Article

Building for Fun (and Maybe Profit) Under the Proposed COAH Regulations
by Stephen M. Eisdorfer

The affordable housing regulations proposed to be adopted by the New Jersey Council on Affordable Housing (COAH) this coming June could create new burdens for builders. They could also create new opportunities. To cope with the burdens and take advantage of the opportunities, it is essential to understand some of the direct and indirect implications of the proposed regulations.

The regulations, proposed by COAH to ostensibly fix defects identified by the Appellate Division in an appeal brought by Hill Wallack LLP on behalf of the New Jersey Builders Association, raise such serious constitutional issues, and have provoked such widespread opposition, that COAH may ultimately choose not to issue them or the courts may ultimately bar COAH from implementing them. For the purposes of prudent planning, however, a builder must assume that the regulations will go into effect in June as presently proposed.

“Pass-Through” Ordinances—New Burdens

Rejecting the recommendations of its own outside consultant, COAH proposes to jettison inclusionary zoning as understood in New Jersey prior to 2004. Instead, it has chosen to retain so-called “pass-through” or “growth share” ordinances—now rebaptized as “inclusionary ordinances”—as the primary mechanism for municipalities to satisfy their housing obligations. Pass-through ordinances enable a municipality to pass its housing obligation through to property owners and builders. As proposed, the COAH regulations would allow municipalities to adopt local ordinances that impose an obligation to construct affordable housing upon all or selected residential and non-residential development, provided that the ordinances also create some adequate incentive for the builder. Each municipality would be free to fix for itself the ratio of market-priced units to required affordable units.

COAH would approve a pass- through ordinance that satisfies four criteria: 1) the property meets COAH’s site suitability criteria; 2) the ordinance provides a “bonus” of one market priced unit (at least a bonus “on paper”) for each affordable housing unit; 3) the bulk requirements make it possible to construct the affordable unit and the “bonus” market unit; and 4) the municipality provides some other form of incentive, which might be allowing alternative housing types, reduction in parking standards (if permitted by the RSIS), cost-reducing relief from local regulation, waived or reduced fees, tax abatement, or direct financial assistance.

A practical example will illustrate how such an “inclusionary development” ordinance might operate. A builder has a property zoned for development of 10 market-priced single family houses on two-acre lots as a matter of right. The town’s so-called “inclusionary development” ordinance would mandate, for example, that one unit out of every five must be set aside for a low or moderate income family. Thus, of the original 10 units, two must be affordable units and eight may be market-priced units. In addition, the builder is entitled to build an additional “bonus” market-priced unit for each affordable unit—a total of two market units. In sum, the builder could then build the original 10 market-priced housing units plus two low and moderate income units. As can be seen, there really are no “bonus” market units under such ordinances. The builder could construct 10 market rate homes before such an “inclusionary ordinance” was passed, and he could build 10 market rate units after such an ordinance were passed. The only difference would be that the builder would carry the obligation to subsidize the two lower income units.

The zoning ordinances must, per the COAH regulations, adjust the bulk standards to enable all 12 units to be constructed on the property. At the discretion of the town, this could involve permitting the two low and moderate units to be constructed as condo flats on a one acre lot and the market-priced units as single family houses on 1.9-acre lots. Alternatively, it could require that each of the 12 units, both the market- priced units and the low and moderate income units, be constructed as single family houses on 1.66-acre lots. Finally, the town must provide some other benefit, which may or may not have any real value. The COAH regulations would allow municipalities to impose similar burdens on nonresidential development.

“In Lieu Fees”and “Off-Site”Options

The COAH regulations also allow municipal ordinances authorizing builders or property owners to elect to pay “in lieu fees” into a housing trust fund or construct housing off-site, but towns are not required to include this option. A builder who chooses either of those options would receive only a reduced (one-half) “bonus.” COAH has proposed a fixed, uniform schedule of “in lieu” fees ranging from $145,000 to $182,000 per affordable housing unit, depending upon the housing region in which the property is located.

Thus, if the builder in the above example were permitted to elect to pay a fee in lieu of building the affordable units onsite, he or she could construct eight market-priced units, pay the uniform fee—perhaps $160,000 for each of two low and moderate income units, and receive a bonus of one additional market unit (one-half of a “bonus” unit for each lower income unit subsidized). In sum, the builder could build a total of 9 market-priced single family houses, but must then pay a fee of $320,000.

