Developers and apartment owners are fighting a bill in Sacramento that would allow the revival of requirements that they set aside a portion of their projects for low-income tenants at below-market rents, saying it would make their projects unworkable.

The bill would effectively overturn a 2009 court ruling in a case brought by an L.A. apartment developer that invalidated the low-income set-asides. It would once again allow cities to enact set-aside ordinances, called “inclusionary zoning,” with the aim of boosting affordable housing.

Proponents say restoring this tool for cities is especially crucial now that redevelopment agencies have been eliminated. Those agencies had been a key source of financing for affordable housing projects.

But developers and the investors and companies that buy their buildings say that inclusionary zoning amounts to full rent control, which is illegal under a 1995 state law known as the Costa-Hawkins Act, and will make projects difficult to pencil, if not unfeasible.

“The ability of developers to proceed with multifamily projects will be severely reduced and, in many cases, eliminated,” said Jeffrey Lee Costell, attorney and spokesman for Geoffrey Palmer, the West L.A. apartment developer who filed the lawsuit that invalidated the requirement.

And, opponents say, even if a developer decides to go ahead with a project, it would have to raise rents on the rest of the units.

“This is a tax on the middle class: The rent is set higher to offset the subsidies that the developer has to provide,” said Carol Schatz, chief executive of the Central City Association, which represents mostly downtown business and property owners along with several major multifamily developers with projects there.

Opponents also said the zoning would complicate negotiations between developers and city councils for incentives and conditions.

Backers of the bill, AB 1229 by Assemblywoman Toni Atkins, D-San Diego, say that if it passes, individual cities could still choose whether to enact inclusionary zoning laws.

“This bill doesn’t require anything; all it says is that local governments have the authority to adopt inclusionary zoning,” said Brian Augusta, Sacramento lobbyist with the Western Center on Law and Poverty, an L.A. non-profit that advocates for low-income people and co-sponsored the bill. “We also have not expanded or detracted the ability of local governments to give incentives.”

However, Costell said local governments will demand the zoning rule.

“If AB 1229 passes, cities will inevitably pass new or reinstate former inclusionary housing ordinances,” he said.

The bill cleared the Assembly earlier this summer and is awaiting a vote on the Senate floor. If that doesn’t happen before this year’s session ends next week, it could be brought back again next year.

Legal challenge

Before the 2009 court ruling, more than 150 cities and counties throughout the state adopted inclusionary zoning, including Los Angeles.

Palmer filed his suit as he was trying to build a 350-unit apartment and retail complex at Bixel and Sixth streets just west of downtown. Under the city’s inclusionary zoning policy, Palmer would have had to either set aside 70 units for low-income tenants at below-market rents or pay an “in-lieu” fee of nearly $6 million that would be used to subsidize other affordable housing projects elsewhere in the city.

In the lawsuit, Palmer contended the inclusionary zoning ordinance amounted to an illegal form of rent control. Under the Costa-Hawkins Act, the only form of rent control allowed is “vacancy decontrol”: As long as a rental unit is occupied, rent increases can be capped; but when a unit is vacated, the rent resets to the current market rate. Inclusionary zoning, Palmer argued, takes away the ability of the landlord to set a vacant unit at market rates because the rent is below market rate. The Second Appeals District Court ruled in his favor.

Despite the ruling, however, cities can still reach agreements with developers to create affordable units in exchange for some trade-off. For example, if it sets aside some units at below market, a developer might get a break on parking space requirements.

A previous bill that would have effectively overturned the court ruling was defeated on the Senate floor. But proponents say their chances have improved because of the elimination last year of redevelopment agencies, which had been one of the biggest financers of affordable housing projects.

“We’re trying to build a broader base of support on this from local governments that are increasingly frustrated at the loss of affordable housing units,” said the law and poverty center’s Augusta.

But opponents say that requiring affordable housing set-asides will make it harder, not easier, to build affordable housing. That’s because cites would have no need to negotiate any trade-offs.

“If this passes, it removes the only remedy that a developer has against cities requiring 20 percent affordable housing set-asides with absolutely no offsetting incentives,” said Steve Carlson, a Sacramento lobbyist representing the Apartment Association of Greater Los Angeles. “It’s the incentives that help make affordable housing feasible. If a city removes that, developers will choose not to build in that city and that means fewer units for everyone, which means even higher rents across the board.”

At least one multifamily developer is neutral on the bill. Bill Witte, president of Related California – the Irvine unit of the New York development giant that is building the Grand Avenue project in downtown Los Angeles – said he does not have a problem with it.

“We have found that inclusionary zoning works well in some cities and not so well in others,” he said, noting that the high demand for Santa Monica apartments allows high rents that can help developers compensate for providing affordable units. But inclusionary zoning didn’t work as well in Los Angeles.

“L.A. has so many submarkets with different levels of demand,” he said. “Besides, the city has so many other requirements that drive up building costs, such as paying prevailing wage to construction workers.”

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