A state appellate court ruling striking down an affordable housing mandate in the City of Los Angeles could have statewide implications. Affordable-housing advocates and municipal attorneys say the decision, if it stands, calls into question inclusionary housing ordinances that require developers to set aside and price a certain percentage of new rental units at below-market rates.
Three years ago, Los Angeles approved developer Geoff Palmer's proposal to build a 350-unit apartment complex on a parking lot west of downtown. A condition of approval was that the project had to comply with a 1991 specific plan requiring that some of the units be made affordable to low-income households. Palmer sued to block the mandate, contending that the city was effectively setting the rent for his units, a violation of the Costa-Hawkins Rental Housing Act. Both a trial court and the Second District Court of Appeal agreed with the developer.
"Forcing Palmer to provide affordable housing units at regulated rents in order to obtain project approval is clearly hostile to the right afforded under the Costa-Hawkins Act to establish the initial rental rate for a dwelling or unit," Justice Steven Suzukawa wrote for a unanimous three-judge appellate panel.
Los Angeles has asked the panel to rehear the case. It is also preparing a possible appeal to the state Supreme Court. If the city is unsuccessful, developers and landowners could challenge inclusionary housing requirements in Los Angeles and across the state when seeking approval for their rental housing projects.

The decision does not affect ordinances that require developers to set aside and price a percentage of new for-sale units at below-market rates, because Costa-Hawkins applies only to rental housing. Nor does the ruling affect housing projects that involve some form of government assistance.
Goldfarb & Lipman attorney Barbara Kautz, an expert on inclusionary zoning and an adviser to the City of Los Angeles, said local governments should let the Palmer litigation reach a conclusion before reconsidering ordinances. "We're suggesting that if people don't have projects they are reviewing immediately, they should hold tight," Kautz said.
Mike Rawson, an attorney with the Public Interest Law Project,  agreed: "It's premature to jump either way on the breadth of this decision."
Still, Kautz said the Second District judges "definitely wrote [the ruling] to be extremely clear. It says developers, under state rent-control laws, have the ability to set the rents when the unit is built."
James Burling, a Pacific Legal Foundation property rights attorney who has fought to end inclusionary requirements, said that many local governments would not be affected by the ruling because their ordinances apply only to for-sale units or they permit in-lieu fees. Los Angeles was more aggressive in pushing inclusionary rules for rental units and it "got slapped down," he said.
"Anybody that wants to have these kinds of controls on rental housing had better rewrite their ordinances," Burling continued. "For rental properties, governments may attempt to impose in-lieu fees, but then they run into the Mitigation Fee Act. To the extent they attempt to restrict rent, they can't do it."
Palmer's attorney, Jeffrey Lee Costell, told the Los Angeles Downtown News that the ruling should "help reverse mandatory inclusionary housing ordinances wrongly adopted statewide."

Rent Control History

The 1995 Costa-Hawkins Act (Civil Code §§ 1954.50 – 1954.535) does not prohibit local governments from adopting rent-control policies. Rather, it establishes what is known as "vacancy decontrol" – landlords may set the new rental price when a unit becomes vacant. Local rent-control laws typically restrict the amount landlords may annually raise their rents until a unit becomes vacant once again.

About one-third of California cities and counties have inclusionary zoning ordinances (see CP&DR, December 2007). In general, they require developers to set aside 10% to 15% of new housing units for moderate- to low-income households. Most cities and counties permit developers to pay in-lieu fees to avoid building affordable units.

Policies governing where affordable units may be built vary from city to city. Some ordinances apply only to for-sale units, while others concern for-sale and rental housing. The state Department of Housing and Community Development has long viewed inclusionary zoning as a constraint on housing development. But affordable-housing advocates contend inclusionary mandates are needed because government funding for housing is insufficient to meet overall demand.
The City of Los Angeles does not have an inclusionary ordinance, though planners, council members and the mayor's office have for years discussed adopting one.

