In one of the most widely followed land use cases in recent years, the Supreme Court of California unanimously upheld the City of San Jose’s affordable housing ordinance because it was intended to advance the constitutionally permissible public purposes of increasing the amount of affordable housing in the community and promoting economically diverse developments. California Bldg. Industry Ass’n v. City of San Jose, __ Cal. 4th __ (June 15, 2015, Case No. S212072). According to the court, such ordinances should be evaluated under a municipality’s broad discretion to regulate the use of real property to serve the legitimate interests of the general public and the community at large, rather than as an exaction imposed to mitigate the adverse impacts of development.

More than 170 California municipalities have already adopted such inclusionary zoning or housing programs, requiring or encouraging developers to set aside a certain percentage of housing units in new or rehabilitated projects for low- and moderate-income residents. The court’s holding substantially strengthens the power of the state’s cities and counties to adopt affordable housing ordinances designed to increase the local stock of affordable housing, to promote economically diverse housing developments, or to advance other police power objectives.

The San Jose case resulted from the city’s 2010 adoption of an ordinance that requires all new residential development projects of 20 units or more to sell at least 15 percent of the for-sale units at a price that is affordable to low- or moderate-income households. The ordinance allows several alternative means of compliance, including construction of off-site affordable units, payment of an in-lieu fee, dedication of land equal in value to the in-lieu fee, and acquisition and rehabilitation of a comparable number of units affordable to low- or very low-income households. The ordinance also provides an incentive for developers to choose to provide inclusionary units on-site.

The city supported the ordinance with a range of findings, including that “[r]equiring affordable units within each development is consistent with the community’s housing element goals of protecting the public welfare by fostering an adequate supply of housing for persons at all economic levels and maintaining both economic diversity and geographically dispersed affordable housing.” In addition, the city intended the ordinance to advance several purposes, including meeting the city’s regional housing needs requirement and implementing goals and objectives of the city’s general plan and housing element. The city also intended the ordinance to integrate low- and moderate-income households within market-rate neighborhoods and to disperse inclusionary units throughout the city where new residential development occurs.

The California Building Industry Association challenged San Jose’s ordinance, alleging that the ordinance was invalid on its face because the city did not provide an adequate evidentiary basis to show a “reasonable relationship” between any adverse public impacts or needs for subsidized housing units in the city caused by or reasonably attributed new developments subject to the ordinance’s requirements. In essence, the CBIA’s challenge was based on the “unconstitutional conditions” doctrine from the Supreme Court of the United States’ Nollan v California Coastal Commission and Dolan v. City of Tigard decisions applicable to governmental conditions on the grant of a permit on the landowner’s agreement to dedicate a portion of its property for public use without payment of just compensation. Together, Nollanand Dolan provide that the government may impose such a condition only when the government demonstrates that there is an “essential nexus” and “rough proportionality” between the required dedication and the expected impact of the proposed land use.

In turn, the city responded that the ordinance should be evaluated under the deferential standard of review applicable to legislatively imposed land use regulations generally. Unlike the heightened scrutiny applicable to exactions, land use regulations must simply be reasonably related to the municipality’s interest in promoting the health, safety, and general welfare of the community.

The trial court agreed with the CBIA and issued a judgment enjoining San Jose from enforcing the ordinance. The trial court ruled that the ordinance was invalid on its face because the city did not provide substantial evidence to demonstrate a reasonable relationship between any adverse public impacts or needs for additional subsidized housing caused by or reasonably attributed to new residential developments of 20 or more units and the city’s affordable housing requirements. The court of appeal reversed the trial court’s judgment, holding that the appropriate legal standard by which the ordinance’s validity should be judged is the ordinary standard applicable to a municipality’s exercise of the police power to regulate land use. The state supreme court granted review to address that relatively narrow legal issue—i.e, whether San Jose’s affordable housing ordinance is valid so long as it is reasonably related to the city’s interest in promoting the public health, safety, and welfare of the community or whether the ordinance is valid only if its requirements are reasonably related to the adverse impacts that are caused by or attributable to the developments upon which its requirements are imposed.

The supreme court’s holding centered on the conclusion that San Jose’s affordable housing ordinance is not an exaction because it does not require a developer to give up a property interest for which the government would have been required to pay just compensation outside the permit process. The court reasoned that the requirement that a developer sell a percentage of it’s on-site for sale units at an affordable housing price does not require the developer to dedicate any land to the public or to pay any money to the public. Instead, the requirement restricts the way a developer may use its property by limiting the price for which some of the units may be offered for sale. The court thus considered the city’s affordable housing requirement to be within the city’s broad authority to regulate land use in the interest of the general public and the community at large, and compared the requirement to local land use regulations regarding building heights, setbacks, density limits, and number of bedrooms.

