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In re Adoption of N.J.A.C.

January 25, 2007

IN THE MATTER OF THE ADOPTION OF N.J.A.C. 5:94 AND 5:95 BY THE NEW JERSEY COUNCIL ON AFFORDABLE HOUSING.
IN RE SUBSTANTIVE AND PROCEDURAL RULES OF THE NEW JERSEY COUNCIL ON AFFORDABLE HOUSING FOR THE PERIOD BEGINNING DECEMBER 20, 2004 (N.J.A.C. 5:94-1 ET. SEQ. AND N.J.A.C. 5:95-1 ET. SEQ.).
IN RE ADOPTION OF THIRD ROUND REGULATIONS, N.J.A.C. 5:94, BY THE COUNCIL ON AFFORDABLE HOUSING.
IN RE ADOPTION OF THIRD ROUND SUBSTANTIVE RULES OF THE NEW JERSEY COUNCIL ON AFFORDABLE HOUSING.



On appeal from the New Jersey Council on Affordable Housing.

The opinion of the court was delivered by: Cuff, P.J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

APPROVED FOR PUBLICATION

Argued: October 25, 2006

Before Judges Cuff, Winkelstein and Baxter.

In this appeal, we address a multifaceted challenge to the validity of the substantive rules of the Council on Affordable Housing (COAH) for the third round that calculate affordable housing needs from 1999 to 2014 and establish criteria for satisfaction of the need between 2004 and 2014.*fn1 N.J.A.C. 5:94-1.1 to -9.2. The challenges focus on several rules that govern the calculation of housing need, the allocation of that need, and compliance mechanisms. The third round rules depart from the practice utilized in rounds one and two of assigning a specific fair share number to individual municipalities. Rather, the third round methodology depends on the net increase in the number of jobs and the number of housing units a municipality experiences between 2004 and 2014. Appellants contend that this methodology is contrary to, and ill-designed to respond to, the constitutional mandate to provide affordable housing to the residents of this State. We affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.

COAH's first round rules extended from 1987 through 1993, and its second round covered a cumulative period from 1987 through 1999. See In re Six Month Extension of N.J.A.C. 5:91-1 et seq., 372 N.J. Super. 61, 73 (App. Div. 2004), certif. denied, 182 N.J. 630 (2005). In May 1999, COAH readopted the second-cycle substantive rules, establishing an expiration date of May 2004. Id. at 74.

Following a protracted period of study and review characterized by this court as "dramatic and inexplicable," id. at 95-96, COAH first proposed the third round substantive and procedural rules in October 2003. 35 N.J.R. 4636(a) (October 6, 2003) (substantive rules); 35 N.J.R. 4700(a) (October 6, 2003) (procedural rules). On April 27, 2004, the Supreme Court denied a petition for certification on a challenge to the absence of final third round substantive rules, taking judicial notice of the fact that COAH's proposed rules would expire if not adopted by October 6, 2004. In re Failure of N.J. Council on Affordable Hous., 180 N.J. 148 (2004).

In response to voluminous comments,*fn2 COAH re-proposed both the substantive rules, N.J.A.C. 5:94, and procedural rules, N.J.A.C. 5:95, in August 2004. 36 N.J.R. 3691(a) (August 16, 2004) (substantive rules); 36 N.J.R. 3851(a) (August 16, 2004) (procedural rules).*fn3 Following the receipt of many additional comments, COAH adopted the substantive and the procedural rules on December 20, 2004. 36 N.J.R. 5748(a) (December 20, 2004) (substantive rules); 36 N.J.R. 5895(a) (December 20, 2004) (procedural rules). New Jersey Builders Association (Builders Association), Fair Share Housing Center (Fair Share), ISP Management Company, Inc. (ISP) and the Coalition for Affordable Housing and the Environment (CAHE) filed timely notices of appeal.

In its appeal, Builders Association argues that COAH is obliged to fulfill the constitutional and statutory obligation to provide affordable housing, but the third round rules do not satisfy or advance that obligation. It also contends that the adoption of a growth share methodology and the rules that abandon the concept of reallocated present need abrogate COAH's constitutional and statutory obligation to remedy the effects of exclusionary zoning. Builders Association also contends that "the statistical machinations" of specific rules massively reduce fair share obligations, and arbitrarily dilute its municipal fair share obligations contrary to constitutional and statutory obligations. Builders Association also argues that the abandonment by COAH of a prior policy that required a developer to receive an offsetting benefit, such as a density bonus, when required to provide lower income housing is unconstitutional and unlawful. In light of the tortured and tortuous rule-making process, Builders Association urges this court to appoint a Special Master to develop and to impose lawful regulations and oversee the adoption by COAH of lawful and constitutional regulations.

