A developer’s recent legal challenge of the affordable housing requirements imposed by the City of Los Angeles in order to gain approval for a new market rate residential rental development “raises the question about whether the affordability requirements for new market rate rental developments in San Francisco and other jurisdictions are valid.”
From the most recent Gladstone & Associates newsletter by way of a plugged-in tipster:
A California Court of Appeal recently upheld a challenge brought by a developer to the affordable housing requirements of the City of Los Angeles. (Palmer/Sixth Street Properties v. City of Los Angeles, 175 Cal.App. 4th 1396). The developer sought approval for a 350-unit residential development. The City approved the project on the condition that the developer comply with the affordable housing requirements in the Los Angeles Central City West Specific Plan. The Specific Plan required applicants for multiple-family residential or mixed use projects to either set aside at least 15% of the dwelling units for low income families or pay in lieu fees.
The developer sued the City on the basis that the affordable housing requirements in the Specific Plan violate the Costa-Hawkins Rental Housing Act (Civil Code Section 1954.50 et. seq.). The Costa-Hawkins Act provides that residential landlords have the right to determine rents for new or vacated units. Established in 1995, the Act is known as having created “vacancy decontrol”.
The Court ruled the affordability requirements as applied to rental housing are invalid because they conflict with and are preempted by the Costa-Hawkins Act. The Court concluded that the Los Angeles law did not allow the developer to set the rent at the outset of the tenancy and thus conflicted with the Act…
The Court rejected the City’s argument that the in-lieu fee alternative does not violate the Act and thus is still applicable. The Court stated the in-lieu fee alternative is “inextricably intertwined” with the affordability requirement for the rent and thus also is invalid.
However, the Court recognized that the Costa-Hawkins Act does not apply to projects that have received incentives such as density bonuses or government funding.
The Court’s decision raises the question about whether the affordability requirements for new market rate rental developments in San Francisco and other jurisdictions are valid. (The Court’s decision is limited to rental units and does not apply to for-sale units). It should also be noted the Court invalidated requirements that were established in a “specific plan,” which vary greatly from one jurisdiction to another. It can be expected that cities such as San Francisco will argue that their specific plans establishing affordability requirements are distinguishable from Los Angeles’ Specific Plan. However, we do not feel that a court would find them distinguishable. We believe the Los Angeles inclusionary requirements are very similar to those of San Francisco. San Francisco may take the position that since it has done a “nexus study” to support its affordable housing requirement, it should not be affected by the Palmer decision. However, we do not feel this is an important distinguishable fact.
It seems that unless the State amends the Costa-Hawkins Act, developers of new rental housing should consider starting to revise their pro formas to create a rental development without an affordable component. This may make the difference between a project that pencils out and one that does not.
∙ Gladstone & Associates [gladstoneassociates.com]