California Supreme Court Endorses City Authority to Adopt Inclusionary Housing Ordinance

On June 15, 2015, in a decision that came as a surprise to many observers, the California Supreme Court unanimously rejected a challenge to San Jose’s inclusionary housing ordinance which had been filed by the California Building Industry Association (CBIA) and supported by the Pacific Legal Foundation. The Court disagreed with CBIA’s position, which claimed that jurisdictions must first show a nexus between new market-rate residential development and the need for affordable housing before adopting any inclusionary housing requirement.  The Court instead held that in adopting an inclusionary housing ordinance the City needs to simply demonstrate a real and substantial relationship between the ordinance and the public interest, and further held that the ordinance did not represent a taking of developers’ property interests.

Case Facts

California Building Industry Association v. City of San Jose (Supreme Court Case No. S212072, June 15, 2015) concerned the City of San Jose’s adoption of an inclusionary housing ordinance in 2010.  San Jose’s ordinance is similar to those adopted by many California jurisdictions, and requires developers to set aside units in new residential development projects for low and moderate income households.  Under San Jose’s ordinance, which applies to all residential developments that create 20 or more new units, at least 15 percent of all for-sale units must be made available at an affordable cost to low and moderate income households.  Although developers have the option of meeting their inclusionary housing obligations by paying an in-lieu fee, constructing affordable units offsite, or dedicating land of an equivalent value, the ordinance includes numerous incentives encouraging developers to include the affordable units as part of the development giving rise to the requirements.  Prior to adopting the ordinance, the City did not prepare a nexus study to justify the 15 percent inclusionary requirement or show that it was roughly proportional to the affordable housing need purportedly created by new development.

The ordinance is also technically applicable to rental housing projects, but the ordinance states that the provisions applicable to rental units are suspended so long as current case law set forth in Palmer/Sixth Street Properties, L.P. v. City of Los Angeles (2009) 175 Cal.App.4th 1396 (Palmer) remains valid.  In Palmer, the Second Circuit Court of Appeal held that the Costa-Hawkins Rental Housing Act precluded the City of Los Angeles from enforcing its inclusionary housing ordinance against newly-built rental units.

Lower Court Rulings

CBIA’s challenged the ordinance, claiming that it was an unconstitutional exaction, and that the City – as is necessary where a dedication of land or payment of a mitigation fee is mandated – had to first prepare a nexus study to support the inclusionary requirement.  After extensive briefing, the trial court agreed with CBIA, finding that the ordinance was constitutionally invalid because the City failed to provide any evidence of a nexus between the construction of new residential developments and the need for affordable housing.  The Court of Appeal subsequently reversed the superior court, holding that the ordinance did not represent an exaction but was merely a zoning use restriction, and therefore the City need not provide any such proof of a nexus.  The Court of Appeal then remanded the case to the trial court to determine whether the ordinance was a valid exercise of the City’s police power.  CBIA thereafter appealed the case to the Supreme Court.

Summary of Supreme Court’s Decision

Many observers predicted that the Supreme Court would follow the logic of recent United States Supreme Court and California Supreme Court opinions (Koontz v. St. Johns River Water Mgmt. Dist. (2013) 570 U.S. __ [133 S.Ct. 2586] and Sterling Park, L.P. v. City of Palo Alto (2013) 57 Cal.4th 1193) which made it easier to challenge government requirements imposed on development projects.  Instead, in a unanimous opinion (including two concurring opinions), our Supreme Court distinguished these earlier cases, and found that San Jose’s inclusionary housing ordinance was nothing more than a use restriction, since it merely limited the price the developer could charge for certain units, and thus should be not be considered an unconstitutional taking.  The Court also distinguished San Jose’s ordinance from the dedication requirements analyzed in Nollan v. California Coastal Commission (1987) 483 U.S. 825 and Dolan v. City of Tigard (1994) 512 U.S. 374, pursuant to which government agencies are required to demonstrate an “essential nexus” and “rough proportionality” between any dedication requirement imposed on a proposed development and the impact expected to result from the development.

Based on its extensive analysis, the Court held that San Jose’s ordinance was not an exaction, and accordingly the constitutional limitations found in the earlier cases with respect to public agencies’ ability to require dedications of private property for public use as a condition of development did not apply.  The Supreme Court remanded the case to the trial court to determine whether the City’s ordinance was valid under the standard ordinarily applicable to general, legislatively imposed land use regulations, namely whether the ordinance’s requirements bear a real and substantial relation to the public welfare.

The CBIA has not determined whether it will seek review from the United States Supreme Court.  Although the California Supreme Court’s opinion will make it more difficult to successfully challenge inclusionary housing ordinances (which have been adopted by more than 100 jurisdictions throughout California), it should be recognized that certain of these ordinances – to the extent they are solely fee-based or require such a high percentage of affordable units that development would be at an economic loss – may still be subject to challenge under the rationale relied upon by the Court in Sterling Park, and/or under the rental housing issue addressed in Palmer.  Accordingly, it is likely that there will be further legal challenges to such ordinances in the future, which we will continue to monitor.

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