January 1, 1900

by Anne L. H. Studholme

Pursuant to the New Jersey Supreme Court's renowned Mount Laurel decisions, the Legislature passed New Jersey's Fair Housing Act (FHA) in 1985, creating the Council on Affordable Housing (COAH), the agency responsible for supervising compliance with lower income housing obligations. The FHA and COAH mandate that each town in New Jersey allow for the provision of a certain number of housing units to be built for occupants of modest means. This number, which COAH calculates for each town, is the municipality's "fair share" of the regional need for lower income housing.

Inclusionary Developments

Towns often choose to meet their lower income housing obligation through "inclusionary zoning," that is, by providing density bonuses or similar incentives to builders willing to subsidize and set aside for the poor a certain proportion of the housing they construct on a site. The zoning must encourage builders who agree to build at least some affordable housing. The Supreme Court has said that any mandatory set aside would have to assure developers an adequate return on their investment.

The FHA and COAH regulations provide that any developer who builds an "inclusionary" project (a project including housing affordable to persons of low or moderate income), is eligible for certain beneficial treatment. For example, the town must eliminate cost-generating development standards not essential for public welfare; must expedite the approval process; must cooperate on scheduling hearings and hold them regularly, with ample time for discussing the application; and, perhaps most importantly, "the focus of municipal review shall not be on whether the sites are properly zoned." Finally, towns must cooperate by granting necessary variances.

Courts have recognized the cooperative treatment to which inclusionary developments are entitled, and have held that various additional forms of municipal (and even extra-municipal) cooperation are also in order. One important example of this has been the right of inclusionary developers to connect to sewer lines in neighboring municipalities.

In Lieu Payments

COAH has also authorized towns to raise money for affordable housing through "development fees." These are fees generally amounting to 1/2% or 1% of the equalized assessed value or the appraised value for construction financing, depending on the type of development. Towns need not provide benefits to developers who have to pay these fees, since, by definition (with certain exceptions generally for very small projects) they are paid by every developer in town. Inclusionary developers are exempt from these fees. In addition to development fees, towns often seek to raise money for affordable housing by asking would-be inclusionary developers to pay money "in lieu" of building the affordable housing. This money generally replicates one-for-one the cost of erecting the housing elsewhere. Usually, "in lieu" payments are higher than development fees. However, builders traditionally have been willing to pay them because of the benefits accruing to inclusionary developments. Until now, no distinction has been drawn between a developer of an inclusionary project who builds affordable housing on site and one who instead pays the money to the town in order that the housing may be built at another, potentially more appropriate site. For example, the COAH regulations describe such developments as "inclusionary." Towns often prefer the flexibility provided by in lieu payments, since they give towns the ability to locate the affordable housing on a site of the town's choice, to control the design and construction, or even to enter into an agreement (called an "RCA") with another municipality for the housing to be built there, using the in lieu money.

The Bi-County Decision

Unfortunately, this win-win system has been upset by a recent decision of the Appellate Division. In Bi-County Development of Clinton, Inc. v. Borough of Highbridge, the court held that a builder who elects to pay an in lieu fee when building in an inclusionary zone is not thereby building "inclusionary housing." Thus, it decided that such a builder is not entitled to the benefits accruing to builders of inclusionary developments. The crucial benefit at issue in the case was permission to connect the project to the sewer system of an adjoining municipality. A prior case had held that all municipalities in a given region have a duty to cooperate with each other in meeting the region's fair share of affordable housing, and that this could include providing sewer to projects in an adjoining town. Bi-County limits that reasoning to projects with affordable housing on site, and holds that developments paying in lieu fees are not entitled to such advantages.

If it stands, Bi-County could have numerous negative effects. For one, prior law has held that as long as a proposed settlement of an inclusionary development application helped the town meet its fair share obligation, the exact mechanism - whether zoning changes, in lieu payments, some percentage of on-site affordable housing (a "set-aside"), or a mix of these or other alternatives - was purely up to the parties. The town would receive credit for meeting or reducing its obligation, and the builder would receive the benefits of being an inclusionary developer. The courts would not interfere unless the proposed settlement was unreasonable, arbitrary, or capricious - a very high threshold. Given the reasoning in Bi-County, this established principle could now be in question.

Supreme Court Review Of Bi-County

The New Jersey Supreme Court heard the builder's appeal of the Bi-County decision on February 11, 2002. At oral argument, the Court seemed to recognize that Bi-County destabilizes the current system by nullifying the prior incentives for builders to make in lieu payments, and that it may contravene COAH regulations. In particular, the Court seemed to pay close attention to the builder's argument that Bi-County removes one of the most helpful tools for resolving development proposals that could otherwise generate lengthy litigation. On the other hand, the Court seemed sympathetic to Highbridge's assertion that developers who make in lieu payments are equivalent to those who pay development fees, and that this is so because neither results directly in the construction of affordable housing on the site at issue in the application. It remains to be seen whether the Supreme Court will reach the conclusion that developers who pay in lieu fees are not "inclusionary," and therefore not entitled to beneficial treatment.

As the law now stands, or until Bi-County is overruled, any developer interested in making in lieu payments must proceed very carefully. Making such payments, as opposed to directly providing lower income housing on-site, risks the loss of important benefits which until now were presumed to accrue.

Anne L. H. Studholme is an associate of the firm and member of the Land Use Division. She concentrates her practice in diverse land use matters.