Is inclusionary housing a misguided mandate?

Is it legal for cities to require developers to include affordable units in their rental projects?

Ever since mega-developer Geoff Palmer successfully challenged how L.A.’s inclusionary housing laws applied to rental projects in a 2009 lawsuit, the answer has been murky. But a Garcetti-backed bill before the California state legislature could soon restore cities’ rights to impose set-aside requirements for apartments, despite the real estate industry’s protests that such restrictions make projects more expensive for developers.

Sponsored by Santa Monica Assemblyman Richard H. Bloom, AB-1505 would allow local governments to require affordable units in new rental housing developments. The bill passed the Assembly with a 47-23 vote on May 4 and cleared the Senate Committee on Transportation and Housing last Tuesday. It is slated for a third reading before the Senate on Thursday.

“Our cities need every tool at their disposal to combat our state’s housing affordability crisis, and [Mayor Eric Garcetti] supports AB-1505 because it would significantly expand the options,” Garcetti spokesman Alex Comisar said in an email to The Real Deal.

But while AB-1505 also has the backing of housing organizations throughout the state — including California Housing Partnership and Housing California — it’s drawn sharp criticism from the real estate community.

Mandate or not, a project costs a developer the same amount to build, said Cary Jones, a partner in the L.A. office of Snell & Wilmer LLP.  If it is mandated that a certain portion of a project is affordable, developers will make the market-rate units more expensive to bridge the gap, he said.

Some developers will be deterred from building entirely, effectively keeping the region’s rental stock low and prices high, he said, adding that incentives and credits are preferred over mandates.

“It’s not something you can just put on the backs of developers and say, ‘This is a problem they have to solve,’” Jones said. “Somehow, government has got to come forward and figure out a way to create incentives.”

AB-1505 has drawn opposition from several industry groups — notably the California Association of Realtors, which said in an email to TRD that the bill “purports to address the low-income housing problem, [but] does nothing to encourage the construction of housing for low-income individuals.”

Earle Vaughan, an apartment building owner in Los Angeles who chairs the Apartment Association of Los Angeles’s State Legislative Committee, said in an interview that his organization has come out against the bill because it would prefer developers cut deals directly with cities.

“Frankly, if it’s mandatory, and it doesn’t work for the developer, it’s not going to get built,” Vaughan said. “It’s much better to have the developer negotiate with the city on an even playing field and decide whether this project will move forward or not.”

If passed, AB-1505 would reinstate a tool that was available to cities before an appellate court ruled in Palmer’s favor in 2009, effectively ending their ability to require an affordable housing component in new rental developments. Palmer sued the city after it granted the 335-unit Piero II project west of Downtown a conditional approval. It could be built, the city said, only if 15 percent of its units were set aside as deed restricted affordable housing — a stipulation dictated by a 1991 site-specific plan.

Palmer’s attorneys successfully argued that the city was effectively setting the rent for his units, a violation of the Costa-Hawkins Rental Housing Act. Palmer was able to break ground on the fully-market-rate project in 2011.

In a statement, Bloom said that the ruling “improperly conflated rent control, which is regulated by the state’s Costa-Hawkins act, and deed-restricted affordable housing.” AB-1505 would narrowly focus on allowing cities to set inclusionary housing requirements on rental developments, but would not mandate they do so.

Cities already have the right to impose inclusionary housing requirements on for-sale projects. A separate 2015 California Supreme Court ruling upheld the city of San Jose’s inclusionary ordinances related to for-sale housing, making it legal for all cities in the state to set similar rules.

Thanks to the passage of Measure JJJ in November, developers seeking zoning amendments must include a percentage of affordable units in their projects and pay their workers union-approved rates. Inclusionary housing mandates, however, could apply to projects that do not require changes to the code as well.

Bills similar to AB-1505 have gone before the state legislature before, including 2013’s AB-1229. That bill passed the legislature, but was ultimately vetoed by Gov. Jerry Brown, who said that he “saw how difficult it can be attract development to low- and middle-income communities” during his tenure as mayor of Oakland.

“Requiring developers to include below-market units in their projects can exacerbate these challenges, even while not meaningfully increasing the amount of affordable housing in a given community,” Brown said in comments accompanying his 2013 veto.