The court upheld a Palo Alto ordinance that requires developers to devote between 15 and 25 percent of their developments to below-market-rate (BMR) housing. The policy also allows developers who can't meet these requirements to pay the city "in-lieu" fees to support affordable housing citywide. The policy is intended to encourage development of affordable housing in a city that officials agree sorely needs it.
The developer Classic Communities, which is building along West Bayshore, argued in a lawsuit that the city's zoning requirement is arbitrary and excessive and that it amounts to an illegal "special tax" on developers. The lawsuit also argued that Palo Alto is "unlawfully" forcing the developer to bear the costs for the city's shortage of affordable housing.
The lawsuit is one of several Palo Alto has faced in the past two years over affordable housing. Last year, SummerHill Homes threatened to sue the city but the parties settled after the developer agreed to pay $4.4 million in in-lieu fees rather than build the requisite number of below-market-rate units.
The city is facing another lawsuit from West Meadow Oaks, the company behind a six-condominium development on West Meadow Drive. The company is run by Forrest Mozart, whose father, John Mozart, is the president of Classic Communities.
The lawsuit from Classic Communities was particularly significant because it challenged the legality of the city's entire affordable-housing program, rather than the details of the particular project. The company agreed in 2006 to allocate 10 percent of the 96-unit Sterling Park development to affordable housing and to pay the city in-lieu fees equal to 5.4 percent of the price for each market-rate unit sold.
The developer argued in the lawsuit that the city's demand "was arbitrary and capricious, not supported by substantial evidence, and excessive." The lawsuit also claimed that the fees and affordable-housing requirements "arbitrarily require one class of property owners to contribute more to affordable-housing programs, which purportedly benefit the community as a whole, than other residents."
Attorney Scott Pinsky, who represented the city against Classic Communities, said the developer could still appeal the ruling. In the meantime, the judgment represents a victory for Palo Alto and its goal of providing more housing opportunities.
"It was challenge to the overall regulatory structure and program for inclusionary zoning," said Pinsky, who also represents the city in the West Meadow Oaks suit. "We were glad it was ratified."
Pinsky wrote in his response to the lawsuit that the city's BMR program has generated about 7.5 units per year, a rate that has been "found to be insufficient to meet the City's need for affordable housing." A study by Keyser Marston Associates found that "present housing conditions in the area warrant an even greater effort to achieve affordable housing than was previously the case, and calls for greater efforts to expand affordable units," Pinsky wrote.
Pinsky argued in the document that the plaintiff's lawsuit also fails because it was filed well after the 90-day statute of limitations.
The ruling by Santa Clara County Superior Court Judge Kevin E. McKenney requires Classic Communities to abide by its 2006 agreement with the city. McKenney also rejected the developer's motion for a new trial.
The fees from the Sterling Park project would support other affordable-housing projects in Palo Alto, including the recently approved development at 801 Alma St., which will feature 50 units for low-income families. The City Council voted last week to contribute $3 million and provide a $2.8 million "permanent loan" for the project, which is a partnership between the nonprofit groups Eden Housing and the Community Housing Alliance.
The council acknowledged at its Feb. 14 meeting the high cost of building affordable housing in Palo Alto but voted unanimously to support the Eden Housing development. The new contributions raised the city's total commitment to the project to $9.3 million.
"We do need to gulp when we realize how much it costs to build affordable housing in our community," Councilman Larry Klein said at the meeting. "I do believe we have a social obligation to accomplish this."
Councilwoman Gail Price agreed and said she feels "we have a personal responsibility to provide affordable housing to our community."
The fees from Classic Communities are expected to cover a part of that cost. The developer had already contributed about $400,000 in fees to the city, and the total funds from the Sterling Park project are expected to amount to about $4.6 million, according to a report from Julie Caporgno, the city's chief planning and transportation official.
Acting City Attorney Donald Larkin said the recent court ruling not only strengthens Palo Alto's affordable-housing program but could also promote similar programs in other communities throughout the state.
"I think it's significant because these challenges are going on all over the area," Larkin said. "It's good for us to get out in front."
"We've always tried to be leaders in affordable-housing programs, and it's good to show other cities that if they follow our lead in doing these types of programs they will benefit."
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