In Palmer/Sixth Street Properties L.P. v. City of Los Angeles, the California Court of Appeal held that local inclusionary requirements (also known as BMR requirements) applied to rental housing and in-lieu fees based upon those requirements violated the Costa-Hawkins Act, the State law governing rent control. The Court concluded that since Costa-Hawkins allows landlords to set the initial rent for a new unit and to increase the rent to market levels whenever a unit is vacated (vacancy decontrol), Los Angeles could not limit the initial rental rate of the Palmer units. Since the in-lieu fee was based upon the number of BMR units required, the in-lieu fee was inextricably intertwined with the preempted rent control option disallowed by Costa-Hawkins. In-lieu fees adopted after Palmer were based on new nexus studies. Effective Jan. 1, 2018, AB 1505 has “fixed” Palmer and allows local inclusionary (BMR) units in rental housing once again.

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