July 24, 2009
In a decision published July 22, 2009, a California Appellate Court held that rent restrictions for newly constructed housing were preempted by the Costa-Hawkins Rental Housing Act (Costa-Hawkins), California Civil Code Section 1954.50 et seq., finding that limitations on initial rents were "hostile and inimical" to a residential landlord’s right under Costa-Hawkins. Palmer/Sixth Street Properties v. City of Los Angeles, No. B206102, slip op. (Cal. App. 3d Dist., filed July 22, 2009). This decision is of particular interest because it calls into question the enforceability of inclusionary housing requirements imposed by many California cities on new residential development projects, at least as to rental housing. In particular, this decision may have significant ramifications on a city’s ability to off-set the costs of increasing the supply of affordable housing in a community by imposing inclusionary requirements on private developers and new development.
The Appellate Court considered the applicability of the affordable housing provisions in the Central City West Specific Plan to the Piero II project–a development consisting of 350 residential units and 9,705 square feet of commercial space. The Plan required one-for-one replacement of affordable housing units demolished on or after 1988. It also limited the monthly rents that could be charged for any required affordable housing unit built under the Plan to a percentage of the median monthly income for the Los Angeles area.
The project site is currently developed as a parking lot. But, the project site previously contained a 60-unit low income apartment hotel that was demolished in 1990. In accordance with the Plan, the City imposed a condition of approval requiring development of 60 replacement affordable housing units with applicable rent restrictions, or payment of an in-lieu fee which would provide the financial means for the City to construct the affordable units elsewhere. The developer refused to agree to the City’s terms and filed a complaint for administrative writ of mandate with the Superior Court arguing that the Plan requirements violated the "vacancy decontrol" provisions of Costa-Hawkins which generally permits landlords to "establish the initial rental rate for a dwelling or unit," "[n]otwithstanding any other provision of law."
The Appellate Court noted that while no case is directly on point, rent control provisions that conflict with Costa-Hawkins have generally been invalidated. Unpersuaded by the City’s attempt to define the Plan as outside of Costa-Hawkins because it is "not a rent control statute that governs the entire rental housing market," the Appellate Court noted that even if the "restrictions apply only to a portion of the residential units within the project and does not control rents for the entire project," the Plan imposes rent restrictions that "conflict with and are inimical to the Costa-Hawkins Act." Further, rejecting the City’s attempt to impose an in-lieu fee, the Appellate Court held that the Plan’s affordable housing requirements and in-lieu fee option are "inextricably intertwined" because the fee amount is based solely on the number of affordable units required by the Plan. Applying the plain meaning of Costa-Hawkins to the Plan, the Appellate Court found "clear and unambiguous" that "[f]orcing" the developer "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 rate of a dwelling or unit."
Given Costa-Hawkins’ application to rental housing alone, inclusionary requirements for for-sale housing are likely unaffected by this decision. However, having found the Plan preempted by Costa-Hawkins, the court’s decision may open the door to invalidation of similar inclusionary housing requirements. It may also allow developers to request relief from existing inclusionary housing requirements on their undeveloped projects. Finally, the California State Legislature may respond in some way to clarify Costa-Hawkins application to inclusionary requirements.
Gibson, Dunn & Crutcher’s Real Estate Practice Group is available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
Amy R. Forbes – Los Angeles (213-229-7151, email@example.com)
Mary G. Murphy - San Francisco (415-393-8257, firstname.lastname@example.org)
Neil H. Sekhri – San Francisco (415-393-8334, email@example.com)
Mary Beth Maloney – Los Angeles (213-229-7167, firstname.lastname@example.org)
Erika R. Randall – Los Angeles (213-229-7365, email@example.com)
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