Fair Share argues that the third round methodology understates the affordable housing need in this State, overstates the units that will be created by secondary sources, inexplicably reduces the need previously determined in the first and second rounds and is, therefore, unconstitutional. It also contends that the growth share methodology employed by COAH is unconstitutional and any form of need allocation that rests exclusively on municipal decisions is unconstitutional. Fair Share also argues that the permitted methods for allocating and satisfying third round obligations perpetrate the exclusion of lower-income families and fail to meet the goals of the Mount Laurel*fn4 doctrine or the Fair Housing Act of 1985 (FHA), N.J.S.A. 52:27D-301 to -329. It also contends that regional contribution agreements violate state and federal civil rights and undermine the Mount Laurel doctrine and the affordability range under COAH's third round rules is unconstitutional. This latter argument is addressed in our opinion in In re Adoption of Uniform Housing Affordability Controls by the New Jersey Housing and Mortgage Finance Agency, supra, ___ N.J. Super. at ___ (slip op. at 24).

ISP addresses the manner in which second round obligations are treated by third round methodology. It argues that by deeming a municipality that received a second round vacant land adjustment to have met its second round obligation based on implementation of all terms of its substantive certification, the third round rules ignore the municipality's obligation to consider in subsequent rounds property that later becomes available for development. Furthermore, ISP contends that by permitting an offset for residential and non-residential demolitions in calculating the growth share obligation, the third round rules unconstitutionally dilute the fair share obligation. ISP also challenges the regulation that permits utilizing square footage of new non-residential development as a surrogate to predict job growth. It contends this failure to employ a more direct means and more reliable information dilutes the fair share obligation. ISP also argues that granting "rental bonus" credits for housing units never built and granting new construction credit for extension of expiring affordability controls violates the Mount Laurel "realistic opportunity" requirement and unconstitutionally dilutes the fair share obligations.

CAHE urges that, properly implemented, the growth share methodology is a constitutionally acceptable method for satisfying the prospective component of the Mount Laurel housing obligation. It argues, however, that N.J.A.C. 5:94 is not growth share and does not insure that growth within the State will fairly share the creation of opportunities for affordable housing. It also contends that the third round methodology understates the need for affordable housing, overstates the manner in which the need is satisfied by secondary sources, and inexplicably reduces need in the second and third rounds.

COAH responds that the selected growth share methodology satisfies the statutory and constitutional mandate. It further contends that the growth share methodology will actually work better to assure that the affordable housing obligation will be more closely tied to where housing and jobs are actually being created. It also insists that it used the most reliable data available and employed that data to make adjustments in the present affordable housing need consistent with its statutory and constitutional obligations. Finally, it emphasizes the adoption of the third round rules should not occasion a reexamination of certain regulations previously approved by the courts or used in prior round methodologies.

Amicus New Jersey Chapter of the National Association of Industrial and Office Properties (NAIOP) argues N.J.A.C. 5:94-4.4(b) permits mandatory set-asides and payments in lieu that are confiscatory and unconstitutional. It also urges that the authorization of in lieu payments without standards to guide municipal action is inconsistent with COAH's mission and, therefore, arbitrary, capricious and unreasonable.

Amici New Jersey State League of Municipalities and New Jersey Institute of Local Government Attorneys (Municipal Amici) argue that the growth share regulations are valid, and a calculation of reallocated present need is not required to satisfy the constitutional obligation. They also contend that Mount Laurel II and subsequent opinions addressing the constitutional obligation authorize the municipal zoning options found in the third round rules. They also urge that N.J.A.C. 5:94-4.19, which increases the percentage of a municipal housing obligation that may be satisfied by age-restricted housing from twenty-five percent to fifty percent, is constitutional.

We commence our discussion with a brief review of the Mount Laurel doctrine and a review of the statutory codification of the doctrine. We also briefly review the prior regulatory experience before we address the specific objections raised by appellants to the third round rules.

I.

In Mount Laurel I, supra, the Court held that a zoning ordinance in a developing municipality that did not make an appropriate variety and choice of housing realistically possible was contrary to the public welfare. 67 N.J. at 173-74. The same municipality could satisfy its constitutional obligation by adopting a zoning ordinance that provided a realistic opportunity for the construction of its fair share of the present need and future regional need for low- and moderate-income housing. Ibid. Eight years later, the Court returned to the issue.

In Mount Laurel II, supra, the Court reaffirmed the doctrine and fashioned a procedure for use by trial courts to determine municipalities' obligation to provide the opportunity for low- and moderate-income housing. 92 N.J. at 220-23. In the course of the opinion, the Court reminded us that "the doctrine . . . arise[s] from . . . underlying concepts of fundamental fairness in the exercise of governmental power." Id. at 209. The Court also reiterated the constitutional basis for the Mount Laurel doctrine. Chief Justice Wilentz stated:

The constitutional power to zone, delegated to the municipalities subject to legislation, is but one portion of the police power and, as such, must be exercised for the general welfare. When the exercise of that power by a municipality affects something as fundamental as housing, the general welfare includes more than the welfare of that municipality and its citizens: it also includes the general welfare -- in this case the housing needs --of those residing outside of the municipality but within the region that contributes to the housing demand within the municipality. Municipal land use regulations that conflict with the general welfare thus defined abuse the police power and are unconstitutional. In particular, those regulations that do not provide the requisite opportunity for a fair share of the region's needs for low and moderate income housing conflict with the general welfare and violate the state constitutional requirements of substantive due process and equal protection.

[Id. at 208-09 (citing Mount Laurel I, supra, 67 N.J. at 174, 181).]

