January 1, 1900

by Stephen M. Eisdorfer

In a case brought by the New Jersey Builders Association, represented by Hill Wallack LLP, the Appellate Division has invalidated key provisions of the so-called “third round” regulations issued by the Council on Affordable Housing (COAH). The court ordered COAH to adopt lawful regulations within six months. It barred COAH from acting on any of the more than 250 pending petitions by municipalities for approval of their housing plans until it adopts lawful regulations. This decision, a striking victory for NJBA (and its non-profit allies), poses a number of practical issues for individual builders.

Victory in the Appellate Division

In a lengthy opinion issued on January 25, 2007, the court invalidated COAH’s so-called “growth share” methodology for determining municipal fair share obligations for the period 1999-2114. It also ruled that COAH could not authorize municipalities to meet their housing obligations by requiring builders to provide affordable housing without also providing compensating incentives. In other rulings, it rejected COAH’s subtraction of 50,000+ units from its determination of the state’s unmet housing need for affordable housing provided through alleged “downward filtration” of previously unaffordable housing. It also ruled that COAH could not authorize municipalities to restrict 50 percent of affordable housing to senior citizens.

The decision, which resolved cases brought by the NJBA, non-profit organizations, and an individual developer, is far reaching. It potentially affects all property owners and all developers and redevelopers of residential and non-residential projects. On each of the key points in its decision, the Appellate Division adopted the arguments made by Hill Wallack LLP on behalf of the NJBA.

Ruling on the Pass-Through Regulation

Among the most important issues addressed by the court was the consti­tutionality of the COAH regulation authorizing municipal “pass-through” or “growth share” ordinances— ordinances that require builders to construct affordable housing in every development without providing compensating incentives. The court ruled that such ordinances tend to have the effect of discouraging production of affordable housing. It held that such ordinances are not a constitutionally acceptable means of meeting the municipal housing obligations. This ruling has implications for virtually all property owners and builders, since many municipalities have adopted such ordinances.

The “Growth Share” Methodology

The court also held that COAH’s so-called “growth share” methodology, which calculates municipal housing obligations based upon municipalities’ own projected housing and employment growth, is unconstitutional. The court concluded that, as formulated by COAH, this methodology does not require municipalities to act to satisfy the actual unmet housing need, but instead encourages them to seek to reduce their housing obligations by deterring development.

The “Filtering” Issue

The court rejected COAH’s claim that municipal housing obligations can be reduced because large numbers of safe, decent housing units are available to lower income families as a result of an alleged decline in housing prices. It concluded that COAH had no evidence that there is a surplus of housing, or that declining housing prices are in fact making housing affordable to lower income families.

The “Age-Restricted Cap”

The court also declared that COAH cannot increase the proportion of affordable housing that municipalities may restrict to senior citizens from 25 percent to 50 percent. It held that restricting affordable housing to senior citizens was potentially exclusionary and that COAH lacked sufficient evidence to justify any such increase.

COAH’s Initial Response

COAH has petitioned the Supreme Court to review the decision of the Appellate Division, but only as to the legality of municipal “pass-through” ordinances. It has announced that it will comply with the order of the Appellate Division directing it to revise its regulations within a six month period. It is not clear what form the compliance will take. Will COAH issue genuinely different regulations? Or will it merely reissue the same regulations dressed in new clothes? And when will it really adopt revised regulations?

COAH has conducted a set of informal public relations meetings with selected interested parties. It has also issued a formal “request for proposals” for social science research. The form of these meetings and the RFP seem designed to justify the agency’s issuing regulations little different from those the court has invalidated. If so, it is foreseeable that the various parties will return to the courts.

In the meantime, the decision of the Appellate Division raises two sets of immediate practical questions for builders: Do builders still have to comply with local pass-through ordinances? What is the status of pending proceedings before COAH?

Responding to “Pass-Through” Ordinances

While the court held that COAH could not accept local pass-through ordinances as a constitutionally acceptable means of meeting the town’s fair share housing obligation, it did not expressly address the question of whether the ordinances themselves are valid. Unless invalidated in separate litigation, these ordinances remain in effect. COAH has reported that at least 120 of 260 municipalities that have petitions pending before the agency have adopted such ordinances. The total number of municipalities that now have pass-through ordinances is probably higher than that. The ordinances vary widely in their details and in their impact on property owners and builders.

Thus, a builder faced with a local pass-through ordinance must make a tactical decision: comply or fight? While the Appellate Division did not directly rule on the validity of local pass-through ordinances, its legal analysis provides a strong basis for concluding that these ordinances are unlawful. A builder who brings suit challenging the ordinance that affects his or her site would have strong arguments. Indeed, the legal analysis is so strong that a careful municipal attorney might, in the face of the prospect of litigation, even advise his client to voluntarily waive or repeal the local ordinance.

If an individual builder chooses to comply—which may be the economically prudent course in some circumstances —he or she may well give up the right to fight later, even if the ordinance is later invalidated by litigation brought by some other property owner or builder. To preserve the future right to seek a refund, it is critically important that a builder who chooses to comply make it clear that he or she is doing so under protest.

Waiting for COAH

Builders have spent a long time waiting for COAH. The agency was supposed to have issued “third round” regulations in 1999. Under acute pressure from the courts, it finally issued regulations in 2004. It gave municipalities a full year to file new housing plans. Of the 259 petitions filed around December 2005, COAH has taken final action on only six. Of the other 253, it has not taken any action—not even reviewing the petitions for completeness—in 193. It has rejected each of the petitions that it has actually reviewed for completeness but permitted the municipalities to remain within the protective jurisdiction of the agency while they revise them. In effect, the agency has created a moratorium on municipal compliance with the Constitution and the Fair Housing Act that has lasted for more than seven years and is still ongoing.

Now the Appellate Division has invalidated key provisions of the belatedly issued “third round” regulations and stayed proceedings on pending petitions for substantive certification for six months. COAH appears reluctant to comply categorically with the stay on proceedings imposed by the court. In consultation with counsel, builders will have to make individual tactical judgments as to the most appropriate response if faced with that circumstance.

Other Options

Although builders who wish to con­struct affordable housing developments cannot sue municipalities that are currently within the protective jurisdic­tion of COAH, they can still bring exclusionary zoning litigation against most of the 300+ municipalities that have not petitioned for substantive certification.

Because the court’s decision invalidates COAH’s use of downward filtration to reduce municipal housing obligations, it is likely that housing obligations for most municipalities will rise under compliant COAH regulations. Utilizing this fact, builders who are willing to construct inclusionary developments can negotiate with municipalities on a site-by-site basis. It may well be that COAH will grant some sort of limited approval to plans for specific sites, even if not for entire municipal housing plans.

As this analysis suggests, builders, whether they seek to construct inclusion­ary developments or are simply affected by local pass-through ordinances, are facing tactical decisions for which sound, informed legal advice will be critical.