AB 1505 Revives Power of Cities and Counties to Impose Inclusionary Requirements on Rental Housing Developments

Cities and counties are once again authorized to adopt inclusionary housing ordinances requiring residential rental housing developments to include a specified percentage of affordable units as a condition of development, under Assembly Bill 1505 which was signed into law on September 29.  AB 1505 is part of the Legislature’s 15-bill housing package approved this fall.

Inclusionary rental housing programs came to an abrupt halt in 2009 when the California Court of Appeals in Palmer/Sixth Street Properties, L.P. v. City of Los Angeles held that inclusionary housing requirements for residential rental units are pre-empted by the Costa-Hawkins Rental Housing Act.  Costa-Hawkins is the state’s primary rent control law, which generally gives residential landlords the right to establish the initial rents payable by new tenants.  Since Palmer, many cities and counties have either repealed their inclusionary rental housing requirements or declined to enforce them.  AB 1505 supersedes the Court’s ruling in Palmer.

The new law does not limit the percentage of units that a jurisdiction may require to be affordable.  However, if an inclusionary rental ordinance that is adopted or amended after September 15, 2017 requires that more than 15% of the total number of units in the development be affordable to low-income households, the Department of Housing and Community Development has the authority to review the ordinance if the jurisdiction has either: (1) failed to meet at least 75% of its share of its regional housing need allocation for the above-moderate income category over a five-year period, or (2) failed to submit its annual housing element report for two consecutive years or more.  An economic feasibility study will be needed to determine whether the ordinance unduly constrains the production of housing.  Based on the study, HCD can require that the ordinance require no more than 15% low income units.

Cities and counties that elect to adopt inclusionary rental ordinances pursuant to AB 1505 must provide developers with an alternative means of compliance, such as the payment of in-lieu fees, dedication of land, the construction of affordable units off-site, or the acquisition and rehabilitation of existing units.

AB 1505 comes on the heels of a 2015 ruling of the California Supreme Court in Building Industry Association v. City of San Jose, 61 Cal. 4th 435 (2015), which strongly upheld the ability of local governments to adopt inclusionary housing ordinances.  Under that ruling, courts will review and uphold inclusionary housing requirements under the most deferential standard, whether the regulation is reasonably related to the public welfare, and will not require the demonstration of a nexus between the development of new market-rate housing and the need for the affordable housing.

Practical Tips

• Cities and counties with existing inclusionary housing ordinances should determine whether or not their ordinances cover rental housing, or whether rental housing would need to be added to their ordinance.  Those ordinances should also be examined to ensure that they contain alternatives to providing onsite affordable housing, as required by AB 1505.
• If more than 15% low income units are to be required in a newly adopted or amended ordinance, the local agency will need to conduct an economic feasibility study for HCD review.
• When adopting a new ordinance or tuning up an existing one, local agencies should look closely at the ordinance upheld in the San Jose case and pay careful attention to the factors the California Supreme Court focused on in its approval of the ordinance.  Those factors include the ordinance’s basis in the city’s Housing Element and General Plan, the structure of the required affordability covenants, the incentives provided to offset the ordinance’s financial burdens, and the inclusion of a “safety valve” process for waiving or reducing inclusionary requirements.