The Court has consistently re-affirmed the doctrine and its constitutional basis. Toll Bros., Inc. v. Twp. of W. Windsor, 173 N.J. 502, 511-13 (2002); In re Petition for Substantive Certification filed by the Twp. of Warren, 132 N.J. 1, 9-13 (1993); Van Dalen v. Washington Twp., 120 N.J. 234, 240 (1990); Hills Dev. Co. v. Twp. of Bernards, 103 N.J. 1, 40 (1986).

In Mount Laurel II, supra, the Court also recognized that every municipality has an obligation to provide a realistic opportunity for affordable housing to its resident poor, and that the obligation to provide for the needs of the region will be borne by those municipalities designated as growth areas. 92 N.J. at 214-25, 226-27, 243-44. The Court instructed that whether an opportunity is realistic "depend[s] on whether there is in fact a likelihood -- to the extent economic conditions allow -- that the lower income housing will actually be constructed." Id. at 221-22. See Toll Bros., supra, 173 N.J. at 552 (realistic opportunity includes economic viability of permitted housing); In re Petition for Substantive Certification Twp. of Southhampton, 338 N.J. Super. 103, 120-21 (App. Div.) (housing element that included a tract without water or sewer service did not provide a realistic opportunity for the construction of affordable housing), certif. denied, 169 N.J. 610 (2001).

The Court also noted that Mount Laurel litigation would ordinarily include proof of the number of housing units needed presently and in the future. Mount Laurel II, supra, 92 N.J. at 215. "Numberless" resolution was disfavored. The Court said:

"Numberless" resolution of the issue based upon a conclusion that the ordinance provides a realistic opportunity for some low and moderate income housing will be insufficient. Plaintiffs, however, will still be able to prove a prima facie case, without proving the precise fair share of the municipality, by proving that the zoning ordinance is substantially affected by restrictive devices, that proof creating a presumption that the ordinance is invalid.

[Id. at 216.]

The Court also addressed the judicial remedy, commonly referred to as the "builder's remedy," and devised a scheme for the consistent and hopefully expeditious resolution of litigation. Id. at 216-18. Finally, the Court reiterated its preference for legislative action in this field. Id. at 212-13, 352.

The designated Mount Laurel judges adopted methodologies to determine need and to allocate the need on a regional basis. In AMG Realty Co. v. Township of Warren, 207 N.J. Super. 388, 453 (Law Div. 1984), Judge Serpentelli noted the key to any methodology was not its ability to produce verifiably accurate results but to use "reliable data, as few assumptions as possible, and an internal system of checks and balances." He continued:

Reliable data refers to the best source available for the information needed and the rejection of data which is suspect. The need to make as few assumptions as possible refers to the desirability of avoiding subjectivity and avoiding any data which requires excessive mathematical extrapolation. An internal system of checks and balances refers to the effort to include all important concepts while not allowing any concept to have a disproportionate impact.

[Ibid.]

The three Mount Laurel trial judges generally followed the methodology published in AMG Realty, supra. Present need was calculated on the number of low- and moderate-income households occupying overcrowded units, or units lacking complete plumbing facilities or adequate heating. Id. at 401, 420; Countryside Props., Inc. v. Mayor and Council of Ringwood, 205 N.J. Super. 291, 295-96 (Law Div. 1984); Van Dalen v. Washington Twp., 205 N.J. Super. 308, 314-16 (Law Div. 1984). The courts recognized that houses could be dilapidated with adequate plumbing and heating, and that inadequate plumbing or heating did not necessarily mean that the property was dilapidated. The judges concluded that the best data was produced from the United States Census. AMG Realty, supra, 207 N.J. Super. at 420; Countryside Props., 205 N.J. Super. at 296. They also determined that they should apply indicators or surrogates of dilapidated housing and then statistically extrapolate the percentage of those dilapidated units occupied by low- and moderate-income households. See e.g. Countryside Props., supra, 205 N.J. Super. at 296-97; Van Dalen, supra, 205 N.J. Super. at 314.

Judge Skillman interpreted Mount Laurel II to require the inclusion of low- and moderate-income households occupying overcrowded but not dilapidated dwellings. Countryside Props., supra, 205 N.J. Super. at 296; Van Dalen, supra, 205 N.J. Super. at 315-16. Judge Serpentelli also used units built before 1940 as a surrogate or marker for calculating housing deficiency, AMG Realty, supra, 207 N.J. Super. at 420-21; yet he determined that cost-burdened households should not be included in the present need calculations of low- and moderate-income housing. Id. at 422-23.

The three Mount Laurel judges also addressed reallocation of present need. Noting that inner cities had an indigenous need that far exceeded their fair share and declaring that these cities should not be expected to provide a disproportionate share of needed housing, the court would determine the total regional housing stock and calculate what percentage of it was substandard, AMG Realty, supra, 207 N.J. Super. at 401. If any municipality's indigenous need in relationship to its housing stock was in excess of that regional percentage, the excess was assigned to a reallocation pool. Ibid. That pool would be distributed to all municipalities that contained any area designated for growth in the State Development Guide Plan (SDGP), excluding certain urban aid municipalities. Ibid.

