Article

APPELLATE DIVISION INVALIDATES COAH “THIRD ROUND” REGULATIONS, INCLUDING ITS “PASS THROUGH” AND “GROWTH SHARE” REGULATIONS
by Kenneth E. Meiser, Esq.

In the January 2007 issue of Builder/Architect Magazine, I wrote about the Council on Affordable Housing (“COAH”) “pass-through” regulation, which authorized municipalities to impose the full burden of Mount Laurel compliance upon residential or commercial developers, as if the Mount Laurel obligation were tantamount to nothing more than a housing tax on select property owners. That article questioned the validity of the pass-through regulation. On January 25, 2007, the Appellate Division invalidated that and other COAH “third round” regulations, including COAH’s “growth share” regulations, in a decision resulting from an appeal of the regulations brought by Hill Wallack LLP on behalf of the New Jersey Builders Association.

The Pass-Through Regulation

COAH’s pass-through regulation authorized municipalities to require a developer to provide at least one unit of lower income housing for every eight market-rate homes, or one unit of lower income housing for every twenty-five jobs created through new nonresidential construction. The pass-through regulation did not require that municipalities provide a density bonus or any other compensatory benefit in return for the obligation to create lower income housing. The regulation further provided that municipalities could require developers to pay monetary fees to the municipality, again without any compensatory benefit, in lieu of providing lower income housing directly. The regulation established no standards for the amount of the fees to be paid, but merely provided that the fees were to be “negotiated” between the municipality and the developer.

The Appellate Division’s decision invalidating the pass-through regulation requires that municipalities must provide incentives for developers to construct affordable housing. The court declared that the COAH regulation which authorized imposition of such a pass-through burden upon developers without any compensating incentives failed to satisfy COAH’s obligation to make it realistically possible that the statewide need for affordable housing units can be satisfied.

The court also found that the absence of standards in the COAH regulation to establish uniformity in the “in lieu” fees was a fatal flaw. There must be a rational nexus, or connection, between the need created by the development and the amount of any such fees. The court referred to one ordinance requiring developers to pay $150,000.00 for each affordable unit in lieu of constructing the unit, and other municipalities had imposed requirements double or triple that amount.

Are Pass-Through Ordinances Now Invalid?

The Appellate Division decision did not directly determine the validity of pass-through ordinances imposing such uncompensated lower income housing obligations, because no such ordinances were directly before the court. The appeal concerned only the regulations of COAH. Accordingly, while pass-though ordinances appear highly vulnerable to legal challenge, some municipalities may still insist that their pass-through ordinances remain in full force and effect until a court invalidates them or enters an injunction against their enforcement. Without such a court order, a developer appearing before a planning board may still be faced with a demand to make such a pass-through payment or to build affordable housing. Any failure of an applicant to challenge such a requirement before the planning board may constitute a waiver of the right to challenge it. Likewise, once a pass-through payment is made, under the “volunteer rule” a developer may be precluded from recovering it, even if the ordinance is subsequently invalidated. Given applicants may also decide to obtain a condition of approval from the planning board providing that the applicant will provide only such amount of affordable housing or contribution as is ultimately approved by the courts. Payment under protest may also be called for by the circumstances. These issues should be carefully analyzed by applicants and their legal counsel on a case-by-case basis.

Invalidation of the “Growth Share” Regulations

The Appellate Division decision also invalidated the COAH regulations applying a “growth share” approach to calculating fair share obligations. In essence, the growth share regulations allowed municipalities to calculate their own fair share obligations based upon various projections of growth. The court held that such regulations did not comply with the constitutional mandate articulated in the Mount Laurel decisions.

The Restriction of Affordable Housing to Senior Citizens

Other portions of the court’s decision are equally important to developers. For example, the decision invalidated a COAH regulation providing that municipalities may reserve 50% of their affordable units for age-restricted households. The decision recognized that the invalid regulation not only allowed municipalities to exclude from half of the affordable housing units families with children, but that it also resulted in the situation where such families had to compete with senior citizens for the non-age-restricted units. The court therefore concluded that the rule discriminates against families with children. It further found that COAH provided no factual justification for such a restriction. The decision, however, permitted the prior COAH rule authorizing a 25% preference for senior citizens to remain in place. Developers in regions already saturated with age-restricted housing may find that this decision provides an opportunity to construct developments providing housing for families with children.

The “Filtering” Issue

The decision also declared that COAH had unreasonably reduced the state’s unmet housing need for affordable housing by more than 50,000 units based upon COAH’s finding of “downward filtration.” The “downward filtration” theory holds that housing which was previously affordable only to middle income households will filter downward in price so that such units will become affordable to lower income households. COAH’s claim of downward filtration is in conflict with the reality, which is that New Jersey homes are becoming less affordable to middle income households.

Conclusion

An article such as this one can only scratch the surface when it comes to summarizing the court’s 127 page opinion. However, on each of the key points in its decision, the Appellate Division adopted the arguments made by Hill Wallack LLP on behalf of the New Jersey Builders Association. The decision potentially affects all property owners and all developers and redevelopers of residential and nonresidential projects. The court directed that COAH adopt compliant regulations within six months of its January 25, 2007 opinion. Whether COAH will seek to appeal is not clear as of the date of the writing of this article. Things could conceivably change as a result but, as matters stand, the Appellate Division’s decision is certainly great news for builders, property owners, and lower income households.

Hill Wallack LLP is one of the largest law firms in Central New Jersey, with offices in Princeton and Atlantic City, New Jersey; Doylestown and Langhorne, Pennsylvania. Over the past 25 years, Hill Wallack LLP has earned a reputation for comprehensive problem solving. The firm’s well-known practice groups in Land Use -- Planning, Zoning, Affordable Housing, and Redevelopment -- Environmental Regulation and Litigation, Regulatory and Government Affairs, Workers’ Compensation, Insurance Defense, Real Estate, Community Association Law, Construction and Business Law are complemented by its specialty practices in Gaming Law, Employment, Professional Liability, Government Procurement, and Public Finance.