City tip-toeing around mandatory inclusionary housing charges

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By David Karnovsky, partner,
Fried, Frank, Harris, Shriver & Jacobson LLP

Last month, quietly and without much fanfare, the DiBlasio Administration announced the outlines of its proposed mandatory inclusionary housing program (MIH) under which developers of market rate housing will be required to set aside a fixed percentage of building floor area for affordable housing units.

The low-key rollout of the proposal was surprising given that MIH was central to the Administration’s 2014 housing plan, Housing New York, and has been a key part of the Mayor’s agenda since the 2013 election campaign.

However, a closer look shows that the announcement was only of the most basic features of the plan. Many details remain to be unveiled, and the process of public comment and scrutiny of the program is only beginning to unfold.

Despite this, one cornerstone of the program is clear — the Administration is advocating a standardized approach under which, rather than customizing MIH for each neighborhood or group of sites subject to a rezoning, the City Planning Commission and ultimately the City Council would select one of among two, and possibly three templates to apply to each rezoning area.

Under the first, 25 percent of total floor area must be for affordable housing units for residents with incomes averaging 60 percent of Area Median Income.

Under the second, 30 percent of total floor area must be for affordable housing units for residents with incomes averaging 80 percent of Area Median Income.

Under a possible third option, yet to be described in any detail, the Area Median Income would be higher but the possibility of City subsidy support reduced or eliminated.

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With this ‘off the shelf’ approach towards MIH, there would be relatively little flexibility for owners, developers and communities to negotiate over what amount of floor area and income ranges are most appropriate for a given rezoning, taking into account factors such as the particular strengths or weaknesses of the neighborhood housing market, special site conditions or infrastructure costs.

For those accustomed to the intensive negotiations and public debates which accompany re-zonings in New York City, whether sponsored by the City or private parties, this may seem like a baffling approach, particularly given the City’s interest in maximizing the amount of affordable housing at every opportunity.

Why this approach? After all, the earlier Housing Plan stressed the need for the program to remain flexible to adjust to different and changing market conditions.

Part of the answer is that a standardized approach is transparent and predictable in a way that alleviates concern about the hazards of the land use review process; in that sense it is simply ‘good government’.

But a significant part of the answer lies in a series of United States Supreme Court decisions relating to so-called ‘exactions’, generally defined as requirements imposed on developers by government to provide, or pay for, a public facility or other amenity as a condition of land use approval.

In a nutshell, the Supreme Court has said that in order for an ‘exaction’ to pass legal muster, it must have an ‘essential nexus’ to the purpose served by the regulation and be ‘roughly proportional’ to the land use concerns it is trying to address — stated differently, the Court has applied a fairly strict ‘means-end’ test to these kinds of government-imposed requirements.

If, then, MIH is classified as an ‘exaction’, the City would need to demonstrate that the development of market rate housing in New York City contributes to a need for affordable housing or exacerbates the affordable housing crunch, and that the amounts and types of affordable housing required by MIH on a site are proportional to the ‘problem’ that market rate development creates.

Reasonable people can differ on the causal relationship between the construction of market rate housing and the City’s severe shortage of affordable housing.

Most would agree, however, that in a city with housing dynamics as complex as those in New York City, it would be difficult to document and convincingly demonstrate one side of the argument or another.

Avoiding the ‘exaction’ label is therefore critical to the success of the City’s MIH program.

When is an affordable housing mandate an ‘exaction’ subject to this kind of strict means-end test? A number of courts have said that the ‘essential nexus/rough proportionality’ test applies when land use agencies engage in individualized, case by case determinations of what to require from the land use applicant.

Why? Because it is in this context that the danger of undue pressure by government to ‘extract’ maximum benefit is greatest.

By contrast, when a mandate is imposed by rule or legislation that prescribes generally applicable and uniform standards to similarly situated properties, that risk is reduced.

While other courts have cast doubt on whether the distinction between individualized determinations and general legislation is all that meaningful, the distinction appears to continue to be viable.

The standardized, rather than customized, approach proposed by the Di Blasio Administration therefore squarely seeks to classify MIH as a form of general legislation of the type that courts routinely uphold if it advances a legitimate government interest, such as promoting diverse neighborhoods and a wide range of housing opportunities.

A property owner who feels that the standard MIH requirements applicable to his or her site will have to seek variance relief from the Board of Standards and Appeals, rather than negotiate an individualized solution with the City.

Will a standardized approach to MIH work, given the enormous complexity of New York City’s zoning and land use system?

Apart from large neighborhood re zonings sponsored by the City itself, there are many instances when owners and developers apply on their own for small-scale re zonings of their own and adjacent properties.

Will a standard-form MIH program work for these privately-sponsored zoning applications or will it have to be adjusted, i.e., negotiated, to address site specific conditions?

For City-sponsored neighborhood rezonings, push come to shove, will the outcomes of the land use review process adhere to standardized formulas, or will the City insist on ‘more’?

Looking beyond rezonings, there are many other kinds of land use actions that can result in an increase in the number of housing units that may be built on a given site — special permits for transfers of floor area, floor area bonuses, or height and setback waivers, to name just a few.

In many cases, these other actions are designed to advance policies other than affordable housing, such as landmark preservation.

If the Administration foregoes applying MIH in these situations, it would lose opportunities to create new affordable housing.

However, devising a system for applying MIH to these actions in a way that balances competing policy goals and accounts for the unique features of each site without leading to the kind of case by case determinations captured by the ‘exaction’ label will be a significant challenge.

During the upcoming public review of the City’s MIH proposal, various parties can be expected to argue for more flexibility than a standardized model provides — for example, developers may argue for an approach that takes closer account of local market conditions and site constraints, while community groups and housing advocates may argue for more flexibility to account for the income characteristics of local residents.

However, as the DiBlasio Administration has recognized, the prevailing legal standards discourage ad hoc approaches and push in the direction of a uniform ‘one (or two or three) size fits all’ approach.

The many demands that will be made upon the City by developers, housing advocates, community groups and others during the upcoming public review process may create significant pressure to dilute the standardized approach in favor of allowing for more case by case determinations concerning MIH.

The question will be whether, at the end of the day, the final, adopted version of MIH successfully avoids the ‘exaction’ label.

Source: http://rew-online.com/2015/09/09/city-tip-toeing-around-mandatory-inclusionary-housing-charges/

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