More Carrot, Less Stick: New Legal Developments Could Improve

It is universally accepted that California needs more affordable housing. The question is how is it going to be provided? Will developers be required to provide affordable housing or will local governments provide incentives to developers for affordable housing to be voluntarily provided?

Many local governments have either not used the state Density Bonus Law or have contended that compliance with mandatory local affordable-housing requirements do not afford project applicants any of the benefits created by the Density Bonus Law unless applicants provide affordable units above and beyond what is mandated by the local governments' requirements.

However, recent California Court of Appeal decisions should provide developers with more options for providing affordable housing. Palmer/Sixth Street Properties L.P. v. City of Los Angeles and Building Industry Association of Central California v. City of Patterson both call into question the ability of local governments to require the provision of affordable-housing units or payment of affordable-housing impact fees on development projects.

Wollmer v. City of Berkeley reinforces the ability of local governments to grant density bonuses and other incentives above and beyond what is authorized by the Density Bonus Law and clarifies that local governments must issue concessions or incentives for affordable-housing projects if the requirements of the Density Bonus Law are satisfied.

In Palmer, the court invalidated the city of Los Angeles' attempt to require the developer either to construct60 low-income rental units or pay an in-lieu affordable-housing fee in connection with the developer's 350-unit apartment project. The court held that the city could not impose affordable-housing requirements on the project because the city's imposition was preempted by the Costa-Hawkins Act.

Costa-Hawkins mandates vacancy decontrol (i.e., the developer/landlord can set the initial rent amount) for all rental units constructed after February 1, 1995, as long as the developer did not receive any financial assistance or other form assistance under the Density Bonus Law. The court also held that the option of payment of in-lieu fees was preempted by Costa-Hawkins and invalid.

The fee amount was based solely on the number of affordable units that the developer had to provide, and thus the provision of affordable-housing units and the in-lieu fee option were "inextricably intertwined." It is likely that Palmer may compel local governments to provide incentives and other concessions as required under the Density Bonus Law in connection with new rental projects, as mandatory affordable-housing requirements now are prohibited.

In Patterson, the court invalidated the city of Patterson's imposition of an affordable-housing impact fee on a single-family for-sale residential project. The project entitlements included a development agreement that required compliance with affordable-housing requirements; the requirements could be satisfied through payment of an in-lieu fee. In the development agreement, the developer acknowledged that the present amount of the in-lieu fee was $734 per dwelling unit, and the developer agreed to pay any increases in the
fee based upon the results of a fee justification study as long as the increased fee was "reasonably justified." The later-completed fee-justification study recommended increasing the in-lieu fee to $20,946 per unit, which the city attempted to impose on the developer.

The appellate court invalidated the fee increase because it was not "reasonably justified." To be reasonably justified, the increase in the fee had to conform to existing law, and to conform to existing law there needed to be a reasonable relationship between the amount of the fee as increased and the project's impacts, which the city did not establish. The court thoroughly analyzed the city's fee-justification study and determined that the amount of the fee was not based upon the cost of the city's affordable-housing need attributable to the developer's project.

Patterson now requires local governments, before imposing an affordable-housing requirement or fee on new residential projects, to demonstrate rigorously that new residential development, whether rental or for sale, will generate the need for affordable housing. If local governments cannot demonstrate a connection, or nexus, between the development of new housing and the increased need for affordable housing, local agencies should be motivated to use the Density Bonus Law to encourage the provision of affordable housing.

In Wollmer, the court held that the Density Bonus Law acts as a floor regarding the incentives and concessions that local governments must provide if a project is eligible for the benefits of the law. The court held that local governments could provide concessions above and beyond what the Density Bonus Law requires, regardless of whether the local government has adopted a separate local ordinance to do so.  Also, the court noted that the 2009 amendments to the Density Bonus Law eliminated the requirement that an affordable-housing project must be economically infeasible in order for concessions or incentives to be issued.

Wollmer provides further clarity concerning the Density Bonus Law by emphasizing that the issuance of any incentives or concessions must be granted by the local government, as long as the development project provides the requisite percentages of either very low-, low- or moderate-income units.

The primary take-away from these cases is that for affordable housing to be provided, local governments are going to have to provide incentives for developers to provide affordable housing voluntarily. Developers and local governments are going to have to become more familiar with the Density Bonus Law, which can be a powerful tool to assist in the provision of affordable units. Local jurisdictions that have relied on mandatory requirements rather than voluntary approaches are going to have to reevaluate their approaches for providing affordable housing.