June 1, 2001 - From the June, 2001 issue

Affordability May Kill Downtown Housing Market: Is 15-Percent Requirement For Thirty Years A 'Taking'?

Our urban core is finally on the verge of regaining a steady residential population, yet private-sector developers still shy away from Dowtown because they see it as too risky. What are the underlying causes of this trepidation? TPR caught up with Peter Novak, Executive Vice President of G.H. Palmer Associates-someone quite familiar with the ups and downs of the Downtown market-who shared with us his perspective on developing housing downtown through the lens of his current project the Visconti. TPR is pleased to present this candid picture of the private-sector pitfalls to developing Downtown.

In the January 1999 issue of The Planning Report, we interviewed G.H. Palmer re: your second project in Downtown, the Medici. You're now attempting to build two more Downtown developments, the Visconti and the Orsini. Could you give our readers an idea of the scope and design of these projects?

Our new Downtown projects are designed as a continuation of our Medici program and will each encompass approximately 300 units. Thus far, the unit mix is similar to that of the Medici, but we've planned these projects in such a way that we can reconfigure the mix based on the most current market data available. As with their sister project, these new developments will have extensive recreational and business amenities and will be very well appointed, to cater to the Downtown clientele.

You're one of a select group of developers actually developing in Downtown L.A. What have you seen in the core that other developers have opted to pass on? It seems as though you've found a niche, what's your secret? What has kept other developers out of downtown yet made you so successful in this process?

That is a difficult question to answer because it's so multifaceted.

In the 70s and 80s no one outside of the CRA was able to build housing in Downtown because we were competing with the commercial developments. The high-rises that now create the Downtown skyline increased the value of land so dramatically that housing simply wasn't an option. The subsequent depression of the 90s brought land values down to where housing developers could again afford to enter the market. When we could justify our projects mathematically, it became a no-brainer to enter the Downtown market.

Another attraction to Downtown is the enormous jobs-housing imbalance. Currently we estimate that Downtown has the capacity for 380,000 white-collar workstations, though only about 300,000 of those offices are occupied. How many of those 300,000 workers would consider living in Downtown is anybody's guess. But the future attraction of the area for permanent residents greatly depends upon the direction of growth of Downtown and its environs.

While we found the market ripe for market rate apartments in Downtown, I believe many other developers were scared off by the negative perceptions of Downtown and regulatory controls like that of the Center City West Specific Plan. That Specific Plan is extremely punishing-replete with draconian restrictions, requirements and exactions, the likes of which exist nowhere in the city. Every development that has materialized in the area of the plan had to be granted a host of exceptions, otherwise there would have been no development at all.

You're dealing with those stipulations in your Visconti development. Describe for our readers what they are, and tell us to what extent they are hampering your ability to provide housing in L.A.

Low-income set asides are the single most onerous issue.

In a nutshell, the Center City West Specific Plan states that if the city makes certain findings required by State law, then a housing development has to either set aside, pay a fee, or otherwise provide for 15-percent of the project units to be rented (or sold) to families having incomes between 50- and 80-percent of median income. In our view, these stipulations must first prove that a proposed development will create a negative impact on housing stock in general, and then must establish a nexus between the purported impact and mitigation thereof.

Unfortunately, the way the Specific Plan is currently being interpreted causes every project within the Center City West Plan Area to require the set asides, regardless of impact or nexus.

The message we're receiving in the development community is, "So you want to increase the housing stock? Good. But you must subsidize 15-percent of your units for the next 30-years." Is that a taking? Of course it is. In the case of our project it would be a $4.5 million exaction. Is it fair for a resident in Unit A to pay $1,500 per month and a resident in Unit B to pay $700 per month for the same type of unit? On what basis can you ask one resident to subsidize his neighbor? This has nothing to do with land use or zoning. It's a simple attempt at wealth redistribution, with the City acting as Robin Hood.

The requirements as you've described them seem to have an immensely adverse effect on your project. If you are required to follow them, what's at stake for the development? Will the project be scrapped? Or do you believe this case will be the 21st Century version of Nollan or Dolan?

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We maintain that the imposition of the exaction is blatantly illegal. It is unconstitutional on several levels, not the least of which is based upon the opinions you mentioned-relating to the 5th Amendment-and several 14th Amendment issues as well. Not to mention that the "inclusionary zoning" provisions of the CCWSP are also in violation of several State and local laws, like the City's own Rent Control Ordinance.

More importantly however, a recent Court of Appeal opinion-Associated Homebuilders of Northern California v. City of Napa-has implicitly validated our legal analysis.

What about your pending appeal?

If the full City Council-acting on our appeal-upholds this exaction, the project won't happen. We're not going to pay an additional $4.5 million to earn the right to put another $50 million of private capital at risk. We will challenge this in court. And if and when that happens, I hope the development community will join us in that legal battle.

These "inclusionary zoning" laws are extremely punitive. And in spite of the stated objectives, they don't produce additional housing units. If-as the City Council has been considering-these draconian exactions are imposed on a citywide basis, it would be disastrous for the city's production of apartments.

It's possible that the matter of affordable housing has become so emotionally charged and politicized, that the courts may be the only hope to keep things rational.

In the end however, developers are not without rights. The one prerogative that many of our colleagues have been exercising with aplomb is to simply not develop apartments in this city, indeed in much of the Los Angeles County.

Let's try to draw this to a close. You've stated that the current development laws are not only hurting development, but have essentially driven homebuilders out of the State. Being that we will have a new Council in less than a month, what would you suggest to them that will give you and other housing developers the consistency and predictability you need to continue developing housing in Los Angeles, Downtown and perhaps elsewhere in the state.

Blaming developers for the lack of housing-both, affordable and market rate-is tantamount to putting one's head in the sand. Politicians need to recognize that the sole controllable reason for the housing shortage is the lack of housing production.

Over the last several decades the restrictions imposed on residential developments in general have expanded to where they are the most difficult projects to entitle. They are perhaps as difficult to get approved as nuclear power plants-although in today's environment I suppose a nuclear power plant would be easier. What does this mean? We need to face up to the problem rather than enact a bunch of "feel good" laws. These laws simply allow politicians to proclaim that they have done something about the housing problem, when in reality those laws accomplish exactly the opposite.

If L.A. wants to create an environment that is more friendly to developing multifamily units-the "traditional" affordable housing-we need to get serious about controlling the development and re-development restrictions. And the first thing to do is to go through the Planning and Zoning codes, on the local and State levels and weed out the punitive regulations. To be fair, the L.A. Planning Commission is about to act on a series of amendments to the CCWSP and has already approved a limited cleanup of the Zoning Code-now trickling through the political maze of the City Hall. I will lay odds however, that far from limiting regulation, by the time these actions become ordinance, they will have picked up more, not less, regulation. But I hope that I'm wrong.

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