Appellate Court Holds Redevelopment Agencies May Use Low/Mod Funds for any Authorized Purpose Provided there is a Nexus with Affordable Housing; Affirms Article 34 Exemption

A California Court of Appeal recently held that redevelopment agencies may use Low and Moderate Income Housing Fund (“LMIHF”) monies to purchase and renovate buildings that will not themselves be used for affordable housing so long as there is a nexus between the expenditures and the goal of improving and increasing affordable housing. In the same case, the Court affirmed the applicability of an exemption from Article 34 voter approval requirements for privately-owned housing developments in which less than one-half of the units are restricted for occupancy by low-income households.

In City of Cerritos v. Cerritos Taxpayers Association, a city, redevelopment agency, school district and nonprofit housing corporation entered into a financing agreement for a 247-unit affordable senior housing project. Under the agreement, the district would ground lease property used for the district’s offices to the agency and the nonprofit housing corporation for the construction of the affordable senior project. In exchange, the agency would purchase and renovate adjacent properties using LMIHF monies to which the district would relocate its offices. The district’s lease payments to the agency for the adjacent properties would be deposited into a trust fund for the operation of the affordable senior housing project.

Upon approval of the financing agreement, the parties filed a validation action seeking a determination that the agency’s proposed use of LMIHF funds was valid. The trial court validated the financing agreement, and a taxpayer association appealed, arguing, among other things, that the agency’s use of LMIHF monies to purchase and renovate the adjacent properties was unlawful because the adjacent properties were not being used for affordable housing.

The Court of Appeal rejected the association’s argument, pointing to language in Health and Safety Code section 33334.2(e) authorizing an agency to exercise “any or all of its powers for the construction, rehabilitation, or preservation of affordable housing.” The Court reasoned that because an agency is explicitly authorized under Health and Safety Code section 33445 to pay for the purchase and construction of publicly owned buildings, the agency could use LMIHF funds to do so as long as there is a nexus between the expenditures and the goal of improving and increasing affordable housing. According to the Court, a clear nexus exists between the expenditures for the adjacent properties and an increase in the supply of affordable housing because the purchase of the properties opens up the district’s property for an affordable senior housing project. Also, the district’s lease payments to the agency for the adjacent properties will be used for operating the affordable housing project.

Although the City Council formed the nonprofit ownership entity for the project and retained the power to appoint the organization’s board of directors, the Court held that the project qualifies as a privately-owned housing development and is exempt from Article 34 voter approval requirements pursuant to Health and Safety Code Section 37001 (a) which provides an exemption for privately-owned housing developments in which not more than 49% of the residential units are restricted for occupancy by low-income households and which are not exempt from property tax except pursuant to specified Revenue and Taxation Code exemptions. In addition, the Court noted that the district’s retention of the fee simple interest in the land did not cause the project to lose characterization as a privately-owned project, reasoning that the long-term lease constituted an ownership interest in the property.

This case clarifies that an agency may use LMIHF funds for any authorized purpose provided that the expenditure of LMIHF funds is clearly tied to increasing or improving the supply of affordable housing. To demonstrate that the required nexus exists, agencies seeking to use LMIHF funds for property or buildings that will not themselves be used for affordable housing should include explicit findings in agreements and resolutions linking such expenditures to the goal of increasing and improving affordable housing.

For more information about the City of Cerritos v. Cerritos Taxpayers Association case or for assistance with redevelopment and affordable housing matters, contact Sue Bloch or Sabrina Wolfson at 800.464.3559.