California Building Industry Association v. City of San Jose

Why It Matters: In a much-anticipated ruling, the California Supreme Court has settled for now the question of whether or not a municipality may condition residential project approvals on the inclusion of affordable housing units, validating the over 170 local agency inclusionary housing ordinances in California. The Court concluded that the required provision of affordable housing is not an exaction subject to the constitutional limits set forth in United States Supreme Court cases such as Nollan and Dolan, but rather was a proper exercise of the police power. The Court did, however, reserve the question of whether the ordinance, when applied to a particular project, might result in an unconstitutional taking of property should the ordinance result in a violation of Nollan v. California Coastal Commission and Dolan v. City of Tigard principals.

Facts: The City of San Jose enacted the inclusionary housing ordinance in 2010 after conducting outreach to the community and after commissioning a study of the issue. The ordinance required that all residential projects of 20 or more units sell at least 15 percent of the for-sale units at a price affordable to low- or moderate-income households. Certain incentives were provided to reduce the economic impact on the developer. In addition, alternative methods of meeting the obligation, including the payment of in-lieu fees, were included in the ordinance. The California Building Industry Association (CBIA) immediately filed a lawsuit challenging the ordinance as being invalid on its face. CBIA prevailed at the trial court level but lost at the Court of Appeal. CBIA petitioned the California Supreme Court for review, which was granted.

The Decision: Citing the lengthy statutory history in California relating to the critical shortage of affordable housing in the state, the Supreme Court concluded that the ordinance was within the broad authority of a municipality to regulate the development and use of real property to promote the public welfare. The Court likened the ordinance to familiar land use restrictions such as limiting the types of activities for which property may be used (commercial or residential, etc.), lot size, density, setback and price controls such as rent control. CBIA had contended that the police power standard was not applicable but that the ordinance would be valid only if the conditions imposed by the ordinance bear a reasonable relationship to the amount of the city’s need for affordable housing attributable to the proposed development. CBIA relied on the U.S. Supreme Court cases of Nollan v. California Coastal Commission (1987) 483 U.S. 825 (Nollan) and Dolan v. City of Tigard (1994) 512 U.S. 374 (Dolan).

The Supreme Court distinguished Nollan and Dolan as cases involving the dedication of property for a public use that justify special scrutiny by courts. The Court concluded that the San Jose ordinance did not violate Nollan and Dolan and the cases that follow those precedents because the ordinance does not require the developer to give up a property interest for which the government would have been required to pay just compensation under the takings clause outside the permit process. The Court also cited the case of Koontz v. St. Johns River Water Management District (2013) 570 U.S. ___, 133 S. Ct. 2586, 186 L. Ed. 2d 697 for the proposition that so long as a permitting authority offers at least one alternative means of satisfying a condition that does not violate the takings clause, the property has not been subjected to an unlawful condition. The Court did state that as a facial challenge the ordinance has not been applied to any proposed development and the application of price controls on 15 percent of the units, along with the availability of economically advantageous incentives such as a density bonus, would not necessarily produce a confiscatory result.

CBIA next contended that the California Supreme Court case of San Remo Hotel v. City & County of San Francisco (2002) 27 Cal.4th 643 (San Remo) supported its argument that the San Jose ordinance must bear a reasonable relationship to the public impact of the project. The Supreme Court, of course, is the final arbiter of what its previous rulings mean. The Court rejected CBIA’s reading of San Remo on the ground that the case did not consider the San Francisco ordinance as applying to permit conditions and that the decisions should be read to only apply to mitigation fees, in which case the issue is whether the fee in question was intended to mitigate the adverse effects of the project. The San Jose ordinance was not mitigation for the impacts, but addressed the broader goal of addressing the shortage of affordable housing in the community, citing the California Supreme Court case of Ehrlich v. City of Culver City (1996) 12 Cal.4th 854.

Practice Pointers

  • A valid inclusionary ordinance should include significant economic incentives if it is to survive a challenge based upon impacts to a specific project.
  • A valid inclusionary ordinance also needs to provide alternative means of complying with the condition that would not implicate takings jurisprudence.
  • A developer should provide evidence of the economic impact of complying with an inclusionary ordinance and the offsetting benefits of economic incentives as part of the processing of projects.
  • Municipalities should develop economic incentives that have real value to a project.