Earlier this year, the California Court of Appeal in Palmer vs. City of Los Angeles (2009) 175 Cal.App.4th 1396 (“Palmer“) issued a ruling that could have a major impact on how local inclusionary housing rules are applied to rental projects. Last week the California Supreme Court decided not to take the case up and therefore the Palmer decision stands. Below we discuss the case and what it might mean for the future of rental inclusionary rules
Facts. A Los Angeles developer obtained approval in 2006 for a mixed-use residential project that included 350 residential units. The Planning Commission approved the project subject to the local inclusionary affordable housing rule, which required that the developer provide 60 replacement low-income dwelling units, either on-site, or pay an in-lieu fee, and execute an agreement with the City to maintain the rental restrictions for a period of 30 years after the Certificate of Occupancy was issued. The developer had requested waivers and otherwise exhausted his administrative remedies to avoid the fee.
The Decision. The Superior Court held that the City’s affordable housing requirement, which required the building of on-site affordable housing, was pre-empted by the vacancy de-control provisions of the Costa Hawkins Rental Housing Act (Civil Code §§ 1954.50 et. seq.) (“Costa Hawkins”). The court also held that the ordinance’s in-lieu fee provision was preempted by Costa Hawkins and not severable from the invalid portions of the affordable housing requirements. The City then appealed from the judgment, which the Second Circuit Court of Appeal affirmed in its July 22, 2009 decision.
Costa Hawkins, enacted in 1995, created what is commonly referred to as “vacancy de-control”: when a rental unit becomes vacant, the owner may establish whatever rent they choose at the commencement of the next tenancy. (See Palmer, 175 Cal.App.4th at 1405.) Costa Hawkins provides without ambiguity that “notwithstanding any other provision of law” all residential landlords may, except in specified situations, “establish the initial rental rate for a dwelling or unit.” (Civil Code § 1954.53(a)). Courts have consistently held that the effect of this provision was to permit landlords “to impose whatever rent they choose at the commencement of a tenancy.” (Cobb vs. San Francisco Residential Rent Stabilization and Arbitration Board (2002) 98 Cal.App.4th 345, 351; see also Action Apartment Association, Inc. vs. City of Santa Monica (2007) 41 Cal.4th 1232.)
As Los Angeles’ affordable housing ordinance established the residential rental rate at the outset of the tenancy, it deprived the owner of the property of the right to set the rental rate at the outset of the tenancy as provided under Costa Hawkins, and thus was preempted by Costa Hawkins. (Palmer, 175 Cal.App.4th at 1411.)
Applicability of Palmer. Palmer only applies to the rental component of inclusionary housing requirements; for sale units are not affected by Costa Hawkins, and therefore are outside of the reach of Palmer. (Id. at 1410-1412.)
Costa Hawkins also does not apply to a project “where the owner has otherwise agreed by contract with a public entity in consideration for a direct financial contribution or any other forms of assistance.” (Civil Code § 1954.52(b); Palmer, 175 Cal.App.4th at 1402.) Therefore, if such financial assistance is taken, the City could impose the inclusionary housing requirements.
While we believe that Palmer has broad applicability, those seeking to limit the application of Palmer have noted that it does have some facts particular to its situation, including: the fee was calculated based on the cost of subsidizing the City’s entire regional housing need, not just the affordable housing that would otherwise have been included in the project; and the court did not address the relation of the ordinance to impact fees. We believe that the preemption holding of the Palmer court rises above these limiting factors of circumstance; however, a sympathetic court could use such facts to try and limit Palmer‘s application.
We believe the Los Angeles inclusionary requirements are very similar to those of San Francisco. However, San Francisco has done a nexus study to support its requirement, and Los Angeles had not. This may be a distinguishing factor if San Francisco’s ordinance were challenged.
If you would like to learn more about Palmer, let us know.
Reuben & Junius, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.