LOS ANGELES, CA—California developers will feel extra pressure to include affordable housing in their projects, in light of a California Supreme Court decision issued Monday. In the exclusive column below, Edgar Khalatian and Spencer B. Kallick of Mayer Brown LLP discuss the implications of this new decision.
The views expressed in this column below are the author's own.
If they have not already, California developers are about to feel extra pressure to either include affordable housing in their projects or be required to pay an in lieu fee. And they have a recent California Supreme Court decision to thank. On Monday, the court issued a decision that allows California cities and counties to require developers to include below-market rate affordable housing as a condition to the issuance of a building permit. The decision makes it easier for cities with housing shortages to require property owners to pay an in-lieu fee or build affordable housing.
The decision's impact will entirely depend on the individual ordinances that cities adopt. The case simply makes it clear that a city can adopt an ordinance requiring affordable housing be incorporated into a project or the payment of an in lieu fee. Cities should consider adopting ordinances that are flexible to avoid unintended consequences—namely reducing the construction of market rate housing and increasing the cost of market rate units. If they are not careful, cities could decrease the number of housing units that are built or substantially increase the cost of the market-rate housing units.
Typically, a developer loses money on the affordable housing portion of a project. That is because the cost to build affordable units is more than what the affordable units can be sold for. Obviously, a property owner will not build a housing project if they are going to lose money.
Affordable housing ordinances need to be drafted carefully. They should ensure property owners continue to develop much-needed market-rate housing, which will in turn increase the number of affordable units and reduce the cost of all housing. They should also provide sufficient incentives to a property owner to spread the cost of building affordable housing, such as density bonuses, fee reductions, and expedited processing at the city level.
If a city's ordinance is overly burdensome, one of two things will happen. First, property owners will not build housing, further increasing the cost of all housing. Second, the cost of the market-rate units will increase to make up the added expense of providing affordable units. This will hurt the middle class – the police officers, the fire fighters, the school teachers—since they do not qualify for the affordable units, but also cannot afford the market-rate units.
The key for this to work is rational, flexible ordinances that protect everyone.
Edgar Khalatian is a partner at Mayer Brown LLP, based in Los Angeles, CA. He can be reached at [email protected] or 213-229-9548. Spencer Kallick is an associate at Mayer Brown LLP, based in Los Angeles, CA. He can be reached at [email protected] or 213-229-5147. Edgar and Spencer's practice focuses on land use entitlements and compliance with the California Environmental Quality Act.
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Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