But in 1991, the city adopted the Central City West specific plan for an area near downtown west of the Harbor Freeway. The plan required developers of projects of more than 10 dwelling units per lot to set aside 15% of the units for households earning 30% to 80% of the median income in Los Angeles (these days, roughly $14,000 to $38,000 annually). Rents for these units must be affordable for the life of the project or 30 years, whichever is greater. Furthermore, very low- and low-income units demolished in Central City West after February 13, 1988, had to be replaced by project developers.
Palmer, who has built more than 2,000 market-rate apartments in and around downtown Los Angeles, asked the city to waive the affordable-housing requirement for his Piero II project at Sixth and Bixel streets, which involves the construction of 350 residential units and 9,700 square feet of commercial space on 2.84 acres. He claimed the affordable-housing requirement would make his project economically infeasible, as well as violate the Costa-Hawkins Act.
Palmer had sued before to evade the Central City West plan's affordability mandates. In 2004, he settled the lawsuit by agreeing to pay the city $2.8 million to bypass the requirements for one project; the city allowed him to convert some moderate-income units to market-rate in another project.

Palmer's waiver request for his Piero II project was rejected by the city Planning Commission. Because the site had contained a 60-unit low-income apartment hotel that was demolished in 1990, the commission required Palmer, as a condition of approval, to replace those units – either on-site or elsewhere – or pay an in-lieu fee of about $5.7 million ($96,000 per unit). Palmer appealed to the City Council and lost.
Palmer then sued the city and won. Los Angeles County Superior Court Judge Dzintra Janavs agreed with Palmer's contention that the affordable-housing requirement violated the Costa-Hawkins Act and that the in-lieu fee was illegal. She declined to consider the in-lieu fee separately, finding that it was inextricably intertwined with the pre-empted requirement to provide affordable units.

The City Appeals
On appeal, the city argued that because Palmer acknowledged he would pay in-lieu fees – rather than replace the demolished units – if he lost the lawsuit, he had rendered the issue of Costa-Hawkins moot. The appellate panel disagreed.
The city also argued that it had not violated Costa-Hawkins because the Central City West plan simply required Palmer to replace the demolished low-income units or pay an in-lieu fee – neither of which implicated rents for his new units. The three-judge panel  was not persuaded. It said the plan's replacement provisions, inclusionary housing requirements and in-lieu fee language should all be read together.
"We find [specific plan] § 11.C's affordable housing requirements to be hostile or inimical to Civil Code § 1954.53 by denying Palmer the right to establish the initial rental rates for the affordable housing units that are required to be built under § 11.C, and by preserving their regulated rent levels for 30 years or the life of the units, whichever is greater," Justice Suzukawa wrote.
Rawson, the affordable-housing lawyer, said the panel ignored the legislative history behind Costa-Hawkins in its ruling. That law, he said, came about as a result of apartment owners pressuring lawmakers to prohibit local rent control.  "Inclusionary zoning was not on their [apartment owners'] radar screen," he said.
Kautz said the judges also skipped over a number of potentially complicating factors. For example, state redevelopment law requires a certain percentage of units within redevelopment project areas to be made affordable to moderate- and low-income households. The Mello Act imposes a similar requirement on new units in the Coastal Zone. The panel's reading of Costa-Hawkins would appear to be in conflict with these laws. She said the court also ignored previous appellate court rulings upholding inclusionary requirements that included an in-lieu fee option, such as Los Angeles's.
The decision is apparently the first published ruling – meaning it may be cited as precedent – that strikes down an inclusionary requirement based on Costa-Hawkins. If the Second District declines to reconsider its decision – such rehearings are extremely rare – Los Angeles will have the support of housing advocates, civil rights groups and local government organizations in its appeal to the state Supreme Court.

Palmer has yet to break ground on Piero II.
The Case:
Palmer/Sixth Street Properties LP v. City of Los Angeles, No. B206102, 2009 DJDAR 10859. Filed July 22, 2009.
The Lawyers:
For Palmer: Jeffrey Lee Costell, Costell & Cornelius, (310) 458-5959.
For the city: Michael Bostrom, city attorney's office, (213) 978-8068.