Prospective need for affordable housing, statewide and regionally, was determined on the number of low- and moderate-income households expected to form over the ensuing decade. Id. at 403. This data was to be derived from the decennial Census. The calculation of prospective need involved a prediction based on data relying on two components for measuring population growth: labor market conditions and past population trends. Id. at 426.

Once present and prospective need in a region was derived, the next step was to allocate the need to individual municipalities in a region. Allocation of present need was determined based on: (1) the number of growth area acres within the municipality compared to the number of growth area acres within the region; (2) the number of jobs in the municipality compared to the number of covered jobs within the region; and (3) the wealth of the municipality, that is, the ratio of municipal median income to the regional median income. Id. at 404. Prospective need was to be determined using the three factors cited above, as well as a municipality's employment growth within the preceeding ten years. Id. at 405. A municipality's growth area was an important factor because "[a]ny reasonable methodology must account for a municipality's physical capacity to provide space for new construction." Id. at 431. Judge Serpentelli recognized that it might be preferable to substitute the amount of a municipality's vacant developable land within a growth area in lieu of the growth area designation, but he rejected that alternative because of the lack of reliable data. Id. at 432.

Present employment was a factor in determining prospective need because a "major goal of Mount Laurel is to enable people to live in decent housing near their place of employment." Id. at 433. Jobs generate the need for shelter. Ibid. In addition, "to the extent that jobs create ratables, it affects the municipality's fiscal capacity." Ibid.

A municipality's median income compared to the regional median income was a relevant factor because it accounted for "the town's ability to defray the infrastructure costs of high density building, to identify prior exclusionary policies or to reward prior inclusionary efforts." Id. at 434. The median income factor more equitably distributed some of the financial burdens a municipality would experience in zoning for affordable housing. Id. at 435.

Finally, the Mount Laurel judges offered a number of pertinent observations regarding municipal compliance with the allocated fair share. To a significant degree, the economy, private enterprise and other branches of government would determine whether the affordable housing need was satisfied. J.W. Field Co. v. Twp. of Franklin, 204 N.J. Super. 445, 457 (Law Div. 1985). For private enterprise to assist in meeting the need, the development community would need to find it profitable to construct affordable housing; if a builder had insufficient incentives, affordable housing would not be built. AMG Realty, supra, 207 N.J. Super. at 446; Allan-Deane Corp. v. Twp. of Bedminster, 205 N.J. Super. 87, 115 (Law Div. 1985). Experience had shown the Mount Laurel judges that twenty percent was the maximum set-aside that would induce builders to participate in the construction of inclusionary development; any requirement in excess of twenty percent would defeat the actual construction of affordable housing. Urban League of Essex County v. Twp. of Mahwah, 207 N.J. Super. 169, 205-06 (Law Div. 1984); J.W. Field Co., supra, 204 N.J. Super. at 467. In addition, excessively high set-asides could require the middle class, including those earning just over eighty percent of the median income, to subsidize the Mount Laurel target population by paying significantly more for housing. Van Dalen, supra, 205 N.J. Super. at 339-40, 343-44. Municipalities may not impose set-asides that are so high that they "impose an excessive and unfair burden upon middle income households when there are other suitable means of achieving" Mount Laurel goals. Id. at 344.

In 1985, the Legislature enacted the FHA and the State Planning Act, N.J.S.A. 52:18A-196 to -207. The FHA created COAH to provide an administrative mechanism for implementing the Mount Laurel doctrine. N.J.S.A. 52:27d-307. The FHA directed COAH to divide the State into housing regions, estimate the present and prospective need for low- and moderate-income housing at both the State and regional levels, and adopt criteria and guidelines that would enable a municipality to determine its fair share of its region's present and prospective housing need. Ibid.

The State Planning Act charged the State Planning Commission with the task of adopting a plan to identify areas for growth, conservation, agriculture, open space or other appropriate designations. N.J.S.A. 52:18A-199(a). This plan, referred to as the State Plan, was designed to be used as a tool for assessing appropriate locations for infrastructure, housing and conservation, but it is not binding on municipalities and was not intended to validate or invalidate specific ordinances. Bailes v. Twp. of E. Brunswick, 380 N.J. Super. 336, 358-59 (App. Div.), certif. denied, 185 N.J. 596 (2005); Mount Olive Complex v. Twp. of Mount Olive, 340 N.J. Super. 511, 543 (App. Div. 2001), remanded on other grounds, 174 N.J. 359 (2002). However, under the FHA, one of COAH's responsibilities is to adjust municipal fair share based on available vacant and developable land, infrastructure considerations or other environmental factors, and to see that the pattern of development is not inconsistent with the planning designations in the State Plan. N.J.S.A. 52:27D-307c(2). In calculating present and prospective need estimates, COAH must give "appropriate weight to . . . implementation of" the State Plan. N.J.S.A. 52:27D-307e. The State Planning Commission must provide COAH with annual economic growth and development projections for each housing region, and COAH must periodically adjust regional need calculations based upon the amount of affordable housing generated through any federal, state, municipal or private housing program. Ibid.

