California Supreme Court Upholds City of San Jose’s Inclusionary Housing Ordinance as a Valid Land Use Regulation, Not an Exaction or Taking

Like more than 170 cities in California, the City of San Jose (City) enacted an inclusionary housing ordinance requiring all new residential development projects of 20 or more units to sell at least 15 percent of the units at a price that is affordable to low- or moderate-income households (Ordinance). The California Building Industry Association (CBIA) challenged the Ordinance as an unconstitutional exaction, claiming that the City did not properly justify the relationship between the Ordinance and the adverse impact that the development projects subject to it would create. On Monday, in a decision that will make it easier for jurisdictions to enact inclusionary housing ordinances, the California Supreme Court held that the Ordinance was a land use regulation, not an exaction, and as such was permissible because the City sufficiently demonstrated the Ordinance was reasonably related to the public welfare. (California Building Industry Association v. City of San Jose et al. (June 15, 2015, S212072) __Cal. 4th __.)

The Ordinance, passed in 2010, requires that for-sale residential developments within the City creating 20 or more units provide 15 percent of the units at an affordable housing cost to households earning no more than 120 percent of the area median income. As an alternative to providing on-site units, the developer may provide off-site affordable, for-sale units, pay an in-lieu fee, dedicate land, or acquire and rehabilitate existing units. The City supported the Ordinance by finding that it was consistent with the community’s housing element goals and that rising price of land was a key factor in preventing development of new affordable housing. The City further found that new residents of market-rate housing place demands on services provided by employees with incomes only adequate to pay for affordable housing, in turn, harming the City’s ability to attain employment and housing goals and service market-rate housing. Some of the stated purposes of the Ordinance were to meet the City’s regional share of housing needs and to integrate “low and moderate income households with households of market rate neighborhoods and to disperse inclusionary units throughout the city.” Other purposes were to mitigate the service burden imposed by households in new market rate residential developments by making additional affordable housing available for service employees.

CBIA challenged the Ordinance, claiming it was invalid on its face. CBIA claimed the Ordinance was an exaction, meaning it was a condition imposed on a land use permit requiring the property owner to dedicate a portion of its property for public use without payment of just compensation. As such, CBIA claimed the City was required to support the Ordinance with substantial evidence of a reasonable relationship between the need for additional subsidized housing units reasonably attributed to the development of new market-rate housing and the affordable housing exactions imposed on residential development by the Ordinance.
The superior court agreed with CBIA that the Ordinance was invalid and the appellate court reversed.  The Supreme Court granted review.

The Supreme Court found that the Ordinance did not constitute an exaction because the “ordinance does not require a developer to give up a property interest for which the government would have been required to pay just compensation under the takings clause outside of the permit process.” Rather, the Ordinance was “like many other land use regulations” in that it “simply places a restriction on the way the developer may use its property by limiting the price for which the developer may offer some of its units for sale. “The Supreme Court explained that municipalities have broad discretion to regulate the use of real property to serve the legitimate interest of the general public and the community at large, suggesting the Ordinance is similar to other land use regulations such as ordinances specifying where certain types of retail may be operated, adopting land use regulations to facilitate development of commercial or residential, or restrictions on the height of buildings, set-backs, density limits, and bedroom requirements. Since the Ordinance “does not constitute a physical taking or deprive a property owner of all viable economic use of property,” it does not constitute an exaction.

Having found the Ordinance was not an exaction, the Supreme Court considered whether the City had shown the Ordinance was reasonably related to the public welfare. The Supreme Court found that the City enacted the Ordinance to comply with Housing Element Law and to locate affordable housing in economically diverse development projects, which were “unquestionably constitutionally permissible” under this standard. The Court found that price controls are a constitutionally permissible means to achieve the municipality’s legitimate public purpose.

Prior to this decision, many believed the Supreme Court would find that inclusionary housing ordinances were exactions based on the earlier decision in Sterling Park, L.P. v. City of Palo Alto (2013) 57 Cal.4th 1193, 1207. In Sterling Park, the Court considered which statute of limitations was applicable to challenges to an inclusionary housing ordinance – the period applicable to land use regulations found in the Subdivision Map Act (Gov. Code, § 66400), or the period applicable to exactions found in the Mitigation Fee Act (Gov. Code, § 66000 et seq.) In that case, the Court found the inclusionary ordinance was more like an exaction.  In the San Jose case, the Court distinguished the earlier case by pointing out that the Sterling Park decision involved an ordinance that required the developer to provide the City with an option to purchase the units for the specified below-market prices; San Jose’s Ordinance contained no such requirement. In addition, the Supreme Court noted that in Sterling Park the Court was considering whether the ordinance was an exaction only for the purposes of determining the applicable statute of limitations.

It is important to note that the San Jose decision does not affect case law restricting local governments from adopting inclusionary housing requirements for rental housing.  A footnote in the decision briefly discusses Palmer/Sixth Street Properties, L.P. v. City of Los Angeles (2009) 175 Cal.App.4th 1396 which held that the vacancy decontrol provisions of the Costa-Hawkins Rental Housing Act (Civ. Code, § 1954.53, subd. (a)) precludes a city from requiring a rental housing developer to charge below-market rents.  As the San Jose Ordinance regulates rental housing only if Palmer is overturned, that issue was not at stake in the San Jose case.

Local jurisdictions which have adopted inclusionary housing ordinances, as well as those considering adoption, should compare their ordinances to the one adopted by the City of San Jose.  The Court emphasized the careful process undertaken by San Jose in its adoption of the Ordinance, including a detailed study of the economic feasibility of the inclusionary housing requirement and extensive meetings with community and industry groups.  The Court also discussed the flexible features of the Ordinance, including the options to meet the requirement with offsite construction, less expensive onsite affordable units, or land donation, as well as a process for obtaining a waiver to avoid an unconstitutional result.  Some existing inclusionary ordinances may also be invalid as applied to particular developments if the requirements are “confiscatory” by denying a property owner a fair and reasonable return on its property.  Ordinances that go too far with excessive inclusionary requirements may still be subject to challenge.

Questions

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Jeffrey A. Mitchell | 916.321.4500