On a hillside overlooking San Francisco's downtown, the wooden studs of a 49-unit apartment building are rising above an unusual base--the roof of a Standard Brands home decorating store.

"It looks like a housing project, not a Standard Brands paint store," said Michael Reed, housing director for the Bernal Heights Community Foundation, the nonprofit agency that is developing the property using the "air rights" above the store.

And to many, the innovative low-income elderly housing development is looking a lot like the future. As cities become more and more crowded, the site of future affordable housing may be, quite literally, up in the air.

For business, the air rights issues seem destined to become a major factor in commercial development. As cities cope with housing shortages and scarcity of land, they are sure to put pressure on companies to build housing as a requisite part of commercial development.

The project in San Francisco's ethnically diverse Bernal Heights neighborhood has been hailed as a pioneering effort between the public and private sectors.

Of course, Los Angeles is not land-short San Francisco. And while no similar development appears to be on the drawing board in Los Angeles, many in the local development community and public agencies are watching the project with interest. Because some day, they say, Los Angeles will be in the same fix.

"I definitely think we're going in that direction," said Kei Uyeda, deputy director of project planning for the Los Angeles Planning Department. "There's going to be a greater demand to go higher rather than wider."

More Commercial

Combining housing with retail or office developments is not new, but often that housing is not within the reach of elderly and low-income residents. In a way, the San Francisco development is a return to the concept of the old Main Street where small stores often had at least one story of apartments above them.

"It is kind of a return, but with a new twist in that it's much more commercial," Reed said. "The idea being to provide living and working environments in close proximity."

It also is a different way to look at air rights and air space, which are not the same thing and which may or may not be valuable commodities depending on where you find them.

Air rights are part of the complicated game known as development in downtown Los Angeles and a few other selected areas, and the procedure for transferring air rights is being revamped.

Air rights, technically known as "transferable development rights," are the space available for development at a given site. Unused air rights are bought and sold as a development tool when a builder wants to exceed the allowed height limits for a particular plot of land.

Air space is generally defined as the space above, below and around freeways and usually is not sold. The California Department of Transportation leases the state freeways' air space, much of it to parking lots and self-storage businesses, although the agency is looking for more creative uses for its air space.

While all buildings have air above them, in Los Angeles air rights have a tradable value only in areas where development is limited--in downtown, Century City and Westwood, for example.

In downtown, a developer is limited to a six-story building if the whole site is used or a 12-story building if half the site is used. If developers want to build higher, they must buy unused air rights of older, existing buildings downtown.

Air rights once were transferred by a variety of means. The city Planning Commission or the Community Redevelopment Agency could approve or deny the transfer, and some trades were even accomplished privately, said John J. Tuite, administrator of the CRA, which oversees downtown redevelopment and has approved 20 air rights transfers since 1980.

Transfers were done at $5 to $80 a square foot by some estimates, Tuite said, including requirements in some cases that the developer provide certain "public benefits."

In most cases, the benefit was historic preservation of a building such as when the well-known Bradbury Building sold its unused air rights for $1 million to Mitsui Fudosan (USA) to build a downtown skyscraper. The Bradbury Building's owners used the more than $1 million proceeds to restore the architectural landmark.

Agency Designated

Not everyone was happy with the process. The Los Angeles Conservancy filed suit against the CRA over Pershing Square Centre, an office and hotel complex, charging that the CRA had illegally allowed the developer the right to build a project double the size of what would normally be allowed.

A settlement of that suit last year brought about an ordinance this May that designated the CRA as the agency, in cooperation with the Planning Commission, that would engineer air rights transfers. The City Council then votes on each transfer.

A CRA task force is developing a procedure on how to value air rights, either in cash or public benefits. Such things have been decided on a case-by-case basis.

In the category of public benefits, a developer could be required to provide such things as low-income housing, child care, transportation, cultural facilities, open space or historic preservation, Tuite said.

As part of the recent transfer of air rights from the Central Library to two nearby office towers, Maguire Thomas Partners of Santa Monica agreed to provide about $76 million in public benefits in addition to the $51 million paid for the air rights.

They included footing part of the bill for the renovation of the library as well as a major art project that features a cascading water garden and staircase called the Bunker Hill Steps that will link the Bunker Hill area with the 73-story Library Tower, which recently changed its name to First Interstate World Center in honor of its largest future tenant.

