On September 26, 2013, the New Jersey Supreme Court issued its long awaited decision of In re Adoption of N.J.A.C. 5:96 & 5:97 by N.J. Council on Affordable Housing which upheld and modified the Appellate Division’s decision striking down the Council on Affordable Housing’s (“COAH”) revised third round rules. 

By way of background, municipalities have a constitutional obligation to afford a realistic opportunity for the construction of the fair share of present and prospective regional need for low and moderate income housing.  The Legislature enacted the Fair Housing Act, N.J.S.A. 52:27D-301 et seq. (“FHA”) in 1985 which codified the obligations first set forth in the New Jersey Supreme Court’s Mount Laurel decisions. 

The FHA created COAH and provided it with rulemaking powers and the responsibility for determining municipal affordable housing obligations.  COAH adopted rules in rounds, the first round for the period of 1987 to 1993 and the second from 1993 to 1999.  The third round rules were initially promulgated in December of 2004, over four years late, and adopted a “growth share” approach.  The rules were subsequently invalidated by the Appellate Division which remanded the matter to COAH for the adoption of revised rules.  In June of 2008 COAH adopted revised third round rules, which contained a modified version of growth share.  The Appellate Division invalidated the revised third round rules in a decision dated October 8, 2010 finding that they suffered many of the same inadequacies as the original third round rules.  Thereafter, the New Jersey Supreme Court granted petitions for certification.

In upholding the Appellate Division’s 2010 decision, the New Jersey Supreme Court held that the “growth share” methodology violates of the FHA.  Specifically, the growth share calculation is not based on region-specific housing needs which are central to determining municipal obligations under the FHA.  Also, municipalities are not provided with a definite quantity of affordable housing to be fulfilled within the duration of the round because a municipality’s obligation is based upon its actual growth. 

The Court explained that COAH is not authorized to rewrite the substantive provisions of the FHA, rather, that authority is vested with the Legislature.  Additionally, the entire third round rules are invalidated because the growth share methodology is so pervasive throughout the procedural and substantive rules that it cannot be severed.  

The Court also upheld the Appellate Division’s pronouncements on the invalidity of several other provisions within the third round rules.  Notably, this includes the rule on presumptive financial incentives.  The panel found the incentives were not sufficient to induce developers to produce affordable housing and viewed the minimum densities and maximum set-aside percentages as insufficient to create a “realistic opportunity” for the development of affordable housing.   The minimum densities are too low and the maximum set-asides are too high.

The Court’s holding requires COAH to adopt regulations governing the third round obligations within the five month period ending on February 26, 2014.  The regulations must allocate fair share obligations among municipalities based on the methodology for the first and second rounds. 

The Court invited the Legislature to take action in the area of affordable housing and acknowledged that its decision to invalidate the third round rules will prompt legislative attention.   The constitutional obligation to provide affordable housing is not limited to any one particular methodology and changes may be made to the enabling legislation of the FHA.  The Court further explained that its decision is not to be viewed as a “constitutional straightjacket” to legislative innovation of remedies responsive to the fair share housing obligation and reiterated its preference for legislative solutions in the affordable housing arena.   

This ruling is good news for news for builders who opposed COAH’s third round rules on the basis that they deterred the construction of affordable housing.  With that said, however, this decision invites the Legislature to amend the FHA, and the Court signaled that it may be receptive to a legislative approach that curtails the builder’s remedy, wherein a builder willing to construct affordable housing may sue to override a municipality’s zoning ordinance and to construct housing at higher densities than the municipality otherwise would allow.  As stated by the Court, “One can envision alternative approaches that, perhaps, might relegate a builder’s remedy to a more reserved status among available solutions to encouragement of construction of affordable housing, reducing the political turmoil that has plagued voluntary compliance with the constitutional goal of advancing the delivery of affordable housing.”

New Jersey developers should be mindful of legislative action going forward and remain involved in the process to ensure that developers are incentivized to construct inclusionary development. GH&C will continue to monitor the ongoing developments in New Jersey’s affordable housing policy.  For more information on affordable housing please contact the author of this article.