COAH is required to consider pertinent information from studies, government reports, AND information from other branches of government, including data from the State Planning Commission. Ibid. It can, however, adopt any approach or school of thought espoused by experts in relevant fields based on its determination of the appropriate response to the constitutional obligation and the purposes of the FHA. Hills Dev. Co., supra, 103 N.J. at 33.

The Court upheld the constitutionality of the FHA against arguments that: (1) its implementation would result in excessively delaying the construction of affordable housing, (2) the moratorium on builder's remedies was unconstitutional, and (3) limiting a court's scope of review, because a party contesting COAH's grant of substantive certification must overcome the presumption of validity by clear and convincing evidence, N.J.S.A. 52:27D-317, violated the right of a party to contest government action by filing a complaint in lieu of prerogative writs. Hills Dev. Co., supra, 103 N.J. at 40-47. The Court noted that the "statutory scheme addresses the main needs delineated in . . . prior decisions on this matter, namely, the consistency on a statewide basis of the determination of regional need, fair share, and the adequacy of the municipal measures." Id. at 37. The Court assumed that COAH would perform its duty to implement the Mount Laurel doctrine "with determination and skill." Id. at 21. It was within the discretion of the Legislature and COAH to implement the doctrine with techniques not previously sanctioned by the judiciary. "Regions, regional need, fair share, all may be different; the locus of the obligation may be different; the timetable different; the method of satisfying the obligation different; and compliance may in fact become voluntary." Id. at 51-52.

The FHA also allows municipalities to transfer up to fifty percent of their fair share to another municipality within the region by entering into a regional contribution agreement (RCA) with the other municipality. N.J.S.A. 52:27D-312. The Court upheld the constitutionality of RCAs. Hills Dev. Co., supra, 103 N.J. at 47 n.13; In re Petition for Substantive Certification Filed by Twp. of Warren, 247 N.J. Super. 146, 163-65 (App. Div. 1991), rev'd on other grounds, 132 N.J. 1 (1993). However, the Court cautioned that:

No one should assume that our exercise of comity today signals a weakening of our resolve to enforce the constitutional rights of New Jersey's lower income citizens. The constitutional obligation has not changed; the judiciary's ultimate duty to enforce it has not changed; our determination to perform that duty has not changed.

[Hills Dev. Co., supra, 103 N.J. at 65.]

A. The First and Second Round Rules

COAH adopted the first round substantive rules covering the period 1987 to 1993, on July 14, 1986, effective August 4, 1986.

18 N.J.R. 1527(a) (August 4, 1986). Codified at N.J.A.C. 5:92-1.1 to -18.20 and accompanying technical Appendices A through F, the rules adopted methodologies similar to those developed in AMG Realty, supra, 207 N.J. Super. 388.

COAH continued to use several surrogates to establish present need, such as overcrowding, age of unit, and lack of plumbing, kitchen or heating facilities as indicators of dilapidated housing. N.J.A.C. 5:92, Appendix A at 92-47 (Supp. 2-20-96). The excess present need in urban aid municipalities was reallocated to all municipalities within the regional growth area. Id. at 92-48. Cost-burdened households were not a component of present need. Prospective need was calculated through statistical analyses to project the number of low- and moderate-income households that would form between 1987 and 1993. Id. at 92-49. As in AMG Realty, the need was allocated to municipalities, except urban aid municipalities, based on employment within the municipality, projected employment within the municipality, the percentage of the municipality in a growth area, and the municipality's wealth. Id. at 92-49 to 92-50.

COAH's methodology differed from that used in AMG Realty in that COAH took into account secondary sources of housing supply and demand in calculating both statewide and regional need. Demolitions added to housing need because they reduce the number of available housing units. Id. at 92-52. COAH also identified three market forces, filtering, residential conversions and spontaneous rehabilitation, that operate to reduce overall housing need. Id. at 92-52 to 92-54.

The first and second round rules recognized filtering as the most significant market force in reducing housing need. Filtering is "a downward adjustment of housing which recognizes that the housing requirements of lower-income groups can be served by supply additions to the higher-income sectors of the housing market." Id. at 92-52. In other words, as newer, more desirable housing options became available in the housing market, middle- and upper-income households would move out of the existing housing, making it available to become the home for a lower-income household. Ibid. "Filtering is predicated on the existence of housing surpluses which cause housing prices to drop because of the excess of housing supply over demand." Ibid. Multifamily housing was "the most likely type of housing to filter down," so COAH granted a "filtering adjustment" to the extent that a community contained multifamily housing, noting, however that filtering was more likely to occur in urban rather than suburban areas. Ibid.

"Residential conversion" occurs when additional dwelling units were created from already existing structures. Id. at 92-53. "Spontaneous rehabilitation" occurs when dilapidated housing, affordable to low- and moderate-income households, was rehabilitated by the private market without the assistance of any government program. Ibid.

The first round methodology employed by COAH resulted in a total statewide present and prospective need for the years 1987 to 1993 of approximately 200,000 units, but after factoring in secondary sources of housing supply and demand, the total statewide need dropped to 147,707 units. Id. at 92-50, 92-54. The bulk of the reduced need was attributable to filtering, with COAH estimating that from 1987 to 1993 approximately 51,000 sound housing units would become affordable to, or filter down to, low- and moderate-income households. Id. at 92-53.