A town that allows the payment of in lieu fees cannot use those fees to fund regional contribution agreements (RCAs) with other municipalities. They must be used to fund affordable housing within the town itself.

The “Development Fee” Regulations

As with previous COAH regulations, the newly proposed COAH regulations would allow municipalities to assess “development fees” against builders, instead of the burdens identified above. However, the new rules would raise the amounts of the development fees that municipalities could charge. For residential development, development fees ranging up to 2% of the value of the development could be charged (depending upon the sales price of the homes), and development fees of 3% of the value of nonresidential development could be charged.

Are These New Rules Lawful?

The proposed “inclusionary development” regulation raises many legal and constitutional issues. It purports to provide a benefit equal to the incremental cost of providing the affordable housing, but does not really do so. Even if it did provide such a benefit, it seems clear that the regulation does not satisfy the mandate by the Appellate Division that any such regulation must provide for an “incentive” to induce builders to construct affordable housing.

The proposed regulations also prohibit towns from including in their housing plans pass-through ordinances for properties in Planning Areas 3, 4, or 5 other than those in designated centers or existing public sewer service areas. How will towns with little or no land in those areas meet their housing obligations? Would towns have the legal power to circumvent that restriction? The regulations do not address these issues.

How will the “additional benefit” beyond the purported density bonus be determined? Will there be some fixed standard, will it have to be negotiated on a project-by-project basis, or will any token benefit suffice? If there really is a density bonus, does it offset the loss in all the diverse housing markets in New Jersey? Does the unrestricted option for individual negotiations undermine the court’s mandate that pass-through ordinances must impose obligations that are uniform and predictable?

Beyond these issues of principle, these regulations pose practical problems for builders. For example, in some instances, the so-called “bonus units” cannot be constructed because of constraints on the site. There may, for example, be wetlands, stream buffers or other regulatory constraints, unfavorable topography, limits on the provision of water or sewer service, or restrictions on site access. In other instances, costs outside the builder’s control, such as site remediation costs, may make provision of affordable housing units at below market prices prohibitive, even with the so-called “bonus.”

Four Possible Remedies

There appear to be four potential remedies for these situations. First, the builder or property owner can seek to negotiate a larger additional benefit from the town.

Second, the builder or property owner may file an objection to the town’s housing plan before COAH. This remedy may or may not be available in any particular instance. The proposed regulations do not expressly require that the town seek or obtain COAH approval to adopt a pass-through ordinance. Indeed, COAH is urging towns to adopt these ordinances even before COAH adopts its own regulations.

Third, the proposed regulations require that municipal ordinances include a procedure for a hardship appeal. The builder or property owner can invoke that procedure.

Finally, the builder or property owner can challenge the legality and constitutionality of such ordinances in court.

Each of these remedies raises complex and novel issues and must be thoroughly reviewed with counsel.

New Opportunities

The actual methodologies utilized by COAH to make the projections of housing and job growth for each town, and to establish municipal housing obligations, raise many legal and constitutional issues. Moreover, the proposed regulations will permit municipalities to seek reductions in the obligation based upon claimed lack of developable land.

Nonetheless, the imposition of fixed numerical obligations opens the door to builders who are willing to construct high density inclusionary developments.

In practice, many towns will not be able to satisfy their unmet housing obligations merely through adoption of pass- through ordinances. Those towns will have to rely on other mechanisms, such as traditional inclusionary zoning, to meet their obligations. For towns that file housing plans with COAH, this creates a potential opportunity for builders to participate in COAH’s mediation and review process to secure favorable rezonings. Towns that are unwilling to face this obligation will be vulnerable to exclusionary zoning litigation and imposition by the courts of builder’s remedies.

Conclusion

To recognize and take advantage of opportunities in a town in which you are building will require careful evaluation of the legal status of the town and implementation of a strategy tailored to the town and your property. COAH’s new regulations are lengthy and complex, and their impact on different municipalities will vary from town-to-town. This article can only scratch the surface when it comes to summarizing the regulations. The Land Use team at Hill Wallack LLP would be happy to further discuss with you the pitfalls and opportunities presented by COAH’s newly proposed regulations as they may impact your business interests.

Stephen M. Eisdorfer is also a partner within the Land Use Division of Hill Wallack LLP. He concentrates his practice in land use litigation, including Mount Laurel litigation and litigation involving the civil rights statutes.