Air rights of a different sort were employed in the construction of the Business Arts Plaza in Burbank, which was built two years ago on a 30,000-square-foot triangular piece of land that limited parking options.

A Planning Tool

"The most effective parking structures are these big rectangular jobs that go on and on and on," said James M. Luckman, whose firm, Luckman Partnership, designed the building. To solve the problem, a rectangular parking structure was built using air rights

the adjacent block of Riverside Drive. (Generally, air rights are defined as above ground, but in a few cases subterranean areas have been labeled "air rights.)

The transfer of air rights "is a tool that very much is a planning tool and one that isn't used extensively," Tuite said. "The city is interested in jobs, which add to the economic base of the city. . . . However, additional development has an impact on the city" that the CRA attempts to mitigate by requiring the public benefits.

The development community seems to acquiesce to the CRA's requirements as the price of building in downtown.

"It's a cost of doing business," said Ray Watt, chairman of Watt Industries, a well-known home builder that is planning its first downtown development, an office-retail-parking complex on the Thomas Cadillac site. The parcel, however, is west of the Harbor Freeway and is free of the CRA's control.

Freeway air space is leased for terms up to 99 years, but most leases are much shorter, said Richard M. Robison, Caltrans chief of right of way for Los Angeles and Ventura counties.

Those three counties have 121 leases, of which about 31 are long term with buildings on those parcels. Of the roughly $10 million California derives from freeway leases, about $2.6 million comes from Los Angeles and Ventura counties.

Many of the buildings are industrial, although air space is leased to a hotel next to the Hollywood Freeway and a restaurant at the interchange of the Glendale and Ventura freeways, Robison said.

More unusual examples can be found elsewhere, like the hotel-casino complex that straddles a highway in Reno. In Southern California, "right now you don't see buildings over freeways, but you will some day," Robison said.

Some Public Projects

As a site for affordable housing, air rights and air space have been used only sparingly in Southern California. Many doubt that the Southland will see such projects in any number until the cities become much more densely populated and land becomes much more scarce.

So far, they have been public projects such as the 150-unit apartment complex for the elderly that was built in Beverly Hills three years ago over five stories of underground parking and one level of retail space.

The CRA has not yet required specific low-income housing projects as part of a transfer of air rights, but has used other methods to replace housing destroyed downtown by redevelopment.

But since 1984, the agency has required developers in downtown's South Park area to pay into a housing trust fund as part of an exchange of excess air rights. The CRA hopes to pay for 500 units of low-income housing in South Park with the fund, an agency spokeswoman said.

Using air rights to create affordable housing should be considered, but only as part of an array of tools, said John Ochoa, executive director of the Greater Los Angeles Partnership for the Homeless.

"By itself, to raise it as a hope or a panacea not being part of a strategic plan, it becomes too isolated," he said, adding that the proximity of housing, transportation, schools and day care must also be addressed. "It intrigues me as long as it's one of a listing of other options in a public policy perspective."

There are significant roadblocks to locating affordable housing above commercial projects or in the air space above freeways or other structures.

Had to Strengthen Roof The city of Los Angeles briefly considered spanning the Los Angeles River to build low-income housing a few years ago but abandoned the plan as too expensive.

Besides donating the air rights, for which it received a $600,000 tax deduction, the Standard Brands San Francisco store found itself spending an extra $232,000 fortifying the store and its roof so that it could support the housing.

Then there is the question of whether people really want to live above commercial developments.

"People have an idea of how they want to live," architect Luckman said. "We're still fighting the desire for the white picket fence."

Watt said he thinks Southern California "still has the opportunity to create satellite cities with affordable housing" rather than building skyward in downtown and other places.

"I just think there are better locations where we can provide amenities such as playgrounds for children to avoid this downtown concentration," he said. "We would rather buy a lot and build housing where it's properly located instead of on top of commercial. They just aren't suited to each other."

For Standard Brands, the desire to locate a store in the gentrifying Bernal Heights community combined with a history of corporate charitable contributions outweighed the expense and Chairman Stuart Buchalter's initial reluctance to see housing on top of his store.

"It was a real good community thing," a Standard Brands spokeswoman said. "We didn't just go in and plow everybody down."