Governor Scuttles Palmer Fix

​In 2009, the Palmer v. City of Los Angeles decision held that the inclusionary rental housing program in Los Angeles  violated the Costa-Hawkins Act, which prohibits local governments from rent-controlling units built after February 1, 1995.   Since then, cities have navigated around the Palmer decision with relatively minor changes in the form, but not the substance, of their inclusionary housing requirements.  In San Francisco, for example, developers are no longer required to provide on-site inclusionary units.  Instead, paying an affordable housing fee is the default option, and developers may voluntarily opt to provide on-site units where certain conditions are met.

In response to Palmer, affordable housing advocates in Sacramento pushed aggressively for AB1229, a statewide law that would reverse the decision by allowing cities to require inclusionary rental units.  It was narrowly passed by the Legislature over bipartisan objections.   Last week, Governor Brown vetoed the bill, recalling his experiences in Oakland:

“As Mayor of Oakland, I saw how difficult it can be to attract development to low and middle income communities.  Requiring developers to include below-market units in their projects can exacerbate these challenges, even while not meaningfully increasing the amount of affordable housing…”

The failure of AB 1229 will not impact San Francisco’s inclusionary housing program, which has been revamped to comply with Palmer.  However, San Francisco’s approach to Palmer is based on a narrow exemption to the Costa-Hawkins Act.  The exemption allows cities to restrict rents in projects that received (a) a direct government financial contribution or (b) a density bonus or development incentive under the state Density Bonus Law.

In order to provide affordable rental units, builders must enter into a Costa-Hawkins Agreement with the City.  In most cases, the agreements are based on a project having received a bonus or incentive under the Density Bonus Law. However, the bonuses and incentives cited in most agreements are far less than what is required by state law.

In fact, prior to the Palmer decision, the City took the position that the Density Bonus Law applied only where projects provided more affordable housing than was required under the Planning Code.   This meant that most private projects were not, in the City’s eyes, eligible for any bonuses or concessions.  The City quietly reversed itself only when it became necessary to avoid the impact of Palmer  on its inclusionary housing program.  A recent court decision, Latinos Unidos del Valle de Napa y Solano v. County of Napa (“Latinos Unidos”) confirmed that the current approach is correct: density bonuses are available for projects including only required affordable housing. 

In spite of its stated commitment to affordable housing, the City has lagged in implementing what could be a powerful tool  to encourage housing production.   It has failed to pass an ordinance describing how the Density Bonus Law is to be implemented – an ordinance expressly required by state law.  In the rare instances where the City has granted bonuses, it has required zoning legislation by the Board of Supervisors.   State law specifically declares this unnecessary.

Though it would certainly be challenging to get a bonus approved given the City’s past reluctance, the benefits are compelling.  For example, a rental project meeting the minimum 12 percent requirement for affordable housing would be eligible for a 23 percent density bonus, plus an incentive or concession to help defray affordable housing costs.  In addition, cities are prohibited from applying “any development standard that will have the effect of physically precluding” a development from providing bonus units.  This could allow for height, bulk or floor area bonuses in districts where density is limited only by the allowable building envelope.  In Wollmer v. City of Berkeley, the Court of Appeals upheld height, floor area and setback variances, which were needed to allow density bonus units. 

Finally, the benefits of implementing the Density Bonus Law would not accrue only to builders.  The general public is the intended beneficiary:  the law is meant to address the housing shortfall as a matter of “urgent public necessity” so that Californians are not “forced to unnecessarily accept further limitations on their personal aspirations, their social and economic mobility, and their physical comfort and well-being.”  That seems like something San Francisco can get behind. 

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, 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 leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.