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Litigation On The Horizon: New COAH Rules Dramatically Increase Developers' Obligations

May 2008

Real Estate New Jersey

Nearly four years ago, residential and non-residential developers formed an unlikely coalition with traditional affordable housing advocates to challenge the NJ Council On
Affordable Housing's ("COAH") Third Round Rules adopted in December 2004 (the "2004 Rules"). The basis for this unusual partnership was driven, in part, by the development community's concern over certain provisions in the 2004 Rules that allowed municipalities to pass along their obligation to build affordable housing to both residential and non-residential developers. The coalition was successful in that the NJ Appellate Division struck down significant portions of the 2004 Rules and sent COAH back to the drawing board for a re-write. After significant delays, the re-proposed rules were published for public comment on January 22,2008. Despite earlier success in challenging the 2004 Rules, the development community was surprised to discover that the re-proposed rules: (1) continue to allow municipalities to pass along their obligation to build affordable housing to developers; and (2) significantly increase the burden.

In challenging the 2004 Rules, the development community advanced a number of arguments before the Appellate Division. One argument challenged whether there was a
sufficient statistical link between COAH's "Growth Share formula" (which calculates a municipality's obligation to build affordable housing based upon new development), and the actual need for affordable housing generated by new development. Another argument challenged the ability of municipalities to require developers to build affordable housing absent sufficient "compensatory benefits" to ensure developers an adequate return on their investments. Finally, there was a challenge to the implementation of a "payment in lieu" scheme whereby developers could be required to pay exorbitant sums to municipalities in lieu of building affordable housing. In striking down the 2004 Rules, the Appellate Division essentially adopted these arguments wholesale and ordered a re-write.

One might have assumed that the result of COAH's re-write would be an end-product that would satisfy at least some of the aforementioned concerns raised by the development community. This appears to have been wishful thinking.

Many of the concepts of the 2004 Rules survived and have reappeared in the re-proposed rules (i.e. COAH is still utilizing a Growth Share formula). Unfortunately, the re-appearance of these concepts is generally bad news as the re-proposed rules actually increase the burden on developers. For example, the 2004 Rules required one affordable housing unit for every eight market-rate residential units developed. The re-proposed rules now require one affordable housing unit for every five market-rate units. On the non-residential side, the 2004 Rules linked the obligation to create affordable housing to job growth -- requiring one affordable housing unit for every 25 jobs generated by new development. Under the re-proposed rules, non-residential developers may be required to build one affordable housing unit for every 16 jobs.

The re-proposed rules also continue to allow municipalities to require developers to build affordable housing on-site in every zone within a municipality - which is ludicrous in the case of non-residential developers. Alternatively, the rules permit municipalities to allow developers to build affordable housing off-site or make a "payment in lieu" of building affordable housing. Under the new rules, however, if a developer elects to either to build off-site or make a payment in lieu, the developer will be penalized by a reduction in financial incentives that are supposed to ensure an adequate return on the developer's investment. For residential developers, this will equate to the loss of one market rate unit for every two affordable housing units built off-site or for which a payment in lieu is made.

Finally, the re-proposed rules continue to allow municipalities to impose development fees, but have increased the fees for non-residential developers from 2% to 3% of the equalized assessed value of the project. Development fees had previously remained at 1% from 1990 until December 2004. While an increase of 1% to 2% after 14 years is defensible, an increase from2% to 3% after only three years is not.

Pursuant to the Administrative Procedure Act, the re-proposed rules were the subject of several hearings as well as the 60 day period for public comment. COAH reportedly received an extraordinary 4,000 submissions during the period for public comment, which closed on March 22, 2008. Written responses to some of these submissions will be forthcoming, but it is unlikely that this commentary will result in meaningful changes as the re-proposed rules are scheduled to be adopted on May 6, 2008.

The 2004 Rules were challenged in a lawsuit filed on the very day they were adopted. Given the fact that the re-proposed rules significantly increase the obligations imposed on developers, it is not a question of whether there will be a new legal challenge, it is merely a question of when the lawsuit will be filed.



Thomas J. Trautner, Jr., Esq. is a member at the firm and co-authored the NJ-NAIOP appellate brief. He can be reached at (973) 530-2079 or by email at ttrautner@wolffsamson.com.

This article is reprinted with permission from Real Estate New Jersey, May, 2008. The views expressed here are those of the author and not of Real Estate Media or its publications. Copyright © 2008 ALM Properties, Inc. All rights reserved.