Affordable Housing: No Quick Fixes, Please

October 16, 2019Articles New Jersey Law Journal

Developers have not had it easy in the four years since the Supreme Court’s 2015 Mount Laurel IV decision. When the Supreme Court transferred jurisdiction of municipal affordable housing obligations for the Third Round (1999–2015 and 2015–2025) to the trial courts, the controversy continued while novel issues arose immediately. Two were the subject of trials, conducted in Middlesex and Mercer Counties, to determine the appropriate methodology for calculating a municipality’s obligation. In addition, a Morris County judge ruled that the Fair Housing Act would supersede the Highlands Act in the event of a conflict between the two statutes. Across the state, judges also considered the effect a shortage of sewer, water or land would have on a town’s obligation. Several courts grappled with and issued decisions on how the Fair Housing Act’s and COAH’s 20% cap and the 1,000-unit cap, both meant to apply to a 10-year period, would operate during the Third Round, which encompassed more than 25 years due to COAH’s extensive delay in adopting valid rules.

Despite the road bumps and several trips up and back down the appellate ladder, many towns finally are poised to proceed with construction of affordable housing in accordance with the nearly 300 court-approved housing plans and settlements reached to resolve the declaratory judgment compliance actions authorized by the 2015 Mount Laurel IV decision.

However, threats to the viability of these and future affordable housing projects still loom. Developers negotiated the projects predicated upon existing regulations, and now, changes to regulations may jeopardize the (relative) certainty these settlements provided. This week, the New Jersey Housing and Mortgage Finance Agency (HMFA) adopted low-income housing tax credits regulations for the 2019 cycle. The HMFA announced it will award $24 million of the competitive federal 9% LIHTC. While the new regulations attempt to “clarify” certain provisions of the Fair Housing Act that were enacted in 2008, they actually reflect a policy reversal by HMFA and a resolve to toughen tax credit application review standards for inclusionary developments.

Before the amendment, an applicant would “conclusively demonstrate” a need for tax credits by submitting documentation to the HMFA for a “feasibility analysis” report to be prepared by the HMFA’s own expert. Pursuant to the new rules, the HMFA will apply an onerous “initial presumption” that the municipally approved zoning alone sufficiently subsidizes the affordable portion of the inclusionary development. Even though zoning alone never qualified as a valid indicator of economic feasibility, to overcome the presumption, applicants must now submit more extensive information and an expert report linking its insufficiency to one of three circumscribed instances. Therefore, barring a developer seeking to build extra affordable units, a drastic change in economic conditions or a municipality’s recognition of an error, the regulations provide no route for developers to overcome the initial zoning presumption.

While the impact will be unclear until the awards are announced, the 2019 regulations may slow affordable housing development statewide by changing the award standards. Most of the 300 settlements were approved prior to the policy change by the HMFA and some projects anticipated tax credits, such as those zoned with a 25% set-aside. Hence, the new rules do not account for the Mount Laurel settlements that contain inclusionary projects that were zoned with set-asides of greater than 15% to 20%, a standard recognized by COAH regulations and the courts to ensure economic viability of a project.

In addition, the Assembly Committee Substitute for A4414 recently proposed to reform the affordable housing structure, which may be disruptive to the state’s current affordable housing situation for those towns that have not reached a settlement or have not had their fair share plans approved by the courts. A4414 would create a statewide rule that requires a 25% set-aside for affordable housing, which will be too onerous on developers and undermine the viability of inclusionary developments. Courts, including the Supreme Court in Mount Laurel IV, recognized that an inclusionary development with a 25% set-aside was not economically feasible, and proceeded to invalidate other COAH regulations that failed to provide sufficient incentives for developers to construct inclusionary developments.

Any future regulatory framework requires a more coordinated approach between the legislature and the state agencies to ensure that policies are implemented without unintended consequences. The application of the new HMFA rules together with proposed A4414, should it be passed as is, is a prime example. A4414 proposes a statewide policy mandating multifamily developments be zoned with a 25% set-aside that would potentially preclude developers from obtaining financing and/or tax credits from the NJHMFA because of the “initial presumption” that the municipally-approved zoning is sufficient to subsidize the creation of affordable housing. Together, the adopted regulations and proposed legislation will create a barrier for developers to obtain financing and/or tax credits from the NJHMFA due to the initial presumption created by the mandatory 25% set-aside zoning.

In addition, A4414 contains additional provisions that discourage the creation of affordable housing. State law clearly prohibits municipalities from demanding illegal exactions and unrelated off-tract improvements from market-rate and inclusionary housing developers. To ensure feasibility of an inclusionary development, municipalities must provide sufficient additional incentives by not only zoning for affordable housing, but also by waiving costly, unnecessary regulations that would otherwise apply to market-rate developers, as well as other techniques such as funding from a municipality’s affordable housing trust fund. A4414 would permit a municipality to deposit half of the development fees received into a municipal affordable housing trust fund and half into a community center trust fund for the development of community centers. The current statute requires all municipalities to deposit these fees into a municipal affordable housing trust fund, where they must be used for purposes enumerated by COAH regulations, including the development of affordable housing, rental and utility assistance and/or administrative expenses. The requirement to divert funds from affordable housing toward a community center in each municipality is fraught with potential mismanagement.

While the current process is less than idyllic, with many legal and procedural pitfalls, it is what remains after COAH became defunct in 2015. It would be unfortunate to disrupt this development. Affordable housing projects will continue to develop, particularly because many townships that have approved settlement agreements will have their mid-term reviews in July 2020. Towns will be required to reassess undeveloped projects to ensure that they are still realistically viable and towns that claimed a “vacant land adjustment” will have to prove that they have taken advantage of and not squandered redevelopment opportunities. For the time being, a level of predictability has ensued so that development may move forward as planned.

It is clear that the New Jersey legislature will have to revamp the state of affairs with the Fourth Round (2025–2035). To be effective, any future changes to state affordable housing policy must be accompanied by an effort to create a comprehensive regulatory scheme that includes contributions from and collaboration with the legislature and state agencies.

Reprinted with permission from the October 16, 2019 issue of the New Jersey Law Journal. (c) 2019 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.