United States: Court Of Appeal Upholds San Jose Inclusionary Housing Ordinance As Legitimate Exercise Of Local Police Power

David Preiss is a Partner and Melanie Sengupta an Associate in our San Francisco

In a recent decision, California's Sixth District Court of Appeal reversed a trial court order and upheld the City of San Jose's Inclusionary Housing Ordinance as a legitimate exercise of the local police power. California Building Industry Association v. City of San Jose (2013) 157 Cal.Rptr.3d 813. The court held that the city was not required to provide evidentiary justification that the affordable units set-aside or alternative in-lieu fee requirements of the ordinance bore a reasonable relationship to the deleterious impact of new market-rate residential development. Rather, the court ruled that the ordinance was an exercise of the city's police power, subject to a highly deferential "reasonable relationship" standard of judicial review.

This opinion still leaves critical issues regarding affordable housing requirements unresolved and exacerbates the confusion surrounding a city's ability to require residential developers to provide affordable housing as part of their projects. In fact, both the petitioner and San Jose have filed petitions for rehearing. The ruling fans the flames of an already-heated debate around affordable housing requirements in California, teeing up these issues for resolution by the California Supreme Court, particularly in light of the subsequent U.S. Supreme Court decision in Koontz v. St. Johns River Water Management District (June 25, 2013, 2013 WL 3184628). (See Holland & Knight's alert on the Koontz ruling.)

San Jose's Inclusionary Housing Ordinance

At the heart of the Sixth District's opinion is the ordinance, which was adopted by San Jose in January 2010 based on its "legitimate interest" in alleviating the shortage of affordable housing in the city. It applied to residential developments of 20 or more units and provided three ways for developers of "for sale" residential units to fulfill the city's inclusionary housing requirement: (1) set aside 15 percent of the units for purchase at a below-market rate to households earning no more than 110 percent of the area median income on-site, although the units could be sold to households earning at most 120 percent of the area median income; (2) construct affordable housing on a different site at specified percentages; or (3) pay an "in-lieu fee" not to exceed the difference between the median sale price of a market-rate unit in the prior 36 months and the cost of an "affordable housing" unit for a household earning no more than 110 percent of the area median income. The ordinance provided incentives to the developer if the affordable units were constructed on the same site as the market-rate units.

The Court Applies a Deferential Standard of Review

The California Building Industry Association (CBIA) sought a writ of mandate to set aside the ordinance, asserting it was invalid on its face. CBIA alleged that the ordinance was not reasonably related to the deleterious impact of market-rate residential development. Several non-profit entities and one individual intervened in opposition to the CBIA's complaint. The trial court declared the ordinance invalid and enjoined the city from implementing it "unless and until the City of San Jose provides a legally sufficient evidentiary showing to demonstrate justification and reasonable relationships between such Inclusionary Housing Ordinance exactions and impacts caused by new residential development."

On appeal, the city argued that the ordinance was a land use restriction, similar to a zoning regulation adopted pursuant to a local government's police power. As such, San Jose argued that it must be accorded a highly deferential standard of judicial review and must be upheld if it "merely has a reasonable relation to the public welfare." CBIA characterized the ordinance as a dedication requirement, rather than a zoning ordinance or regulation of the use of property, since it required a developer to "dedicate or convey property (new homes) for public purposes" or to pay a fee. Thus, CBIA contended that judicial review of the ordinance "clearly calls for the highest scrutiny."

The Court of Appeal disagreed with CBIA and reversed the judgment, finding that the trial court applied the wrong standard of review and that the ordinance did not prescribe a dedication, i.e., "the transfer of an interest in real property to a public entity for the public's use." Instead, according to the Court of Appeal, the ordinance should be reviewed as an exercise of the city's police power stemming from the California Constitution, invalid only if it is arbitrary, discriminatory and without a reasonable relationship to a legitimate public interest. Under this standard, the ordinance withstands constitutional attack "if it is fairly debatable" that the ordinance "reasonably relates to the welfare of those whom it significantly affects," including the surrounding region if affected. The opinion cautioned, however, that judicial deference is not judicial abdication and there must be a "reasonable basis in fact, not in fancy, to support the legislative determination." The court found that it was CBIA's burden to establish the facial invalidity of the ordinance, not the city's, to prove that it survives the challenge. Accordingly, the Court of Appeal remanded the case back to the trial court and left it to that court to determine whether CBIA had rebutted the presumption that the ordinance is reasonably related to the city's legitimate public purpose of ensuring an adequate supply of affordable housing in the community.

