By Robert Axel Kasuba, Associate, Sills Cummis & Gross P.C.

The New Jersey Council on Affordable Housing (“COAH”) published regulations in January 2008, which, if adopted, will likely effectively shut down real estate development in New Jersey. While the financial impact of the regulations is difficult to quantify, it has been estimated that these regulations effectively impose an $18.5 billion tax on new real estate development to be payable over the next ten years to provide for the development of 115,666 new affordable housing units by 2018.

Municipalities may impose this tax by requiring developers to build affordable housing units onsite or to make a financial contribution to be used by the municipality for affordable housing purposes. Municipalities may impose these affordable housing contributions on both residential and non-residential development. The regulations only offer vague assurances that developers will be offered some incentive to make these affordable housing contributions. However, there is no guarantee that the incentive will come close to offsetting the amount of the affordable housing contribution to be made by the developer.

These proposed regulations are COAH’s response to a court decision decided in January 2007, which invalidated many of COAH’s previous regulations and gave COAH time to develop new regulations. The current court-imposed deadline for COAH to adopt new regulations is June 2, 2008. That litigation was just another round in New Jersey’s long history of wrestling with municipal exclusionary zoning practices. No one disputes that COAH has an important mission in promoting the development of affordable housing, but these regulations cannot be the answer, because the affordable housing contributions to be imposed on the development community are simply too high and the effective result will be to shut down almost all development in the State, including the affordable housing sought to be promoted by the regulations.

The regulations will likely require almost all developers to make an affordable housing contribution, which will be the result of a formula. For every four new market rate units, there will be an obligation to develop one affordable housing unit, i.e. a 4:1 ratio. There will be an obligation to develop one affordable housing unit for every 16 jobs generated by non-residential development, i.e. a 16:1 ratio, and, according to the regulations, this means that every 5,714 square feet of office space, 9,412 square feet of retail space, 10,667 square feet of warehouse space and every 13,333 square feet of factory space will generate an obligation to provide for 1 affordable residential unit.

A municipality may require any developer to build these affordable housing units onsite, even commercial or industrial developments, or, at the municipality’s option, the affordable units may be built offsite within the municipality. In lieu of constructing the affordable housing onsite, the municipality may permit the developer to make a payment, known as a payment-in-lieu, to the municipality. The amount of the payment-in-lieu depends on where the development is located in the State and ranges from approximately $146,000 to $183,000 per affordable unit.

The incentives COAH offers are woefully insufficient and will not come close to compensating the development community with the cost of making the affordable housing contribution. COAH will generally accept an incentive of an additional 1 market rate unit for every affordable housing unit built onsite. This means that the construction of 5 market rate units will subsidize the cost of providing one affordable housing unit onsite. If a payment-in-lieu is chosen by the municipality, the municipality will likely be required to offer an incentive of an additional 0.5 market rate units for every affordable unit to be built somewhere else in the municipality. This means that 4.5 market rate units will subsidize the development of each affordable unit, which results in a subsidy of $32,423 to $40,635 per market rate unit. These contributions make most residential development unprofitable according to the developers I have spoken with.

Likewise, the contributions to be imposed on non-residential development make them unprofitable according to every non-residential developer I have spoken with. In theory, a municipality may offer an increase in floor area ratio (FAR) to provide an incentive to a non-residential developer, but there are no standards setting forth how much of an increase will be required. Without any increase in FAR, the amount of a payment-in-lieu contribution for non-residential development is between $25.53 to $32.00 per square foot of office space, $15.50 to $19.43 per square foot of retail space, $13.68 to $17.14 per square foot of warehouse space, and $10.94 to $13.71 per square foot of factory space.

COAH needs to understand that the development industry cannot withstand these affordable housing contributions, and, if these contributions are imposed, most real estate development in the State will stop. As a result, these regulations will hurt New Jersey’s ability to attract new businesses to relocate to New Jersey and to retain existing businesses seeking to expand their operations. As a result, few, if any, jobs will be generated and the State’s economy will suffer. This clearly was not the result envisioned by the judiciary when it interpreted the New Jersey Constitution as requiring each and every municipality to create a realistic opportunity to provide its fair share of affordable housing in the Mount Laurel II decision in 1983 or by the State Legislature when it enacted the Fair Housing Act in 1985 and created COAH.