Being challenged is Mountain View's "inclusionary zoning" policy, which requires developers to build a certain number of affordable homes in every housing development, or pay a fee to subsidize affordable housing elsewhere.
Mozart, owner of housing developer Classic Communities, has sued the city of Palo Alto for a similar ordinance and is threatening to sue Sunnyvale as well.
The legal question was first raised in the city of Patterson, where a developer sued in response to a significant increase in such fees. A state court ruled, in a decision an appellate court recently let stand, that the fees had to be calculated in a reasonable way, effectively throwing such fees into question in many California cities, said city attorney Michael Martello.
Mozart's lawyers argue in a letter to city officials that the city has not adequately demonstrated the reasoning for its fees, which makes the fees an illegal tax on development. Mozart's Classic Communities is demanding "prompt refund and reimbursement" of an estimated $2 million fee for its recent Miramonte Avenue development next to St. Joseph's Catholic school, which has 58 single-family homes now for sale.
"They are not entitled to a refund," Martello said. "They proposed meeting their affordable housing requirement by paying the fee. They did have a right to object to the fee before it was imposed and argue for no mitigation."
However, developers are likely to continue to play hardball as housing development resumes after the recession, and the city may have to make some changes. Classic Communities already has a proposal in the works for 96 homes on property it owns at Calderon and Evelyn Avenue.
"The court decision says if you are going to charge a fee you have to arrive at what the fee is by a certain process, called the nexus study," Martello said, adding that the city may now have to pay consultants to come up with these studies.
After 10 years of existence, the city's inclusionary zoning, or "below market rate" housing policy, happens to be due for a scheduled re-evaluation by the City Council, Martello said. Currently it requires developers to build one affordable home for every 10 built in a Mountain View development, or pay an in-lieu fee (3 percent of the actual sales price of each unit) to subsidize affordable housing elsewhere.
In Mountain View most developers find it more worthwhile to pay the fees than build affordable units. Only eight "below market rate" units have actually been built since the policy's inception in 1999, a cause of lament for some City Council members. Bubb elementary school teacher David Franklin was lucky enough to be chosen from a long list of interested buyers (teachers and lower income emergency responders get first pick) for three units on Evandale Avenue in 2007, and said it was "like winning the lottery."
Prices for such units have been in the $300,000 range, Martello said, while the same development's other units, indistinguishable from the affordable ones, usually go for $800,000 or more.
City Council member Tom Means, an economics professor at San Jose State University, has long opposed inclusionary zoning. He and two colleagues published a 2007 study called "Below Market Housing Mandates as Takings," which argues that cities with inclusionary zoning produce fewer homes at higher prices.
Means said that in good times, homebuyers and landowners pay the costs of inclusionary zoning, and the developer is happy to go along with it. But with the recession putting the squeeze on the housing market, it appears that developers are looking for some relief, and perhaps the ability to sell their homes for less.
Because the price of each affordable unit is fixed upon resale, there is little incentive to keep it maintained or to upgrade the affordable home as it gets older, Means said. There is also little to keep a buyer from renting the home at market rate for a tidy profit. It can "lead to all kinds of arbitrage that's not useful," Means said.
There are proponents of the practice, however, including the majority of past City Councils, who argue that it is effective in subsidizing much needed affordable housing. Through the fees, the city has accumulated millions in a below-market-rate housing fund, part of which is going towards a 51-unit affordable housing development on Evelyn Avenue and Franklin Street.