By Katherine J. Hart

The City of Los Angeles (“City”) adopted a Specific Plan containing a provision which imposes affordable housing requirements on residential and mixed use projects of more than 10 dwelling units (“DUs”) per lot.  At issue in this case was whether the Costa-Hawkins Act preempts the City’s affordable housing requirements. The superior court held that the Costa-Hawkins Act does preempt the affordable housing requirements in the City’s Plan.

The Project

In 2006, Palmer/Sixth Street Properties, L.P. (“Developer”) applied to construct 350 residential units and 9,705 square feet of commercial space on 2.84 acres, consisting of 11 separate but contiguous lots. The site at issue was a parking lot, that previously contained a 60-unit low income apartment hotel that was demolished in 1990.

The City’s Affordable Housing Requirements

In 1991, the City adopted a Specific Plan (“Plan”) for the area in which the Developer’s site is located – Central City West. Section 11.C of the Plan requires either 1) the construction of affordable housing units that are subject to rent restrictions for the life of the unit or 30 years, whichever is longer; or 2) the payment of in-lieu fees that the City will use to build affordable housing units somewhere else, on any residential or mixed use project containing more than 10 dwelling units.  The City’s plan is retroactive to 1988 – in other words, all applicants for multi-family residential or mixed use projects must document and replace on a 1-for-1 basis low and very low income DUS demolished on the lot or lots on or after February 14, 1988. If no DUs were demolished, the applicant has to designate and reserve 15% of the DUs within the project as low income DUs. In the alternative, as adjusted in 2006, an applicant could pay an in-lieu fee of $122, 632.02 for every very low income DU or $96,182.17 for every low income DU.

Furthermore, the Plan limits the amount of rent that can be charged for any required affordable unit – no more than 30% of 80% of the median monthly income for persons or families residing in the Los Angeles Standard Metropolitan Statistical Area or very low income dwelling units or 30% of 50% of the median monthly income.  Such restriction must remain in place for the life of the deed restriction or 30 years, whichever is longer.

State Law

The Costa-Hawkins Act (Civ. Code, § 1954.50 et seq.) contains vacancy decontrol provisions which allow residential landlords to set the initial rent levels at the commencement of a tenancy (or after a tenant is evicted in conformance with the Ellis Act[1]).

The Dispute

The Developer asked for a waiver of the Plan provisions on the grounds that he was not receiving any governmental support in the form of loans or density bonuses and that the Costa-Hawkins Act preempted the Plan provisions relating to affordable housing. The City denied the Developer’s request on the basis that the site formerly housed a 60-unit low income apartment hotel destroyed in 1990. The Developer sued under the Costa-Hawkins Act and the Mitigation Fee Act.

The superior court agreed with the Developer that the Plan provisions were inconsistent with the Costa-Hawkins Act and ordered the City to set aside, eliminate and not enforce condition 10 of the project approval; and prohibited the City from applying the Plan’s affordable housing provisions to the Developer’s project. The City appealed on the grounds that its Plan did not conflict with the Costa-Hawkins Act.

Legal Analysis

Preemption law is clear in California. Under Article XI, section 7 of the California Constitution,

 “[a] county or city may make and enforce within its limits all local, police, sanitary and other ordinances and regulations not in conflict with general laws.” [Italics added.] “A conflict exists if the local legislation ‘duplicates, contradicts, or enters an area fully occupied by general law, either expressly or by legislative implication.’” [Citations omitted.] 

Here, the appeals court held as follows: “Forcing Palmer 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 rental rate for a dwelling or unit.”

In its defense, the City argued (among other things) that because the Developer had indicated it would pay the in-lieu fees and not build any affordable housing in the project, the Developer’s protection under the Costa-Hawkins Act was moot, and the in-lieu fee portion of its Plan should be severable. The appeals court disagreed saying, “the Plan’s affordable housing requirements and in-lieu fee option are inextricably intertwined” because the in-lieu fee provision “exists only within the context of the preempted affordable housing requirements.”

Potential Impacts of the Case

While affordable housing advocates will undoubtedly argue this case is of limited application due to the nature of the facts, (maybe set forth a likely factual distinction). Development and Free Market proponents will no doubt argue it is of wide application. Either way, it appears affordable housing or inclusionary zoning ordinances are under siege in this state (see our blog article on Building Industry Association of Central California v. City of Patterson [holding an in-lieu affordable housing fee is not reasonably justified if the fee is simply based on the amount of housing allocated to the jurisdiction under the regional housing need assessment]), and this case will likely only add fuel to the fire.

We expect efforts to have this case reviewed by the California Supreme Court or that the appellate decision is “unpublished”, thus uncitable.

Katherine J. Hart is a senior associate at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.

[1] The Ellis Act (Gov. Code, §§ 7060-7060.7) The Ellis Act allows a local rent control jurisdiction, like Los Angeles, to require that if any units withdrawn from the rental market under the Ellis Act are offered again for rent within five years after the notice of intent to withdraw is filed with the local jurisdiction, the units shall be rented at the lawful rent in effect at the time the notice of intent was filed plus annual adjustments; allows residential landlords to evict tenants or go out of business if the landlords comply with certain procedural requirements. The Ellis Act does not apply in this case because more than 5 years has elapsed since the 60-unit apartment hotel was demolished.