The second round substantive rules (1987 to 1999) continued the same methodology, notwithstanding its complexity, because COAH deemed it fair and because the methodology embodied "the most up to date and sophisticated procedures for housing need determination and allocation." N.J.A.C. 5:93, Appendix A. For a variety of reasons, including information gleaned from the 1990 Census, the total statewide affordable housing need for the second cycle decreased from over 145,000 units to approximately 86,000 affordable units. See County of Morris v. Riverview Condos., Inc., 304 N.J. Super. 322, 336-37 (App. Div. 1997), certif. denied, 152 N.J. 364 (1998).

COAH also permitted municipalities to reduce their fair share figures through a number of credits and adjustments, including: (1) credits for affordable housing constructed between 1980 and 1986, N.J.A.C. 5:93-2.15, -3.2; (2) credits for substantial compliance, N.J.A.C. 5:93-3.6; (3) up to a two-forone credit for rental housing, N.J.A.C. 5:93-5.15; and (4) adjustments for municipalities that lacked sufficient vacant land or did not have access to water and sewer, N.J.A.C. 5:93-4.2, -4.3. Finally, municipalities were permitted to satisfy up to twenty-five percent of their fair share through age-restricted affordable housing. N.J.A.C. 5:93-5.14.

Numerous challenges to COAH's first round and second round methodology have been largely unsuccessful. The Court upheld COAH's decision to rely on planning designations in the SDGP, and to refuse to accept evidence that a municipality had a larger growth area than designated in the SDGP. Van Dalen, supra, 120 N.J. at 246-47. While the Court recognized that the SDGP was not the ideal tool for determining the location and size of a municipality's Mount Laurel obligation, COAH "may reasonably have concluded that for the time being the advantages of easy administration and stability in the planning process afforded by the SDGP outweigh the possibly greater precision that could accrue from a more flexible planning formulation." Id. at 246. The Court observed that the method of allocating affordable housing would need to be updated periodically based on current demographic data, id. at 247, and signaled that it was not prepared to defer to data that was clearly out-of-date. Id. at 243. This court has also rejected claims by municipalities that COAH was arbitrary in considering a municipality's wealth as an allocation factor that would increase its fair share, and that COAH should reduce the fair share if a municipality lacked sufficient developable vacant land. Twp. of Bernards v. Dep't of Cmty. Affairs, 233 N.J. Super. 1, 19, 21 (App. Div.), certif. denied, 118 N.J. 194 (1989).

Housing advocates unsuccessfully challenged several components of COAH's regulations: (1) permitting municipalities to receive credit for affordable accessory apartments; (2) granting bonus credits for rental units; (3) using filtering as a secondary source of housing; and (4) refusing to reallocate credits granted to one municipality to increase the fair share of other municipalities in the region. Calton Homes, Inc. v. Council on Affordable Hous., 244 N.J. Super. 438 (App. Div. 1990), certif. denied, 127 N.J. 326 (1991). Housing advocates were also unsuccessful in persuading this court that COAH's affordability regulations, which did not require municipalities to zone for housing for the very poor, violated the Mount Laurel doctrine. Twp. of Warren, supra, 247 N.J. Super. at 179-83. This court also upheld COAH's credit without controls regulation, Non-Profit Affordable Hous. Network v. N.J. Council on Affordable Hous., 265 N.J. Super. 475, 478-82 (App. Div. 1993), and the regulation ensuring that proposed affordable housing developments have access to water and sewer, In re Adoption of Amendments to N.J.A.C. 5:93-1.3 and 5:93-5.3, 339 N.J. Super. 371, 385-91 (App. Div. 2001).

On the other hand, the Supreme Court invalidated a COAH occupancy preference regulation that would have allowed municipalities to set aside fifty percent of their fair share housing for low- and moderate-income persons who lived or worked in the municipality. Twp. of Warren, supra, 132 N.J. at 41-42. This court also invalidated, as inconsistent with the FHA, a technical regulation that capped a municipality's fair share at 1000 units. Calton Homes, supra, 244 N.J. Super. at 453. The Legislature responded by amending N.J.S.A. 52:27D-307(e). See L. 1993, c. 31.

B. The Third Round Rules

COAH's third round substantive rules are designed to permit municipalities to meet a cumulative fair share beginning in 1987 and ending on January 1, 2014. N.J.A.C. 5:94-1.1(d). There are three major components: (1) a municipality's "rehabilitation share" based on the condition of housing revealed in the data gathered for the 2000 Census, previously known as a municipality's indigenous need; (2) a municipality's unsatisfied prior round obligation (1987 through 1999), satisfaction of which will be governed by the second round rules; and (3) a municipality's "growth share" based on housing need generated by statewide job growth and residential growth from 1999 through 2014. N.J.A.C. 5:94-1.2. The "delivery period" for the growth share obligation is ten years, from January 1, 2004 to January 1, 2014. N.J.A.C. 5:94-1.1(d).

