may 2007

Developers Should Anticipate Impact of Third Round COAH Regulations on Development Fees and Existing Payment in Lieu of Construction Agreements

BACKGROUND

The Council on Affordable Housing (COAH) is charged with helping municipalities honor their constitutional obligation to provide low and moderate income housing by establishing regulations to govern identification and allocation of housing needs, and by developing compliance criteria. Periodically, COAH reviews and allocates municipal housing obligations statewide and issues a new round of regulations. In December of 2004, COAH adopted controversial third round affordable housing regulations, which were quickly challenged by a number of organizations.

On January 25, 2007, the New Jersey Appeals Court invalidated COAH’s growth share methodology, which calculates affordable housing obligations based on the number of units to be sold at market value and jobs to be created by non-residential construction, as opposed to a demographic evaluation of regional need. The Court found this methodology unconstitutional and in violation of the State’s Mount Laurel doctrine and the New Jersey Fair Housing Act.

Two other important aspects of the COAH regulations will impact the cost of development and remain an issue for builders: the increases in development fees paid by developers to support COAH-approved affordable housing activities, and the enforceability of existing agreements to pay a fee in lieu of construction of third round affordable housing.

DEVELOPMENT FEES

There was no challenge to the provisions calling for an increase in development fees, which remain valid. The regulations allow for increase of fees from one-half percent to one percent of the equalized value of new construction for residential development, and from one percent to two percent of the equalized value of new construction for non-residential development.

The third round development fee may be applied to non-third round COAH approved affordable housing activities. Accordingly, the collection of the third round development fee may not be challenged on the basis that third round activities have presently been invalidated by the Appellate Court.

AGREEMENTS FOR IN LIEU OF PAYMENTS

The Court’s decision does not address existing agreements between developers and municipalities or fees payable in lieu of construction of affordable housing, negotiated before the decision with intent to comply with the original third round regulations. In these agreements, developers agreed to pay fees based upon the now-invalidated growth share methodology. It is possible that COAH may not recognize these previously negotiated agreements, or that they will bear no relationship to the needs identified by the new third round fair share methodology, thus leaving them open to challenge by municipalities, housing advocacy groups and developers. It is also possible that the third round regulations, when adopted, will result in a reduced obligation to support affordable housing for a given project such that the previously negotiated fee will exceed what the municipality is authorized to assess.

The Court has stayed all applications for substantive certification (approval by COAH) of third round affordable housing plans pending the adoption of new regulations, which the Court ordered be adopted no later than July 25, 2007.

WE RECOMMEND

The increased development fees cannot be required without a municipal ordinance reviewed and approved by COAH. If a third round development fee ordinance has been adopted by a municipality, we recommend confirming that the ordinance has received the requisite COAH approval prior to payment of the fee. The increase in development fees should also be considered in the development budget.

The basis for previously negotiated agreements in lieu of construction will fundamentally change due to the new methodology for calculating third round fair share need. Developers should not rely on these agreements for budget purposes. Developers should also begin the process of carefully evaluating the facts and circumstances surrounding such agreements so that when the replacement regulations are adopted, they will be prepared to take a position as to whether to challenge, renegotiate or defend prior agreements.

We anticipate that the complex and far-reaching issues presented by the Appellate Court’s decision will remain outstanding for a period of time extending well beyond the adoption of replacement fair share methodology rules by COAH this summer. This is a fluid situation and we recommend an ongoing review by developers of all components of a municipality’s compliance with the replacement third round regulations.

If you have any questions concerning these issues, please contact John H. Hague.