California Supreme Court Upholds Inclusionary Housing

Earlier this week the California Supreme Court issued a major takings decision rejecting a suit by the California Building Industry Association (“CBIA”) seeking invalidation of the City of San Jose’s inclusionary housing ordinance. The unanimous decision In CBIA v. City of San Jose is not only a ringing affirmation of the constitutionality of inclusionary housing policies but also an important explication of the line between “exactions” (subject to unusually strict judicial review) and land use regulation (subject to more traditional, deferential review). The case was brought under both the California and the Federal takings clauses, but the California Court assumed the two clauses should be interpreted congruently in this context.

The ordinance’s basic requirement is that all new residential development projects of 20 or more units sell at least 15 percent of the units at a price that is affordable to low or moderate income households. The ordinance provides developers various other compliance options, including (among other things) constructing off-site affordable units or paying in lieu fees. However, to encourage developers to provide on-site inclusionary units, the ordinance provides that when a developer chooses one of the alternative compliance options the inclusionary housing requirement increases to 20 percent. The ordinance also offers various positive incentives for on-site units, including a density bonus and various financial subsidies.

The CBIA’s central argument was that the ordinance would be valid only if the city produced evidence demonstrating that affordable units were needed to address an adverse effect on housing affordability caused by or attributable to a specific development project subject to the ordinance. The Court rejected this argument, concluding that it would be sufficient for the community to demonstrate that the ordnance bore a reasonable relationship to the goals of increasing the number of affordable units in the city and assuring that new affordable units were distributed throughout the city. In other words, the city could impose the requirement without a specific showing about whether or how a proposed development would cause or contribute to the problem.

The CBIA attempted to support its argument by invoking the “unconstitutional conditions” doctrine applicable to certain development exactions under the Supreme Court’s 2013 decision in Koontz v. St. Johns River Water Management District. The California Supreme Court rejected this argument, concluding that the San Jose ordinance did not involve an “exaction.” The Nollan/Dolan/Koontz exactions doctrine, the Court explained, is limited to (certain) development conditions requiring the payment of monetary fees or the dedication of some area of property to public use. In the Court’s view, a limitation on the price that developers can charge for certain units represents a regulatory restriction on the use of property, akin to an ordinary price control regulation.

The California court acknowledged that one of the options for developers to meet the ordinance was to pay a monetary fee to support the provision of affordable housing. However, that feature of the ordnance did not help the plaintiff, the Court explained, because Koontz said that so long as one alternative method of meeting a condition does not violate the Takings Clause, no unconstitutional condition has been imposed. Because the ordinance’s basic requirement of on-site housing did not trigger Nollan/Dolan scrutiny, the Court said, it did not matter that a developer might choose to meet its obligations by paying a fee instead.

Accordingly, the Court ruled, the heightened standard applicable to exactions did not apply in this case; instead this type of challenge to an inclusionary housing requirement should be governed by the more deferential (but not toothless) reasonable relationship standard.   Because CBIA’s legal theory for challenging the ordinance was fundamentally flawed, the suit was rejected and the ordinance was upheld.

While this case involves a single facial challenge to an inclusionary ordinance adopted by one city, the California Supreme Court made clear that more was at stake. It described this recently adopted ordinance in the context of California’s longstanding policies on affordable housing, and noted that more than 170 California communities have adopted inclusionary housing ordinances.   This larger context will no doubt be important when the U.S. Supreme Court takes a look at the inevitable petition for certiorari.