Palo Alto Weekly

News - January 1, 2010

Developer sues Palo Alto over housing policy

City's requirements for low-income housing called 'excessive' and 'arbitrary'

by Gennady Sheyner

A Palo Alto policy that requires developers to dedicate portions of their residential projects to affordable housing is facing a legal challenge from a developer who is calling the policy excessive, onerous and arbitrary.

Sterling Park is the second developer to protest the city's policy for below-market-rate (BMR) housing in recent months.

Last week, the Palo Alto City Council voted 7-1 (with Mayor Peter Drekmeier dissenting and Councilman Yiaway Yeh absent), to approve a settlement with SummerHill Homes, builder of a 45-home complex on the former Elks Lodge site on El Camino Real. SummerHill argued that the city's affordable-housing requirement "would severely undercut" its ability to complete the project.

The settlement allows SummerHill to pay the city about $4.4 million in in-lieu fees instead of constructing the required seven units of below-market-rate housing.

But while SummerHill's challenge focused on the economic viability of its particular project, Sterling Park's lawsuit targets the affordable-housing policy itself. Sterling Park claims that the policy -- which requires developers to set aside between 15 and 20 percent of the housing units for below-market-rate units -- essentially amounts to a "special tax" against homebuilders.

Sterling Park claims Palo Alto has failed to demonstrate a connection between the new project and the shortage of affordable housing in the city. The suit also claims that the city's policy "unlawfully required the project to bear costs and burdens necessary for the city to cure its existing perceived deficiencies of 'affordable housing' in the community."

"The city's demand for 20 percent of the homes in the Project to be restricted by its BMR housing exaction policies (including payment of alleged BMR in-lieu fees) was arbitrary and capricious, not supported by substantial evidence and excessive," the lawsuit states.

The Sterling Park project, located on West Bayshore Road in Midtown, was approved in 2006. As a condition of approval, Sterling Park agreed to include 10 BMR units in the development as well as pay in-lieu fees to avoid having to build additional BMR units. The developer has been reluctantly paying these fees since June 2009 in order to obtain building permits for the new houses.

City officials have disputed Sterling Park's lawsuit and argued in a demurrer that the city's BMR program fully complies with state law. The demurral, filed by attorney Scott Pinsky on behalf of the city, also notes the developer submitted his claim against the city after the three-year limitation period has expired. The initial contract between the city and the developer was signed in June 2006, according to the demurrer.

The BMR program, which has been producing about 7.5 BMR units a year, is needed to address the city's severe shortage of affordable housing, Pinsky wrote. A recent study by consultant Keyser Marston Associates found that an even greater effort is needed to meet the needs for affordable housing in the city.

Assistant City Attorney Don Larkin said the city's recent settlement with SummerHill in no way acknowledges any flaws in the city's BMR policy. The agreement was to avoid costly litigation and get a good deal for the city, Larkin said. The in-lieu fees will go to the city's Housing Fund and will be used to support two affordable-housing projects: an Eden Housing development at 801 Alma St. and the Treehouse development at 488 West Charleston Road.

Larkin also disputed Sterling Park's claim that the city's BMR program is flawed.

"We don't accept that our ordinance is invalid and we have no plans to end or significantly revamp the BMR program," Larkin said.

Staff Writer Gennady Sheyner can be e-mailed at gsheyner@paweekly.com.

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