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In early 2007 a New Jersey Superior Court appellate panel ruled that the state’s Council on Affordable Housing (COAH) used faulty methods in calculating housing needs. The decision required COAH to revise their methodology and, among other things, create incentives for private-sector developers to build affordable housing.

COAH responded to the Court’s demands with the release of proposed regulations on December 17, 2007. Once again, New Jersey’s development community will be asked to engage reluctant municipalities on the issue of affordable housing. How do the new rules help and what should you do?

New Jersey has long relied on private-sector development in suburban areas to meet the ever-growing affordable housing need. In a series of landmark decisions going back to 1971, the New Jersey Supreme Court created the Mount Laurel Doctrine that looked to dissuade municipalities from using their zoning powers to effectively prevent affordable housing. To enforce this, the Court pitted developers against municipalities by creating the “builder’s remedy” in Mount Laurel II (1983).

The builder’s remedy allowed builders to bring suit against municipalities that did not create a realistic zoning opportunity for affordable housing or, in subsequent years, have a COAH-approved housing plan in place. This mechanism compelled municipalities to provide housing by allowing developers to override local zoning laws by proceeding with development at a higher density than would otherwise be permitted.

The outcome of the 2007 litigation regarding the long-awaited “Round III” rules (COAH rules were promulgated in three rounds between 1987 and 2004), in which the court ultimately threw out the methodology for computing affordable housing allocation, reinstitutes a density bonus for market-rate housing based on percentage of affordable housing units provided on-site. This was due in part to the contention presented by the development community on behalf of the NJ Builders Association and NAIOP in their amicus briefs. The court recognized the need for economic incentives and fairness in providing developers with such a bonus.

New Jersey’s constitutional obligation commits the state to providing affordable units based on individual or household income as a percentage of county median income. The “growth share” methodology of Round III gives greater transparency to affordable housing obligation by replacing the abstruse allocation formula that calculated “indigenous need” and “prospective need” promulgated by Round II.

The essential framework of the original Round III methodology remains the same, but with increased growth share ratios and a density bonus. The revised Round III rules require growth share ratios of one affordable unit built per five market rate units and one affordable unit per 16 jobs created. This is largely due to the court’s conclusion that filtering, the movement of homes from higher to lower-income families, was not occurring in the New Jersey housing market. The court went so far as to declare it “incomprehensible” that COAH would rely on filtering.

What does this ultimately mean for the development community? There is good news and bad news. The good news is that the density bonus has been reinstated. The bad news is that the new rules are hardly a bonanza. It is worth noting that he Department of Community Affairs is anticipating 115,000 new affordable units by 2015, despite controversy over available land to accommodate this growth and New Jersey’s looming out-migration trends.

The compensating benefits are that under the first version of third-round rules, there was no benefit or incentive to developers to create affordable housing. The revised rules include a density bonus for residential and non-residential projects. While residential units will require one affordable unit per every five market-rate units, the new rules allow developers a 1-1 density bonus. For example, a property that can lawfully accommodate 10 residential units will require two affordable units. If theses units are constructed on-site, they will not count toward the density of the site, nor will the two additional market-rate units.

Non-residential developers will not be required to go into the housing business, but are expected to address their share (calculated through job creation) through a payment-in-lieu-of. The payment-in-lieu-of will include a density to allow for square footage.

Prior to the recent decision, municipalities throughout the state had free reign to calculate their own payment-in-lieu-of providing an affordable housing unit on site. These payments sometimes resulted in hundreds of thousands of dollars per unit. The new regulations standardize these payments by region at an average of $161,000 per unit.Also, if a municipality zones a tract of land for affordable housing, it must accommodate the claimed density.

Prior to the new regulations, municipalities would specify a certain zoning density, but would simultaneously impose certain restrictions, such as setbacks, that would make the density impossible to build. The new rules require densities to materialize if the municipality wants to impose the 1-5 requirements and retain certification of their COAH-approved housing plan.

Also, municipalities must work with developers to create affordable housing in order to receive their protection from builders’ remedy suits. In accordance with new the proposed legislation, municipal officials and land use boards are expected to cooperate with developers in granting reasonable variances necessary to construct inclusionary development.

Municipalities must also eliminate development standards not essential to protect public welfare and essentially “fast-track” approvals and denials on inclusionary applications. To accomplish this, the statute requires municipalities to cooperate in scheduling pre-application conferences and hold regular meetings with developers with the goal of limiting time required for land use board action. Municipalities that fail to work with developers in this manner could have their COAH certification revoked.

And if a municipality continues to have an unmet need for affordable housing (which most do) or their affordable housing zoning is not realistic (few are) they are in a very good position to enter into negotiations with a developer. If there are vacant land or redevelopment opportunities, the municipality is legally in a position requiring cooperation with a developer of a development that includes affordable units. This is especially true of municipalities that have claimed the “vacant land defense” or that there is no vacant land available to accommodate new affordable housing construction.

COAH—your new ally? COAH has announced it will work with developers in negotiating with other state agencies and regional planning commissions. COAH representatives will be holding regular meetings with the NJ DEP, Office of Smart Growth, DOT and other regulatory agencies to advocate for projects that include affordable housing units. They may turn out to be your new best friend in Trenton.

What to do? Approach municipalities. If you own a residential property or a property that can accommodate residential development, your municipality will soon be interested in hearing inclusionary development proposals. Negotiate with the towns and come up with something that makes sense for both sides.

Stick to the Fundamentals. As with any land use application, it is crucial that your inclusionary project receive legally appropriate approvals. This means following the substantive and procedural rules outlined in the Municipal Land Use Law and the design guidelines in the Residential Site Improvement Standards. Remember, affordable housing development typically attracts objectors and as such receive more legal scrutiny. Talk to your land use professionals or trade groups. The time is now to evaluate how these new rules, which were recently in a period of public comment, will impact your current projects or your properties.

The views expressed here are those of the authors and not of Real Estate Media or its publications.

Philip A. Abramson and Meghan Hunscher are with the consulting engineering firm Pennoni Associates Inc. in Cedar Knolls, NJ. They can be reached at [email protected] and [email protected].

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