Two recent court decisions have materially changed the affordable housing game as it's been played by local governments throughout California.
In Palmer/Sixth Street Properties, L.P. et al. v. City of Los Angeles (a case in which JMBM represented the developer at all the administrative hearings), the California Court of Appeal upheld our challenge to a Los Angeles affordable housing mandate in the city's Central City West Specific Plan on the basis that it violated the state's Costa-Hawkins Housing Act. Los Angeles had attempted to impose a 15 percent affordable housing requirement on Palmer's 335-unit Piero II development. This would have effectively reduced the rental income from the project violating Costa-Hawkins, which prohibits cities from applying rent control to new projects. In the other case, Building Industry Association of Central California v. City of Patterson, the Court of Appeal invalidated an in-lieu affordable housing impact fee being assessed on a single family for-sale residential project. The court found that the fee, which the city had increased from $734 to $20,946 per unit, bore no relationship to the actual impact the development would have on the community.
Focusing on the Carrot
For far too many years, municipalities throughout California have attempted to use mandates to force private development of low-cost and affordable housing. It's clear from the above cited cases (and others of recent vintage) that this approach is unworkable. We can all agree that the shortage of available low-cost, affordable and even workforce housing needs to be addressed if this state is to move forward both socially and economically. However, imposing onerous mandates on private developers without incentivizing them in any way Cities need to step back and find more enlightened ways to engage the private sector in meeting this critical need. In doing so, cities could begin by embracing, rather than resisting, California's existing affordable housing statutes, notably Government Code Section 65915 and SB 1818. Both of these laws seek to incentivize the development of affordable housing by allowing the building of additional (bonus) market rate units to offset the cost of mandated affordable or low-cost units and allowing the developer to apply for zoning concessions or incentives. Incentives can include such things as relief from set back requirements, reduced on-site parking mandates, increased building heights and square footage, among others. Such incentives translate into the economic reality that helps make the inclusion of affordable housing in a private development possible. While the state mandate for increasing affordable housing has been around for years, local governments have been circumventing these state requirements thereby necessitating the adoption of SB1818 in 2008.
It Takes Creativity to Solve Problems
State law in no way precludes opportunities for cities to be creative in encouraging the development of affordable housing. There are a variety of other initiatives local governments can implement to assist in the private development of affordable housing. These include lowering development fees, expediting the project approval process, and increasing flexibility when it comes to zoning issues. Unfortunately, the current economic climate may militate against some of these initiatives. The unavailability of construction funds have brought many residential and commercial projects to a screeching halt. Simultaneously, cities need money and we can expect them to increase rather than lower development fees. Lay-offs in the planning departments will make it more difficult to fast-track the project approval process. Nonetheless, short term fixes should not be allowed to crowd-out the implementation of long term solutions.
One would hope that local governments have gotten the message that mandates do not work unless they are linked to economic reality. In other words, if a bank will not loan on a project that cannot demonstrate sufficient cash flow to service its debt, all the well-intentioned mandates are useless and counter-productive. On the other hand, more and more of my clients are opting to participate in the state's density bonus program (SB 1818) because the additional market rate units and zoning incentives make it economically viable. No mandate needed!
Unfortunately recent discussions in Los Angeles indicate the message hasn't been received. In response to the Palmer decision, the City of Los Angeles Planning Department presented a report on the city's proposed Mixed Income Housing Ordinance in February to the Planning & Land Use Management and the Housing, Community and Economic Development Committees of the City Council. The department presented four options for the city to consider: change state law and pursue the city's original plan; require an affordable housing impact fee on all new development; impose an affordable housing fee only on for-sale projects; or require affordable housing set-aside fees on all new rental and for-sale projects in the city with a provision that the fee on rental housing only become effective when and if the legislature amends Costa-Hawkins. No mention was made of incentivizing the private development of affordable housing!
It's clear that moving forward, we have a major educational challenge to demonstrate to policy makers that mandates alone do not work unless they are linked to economically driven incentives sufficient to satisfy the loan underwriting requirements of banks and institutional investors for such projects. Without that, projects simply will not get built and everyone suffers.
Ben Reznik is the founder and chair of the Government, Land Use, Environment and Energy Department at Jeffer Mangels Butler & Mitchell LLP. Ben's practice emphasizes real estate development entitlements, zoning and environmental issues. He appears regularly before planning commissions, city councils and other governmental boards and agencies, as well as the courts. Ben and his work have been featured in the Los Angeles Times and the Los Angeles Business Journal, and he has been included in the Los Angeles Daily Journal as one of California's "Top 100" lawyers. Ben leads a group of distinguished attorneys whose work has resulted in JMBM's inclusion in the U.S. News & World Report / Best Lawyers® list of Best Law Firms (2011-2012) with a National First-Tier Ranking and a Metropolitan First-Tier Ranking (Los Angeles) in the area of Land Use and Zoning Law. Contact Ben at BMR@jmbm.com or 310.201.3572.