The California supreme court’s treatment of precedent warrants attention. Among others, the court examined Koontz v. St. Johns River Water Mgmt. Dist., a U.S. Supreme Court case in which the court held that the Nollan and Dolan tests apply not only when the government conditions approval of a land use permit on the property owner’s dedication of a portion of the property for public use but also when it conditions approval of such a permit upon the owner’s payment of money. According to the California supreme court, however, “the full range of monetary land-use [sic] permit conditions to which the Nollan/Dolan test [sic] applies under the Koontz decision remains at least somewhat ambiguous.” The court reasoned that “[n]othing in Koontz suggests that the unconstitutional conditions doctrine under Nollan andDolan would apply where the government simply restricts the use of property without demanding the conveyance of some identifiable protected property interest (a dedication of property or the payment of money) as a condition of approval.”

The court looked for support in its own precedent, including Santa Monica Beach, Ltd. v. Superior Court, in which the court noted that the U.S. Supreme Court has held that one of the constitutionally permissible purposes that justifies imposing limits on the rent a landlord may charge his or her tenants is preventing excessive and unreasonable rent increases caused by the growing shortage of and increasing demand for housing within a municipality. The court thus reasoned that “[t]here is no reason that a municipality’s comparable interest in combatting the excessive sale prices of housing that are caused by the growing shortage of and increasing demand for housing, and that deny moderate and lower income families the opportunity to reside within the city, does not similarly justify the city’s imposition of price controls on a portion of the units that are offered for sale in a proposed new residential development.”

The court also considered Ehrlich v. City of Culver City, which among other things approved a public art requirement that required developers to either (1) to pay into the city art fund a fee equal to 1 percent of the total building valuation, or (2) to contribute an approved work of public art of an equivalent value that could be placed on site or donated to the city for placement elsewhere, on the ground that the requirement and related in-lieu fee was reasonably related to the constitutionally legitimate public purpose of increasing the amount of publicly accessible works of art for the benefit of the community and the public as a whole. The court rejected the CBIA’s argument that Ehrlich should be limited to development restrictions that constitute “aesthetic controls,” and reasoned that

“just as it would be permissible for a municipality to attempt to increase the amount of affordable housing in the community and to promote economically diverse developments by requiring all new residential developments to include a specified percentage of studio, one-bedroom, or small-square-footage units, there is no reason why a municipality may not alternatively attempt to achieve those same objectives by requiring new developments to set aside a percentage of its proposed units for sale at a price that is affordable to moderate or low income households.”

The court ruled that the court of appeal in Building Industry Assn. of Central California v. City of Patterson was incorrect to the extent the appellate court held that the conditions imposed by an inclusionary zoning ordinance are valid only if they are reasonably related to the need for affordable housing attributable to the projects to which the ordinance applies.

Finally, the court distinguished, and narrowly read, its own decision in Sterling Park, L.P. v. City of Palo Alto, a 2013 decision in which the court addressed which of two statutes of limitation—the 90-day statute under the Subdivision Map Act or the 180-day statute under the Mitigation Fee Act—applied to a challenge to an inclusionary housing ordinance adopted by the City of Palo Alto. The court first reasoned that the Sterling Park decision was premised on an ordinance that required the developer to give the city an option to purchase the required units at below market rates, whereas the San Jose ordinance had no such requirement. The court then pointed out that it’s Sterling Park opinion “did not address or intend to express any view whatsoever with regard to the legal test that applies in evaluating the substantive validity of the affordable housing requirements imposed by an inclusionary housing ordinance. The opinion in Sterling Park focused exclusively on the procedural issue presented in that case . . . .”

The CBIA v. San Jose decision is likely to result in more California municipalities adopting affordable housing ordinances to address the state’s shortage of such housing and other similar objectives. Municipalities that already have such ordinances will review them to ensure they advance legitimate public purposes and do not hinge solely on addressing adverse impacts. So long as such ordinances are crafted to promote the health, safety, and welfare of the community, and not to address the alleged adverse impacts of new development and the need for affordable housing, the odds of successful legal challenge will be long. Given the stakes, however, a petition for certiorari to the Supreme Court of the United States is likely.