As was the case for "indigenous need" in the prior rounds, the rehabilitation share is the measure of a municipality's old, crowded, deficient housing occupied by low- and moderate-income households. N.J.A.C. 5:94-1.4; N.J.A.C. 5:94, Appendix A at 94-33; N.J.A.C. 5:94, Appendix B at 94-52. As before, dilapidated housing is determined by using statistical measures to calculate the number of units within a municipality that are overcrowded, built before 1940, lack adequate plumbing facilities, or lack adequate kitchen facilities. N.J.A.C. 5:94, Appendix A at 94-33. COAH estimated that there were approximately 60,000 dilapidated units in need of rehabilitation in the State, of which approximately 40,000 were occupied by low- and moderate-income households. Id. at 94-34. However, the actual statewide rehabilitation share, as determined by COAH, is approximately 25,000 units because COAH reduced the 40,000 unit rehabilitation share by two calculations that are challenged in this appeal. Id. at 94-36. In doing so, COAH applied a "reallocated present need credit" of approximately 8500 units, and a "spontaneous rehabilitation credit" of approximately 7300 units. Ibid.

COAH calculates that the statewide new construction obligation from the prior rounds (1987-1999) totals approximately 77,500 units. Id. at 94-37. Of these, COAH estimates that approximately 45,000 new units have been built, or are under construction, have planning board approval, or have realistic zoning in place. 35 N.J.R. 4637 (October 6, 2003).*fn5

As noted, municipalities are responsible for fulfilling their prior round obligation. N.J.A.C. 5:94-2.1(a)(2). A municipality is entitled to credits for housing activities undertaken to fulfill that obligation, N.J.A.C. 5:94-3.2;to a reduction in their prior round obligation if sites zoned for affordable housing remain realistic, N.J.A.C. 5:94-3.3; and to an adjustment in their first or second round fair share obligation if it lacks sufficient vacant land or adequate access to water or sewer, N.J.A.C. 5:94-3.4.

As in the prior rounds, COAH relies on statistics and estimates for future population growth to determine prospective need, which for the third round will cover 1999 to 2014. N.J.A.C. 5:94, Appendix A at 94-38. Using projections available from the Office of Smart Growth, COAH estimates that New Jersey's population will grow by 833,188, from 8,348,880 in 1999 to 9,232,068 in 2014. Ibid. The expected population growth will equate to 335,096 new households, approximately forty percent of which (140,365) will be in need of affordable housing. Id. at 94-40. However, COAH finds that secondary sources of supply and demand (filtering, spontaneous rehabilitation, residential conversions, publicly assisted housing and demolitions) will reduce the number of affordable units needed to meet the prospective need from approximately 140,000 units to 52,726 units, which COAH concludes is the figure that represents "adjusted projected need." Id. at 94-46. COAH attributes a substantial percentage of the reduced need to filtering. Id. at 94-42. COAH projects that 59,156 non-dilapidated housing units will become affordable to low- and moderate-income households between 1999 and 2014 through filtering. Ibid.

COAH next addresses how to produce the 52,726 new units identified in the adjusted projected need calculation, representing the increased number of low- and moderate-income households. Id. at 94-46 to 94-49. Discussing housing supply and demand as related to employment, which forms the basis of the "growth share" methodology for determining municipal fair share obligations, COAH predicts the construction of 245,190 new housing units and an employment increase of 679,302 new jobs. Id. at 94-47 to 94-48. If one out of eight of those new units is affordable, the State will gain 25,575 affordable units. Id. at 94-49. Similarly, if new employers are required to produce one affordable unit for each twenty-five jobs produced, 27,172 new units will be constructed. Ibid.

To meet the prospective need as defined by COAH, each municipality must provide for the development of one affordable housing unit for every eight new market-rate residential units projected, plus one affordable unit for every twenty-five newly created jobs. N.J.A.C. 5:94-2.1(d). Municipalities will not calculate each new or additional job created in the municipality. Rather, COAH has determined that various categories of new construction will create varying numbers of jobs, depending upon the category, or "use group," of the construction. N.J.A.C. 5:94, Appendix E at 94-86. For example, an office building will generate three jobs per 1000 square feet, whereas a strip mall will generate one job per 1000 square feet. Ibid. However, municipalities will not be responsible for the new jobs created by, for example, rehabilitating an existing vacant office, store or factory.

COAH expresses its belief that the growth share approach "will hew more closely to the doctrinal underpinning of Mount Laurel in that municipalities will provide a realistic opportunity for construction of a fair share of low and moderate income housing based on sound land use and long range planning." N.J.A.C. 5:94-1.1(b). The growth share methodology "allows each municipality to determine its capacity and desire for growth in a way that is consistent with the policies of the State Development and Redevelopment Plan; its Mount Laurel obligation arises as a share of that growth." N.J.A.C. 5:94-1.1(c). Finally, COAH asserts that "[t]his method tightens the working definition of 'realistic opportunity' to meet the constitutional obligation with not merely a good faith attempt, but with the actual provision of housing for low and moderate income households." N.J.A.C. 5:94-1.1(d).

II.

We commence our review of the challenged methodology and specific regulations with a discussion of the scope of our review. We do not write on a clean slate.

