Palmer Redux: On-Site Rental BMR Rules In Flux

​The battle over California cities’ and counties’ ability to require developers to provide on-site affordable rental units in new residential projects is raging in Sacramento.  On September 9, legislation that would allow cities and counties to impose such requirements was presented to Governor Jerry Brown and is awaiting his signature.  The bill, Assembly Bill 1229, was co-authored by State Senator Mark Leno and passed in the State Assembly on May 30, 2013 by a vote of 41 to 31, and the State Senate on September 3, 2013 by a vote of 21 to 16.  This vote is not surprising given the current composition of the State Legislature.  Similar bills in recent years have failed to move out of the Legislature.    

The California Constitution grants what is referred to as the “police power” to each city and county, giving them the power to “make and enforce within its limits all local, police, sanitary, and other ordinances and regulations not in conflict with general laws.”  State planning and zoning laws set forth minimum standards for cities and counties to follow in land use regulations.  However, the State Constitution establishes the Legislature’s intent to “provide only a minimum of limitation in order that counties and cities may exercise the maximum degree of control over local zoning matters.”  

Using the police power, cities and counties throughout California have adopted inclusionary zoning or inclusionary housing ordinances which force developers to ensure that a percentage of residential units in a new development, whether rentals or individually owned, be affordable for lower income households.  There is wide variation in the percentage of affordable units required, the depth of the affordability required and the options for compliance by developers.  Often, developers do not build the required affordable units themselves or pay their full cost; rather, developers may donate land and/or make a financial contribution toward development costs.  Some jurisdictions permit developers to pay in-lieu fees to finance a city or county’s own low income development.   This may enable a developer to receive certain entitlements, like more density and floor area.  Inclusionary zoning’s intent is also to achieve inclusiveness in certain neighborhoods, leading to a greater mix of housing products with varied prices within a neighborhood.  The real estate development industry is one of the few industries that are required to provide below market pricing for its products. The Legislature has determined that inclusionary housing ordinances have provided affordable housing to approximately 80,000 people in the California in approximately 30,000 units of affordable housing over the last decade.  

The ability of cities and counties to require the provision of on-site affordable rental units (as opposed to ownership units) in new residential projects was called into question by the holding in Palmer/Sixth Street Properties, L.P. v. City of Los Angeles, which was handed down by the California Court of Appeal on July 22, 2009.  Palmer was a developer that argued that the City of Los Angeles’s affordable housing requirements violated and conflicted with the Costa-Hawkins Act.  Enacted in 1995, Costa-Hawkins established what is referred to as “vacancy decontrol,” declaring 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,” even if the local rent control ordinance would otherwise limit rent levels across tenancies.  The practical effect of this, according to the Palmer decision, was to permit landlords to “impose whatever rent they choose at the commencement of a tenancy.”  The Palmer court found Los Angeles’s requirement that Palmer to provide a certain number of affordable rental housing units in a new residential project violated Costa-Hawkins.  As a result of the Palmer, decision, many cities and counties no longer require developers to provide on-site affordable rental units as part of a new residential project.

The intent of AB 1229 is to expressly overturn the decision in Palmer.  Specifically, AB 1229 authorizes California cities and counties to “establish, as a condition of development, inclusionary housing requirements, which may require the provision of residential units affordable to, and occupied by, owners or tenants whose household incomes do not exceed the limits for lower income, very low income, or extremely low income households … .”

We will keep you updated on the status of AB 1229 and the Governor’s decision.  

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.