On July 22, 2009, the California Court of Appeals issued a ruling
that could send California’s affordable housing laws into a
tailspin. The case is Palmer/Sixth Street Properties, L.P., et al., v. City of Los Angeles,
and it questioned whether cities can impose mandatory affordable
housing, also known as inclusionary zoning, requirements on the
development of market-rate apartment projects. The Second Appellate
District Court believes not.
Specifically, the court affirmed a superior court decision that
precluded the City of Los Angeles from enforcing an affordable housing
ordinance against a mixed-use project that is being developed by
Palmer. The court concluded that, as applied to Palmer’s project, the
ordinance conflicts with, and is preempted by, the rent control
provisions of the Costa-Hawkins Rental Housing Act ("Costa‑Hawkins"),
which allows residential landlords to set the initial rent levels at
the commencement of a tenancy. It appears, however, that the battle is
not over. Based on recent statements from the City Attorney’s Office,
it is likely that the City will petition the California Supreme Court
for review of this decision.
The case grew out of Palmer’s 2006 Piero II project in downtown Los
Angeles. The project included 350 residential units and 9,705 square
feet of commercial space on a 2.84-acre parking lot site. The site
previously contained a 60-unit low income apartment hotel that was
demolished in 1990. The project was within the boundaries of the
Central City West Specific Plan area, which imposes an affordable
housing requirement on residential and mixed use projects of more than
10 dwelling units per lot. The City approved the project, but
conditioned it to (1) either provide 60 replacement low-income dwelling
units or pay an approximately $5,770,930 in-lieu fee; and (2) maintain
rent restrictions pursuant to the Specific Plan for at least 30
years. Palmer claimed that these conditions conflicted with
Costa‑Hawkins.
The Act provides in relevant part that all residential landlords may
“establish the initial rental rate for a dwelling or unit.” Civ. Code
§1954.53(a). The court quickly honed in on how this provision of
Costa‑Hawkins preempted the Specific Plan’s affordable housing
requirements. The court found that the Specific Plan’s affordable
housing requirements were “hostile or inimical” to Costa‑Hawkins
because they stripped Palmer of the right to establish initial rent
rates and effectively locked in rent levels for 30 years. The court
felt that the language of Costa‑Hawkins was clear and unambiguous, and
therefore the City’s constraints on the project were unlawful.
The City then argued that the in-lieu fee provisions of the Specific
Plan were severable and did not conflict with Costa‑Hawkins because it
does not mention impact fees. The court disagreed and found that the
fee provisions were inextricably intertwined with the Specific Plan’s
affordable housing requirements. In other words, the Specific Plan
boxed Palmer into either paying for, or building, the affordable units,
which is in conflict with Costa‑Hawkins because neither of those
options allow the landlord to establish the initial rental rate for the
units.
In summary, it appears that the court may have dealt similar affordable
housing laws a serious blow, at least to the extent that they may
attempt to mandate the dedication or provision of rent-restricted
affordable units. Although the court recognized that affordable housing
requirements could still apply to certain projects, such as those
receiving government support or under contract with a public entity,
the ruling appears broad enough to call into question affordable
housing programs across California. Adding to the uncertainty, the
Fifth Appellate District Court decided the Building Industry Association of Central California v. City of Patterson
case in March 2009, which questioned the legitimacy of affordable
housing in-lieu fees. Are these recent appellate court decisions the
harbingers of substantial change in the way local communities address
the provision of affordable housing? It is too early to tell. For now,
however, the affordable housing atmosphere is unstable while cities,
developers and affordable housing advocates anxiously await the next
step in the Palmer case. The City has until August 31 to file its petition to the California Supreme Court.
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