Tuesday, July 25, 2006 | With its affordable housing program facing a stern legal challenge, San Diego city officials mulled a proposal months ago that would have allowed them to end a multimillion-dollar lawsuit and essentially keep their housing program intact.

The settlement looked like a go, as it was approved by the City Council objections from the city attorney, the council’s independent budget analyst and affordable housing advocates. Still, the Building Industry Association of San Diego County desired more.

But when builders group pushed for more demands, the City Council panned the settlement – spawning a months-long political and legal imbroglio that could come to an end Tuesday when the City Council considers a second settlement offer.

The offer on the table: the exact deal the City Council panned months ago.

Since then, the building association has prevailed in court on its insistence that the way in which the city collects affordable housing fees from developers is unconstitutional – a courtroom loss that threw into question the entire ordinance and millions of dollars in fees the city has collected from developers since the ordinance went into effect in 2003.

But, with a new lawyer on the case for the city confident he could win on appeal, the building industry chose to settle.

“More litigation would unquestionably result in more distraction. It was going to be more expensive, more time-consuming, more frustrating,” said Paul Tryon, CEO of the builders association.

He said the city’s confidence in its attempt to appeal the ruling led his organization to seek a settlement, even though they had the upper hand at the time. Tryon said the organization is happy to settle for the terms it originally sought, even though a successful defense of its position could have potentially resulted in the refund of more than $7 million to builders who had paid fees.

Likewise, city officials appear content to drop their appeal of the case and settle for the industry’s demands.

“We just don’t know if we would have prevailed had we pushed this thing further,” said Council President Scott Peters. “The city is better off with the settlement.”

In 2002, the city passed what is known as the “inclusionary housing ordinance” that forced residential developers to price at least 10 percent of their units at an affordable price, or pay an in-lieu fee.

Builders took issue with the time in which the city charged the fee, saying it should be imposed when the first “tentative map” of a project is filed with the city. The city imposes the fee when the building permit is issued – a detail that proves costly for developers.

Those fees move up on a sliding scale as time passes, meaning that the burden of the fee is lessened the sooner a developer can pay the fees. On July 1, the fee tripled from $2.50 per square foot to $7.31 per square foot.

The pending settlement requires the city to assess the in-lieu fee at an earlier point in a project’s timeline, although the surcharge would be recalculated if the developer did not file for a building permit within three years of paying the fee. Also, the tentative agreement prohibits the city from changing the cost of the in-lieu fees until September 2008.

Affordable housing advocates who criticized the settlement plans earlier are now more receptive.

Tom Scott, executive director of the San Diego Housing Federation, a nonprofit affordable housing advocate, said the affordable housing trust fund will likely lose less than the $9 million to $43 million that Housing Commission officials estimated in April at the time of the first proposed settlement.

Because of a slowdown in the market – particularly in downtown condos – builders are more likely to hold off on seeking building permits, which could mean that the grandfathering they win in the pending settlement is more likely to lapse, Scott said.

“The settlement isn’t the same now,” he said. “Those downtown condos that are in the pipeline may not get built in three years.”

Unable to challenge the way the fee is assessed in court, the BIA instead challenged other issues peripheral to the ordinance were illegal, such as the developer’s inability to seek a waiver from the fees.

“There wouldn’t be a lawsuit if there had been an agreement on when the fee is assessed,” said Sherm Harmer, president of the Urban Housing Partners, Inc., and a BIA member. “That’s 99 percent of it.”

In the first settlement talks, builders wanted to change the timing of the fees. After the council approved the settlement, builders then pushed for a two-year moratorium on any fee increases.

The case headed to court after the City Council backed out of the first settlement offer.

Initially, the decision not to settle appeared to be the best for the city, as the presiding judge noted in his opening remarks at the May 19 hearing that, had he issued a tentative ruling, he would have sided with the city.

But after an afternoon in court, the judge agreed with the builders’ assertion that the city’s law was unconstitutional.

The judge said a developer had the right to ask the city for a waiver from the affordable housing law, and he determined that the city set up too many hurdles for the developer to clear before that was possible. A builder should be able to argue that his residential project does not have any impact on affordable housing, and that the builder’s compliance with the program does not help solve the city’s affordable housing problem

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