A Silicon Valley homebuilder planned a project with union rules. Can it work anywhere else?

A builder in a wealthy South Bay community agreed to a strict union-hiring standard to take advantage of a new housing law. Then it tried to change the deal.

From the parking lot, there’s nothing to suggest that Quito Village is the California housing policy equivalent of a unicorn, or that the seemingly low-key project is sitting at the center of one of this year’s biggest political fights.

Peek through one of the gates of this dirt lot in the San Jose suburb of Saratoga. Trenches, a few foundations and an excavator pawing at a mountain of dirt are the only indication that, if all goes to plan, this will be the site of 90 new townhouses next year.

But though it may not be obvious — even to one of its developers, who was surprised to hear the news — this easy-to-ignore housing development appears to be one of a kind.

What makes Quito Village unique dates to early 2020 when Sand Hill Property Company agreed to follow a strict labor standard, promoted by some of the state’s most powerful organized labor groups, that favors the hiring of union workers. The Silicon Valley real estate developer did so to take advantage of a 2017 state law meant to speed the construction of dense housing.

Atlanta-based real estate giant PulteGroup took over the project in 2022 and began construction in September. That makes Quito Village the only known project in California that has broken ground under the law’s union-hiring rule.

Now lawmakers are debating making that 2017 law permanent, but with a bill that would strike out the union-backed labor standard that Sand Hill agreed to take on for the Saratoga project.

For many Democrats in the Legislature who want to see the state turbocharge its housing construction and who argue that the union-hire rule places too onerous a standard on developers amid a dire housing shortage, Quito Village is a case in point.

“So that’s one in five years,” Assemblymember Buffy Wicks, chair of the Assembly’s housing committee, said in an interview last month. “That to me kind of says it all.”

As lawmakers and competing unions debate the rule’s merits, much of the argument rides on the answer to a single question: Can California simultaneously encourage developers to build our way out of the state’s housing shortage while also requiring them to reserve jobs for the state’s unionized construction workforce?

If PulteGroup is in fact the only company actively building new housing under the terms of this controversial rule, as housing data assembled by the state suggests, how and why it has been able to go forward might shed light on that question and help settle a fiery and protracted debate.

But it’s not clear that the company is even following the rule.

Upon taking over the project last year, PulteGroup’s legal team made the case to the city of Saratoga that state law does not obligate the company to abide by the union-backed standard imposed on mixed-income projects, according to emails shared with CalMatters. The city disagreed.

A year later, prompted by a Public Records Act request filed by CalMatters, Saratoga city staff noted Pulte has not been submitting monthly reports to prove that it is complying with the rule.

“Significant monetary penalties may be imposed under State law for failure to comply,” Saratoga’s Community Development Director Debbie Pedro wrote to Brett Walsh, a Bay Area-based project manager with Pulte on May 1, in a letter the city shared with CalMatters.

Developers are subject to state fines of up to $10,000 per month for each missing monthly compliance report. If a company is found to be skirting the “skilled and trained” standard entirely, the penalties can rack up much higher and much quicker: $200 per day “for each worker employed in contravention” of the rule.

Walsh did not respond to an email from CalMatters. When asked about the project’s construction crew in April, Pulte vice president of  communications Jim Zeumer said the company only shares “basic project scale, scope and pricing” information. Zeumer did not respond to additional requests for comment after the City of Saratoga sent its letter.

David Bini, a construction worker union labor leader in Santa Clara county, said that he, too, is curious whether the company is complying with the labor law.

He said he put in a call to the company last month with an offer to “help them in getting in compliance” if they need it, he said.

But as the letter from the city of Saratoga to Pulte suggests, the true number of projects that have moved forward under the controversial rule might not be one. It could be zero.

Skewed results in California housing law

Under the 2017 streamlining law authored by San Francisco Democratic Sen. Scott Wiener, developers are offered a trade:

In cities and towns that haven’t kept up with state-set housing production goals, developers can skip some of the permitting hurdles that often delay or kill projects early on. In exchange, developers have to set aside a portion of the new units for low-income occupants, and abide by higher labor standards.

For projects in which every unit is designated “affordable,” developers simply have to pay their crews more. A “prevailing wage” is a state-determined minimum rate for each trade that roughly corresponds to what unionized construction workers make.

But for “mixed-income” projects, where developers meet the law’s minimum affordable housing rule but plan to charge as much as they can on the remaining units, an even higher standard applies: Construction crews must be “skilled and trained.” That means a little over half of most trade workers must be graduates of apprenticeship programs, the vast majority of which are sponsored by unions.

Presented with those two options, most developers who make use of the law have taken the first path.

Since the law went into effect, developers have invoked the streamlining bill to propose nearly 18,000 units, according to an analysis by UC Berkeley’s Terner Center for Housing Innovation. Roughly two-thirds of the proposed projects are entirely affordable, meaning the projects only have to pay prevailing wages.