Questions Left Unanswered

Several key issues were not before the court in this ruling. The opinion only addressed "for sale" affordable housing, and did not indicate whether the result would have been different had the ordinance addressed rental housing (the post-recession demand for which has been steadily growing throughout the state). Thus, the opinion did not reconcile this result with the Second District's controversial earlier decision in Palmer/Sixth Street Properties, LP v. City of Los Angeles (2009) 75 Cal.App.4th 1396. Instead, it noted that the ordinance specifically excluded rental housing until the decision in Palmer was overturned, disapproved, or modified by the legislature. In Palmer, the court struck down the City of Los Angeles' affordable housing ordinance, which required the inclusion of affordable multi-family rental units in a mixed-use project. The Palmer court found that, as applied to the project at issue in that case, Los Angeles' ordinance was preempted by the rent control provisions of state law found in the Costa-Hawkins Rental Housing Act.

The opinion also did not speak to the adequacy of so-called "nexus studies" that many cities have commissioned to support their inclusionary housing requirements by establishing a link between new market rate housing in the community and the need for more affordable housing units. Critics have questioned the validity and accuracy of such studies. CBIA itself commissioned an analysis of nexus studies in 2011, finding faults with such studies, including overly broad jurisdictional scopes, unreliable affordability gap estimates and statistically improbable lower-income household percentages. The CBIA study concluded that that "residential nexus analysis, as it has been applied in California to date, is an unreliable means of estimating inclusionary housing percentage requirements and in-lieu fees." The Sixth District's opinion seems to indicate that nexus studies do not need to show the impact of the creation of market rate housing on the need for affordable housing. Going forward, pursuant to the opinion standing alone, such studies may only need to show that there is a need for affordable housing in the community that needs to be filled.

Finally — and critically — the opinion did not specify whether or not the ordinance was subject to review for compliance with the Mitigation Fee Act (Government Code §§66000-66025), which applies to development fees and exactions other than taxes or special assessments. The Mitigation Fee Act requires as a condition to their imposition of most development fees that cities clearly document a "reasonable relationship" (i.e., nexus) between factors such as the need for the public facility, the type of development project on which the fee is imposed, the amount of the fee and the cost of the public facility attributable to the development on which the fee is imposed.

The issue of whether the Mitigation Fee Act applies to affordable housing in-lieu fees has been raised before the Court of Appeal in several instances. See, e.g., Trinity Park, L.P. v. City of Sunnyvale (2011) 193 Cal.App.4th 1014;Building Industry Association of Central California v. City of Patterson (2009) 171 Cal.App.4th 886, 897, fn. 13; Palmer, supra, 75 Cal.App.4th at p. 1404, fn. 12. The California Supreme Court will have the opportunity to address this issue in Sterling Park, L.P. v. City of Palo Alto, Case No. S204771, which is currently being briefed by the parties. In reaching any decision, the California Supreme Court will undoubtedly have to take into consideration the Supreme Court's decision in Koontz, where the high court held that a local government's demand for property or money from a land use permit applicant must satisfy the nexus and "rough proportionality" requirements established in previous Supreme Court cases.

Implications for Developers

Going forward, it appears that the best course of action for developers to navigate local affordable housing requirements is to confer early and often with the particular jurisdiction regarding its expectations for affordable housing. Pending further court or legislative pronouncements, developers will likely raise the limitations on local requirements posited by the holdings in Palmer and Koontz, while cities will raise the great leeway afforded them by the opinion in the CBIA case. In many circumstances, the parties will consider a range of approaches (e.g., a mix of unit set-asides, both on and off-site, alternative fee and deferral arrangements, and enlisting and funding non-profit affordable housing developers) and reach agreement through negotiation.

Furthermore, it is critical that the development community stay involved and provide practical input in the adoption of any local inclusionary housing ordinances, so that such ordinances provide a workable framework for addressing future needs for affordable housing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.