LAFAYETTE -- City leaders think they can accommodate their projected housing needs within Lafayette's roughly two-mile-long downtown core.

However, state officials want more specifics on how they plan to do that.

The Department of Housing and Community Development has, for the third time, rejected Lafayette's "housing element," a state-mandated plan that outlines how the city plans to meet its housing needs.

Officials are examining the department's comments and will begin revising the document soon, City Manager Steven Falk said.

Meanwhile, affordable-housing advocates say the letter validates their assertions that Lafayette is trying to skirt its obligation to provide lower-cost housing. City Council members have flatly rejected those arguments.

Neither the city nor property owners are required to actually build any housing. However, officials must show that policies are in place that allow for construction of 361 housing units in Lafayette by 2014, 270 of them for low- or moderate-income households.

The housing element lists 22 downtown sites that officials think can accommodate 760 housing units, 388 of those "affordable."

Many of Lafayette's proposed housing sites in the city have multiple property owners, host existing businesses or both. Because of that, the city must outline specific programs to consolidate such parcels, Cathy Creswell, deputy director of Housing and Community Development, wrote in a Sept. 7 letter to Falk.

Comments from the state show Lafayette has made progress on its housing element, Falk said, "because (the letter) does not question the adequacy of our housing inventory, which in the past has been, I guess, a flash point for some of the critics."

Those critics, not surprisingly, disagree about progress.

"You can read between the lines of what HCD's determination is," said Craig Castellanet, an attorney with the Public Interest Law Project. "It concludes ... that (Lafayette) would have to look outside of the downtown" to meet its housing needs.

Council members maintain that they are committed to providing affordable housing in the city, but they also want the hilly residential neighborhoods kept free of further development.

"The community wanted to maintain open hillsides as much as possible, and part of the bargain for that was that, yes, we would ... concentrate the density in the downtown," Vice Mayor Carl Anduri said.

One downtown site with multiple owners includes the closed Park Theatre and is bordered by a creek, plus parking for adjacent businesses that likely would have to be replaced. Another includes parking for the Lafayette Methodist Church and parcels the city is buying for possible use as a parking lot.

Affordable-housing advocates say that, given these complications, the city's list of sites is too short to meet Lafayette's housing needs.

Even if property owners are willing to sell and lots could be cobbled together, they are more likely to be developed as all-commercial projects than residential ones, said Michael Henn, who served as Lafayette's planning director until 2001.

By restricting development to a handful of downtown parcels, he said, the city will create a seller's market for those lots, driving up the cost of housing.

Lafayette is not alone in feeling pressure to provide more housing. Pleasanton recently scrapped its voter-approved housing cap and paid $2 million as part of a settlement with an environmental justice group. Pittsburg must add nearly 1,000 affordable housing units by 2014 as part of a 2005 settlement with housing advocates.

While a lawsuit is an option, housing advocates would rather work with the city to create more housing sites, said David Levin, an attorney with Bay Area Legal Aid.

That could be difficult, with officials also feeling pressure from the other end of the spectrum. A plan to bring higher densities and residential development to downtown has been met with fierce opposition from residents.

In addition, council members are committed to the downtown-only policy.

"I think the general approach of the city still makes sense," Mayor Brandt Andersson said. "We've got single-family areas that we want to keep that way. We've got ridges and hillsides we want to keep open."