Inclusionary Housing Ordinances that Apply to Rental Projects that Do Not Receive Public Agency Financial Assistance or that Do Not Include Density Bonus Units or Incentives May Need to Be Revised

Following a decision by the California Supreme Court to not review or depublish the appellate court decision in Palmer/Sixth Street Properties v. City of Los Angeles, cities and counties should evaluate their inclusionary housing ordinances with respect to rental properties.

The Palmer decision calls into question whether inclusionary housing ordinances which require developers to offer a portion of rental units as low-income units or pay an in-lieu fee may be in violation of California’s Costa-Hawkins Act. Unless and until the Legislature amends the Costa Hawkins Act, local agencies should consider how to revise their existing inclusionary requirements in accordance with Costa-Hawkins and the Palmer decision.

The California Supreme Court’s recent decision not to review or depublish the appellate court’s opinion in Palmer/Sixth Street Properties v. City of Los Angeles (2009) 175 Cal.App.4th 1396, is forcing California cities to reevaluate their inclusionary housing practices with respect to rental properties. In its opinion, the appellate court affirmed the trial court’s judgment that the application of Los Angeles’ inclusionary housing ordinance which required the developer of a mixed-use rental housing project to restrict 15% of the units as low income units or pay an in lieu fee, conflicted with and was preempted by California’s Costa-Hawkins Rental Housing Act (Civ. Code §§ 1954.50 et seq. (Costa-Hawkins).)

While the Costa-Hawkins Act had been interpreted in this context before (see, e.g., Bullard v. San Francisco Residential Rent Stabilization Bd. (2003) 106 Cal.App.4th 488; Apartment Assn. of Los Angeles County, Inc. v. City of Los Angeles (2006) 136 Cal.App.4th 119), Palmer was the first decision to apply the Costa-Hawkins Act to an inclusionary housing ordinance. In Palmer, the court held that the City’s rent restriction was “hostile or inimical” to section 1954.53 of the Costa-Hawkins Act, which provides that “[n]otwithstanding any other provision of law, an owner of residential real property may establish the initial rental rate for a dwelling unit.” The court further found that because the City’s in-lieu fee was based solely on the number of affordable housing units that a developer must provide, it was “inextricably intertwined” with invalid affordable housing requirements, and therefore could not be severed from the ordinance.

Since the Costa-Hawkins Act addresses only rent restrictions, the court’s opinion does not affect inclusionary ordinances that require production of affordable for-sale units. Further, Costa-Hawkins includes an exception for projects where the owner has “agreed by contract with a public entity [to build affordable housing] in consideration for a direct financial contribution or any other forms of assistance specified in [the State Density Bonus law].” (Civ. Code, § 1954.53(a)(2).) Therefore, rental units in projects that receive any such financial assistance or density bonus incentives from the public agency are also unaffected by the court’s decision. The decision does affect inclusionary requirements pertaining to future rental projects that do not receive financial or other assistance from a public entity.

The partial loss of inclusionary housing programs would mean the elimination of an important tool for cities and counties to satisfy their state-imposed obligations to produce affordable housing. The Palmer decision does little to clarify the relationship between Costa-Hawkins and local agencies’ statutory duties to provide affordable housing.

For example, the State Housing Element Law provides that jurisdictions with housing elements that require a fixed percentage of housing units to be affordable must allow a developer to satisfy that requirement with rental units offered at affordable monthly rents (Gov’t Code, § 65589.8.). Similarly, the Mello Act provides that every new housing development in the State Coastal Zone must, where feasible, provide low- or moderate-income units, and the conversion or demolition of housing formerly occupied by low- or moderate-income persons must be replaced within three years (Gov’t Code, § 65590(a), (d).). Furthermore, redevelopment agencies are required to ensure that in the aggregate, at least 15% of the housing units developed within redevelopment project areas is affordable to low- and moderate-income households pursuant to recorded agreements that restrict rents or sales prices, as applicable. The court in Palmer did not acknowledge these other obligations in its decision.

It is possible that the State Legislature may amend the Costa-Hawkins Act to address the impacts of the court’s decision in Palmer. Meyers Nave’s office will be coordinating with the League of California Cities to assist with any legislative effort. Unless and until a legislative fix is adopted, local agencies must consider how to revise and apply their existing inclusionary requirements in accordance with Costa-Hawkins and the Palmer decision. In the meantime, mandatory inclusionary requirements and in-lieu fees for for-sale projects and projects receiving financial or other assistance from the local agency are still viable options for cities and counties

Meyers Nave has been closely following the Palmer litigation and its impacts on local inclusionary requirements. Our attorneys are available to provide advice and assist cities and counties with updating their inclusionary ordinances and implementing documents. If you have any questions regarding these matters, please contact Steve Mattas in our San Francisco office; or John Bakker or Sue Bloch in our Oakland office.