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Sunday, Sep 25, 2022

Building on Incentives

Two recent court decisions have materially changed the affordable housing game as it’s been played by local governments throughout California.

In a case in which our law firm represented the developer, the California Court of Appeal upheld our challenge to the city of L.A.’s affordable housing mandate in the Central City West Specific Plan, on the basis that it violated state law.

Los Angeles had attempted to impose a requirement that 15 percent of the units in a downtown apartment complex be affordable housing. That would have effectively reduced the rental income from the project, violating the state’s Costa-Hawkins Housing Act, which prohibits cities from applying rent control to new projects.

In the other case, in Central California, the Court of Appeal invalidated an in-lieu affordable housing impact fee being assessed on a housing project. The court found that the fee, which the city had increased from $734 to $20,946 per unit, bore no relationship to the actual impact the development would have on the community.

For many years, municipalities throughout California have attempted to use mandates to force the private development of low-cost and affordable housing. It’s clear from these and other cases that this approach is unworkable.

The shortage of available, low-cost, affordable and work force housing needs to be addressed if this state is to move forward both socially and economically. However, imposing mandates on private developers without incentivizing them just doesn’t work.

Embracing statutes

Cities need to begin embracing rather than resisting California’s existing affordable housing statutes. These laws seek to incentivize the development of affordable housing by allowing the building of additional (bonus) market-rate units to offset the cost of mandated affordable or low-cost units. Incentives can include such things as relief from set-back requirements, reduced on-site parking mandates, and increased building heights and square footage. Such incentives help make possible the inclusion of affordable housing in a private development. While the state mandate for increasing affordable housing has been around for years, local governments have been resistant to their implementation.

State law in no way precludes opportunities for cities to be creative in incentivizing the development of affordable housing. Initiatives can include lowering development fees, expediting the project approval process, and increasing flexibility when it comes to zoning issues.

Unfortunately, the current economic climate may militate against some of these initiatives. The unavailability of construction funds has brought many residential and commercial projects to a halt. Simultaneously, cities need money and so we can expect them to increase rather than lower development fees. Layoffs in the planning departments will make it more difficult to fast-track the project approval process. Nonetheless, short-term fixes should not be allowed to crowd out long-term solutions.

Local governments should have gotten the message by now that mandates do not work unless they are linked to economic reality. For example, if a financial institution will not lend on a project that cannot demonstrate cash flow to service its debt, all the well-intentioned mandates are worthless. Unfortunately recent discussions in Los Angeles indicate the message hasn’t been received. In response to the court decision, in February the Los Angeles Planning Department presented a report on the city’s proposed Mixed Income Housing Ordinance. The department offered four options for the city to consider – all of which envision the continued imposition of a mandated affordable housing fee in one form or another. No mention of incentivizing the private development of such housing!

Moving forward, it’s clear that we have a major educational challenge to demonstrate to policy makers that mandates alone do not work unless they are linked to economically driven incentives.

Benjamin M. Reznik is chairman of the government, land use, environment and energy department at the law firm of Jeffer Mangels Butler & Marmaro LLP.


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