Costa-Hawkins Rental Housing Act Preempts City’s Application Of Affordable Housing Ordinance To Development Project

In a case that may have significant implications on the validity of municipal inclusionary housing requirements, the California Court of Appeal in Palmer/Sixth Street Properties, L.P. v. City of Los Angeles, (— Cal.Rptr.3d —-, Cal.App. 2 Dist., July 22, 2009) found that a city’s application of an affordable housing requirement is preempted by the vacancy decontrol provisions of the Costa-Hawkins Rental Housing Act (the “Costa-Hawkins Act”).

The Costa-Hawkins Act was enacted in 1995 to prohibit “strict” municipal rent control ordinances which did not allow landlords to raise rents to market level when tenants vacated a unit. Under the Costa-Hawkins Act, landlords are free to set initial rent levels at the beginning of a tenancy (“vacancy decontrol”), although municipalities can regulate later increases in rents while the tenant remains in the unit. The Court of Appeal held that the Costa-Hawkins Act preempts the long-term rent restrictions imposed by Los Angeles, and further invalidated the City’s in-lieu fee provision, which it found could not be severed from the rent restrictions

Facts

The Specific Plan for the Central City West area of the City of Los Angeles (“City”) imposes affordable housing requirements on multi-family residential or mixed use projects with 10 or more apartment units. The Specific Plan requires developers to replace on a one-for-one basis low income rental units that were demolished in 1988 or later. If no rental units were demolished, the developer must reserve 15% of the project’s units as low income rental units. The maximum monthly rent for the affordable housing units is based on a formula tied to Los Angeles area median incomes, for the greater of the life of the dwelling units or 30 years. A developer who does not wish to comply with these requirements may pay an “in-lieu” fee to the City.

In 2006, Palmer/Sixth Street Properties, L.P. (“Palmer”) applied for approval for a development project consisting of 350 residential units and commercial space. Because the proposed project site previously contained a 60-unit low income apartment hotel that was demolished in 1990, the Specific Plan required Palmer to provide 60 replacement low income units or pay an in-lieu fee for each of the 60 units. Palmer asked City to waive the affordable housing requirements on the grounds that compliance would make the project economically infeasible, pointing out that its project would provide additional housing for the local market on property that was currently being used only as a parking lot. City denied Palmer’s waiver request. Palmer later indicated that if it did not receive a waiver, it would pay the in-lieu fee rather than build the required affordable housing units.

Palmer filed a complaint for administrative writ of mandate against City to prevent the enforcement of the affordable housing requirements. The trial court found that applying the Specific Plan’s affordable housing requirements to the project “would be fatally inconsistent with the Costa-Hawkins Act.” The trial court rejected City’s argument that the in-lieu fee provision could be enforced as a stand-alone fee provision, finding that the in-lieu fee provision could not be severed from the preempted portion of the ordinance.

Decision

Palmer argued that the Costa-Hawkins Act preempts the Specific Plan’s requirement to restrict the rents of a portion of the apartment units. The vacancy decontrol provisions of the Costa-Hawkins Act declare that “[n]otwithstanding any other provision of law,” all residential landlords may, except in specified situations, “establish the initial rental rate for a dwelling or unit.” The effect of this provision of the Costa-Hawkins Act is “to permit landlords ‘to impose whatever rent they choose at the commencement of their tenancy.'”

The Court of Appeal concluded that the Specific Plan’s requirement to either provide affordable housing units or pay an in-lieu fee are “hostile or inimical to” the Costa-Hawkins Act because they deny Palmer the right to establish the initial rental rates for a portion of the apartment units. The court therefore found that the Specific Plan’s affordable housing requirement as applied to Palmer’s project was preempted by the Costa-Hawkins Act.

City asserted that there is no conflict between the Specific Plan requirement and the Costa-Hawkins Act because it “is not a rent control statute that governs the entire rental housing market.” City claimed that the Specific Plan requirement does not mandate rent control but instead requires replacement of affordable units or payment of an in-lieu fee. The court rejected City’s argument, finding that the Specific Plan requirement imposes rent controls in direct conflict with the Costa-Hawkins Act.

City claimed that Palmer’s preemption argument was moot because Palmer admitted that if the affordable housing requirement were upheld, Palmer would pay the in-lieu fee instead of building affordable housing units. City claimed that once Palmer made an election to pay the in-lieu fee, “there was no longer any danger that [the Specific Plan requirement] would have any impact on the initial rents” for the residential units constructed. The court rejected this argument, finding that Palmer’s clarification of its intent to pay the in-lieu fee instead of building affordable housing units did not constitute a waiver or forfeiture of its preemption claim.

The court also rejected City’s argument that the in-lieu fee provision does not conflict with the Costa-Hawkins Act because the Act does not restrict impact fees. The court found that because the in-lieu fee amount is computed solely on the number of affordable housing units that a developer must provide under the Specific Plan, “the affordable housing requirements and in-lieu fee option are inextricably intertwined.” The objective of the requirement “is not to impose fees, but to impose affordable housing requirements that may be satisfied by paying fees that the City concedes are ‘in lieu of the set-aside provisions, not the other way around.'” The court found that the in-lieu fee provision is preempted by the Costa-Hawkins Act because it exists only within the context of the preempted affordable housing requirements.

Comment

The sweeping nature of the court’s decision raises the prospect that the inclusionary housing ordinances that have been adopted by many other municipalities may also be preempted by the Costa-Hawkins Act. Because the Costa-Hawkins Act applies only to rental housing, the decision’s impact would appear to be limited to affordable housing requirements applied to rental housing developments and not to for-sale housing. In addition, the decision would not apply to projects where the owner has agreed by contract with a public entity to build affordable housing in consideration for a direct financial contribution or certain other forms of assistance, such as a density bonus, under an exemption to the Costa-Hawkins Act.

Questions

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