NJ Supreme Court Focuses on ‘Gap Period’ in Affordable Housing Case

December 7, 2016Alerts Real Estate Alert

On November 30, the New Jersey Supreme Court heard arguments regarding the affordable housing need that arose between 1999 and 2015 (the so-called “Gap Period”) in reviewing the Appellate Division’s opinion in In re Barnegat, County of Ocean, Regarding Fair Share Obligations during the period of 1999-2015, 446 N.J. Super. 259 (App. Div. Jul. 11, 2016). In sum, the news is positive. Based on the Justices’ comments and questions, the decision may significantly increase municipal fair-share obligations throughout the state, leading to a spur of development. 

Genesis of the Gap Period Dispute

Historically, a township’s affordable housing obligation encompassed: (1) Prior Round obligation (1987-1999); (2) Present Need obligation (which is undefined by the Fair Housing Act (FHA), but historically refers to substandard housing); and (3) the Third Round Prospective obligation (1999-2025). 

A sharp dispute has arisen over calculation of the Third Round.

Municipal advocates posit that municipalities do not have a Third Round affordable housing obligation for the period of 1999 through 2015. Rather, their position is that the Third Round obligation should be calculated only for the period of 2015 through 2025. Housing advocates, including Fair Share Housing Center (FSHC) and private land owners/developers, take the position that the Third Round obligation must encompass the Gap Period as part of a town’s Prospective Need obligation.

The importance of this dispute is best demonstrated by the discrepancy in the fair share calculations proposed by Dr. David Kinsey (FSHC’s expert) and Dr. Peter Angelides of Econsult (the Municipal Consortium’s expert). In some instances, this disparity reduces the fair share obligation by 60 percent.

The underlying Appellate Division decision held that the FHA defines Prospective Need as a “projection of growth” in the future so that a retroactive look back was not authorized by the FHA. The Appellate Division stated: “In sum, to impose a gap-period requirement would inevitably add a new requirement not previously recognized under the FHA.” The court reasoned that a retroactive calculation of the Gap Period did not accurately reflect the changes that occurred to low- and moderate-income households formed during the 15-year period. 

The Appellate Division, however, left all parties to ponder the meaning of the following closing comments: “our holding today does not ignore housing needs that arose in the Gap Period” and “identified low and moderate income households formed during the Gap Period in need of affordable housing can be captured in a municipality’s calculation of present need.” Therefore, while rejecting the notion of a retrospective calculation, the Appellate Division alluded to the potential that the housing need during the Gap Period should be calculated as a subset of Present Need. 

Statewide, the only trial regarding the fair share calculation was tried in two parts before Judge Wolfson in South Brunswick. Fox took one of the leading roles at the trial together with FSHC. The trial was conducted in two parts due to the intervening Appellate Division decision and a subsequent stay of that decision by the Supreme Court and the grant of FSHC’s Petition for Certification of In re Barnegat.

The first trial in May 2016 concerned the Third Round obligation, which included a calculation of the Gap Period as Prospective Need. Judge Wolfson heard expert testimony from Dr. Kinsey, Dr. Angelides and Fox’s expert, Art Bernard, who is the former executive director for the Council on Affordable Housing (COAH), regarding the 23-step process involved to calculate the Third Round. 

The Appellate Division’s decision in In re Barnegat was released before Judge Wolfson issued his decision in connection with the first trial. Following the Appellate Division decision, the parties proceeded to retry the Gap Period calculation by presenting expert testimony to recalculate the need as a subset of Present Need. Ultimately, because the Supreme Court stayed the Appellate Division decision and granted FSHC’s petition, Judge Wolfson issued a decision calculating the Gap Period obligation for South Brunswick as Prospective Need. 

The same 23 steps are involved to calculate both the Present Need and the Prospective Need. The difference is in the timing of the data source; hence, when calculating Present Need, experts use 2015 data for the 23 steps. The data used in calculating Prospective Need relates back to 1999 to serve as a projection of housing need through 2025. Technically, the latter is the method COAH would have utilized had compliant regulations been adopted by 1999 for the Third Round. 

The difference in the amount of units to be developed? The projected need was greater than actual growth, as some would say, due to the stagnation in the economy. Hence, it is not surprising that the Present Need calculation results in a 25 to 50 percent reduction in units when compared with Prospective Need.

Supreme Court Signals That Gap Period Need Exists

FSHC appealed the Appellate Division’s decision regarding the Gap Period. Oral arguments lasted more than two hours. Questions and comments by Justices LaVecchia, Albin and Patterson, the most active during the argument, telegraphed that common sense would prevail and that municipalities do indeed have an affordable housing obligation during the Gap Period. 

Municipal counsel argued that the plain language of the FHA undercut housing advocates’ argument that the definition of Prospective Need in the FHA cannot be calculated retrospectively. The Justices seemed to categorically reject municipal counsel’s argument that the legislative intent of the FHA allowed the elimination of the Gap Period need altogether. The Justices’ comments suggested that the Legislature would never envision that an agency it created would abdicate its duties for 16 years.

The Justices intimated that because the FHA is the statutory manifestation of the Mount Laurel Doctrine, a constitutional obligation, the lack of a fair share obligation during the Gap Period may not pass constitutional muster. Consequently, the Justices mused over whether the court could broaden the FHA’s definitions of Prospective or Present Need if the court determines that a Gap Period is constitutionally mandated by the Mount Laurel Doctrine.

The focus of the questions instead shifted to how to account for the need within the statutory confines of the FHA. FSHC articulated that the court and COAH have consistently considered the housing obligation to be cumulative since the time the FHA was adopted. The Justices receptively inquired about the impact to municipalities that either did or did not produce affordable housing during the Gap Period and whether towns would lose credits for housing built during that period. FSHC further urged the court to interpret Prospective Need to mean that the Legislature intended it to be calculated from the beginning of each period, even if the calculation resulted in a retroactive look back.   

Regardless of whether the court calculates the need as Prospective or Present Need, it will have to determine whether cost-burdened low- and moderate-income households should be part of the calculation. Despite the municipal counsel’s argument that cost-burdened households were rejected once before as a subset of need, the court acknowledged that under the circumstances here, the reason that low- and moderate-income households may be cost-burdened is that the production of affordable housing stalled during the Gap Period because COAH failed to adopt valid regulations.

Notably, Justice LaVecchia – the author of Mount Laurel IV in March 2015 – pointed out several times that the Supreme Court in Mount Laurel IV had extended immunity to all municipalities retroactively to the beginning of the Third Round, i.e., 1999, regardless of whether substantive certification was granted. Justice LaVecchia stated that this was intended to signal to the parties that the housing obligation is continuous and intended to include the Gap Period in municipal fair share obligations. 

This time period provides a unique opportunity to engage land owners and developers to construct housing at increased densities. Based on the Justices’ reactions, comments and questions, the decision is expected to enhance the municipal fair share obligations regardless of whether the Supreme Court concludes that the Gap Period is part of Present or Prospective Need.

Should this methodology be accepted, most municipalities will have higher fair-share obligations than the amount of affordable housing proposed thus far by intervening developers. Therefore, many municipalities will have unmet housing needs, which could open the door to even more development opportunities.  

For questions or more information, please contact Irina B. Elgart at 609.895.6632 or [email protected] or any member of the firm’s Real Estate Department