On April 8, 2015, the California Supreme Court heard oral argument in California Building Industry Association v. City of San Jose (Affordable Housing Network of Santa Clara County et al.), S212072, a case with statewide significance for local affordable housing measures.  At issue is the City of San Jose’s Inclusionary Housing Ordinance (the “Ordinance”), adopted by its City Council on January 12, 2010, which requires new residential developments of 20 or more units to set aside 15 percent for purchase at below-market rates to buyers earning no more than 110 percent of area median income.  Alternatively, the Ordinance may be satisfied through dedication of land or payment of an “in-lieu fee” not to exceed the difference between the median sale price of a market-rate unit and the cost of an affordable housing unit.  The California Building Industry Association (“CBIA”) filed a complaint on March 24, 2010, seeking declaratory and injunctive relief against the City on grounds that the Ordinance is facially unconstitutional under the state Constitution.

CBIA Challenged the Court of Appeal’s Decision to Uphold the Ordinance

The case rose to the Supreme Court on CBIA’s appeal of a decision favoring the City.  CBIA had been successful in the Superior Court, which granted CBIA’s requested relief and found that the City had failed to demonstrate a nexus between the Ordinance and the “deleterious public impacts of new residential development.”[i]  CBIA argued that the builders of new housing should not be required to pay for the costs of subsidizing affordable housing, and that the City’s justification for shifting that burden to the builders was not adequate.  However, the Court of Appeal reversed, holding that the Superior Court had erred by applying an overly rigorous standard of judicial review to the City’s reasoning.[ii]  Whereas the Superior Court had applied the  test previously announced by the Supreme Court in San Remo Hotel L.P. v. City & County of San Francisco,[iii] in which the Court upheld a local development mitigation fee against a constitutional takings claim, here the Court of Appeal pointed out that a takings claim had not been asserted.  The Court of Appeal applied a more lenient standard of review, finding that “the Ordinance should be reviewed as an exercise of the City’s police power.”[iv]  Accordingly, under the Court of Appeal’s view, the Ordinance represents a valid exercise of the City’s police power if it bears a “substantial and reasonable relationship to the public welfare,” and it is invalid “only if it is arbitrary, discriminatory, and without a reasonable relationship to a legitimate public interest.”[v]  The Court of Appeal directed that a remand to the Superior Court should occur for the City’s justification to be analyzed under this less exacting standard.

Oral Argument Challenged Counsel for Both Sides With Critical Questions About the Standard of Review and Public Policy Implications

In oral argument before the Supreme Court last week, the Justices peppered attorneys for CBIA and the City with questions.  As to the strict standard of review supplied by San Remo in a constitutional takings challenge to a local development mitigation fee, the Justices called upon the attorneys to  distinguish such fees from an inclusionary housing set-aside like the Ordinance.

To the attorney for the City, the Justices questioned whether the Court of Appeal’s lenient “legitimate public interest” test might be too broad.  In particular, Justices Chin and Liu asked whether any inclusionary housing measure could possibly fail the standard of review applied by the Court of Appeal.

On the other side, the Justices probed counsel for CBIA to answer whether the Ordinance in fact deprived developers of a legally identifiable property interest.  Additionally, after noting the state and local interest in addressing the housing shortage, Chief Justice Cantil-Sakauye asked how application of the stricter San Remo standard might cast doubt upon the over 170 existing inclusionary housing measures adopted by localities statewide.

What to Watch For

California is in the midst of a well-documented housing shortage.  Just weeks ago, on March 17, 2015, the state Legislative Analyst’s Office published a report attributing high housing costs to undersupply, including shortage of  market-rate units.  The Court’s decision whether to affirm or reject the Court of Appeal’s treatment of the Ordinance could have substantial ramifications, not only for existing local inclusionary housing measures, but also for localities considering future such measures and for housing developers transacting in these markets.  We will report in an updated post when the opinion is issued, which is expected by July 7, 2015.