Local Governments May Be Prohibited From Requiring Developers to Build Affordable Housing Units

By Terri Molinaro, Esq.

Many local governments have enacted ordinances that require new housing developments to include a specified number of affordable housing units. A recent case held that one such ordinance conflicts with and was preempted by the Costa-Hawkins Act, and thus is unenforceable. In Palmer/SixthStreetProperties,L.P.v City of Los Angeles (2009)(Palmer v Los Angeles), 175 Cal. App. 4th 1396, the California Court of Appeal held in favor of the owner/developer, and prohibited the City of Los Angeles from enforcing its affordable housing ordinance; the California Supreme Court has let stand that decision,denying review of theappellate court’sruling. As a result of this case, cities (including San Jose) have been required to modify their affordable housing requirements.

In Palmer v Los Angeles, the owner/developer, Palmer, submitted plans to the City of Los Angeles (City) to develop a mixed use project. The proposed project is in an area in Los Angeles governed by a Specific Plan (Plan) adopted by the City, which Plan imposes affordable housing requirements on residential and mixed use projects. The City conditionally approved Palmer’s project subject to his compliance with the affordable housing requirements. As a result, Palmer was required (i)to construct 60 low income dwelling units (to replace 60 units that had been demolished at the site in 1990), which replacement units would be subject to rent restrictions “for the life of the dwelling units or for 30 years, whichever is greater,” or (ii)pay an in-lieu fee. Palmer argued that the affordable housing requirement was contrary to the Costa-Hawkins Act and that imposition of the requirement reduced, if not entirely eliminated, the economic motivation to proceed with the mixed use development. The Court of Appeals concurred and prohibited the City from applying its affordable housing requirements to Palmer’s project. In so holding the Court stated that, “Forcing Palmer to provide affordable housing units at regulated rents in order to obtain project approval is clearly hostile to the right afforded under the Costa-Hawkins Act to establish the initial rental rate for a dwelling unit.” The Court also held that the proposed “in-lieu fee” conflicts with the Costa-Hawkins Act because the fee is based solely on the number of affordable housing units that Palmer must provide under the Plan. Lastly, the Court acknowledged that the Costa-Hawkins Act does not apply where the owner has agreed to build affordable housing in consideration for a direct financial contribution or any other form of assistance specified in state density bonus law; however, since Palmer did not accept any such assistance, the exception did not apply in his case.

The Costa-Hawkins Act, Civ. Code 1954.53(a), was enacted in 1995 and specifies that residential landlords may “establish the initial rental rate for a dwelling or unit.” In part, the Costa-Hawkins Act provides that: (1)housing constructed after 1995 is exempt from rent control ordinances, (2)new housing that was exempt from a rent control ordinances in place before February 1, 1995, pursuant to a local exemption, must remain exempt, and (3)rental property owners are allowed to establish their own rental rates when dwelling units change tenancy. While these rules provided rental property owners with much needed relief from “extreme” vacancy control ordinances in effect in the 1980s, owners must heed the exceptions to the Costa-Hawkins Act. For example, the Costa-Hawkins Act (a)does not apply if the previous tenancy was terminated by the owner with a 30-day or 60-day notice to terminate the tenancy, and (b)will not apply for a period of time, if the owner fails to renew a contract or recorded agreement with a governmental agency that provides for a rent limitation to a qualified tenant. Further, in the event that a property is removed from the rental market under the Ellis Act, Gov. Code 7060, then the removed units cannot be re-rented (except at the rent controlled rate) for a period of five or more years. (Note: The Ellis Act was not applicable to Palmer, since the 60 units were demolished more than 5 years prior to the time the property was to be redeveloped.)

In response to Palmer v Los Angeles, the City of San Jose has excluded rental property from its affordable housing mandates. Thus, in evaluating local affordable housing requirements applicable to a project (or deciding that a new project is not worth pursuing because of such requirements), developers should verify whether the applicable City is enforcing its requirements, and if so, whether the subject property could benefit from the protections of the Costa-Hawkins Act á la Palmer v. Los Angeles.

The above article is provided for informational purposes only. It is not legal advice, nor does it create an attorney-client or any other relationship. You should always contact an attorney for legal advice applicable to your particular situation.