The Legislature has directed COAH to adopt rules to discharge its constitutional and statutory obligations. N.J.S.A. 52:27D-307. Regulations of an administrative agency enacted pursuant to legislative authority and to implement legislative policy enjoy a presumption of validity. Twp. of Warren, supra, 132 N.J. at 26. In Township of Warren, the Court held that the "principle of judicial deference to agency action is particularly well-suited to our review of administrative regulations adopted by COAH to implement the [FHA], . . . ." Id. at 27. See also Mount Laurel II, supra, 92 N.J. at 305-06. The Court emphasized the legislative and executive branches' response to the constitutional obligation and the broad powers bestowed on COAH by the legislature to address "'one of the most difficult constitutional, legal and social issues of our day --that of providing suitable and affordable housing for citizen of low and moderate income.'" Twp. of Warren, supra, 132 N.J. at 27 (quoting Hills Dev. Co., supra, 103 N.J. at 21). Due to the novelty of the legislative scheme and the evolving nature of the process, the Court has declared that COAH "'is entitled to a reasonable degree of latitude, consistent with the legislative purpose . . . .'" Ibid. (quoting Van Dalen, supra, 120 N.J. at 246). On the other hand, "[t]he breadth of COAH's discretion in selecting methodologies to implement the [FHA] . . . does not dilute COAH's duty to adopt regulatory methods that are consistent with the statutory goals." Id. at 28.

Several appellants urge that we should subject the challenged regulations to heightened scrutiny because they are designed to address a constitutional imperative -- the provision of suitable housing for low- and moderate-income citizens in this State. The Court in Township of Warren was also faced with a challenge to an occupancy preference regulation promulgated by COAH that appellants contended diluted the constitutional obligation. Id. at 4-5. Notwithstanding the constitutional dimensions of the agency responsibility, the Court declared that the well-established scope of review of administrative action would be used to review the occupancy-preference regulation. Justice Stein wrote:

In reviewing administrati[ve] actions, the judicial role is ordinarily confined to three inquiries: (1) whether the agency's action violates enabling acts, express or implied legislative policy; (2) whether there is substantial evidence and records to support the findings upon which the agency based application of the legislative policies; and (3) whether, in applying the legislative policies to the facts, the agency clearly erred by reaching a conclusion that could not reasonably have been made upon a showing of relevant factors. [Id. at 28 (internal citations omitted).]

Justice Stein also held that in the rule-making setting, we impose the analogous requirement that the agency demonstrate at a minimum that its action can be understood to be consistent with the underlying legislative mandate. [Id. at 41 (citations omitted).]

Application of this standard allows, indeed requires, a reviewing court to ensure that COAH has faithfully carried out its statutory mandate. Twp. of Southampton, supra, 338 N.J. Super. at 114. COAH's regulations must be consistent with the central purpose of the FHA to provide affordable housing on a regional basis consistent with both sound planning principles and the Mount Laurel doctrine, and COAH may not adopt any regulation that undermines its methodology for calculating or allocating regional fair share obligations. Twp. of Warren, supra, 132 N.J. at 28; Non-Profit Affordable Hous. Network, supra, 265 N.J. Super. at 479. Indeed, the Court's invalidation of the occupancy preference for municipal residents in Township of Warren, supra, 132 N.J. at 30-31, 41-42, undermines appellants' implicit contention that the traditional presumption of validity enjoyed by any agency action and the limited scope of review traditionally employed prevents vindication of the constitutional right.

III.

In addressing the broad-based and multifaceted challenges to the third round rules, we have elected to group the challenges by issue. To that end, we have identified three general groups: 1) calculation issues, 2) allocation issues, and 3) compliance mechanisms. We commence our discussion with the calculation issues that include estimating housing need, defining substandard housing, and the use of secondary sources of supply, such as filtering and tax credit developments.

A. Calculation Issues

Implementing the Mount Laurel doctrine requires a determination of regional housing need. Mount Laurel II, supra, 92 N.J. at 215-16, 252-54. The FHA directs COAH to "[e]stimate the present and prospective need for low and moderate income housing at the State and regional levels[.]" N.J.S.A. 52:27D-307(b). For the first round, covering 1987 to 1993, COAH calculated a total statewide need of 199,966 units, consisting of 85,134 units of indigenous need, 34,411 units of reallocated present need, and 80,421 units of prospective need. N.J.A.C. 5:92, Appendix A at 92-46. After taking into account secondary sources of supply and demand including demolitions, filtering, residential conversion and spontaneous rehabilitation, the statewide need (also known as pre-credited need) was reduced by approximately 50,000 to 145,707 units. Ibid.

For the second round, in which need was calculated on a cumulative basis from 1987-1999, the total statewide need was 140,610 units, which, after reductions for secondary sources of supply and demand and other adjustments, resulted in a calculated need of 86,308 units. N.J.A.C. 5:93, Appendix A at 93-47.

The total third round statewide need has been estimated at 77,594 units, consisting of a rehabilitation share (formerly indigenous need) of 24,847 units and a projected statewide growth share of 52,747 units. N.J.A.C. 5:94, Appendix A at 94-30. This number does not include the municipalities' prior round obligations, which are to be determined individually. Ibid. As noted above, COAH arrived at this figure by assuming a statewide total projected need for 1999-2014 of 140,365 units, id. at 94-41, less 87,639 ...


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