed to make subjective judgments about whether a proposal warrants approval. These “discretionary” permits can be either permissive or restrictive. Permissive discretion applies to cases in which officials approve a proposed project that violates certain regulatory policies, such as when a city grants a permit for an apartment complex in a low-density zoning district. 

Restrictive discretion, which is especially common in California, involves cases in which city officials are required to consider local aesthetic or political preferences before approving an application, meaning that they can deny permits even for code-compliant projects.

San Francisco is distinctive because it is the only city in which discretionary permits are the default rather than the exception. Perhaps even more incredible is that every San Franciscan has the right to appeal any permit at any point in the construction process. In other words, every construction project is subject to the time-consuming discretionary review process, usually many times over, and each review hearing poses the threat that a necessary permit may be revoked even if construction has already begun.

Why did San Francisco develop such an unusual permitting process? The origins of this policy trace back to 1954, in a story that involves a children’s hospital, a real-estate developer, and an activist city attorney.

The Shriners’ Hospital Saga

In 1954, the San Francisco Public Works Department granted the construction firm A. Nelson, Inc. a permit to build a 31-unit motel on the corner of 19th Avenue and Lawton Street. The site for the motel was directly across the road from the Shriners’ Hospital for Crippled Children.

Hospital authorities were displeased with the project, fearing it would create too much disruptive noise. They asked medical professionals throughout to write complaints to the planning commission. “As a physician I personally feel that such a project, close to a hospital, would constitute a hazard,” wrote Dr. Samuel R. Sherman. Pressure to repeal the permit escalated when the local Parent-Teacher Association (PTA) jumped into the fray. Even the director of city planning, Paul Opperman, contributed a letter of protest.

The basis for the hospital’s challenge was San Francisco’s 1921 planning code—the first zoning regulation adopted by the city. The original code was remarkably brief by today’s standards, consisting of only a single page alongside a handful of maps. The hospital was located in the “second residential district,” which allowed construction for only ten specified types of buildings. Hospital authorities pointed out that the planning code allowed hotels, but not motels.

The problem was that the commission could not have possibly accounted for motels, which did not exist in 1921. Motels offer cheaper lodging by cutting out additional services that hotels traditionally provide, such as a complimentary breakfast or a pool, but the nation’s first motel opened in 1925, four years after the planning code was written.

The decision to approve the permit thus seemed logical enough. If zoning rules allowed for hotels, then motels naturally aligned with the spirit of the code. But the hospital authorities pounced on the omission, demanding that regulators follow the precise letter of the code, irrespective of purpose or context.

Facing pressure from both San Francisco’s medical community and the PTA, the planning department requested an opinion from the City Attorney, Dion Holm, on whether they had the authority to repeal a permit that another department had issued. Holm’s opinion, which I obtained through a public records request, would establish the precedent for San Francisco’s distinctive permit-approval process and shape the city’s housing development for 70 years.

“Sound Discretion”

City Attorney Holm began by citing a case that had come before the California Supreme Court in 1943. Lindell Co. v. Board of Permit Appeals involved a dispute over residential building permits for the construction of 31 single-family homes. The Second World War had drawn a new population of factory workers into the city, creating an urgent need for housing, but wartime shortages made it necessary to approve “minor deviations” from building regulations.

San Francisco had already passed emergency ordinances authorizing officials to grant waivers for projects that contributed to the war effort, so the Central Permit Bureau issued permissive discretionary permits for the homes. After a group of homeowners protested that the new houses would turn their neighborhood into a “slum,” the Board of Permit Appeals revoked the permits. The builder, Lindell, challenged the decision, arguing that the board had no discretionary authority.

When the case came before the California Supreme Court, the justices ruled that the discretionary powers of the Board of Permit Appeals necessarily had to match those of the Central Permit Bureau. This meant that for ministerial permits, the board could only review whether or not a project was code-compliant. But for discretionary cases, it “may take into consideration the effect of the proposed business or calling upon surrounding property and upon its residents” and exercise its own “sound discretion” in revoking or upholding a permit.

The court did not rule that all permits were discretionary. It merely clarified the powers of the Board of Permit Appeals in discretionary cases. The city attorney acknowledged that this was enough to settle the matter of the motel permit, which also deviated from the regulatory code, albeit on a technicality.

Holm could have stopped there, but he decided instead to further expound upon the Planning Commission’s discretionary powers. He pointed to a provision in the city’s planning code stipulating that zoning regulations were “adopted for the promotion of the public health, safety, comfort, convenience and general welfare.” In what may be considered a strained interpretation of the law, he asserted that the court’s language about “sound discretion” applied to any permit that fell under the infinitely broad umbrella of the “general welfare.”