Though data collected by the state is self-reported by local governments and riddled with errors, of the remaining third that includes market-rate units, Quito Village appears to be the only one that has actually broken ground.

Wiener cited the law’s uneven performance as reason to take out the “skilled and trained workforce” standard entirely when he introduced his proposal to make the law permanent.

But there is at least one other possible reason to explain the disparity.

Under the law, the exact percentage of units that developers have to set aside for low-income residents depends on which kinds of homes the locality is falling behind on.

In cities and towns short on permitting new homes for lower-income households, streamlined projects have to be 50% affordable. In places that aren’t allowing enough building on the higher end, the requirement is only 10%.

Saratoga falls into the second bucket. As planned, 10% of the townhomes at Quito Village will be provided at below-market rates.

“When you have to use ‘skilled and trained,’ then you can’t move until you find that worker or that contractor. That may delay me three or four months per trade.”

Dan Dunmoyer, head of the California Building Industry Association

Many California cities have met their state production goals for market-rate housing, but not for lower-income units. In those municipalities — a little more than 200 in recent years — streamlining privileges are granted only if half of the units are set aside for lower-income occupants. That’s a high bar for profit-driven builders, leaving the field to nonprofit-subsidized affordable housing developers.

But interviewees for that report also pointed to the union-hire rules for mixed-income projects as a factor that might “reduce the financial feasibility” of projects.

Dan Dunmoyer, head of the California Building Industry Association, said projects that require “prevailing wages” and those that demand a “skilled and trained workforce” tend to have similar payroll costs. The big difference comes down to time, he said.

“When you have to use ‘skilled and trained,’ then you can’t move until you find that worker or that contractor,” he said. “That may delay me three or four months per trade.”

Even so, he added, the argument about which higher labor standard ought to apply is academic in most of California. Both are “cost prohibitive other than in the highest end communities,” he said. “It just doesn’t pencil in 85% of the state.”

An exception in Saratoga?

If ever there was a place where higher labor standards could pencil out, it’s Saratoga. That’s because the Santa Clara county ‘burb is, in a word, loaded.

The average household income here is nearly $225,000, according to the U.S. Census Bureau. The average listing price of a new home exceeds $3.5 million. It’s the kind of place where developers can afford to take on higher costs because residents here are willing to pay for them.

“Once you add the economics of a high-market community, these extra premium dollars are okay. You’re selling townhomes for $1.3 million up, so there’s some meat on the bone,” said Steve Lynch, director of planning for Sand Hill Property Company, which got the site ready for development before selling the residential portion to PulteGroup.

Asked why Sand Hill was willing to do what other developers have thus far been unwilling to do and accept the “skilled and trained” standard, Lynch said that, in fact, it did not.

Though an initial project approval letter from the city specifies that the project is subject to that union-hire requirement, as does an FAQ listed on the project’s website and a letter that Lynch sent to Saratoga’s city manager James Lindsay in the company’s initial streamlining application obtained by CalMatters through a public records request, Lynch said Sand Hill later determined that the language of the 2017 law actually exempts small towns like Saratoga.

“Once you add the economics of a high-market community, these extra premium dollars are okay. You’re selling townhomes for $1.3 million up, so there’s some meat on the bone.”

Steve Lynch, director of planning for Sand Hill Property Company

Pulte’s legal team seemed to have its own questions about the project’s labor requirement prior to taking over.

In an email exchange in the early summer of 2022, Winter King, an attorney representing the city of Saratoga, wrote to the developer’s lawyer, David Chidlaw, referencing Pulte’s questions about “whether your client would be required to use a ‘skilled and trained workforce’ if it acquires the Quito Village project.”

In a subsequent email King sent to Chidlaw, she made the city’s position clear. “We don’t see a way around this requirement,” she wrote, adding that compliance with the “skilled and trained” standard is a condition of the project’s approval and “required by law.”

It’s unclear whether the conversation continued. Winter referred questions to the city of Saratoga and Chidlaw did not respond to requests for comment.

The uncertainty over whether the law does or doesn’t apply, at least as described by Lynch at Sand Hill, seems to boil down to a question of syntax.

The text of the law carves out an exemption for projects “located within a jurisdiction located in a coastal or bay county with a population of 225,000 or more.” Santa Clara County, which is considered a bay county, has nearly 2 million residents. The city of Saratoga has a mere 30,000. The question: Does the 225,000 threshold figure apply to the county or the city? If the threshold applies to the jurisdiction of Saratoga, the project would be exempt from the “skilled and trained” requirement.

So, too, would projects in the vast majority of California’s cities and towns.

Under that more restrictive interpretation of the law, the “skilled and trained” standard — the subject of years of legislative debate and political gridlock — would only apply to 12 of California’s 482 cities.