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June 2008

Coah Update

With the June 2, 2008 publication of its new rules in the NJ Register (the “Rules”), the New Jersey Council on Affordable Housing (“COAH”) concluded a nearly four-year odyssey, which began with the adoption of an earlier set of rules in December 2004, included the instantaneous filing of a number of lawsuits by myriad disparate parties, each seeking to overturn the rules, and ended with the appellate court’s January 2007 decision summarily rejecting wholesale portions of the original rules and ordering their re-write. The new Rules, adopted on May 6, 2008, were COAH’s response to that 2007 court order. With their publication, these Rules became ripe for a new lawsuit.

In the previous court action, the development community advanced a number of arguments before the court. One argument challenged whether there was a sufficient statistical link between COAH’s “Growth Share formula” (which calculates a municipality’s obligation to build affordable housing based upon new development), and the actual need for affordable housing generated by new development. Another argument challenged the ability of municipalities to require developers to build affordable housing absent sufficient “compensatory benefits” to ensure developers an adequate return on their investments. Finally, there was a challenge to the implementation of a “payment in lieu” scheme whereby developers, especially non-residential developers, could be required to negotiate and pay exorbitant sums to municipalities in lieu of building affordable housing. In ordering COAH to re-write its rules, the Court adopted many of the criticisms advanced by the development groups.

Despite the successes achieved by developers in court, many of the concepts of the 2004 rules survived the re-write and have reappeared in the new Rules. COAH is still utilizing a Growth Share formula. Indeed, it was a surprise (and a disappointment) to discover that the re-written and re-proposed Rules: (1) continue to allow municipalities to pass along their obligation to build affordable housing to developers while offering limited benefits to developers; and (2) significantly increase the burdens associated with the same.

For example, the 2004 rules required one affordable housing unit for every eight market-rate residential units developed. The re-proposed Rules now require one affordable housing unit for every five market-rate units, increasing the developer’s obligation to create affordable units from approximately 11 to 20 percent. On the non-residential side, the 2004 rules linked the obligation to create affordable housing to job growth – requiring one affordable housing unit for every 25 jobs generated by new development. Under the re-proposed Rules, non-residential developers are required to build one affordable housing unit for every 16 jobs. This calculation is linked to the square footage associated with the building’s use. Upon review, the statistical basis for the recalculation of jobs per square foot is questionable, and this could be the source of a future legal challenge.

The re-proposed Rules also continue to allow municipalities to require “inclusionary” zoning in every zone within a municipality, thus tagging non-residential developers with an obligation to create housing units based on the jobs per square foot calculation and conceivably requiring such units to be built on the non-residential site. The highly criticized “payment in lieu” concept survived the re-write as well, permitting developers to build affordable housing off-site or make a “payment in lieu” of building affordable housing, although the “payments in lieu” are now subject to a cap. Under the new Rules, however, if either a residential or non-residential developer elects to either build off-site or make a “payment in lieu,” that developer will be penalized, reducing the market rate units pursuant to a formula governing the treatment of units built off-site or for which a “payment in lieu” is made.

Finally, and in particular, the re-proposed Rules continue to allow municipalities to impose development fees, but have increased the fees charged to non-residential developers from 2% to 3% of the equalized assessed value of the project. Development fees had been static for years, holding at 1% from 1990 until December 2004. While an increase of 1% to 2% after 14 years was arguably defensible, an increase from 2% to 3% after only three years is not. The Rules punish non-residential developers that elect to pay fees in lieu of building units: the fee assessed against them can float upwards to 6% of the equalized assessed value of the project.

The delays associated with meeting the Court’s order to deliver a rewritten version were significant and numerous extensions were sought and obtained from the Court. Even with the May 6 adoption of the Rules, COAH hardly evinced pride in its work product. Indeed, as if to admit the new Rules were “broken,” COAH took the unprecedented step of releasing numerous amendments to the new Rules on the very same day it officially adopted them. Until the amendments become official, likely in September or October 2008, developers will not have a clear sense of where they stand in all of this.

As if to offer an additional “olive branch,” COAH has encouraged the development community to look to proposed legislative solutions to fix its newly re-written Rules. Relief may come from a highly negotiated joint bill, A500/S1783, which has been passed by both Houses of the NJ Legislature and is expected to be signed by the Governor shortly.

Among other things, A500/S1783 allows COAH, upon application of a municipality and a developer, to approve reduced affordable housing set-asides or increased densities to ensure the economic feasibility of an inclusionary development. A500/S1783 removes the deposit of development fees from the municipal level to a newly created NJ Affordable Housing Trust Fund, which will be administered by the State, and caps fees related to non-residential development at 2.5%. The “payment in lieu” provision will no longer apply to non-residential development.

Of note, A500/S1783 puts an end to the 20+ year old practice of using regional contribution agreements, which permit municipalities to transfer a certain portion of their fair share housing obligation outside the municipal borders.

Unquestionably, there is a lot to sort out and developers must find a way to do business while the statutory and regulatory dust settles. All of this requires careful attention. If you are a developer and have questions about the Rules or how they pertain to your situation, please call us for guidance.


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