By combining the planning code provision with the Lindell opinion, Holm effectively twisted the court’s ruling to mean that all building permits were discretionary. Even when a project “is clearly permitted” by the planning code, he opined, “the department and the Board of Appeals are granted the discretionary power delineated above to consider its effect upon the surrounding property, its residents and inhabitants so that the general welfare may be subserved.”

What was not discretionary for Holm was the authority of the Board of Permit Appeals to refuse a review hearing. Citizens had “the right to appeal a permit,” and “the Board shall hear the applicant, the permit-holder, or other interested parties” before deciding to grant, deny, or revoke a permit. When an appeal was made, the hearing was essentially a ministerial duty of the department, while the permit itself was wholly discretionary.

Holm closed his letter with the recognition that “to vest such discretion in the City Planning commission is to introduce an incalculable into the ownership of property which . . . may cause grave concern to individual landowners.” Indeed, after 70 years, there is virtually no greater hurdle developers face than San Francisco’s system of discretionary permit review.

The Legacy of the Shriners Hospital Case

While upholding the decision to revoke the motel permit, Holm warned that the authority he ascribed to the Planning Commission was “a sensitive discretion” that “must be exercised with the utmost restraint.” Indeed, the city rarely denies a permit application outright. The real problem, from the developer’s perspective, is the obligatory review process, which can occur repeatedly throughout the construction process, both before and—more uniquely—after the permit is issued.

When Holm asserted in 1954 that all permits were discretionary, developers had to obtain approvals from only three agencies: the Planning Commission, the Department of Building Inspection, and the Division of Fire Prevention and Investigation. But since the “permit explosion” of the 1970s, builders have had to obtain approval for everything from demolition to utility connections, street closures, tree removal, and much more, all of which is subject to discretionary review.

The costs imposed by the discretionary review process come in many forms. A single appeals fee can run into the thousands of dollars, and the developer must pay the fees rather than the appellant. This is on top of dozens of other permit fees a builder must shell out to usher a project to completion. For one “affordable” housing project in San Francisco’s Tenderloin district, permit fees alone accounted for $1 million of the construction costs. 

This still does not include lawyer fees, payments to “permit expediters,” and questionable donations to local politicians’ campaigns or favorite charities. San Francisco is currently embroiled in a corruption scandal rooted in the difficulty of building anything without greasing the palms of everybody with a speck of discretionary power.

The biggest expense, however, comes from delays. Each appeal requires a hearing, which takes months to complete. The result is an absurdly prolonged construction time. The same Tenderloin project also took an astonishing 11 years to build only 113 apartment units and two attached retail spaces.

The California Environmental Quality Act (CEQA) has dramatically exacerbated the problem of discretionary review. Signed into law by Gov. Ronald Reagan (R) in 1970, CEQA requires all public projects to submit an Environmental Impact Report (EIR) before receiving approval for construction. Although private projects were initially exempt from the law, the state Supreme Court ruled in 1972 that any project requiring government approval constituted a “public” project. This means that all projects subject to discretionary review, even private developments, are bound by CEQA requirements.

Because CEQA empowers citizens to file lawsuits demanding more extensive environmental review even after an EIR has been accepted, the law has been the source of a great deal of abuse, delaying all construction. A comprehensive study on CEQA lawsuits by the law firm Holland & Knight found that the use of CEQA litigation to “advance non-environmental interests”—such as advancing labor union interests—was “widespread.”

San Francisco’s massive zoning code also exacerbates the lengthy review process. In a white paper published in 2016, the planning department itself described the code as “labyrinthine,” noting that it consisted at the time of an astounding 840,000 words specifying “116 distinct Land Uses within 207 Zoning and Special Use Districts.” The authors noted that the enormous complexity added immensely to the time required to conduct a proper review, frustrating city planners as much as developers. San Francisco has the slowest permitting process of any city in California.

Delays can vary greatly between projects, but a study conducted by UC Berkeley’s Terner Center for Housing Innovation found that the average permit process for multifamily housing with at least ten units took four years—and that is only the time required for a builder to get the green light to begin construction. In a separate study, the Terner Center estimated that “each additional layer of independent review is associated with a 4 percent increase in a jurisdiction’s home prices.”

Today, local officials commonly believe that universal discretionary review is enshrined in the city charter. Law professor Christopher Elmendorf of UC-Davis dismisses that belief as unsupportable “lawyer’s lore.” This legal folklore, which has guided San Francisco policy for seven decades, was the invention of a city attorney, weighing in on a dispute that never even came before the courts. 

Christopher J. Calton is the Research Fellow in Housing and Homelessness at the Independent Institute. He received his Ph.D. in History at the University of Florida, where his research focused on the history of the corporation.
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