In California Building Industry Association v. City of San Jose (Case No. S212072, filed June 15, 2015), the California Supreme Court upheld an inclusionary housing ordinance imposing affordable housing requirements as a valid exercise of a municipality’s police power, rather than an exaction subject to a constitutional takings analysis.

In 2010, the City enacted an inclusionary housing ordinance that requires all new residential development projects of 20 or more units to sell at least 15 percent of the for-sale units at a price that is affordable to low or moderate income households.  As an alternative to providing the required number of for-sale inclusionary units on the same site as the market rate units, the ordinance affords a developer a number of other compliance options.

Plaintiff California Building Industry Association argued that the ordinance was invalid on its face because the City failed to provide a sufficient evidentiary basis “to demonstrate a reasonable relationship between any adverse public impacts or needs for additional subsidized housing units in the City ostensibly caused by or reasonably attributed to the development of new residential developments of 20 units or more and the new affordable housing exactions and conditions imposed on residential development by the Ordinance.” CBIA maintained that the conditions imposed by the City’s inclusionary housing ordinance would be valid only if the City produced evidence demonstrating that the requirements were reasonably related to the adverse impact on the City’s affordable housing problem that was caused by or attributable to the proposed new developments that are subject to the ordinance’s requirements, and that the materials relied on by the City in enacting the ordinance did not demonstrate such a relationship. CBIA’s challenge is based on the premise that the conditions imposed by the ordinance constitute exactions under the takings clauses of the United States and California Constitutions.

The court rejected these arguments and held that the appropriate legal standard by which the validity of the ordinance is to be judged is whether the ordinance bears a real and substantial relationship to a legitimate public interest. The court explained that the conditions that the ordinance imposes upon future developments do not impose exactions upon the developers’ property so as to bring into play the unconstitutional conditions doctrine under the takings clause of the federal or state Constitution.  Specifically, the court distinguished past decisions (including the Nollan/Dolan line of decisions) by explaining that 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. Instead, like many other land use regulations, the ordinance 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 court explained that land use regulations often result in diminished market value, but such reduction does not constitute a taking of the diminished value of the property.  The court likened the restriction to land use limitations on the height of buildings, set-back requirements, density limits, bedroom requirements and a variety of other use restrictions.  The court also noted that the U.S. Supreme Court in Koontz v. St. Johns River Water Management District made clear that so long as a permitting authority offers a property owner at least one alternative means of satisfying a condition that does not violate the takings clause, the property owner has not been subjected to an unconstitutional condition.  As an alternative to providing the required number of for-sale inclusionary units on the same site as the market rate units, the City’s inclusionary housing ordinance affords a developer a number of compliance options, including (1) constructing off-site affordable for-sale units, (2) paying an in lieu fee based on the median sales price of a housing unit affordable to a moderate income family, (3) dedicating land equal in value to the applicable in lieu fee, or (4) acquiring and rehabilitating a comparable number of inclusionary units that are affordable to low or very low income households.  Accordingly, rather than being an exaction, the ordinance is an example of a municipality’s permissible regulation of the use of land under its broad police power.