United States: California Supreme Court Paves The Way For Ownership Inclusionary Housing

Chelsea Maclean is a Partner in our San Francisco office.

Many Developers Maintain That the Costs Associated with Inclusionary Housing Requirements Can Determine the Economic Feasibility of a Project

HIGHLIGHTS:

  • The California Supreme Court unanimously rejected the California Building Industry Association's (CBIA) challenge to the City of San Jose's ownership inclusionary housing ordinance in California Building Industry Association v. City of San Jose.
  • This decision paves the way for the adoption, implementation and enforcement of similar inclusionary housing ordinances throughout the state.
  • Cities that have held off on enforcing their ownership inclusionary housing programs during the pendency of the San Jose case are expected to reevaluate and begin enforcing their programs once again.

In a highly anticipated case affecting residential development throughout California, the California Supreme Court unanimously rejected the California Building Industry Association's (CBIA) challenge to the City of San Jose's (City) ownership inclusionary housing ordinance in California Building Industry Association v. City of San Jose. This decision paves the way for the adoption, implementation and enforcement of similar inclusionary housing ordinances throughout the state.

Specifically, the Court held the City's inclusionary housing ordinance is subject to the deferential standard of review afforded to traditional legislative land use regulations. Under this standard, the ordinance will be considered invalid only if it is arbitrary, discriminatory and without a reasonable relationship to any legitimate public interest. The Court held that inclusionary housing requirements are not subject to takings claims because they do not require a property owner to dedicate an interest in land to the government. Then, in distinguishing previous cases which had previously suggested that similar conditions were subject to heightened review, the Court emphasized the purpose of the condition, distinguishing regulations that are imposed to mitigate impacts from conditions imposed to serve distinct, constitutionally legitimate public purposes (such as meeting the City's regional share of housing needs and providing for residential integration among low and market rate households as was articulated here).

In emphasizing the purpose of the condition, the Court adds another nuance to a patchwork of legal opinions relating to takings claims that previously focused on other factors such as the manner of application (e.g., as an ad hoc condition or via generally applicable legislation). In the context of affordable housing, cities are likely to move swiftly in adopting, implementing and enforcing ownership inclusionary housing ordinances given the relaxed standard, though the likelihood that CBIA petition for certiorari to the U.S. Supreme Court and challenges to other ordinances "as applied" to actual development could reduce the inclusionary housing momentum.

Background of the San Jose Ordinance

San Jose's ordinance required developers of "for sale" residential units to set aside 15 percent of their project units as affordable units. (See Holland & Knight's alert " California Supreme Court to Review Inclusionary Housing Requirements," Oct. 16, 2013.) In the alternative, developers could satisfy the Ordinance's obligation in one of the following four ways:

  1. build inclusionary units off-site
  2. pay an in lieu fee
  3. dedicate land suitable for construction of inclusionary units equal to the value of the applicable in lieu fee
  4. acquire and rehabilitate a comparable number of inclusionary units that are affordable to low or very low income households

CBIA brought a facial challenge to the Ordinance, arguing that it was invalid on the ground that the City, in enacting the Ordinance, failed to demonstrate a reasonable relationship between any adverse public impacts or needs for additional subsidized housing units in the City caused by the development of new market rate residential developments and the new affordable housing exactions and conditions imposed by the Ordinance. CBIA cited San Remo Hotel v. City and County of San Francisco (San Remo) and Building Industry Assn. of Central California v. City of Patterson (City of Patterson). In constitutional terms, CBIA argued that the San Jose Ordinance's conditions constitute exactions for purposes of the takings doctrine.

The trial court agreed with CBIA's contention and declared the Ordinance invalid since the City had been

... unable to demonstrate ... the constitutionally required reasonable relationship between deleterious public impacts of new residential development and the new requirements to build and to dedicate the affordable housing or pay the fees in lieu of such property conveyances" under the San Remo standard. The Sixth District Court of Appeal reversed and held that the Ordinance should be reviewed under the highly deferential standard of review as an exercise of the City's police power rendering the ordinance invalid only if it is arbitrary, discriminatory and without a reasonable relationship to any legitimate public interest.

CBIA petitioned the California Supreme Court for review, specifically requesting review of two intervening decisions:

  1. the U.S. Supreme Court's decision in Koontz v. St. Johns River Water Management District (Koontz) (extending holdings in Nollan v. California Coastal Commission (Nollan) and Dolan v. City of Tigard (Dolan) to instances in which a jurisdiction denies a land use permit and where monetary exactions are imposed on a development proposal)
  2. Sterling Park, L.P. v. City of Palo Alto (Sterling Park) (holding that the longer statute of limitations in the Mitigation Fee Act applied to a developer's challenge to an inclusionary housing obligation, rather than the shorter statute of limitations in the Subdivision Map Act)

Inclusionary Housing: What It Is, What It Isn't and How Courts Should Tell the Difference

The lengthy opinion spends as much, if not more, time talking about what the Ordinance is not and distinguishing the bevy of related case law before settling on the legal standard.

Inclusionary Housing Is Not an Exaction Subject to the Nollan/Dolan Standard

The Court held, contrary to CBIA's contention, that the conditions that the "San Jose ordinance imposes upon future developments do not impose exactions upon the developer's property so as to bring into play the unconstitutional conditions doctrine under the takings clause of the federal or state Constitution." The Court explains that the special limitations imposed by the unconstitutional takings doctrine derive from Nollan and Dolan cases, both of which involved dedications of property.

  • The "Nollan/Dolan" standards impose a high level of judicial scrutiny. The Nollan test requires an agency to demonstrate a "nexus," that is, a legitimate state interest in advancing the exaction.
  • The Dolan test requires an agency to demonstrate "rough proportionality" between the magnitude of the exaction and the nature and extent of the project impact.

More recently, the Court held in Koontz that the heightened scrutiny standard applies when the government conditions its approval upon the owner's payment of money.

But the Court retorts that

... nothing in Koontz suggests that Nollan and Dolan would apply where government restricts use of property without demanding conveyance of property interest. It is the governmental requirement that the property owner convey some identifiable property interest that constitutes a so-called exaction under the takings clause and that brings the unconstitutional conditions doctrine into play.

In the present case, the Court finds that the Ordinance does not require the developer to give up a property interest or to "to dedicate any portion of its property to the public or to pay any money to the public." Specifically, the Court rejects arguments that the diminished property value as a result of the Ordinance constitutes a takings. Similarly, the Court notes that the fact that the Ordinance requires restrictions upon resale to be recorded against the residential development and all inclusionary units does not transform the Ordinance's conditions into a takings. Finally, the Court notes that the Koontz decision makes clear that so long as a permitting authority offers at least one alternative means of satisfying a condition, the property owner has not been subjected to a takings.

Inclusionary Housing Ordinances Are Not Like Mitigation Impact Fees Subject to Reasonable Relationship Standard

The Court distinguishes the "reasonable relationship" standard set forth in San Remo for mitigation fees that "do not serve a broader constitutionally permissible purpose unrelated to the impact of the proposed development." In San Remo, the challenged ordinance imposed a requirement to replace long-term rental units (or pay an in-lieu fee). This ordinance was explicitly intended to mitigate the adverse effect that a proposed conversion of long-term rental units into tourist units would have on the city's stock of long-term rental units. Based on the intended mitigation purpose, the Court said it was appropriate for the San Remo court to focus on whether the fee was reasonably related to mitigating the impact of the proposed conversion.

In contrast, the Court said that the San Jose Ordinance's conditions are intended not only to mitigate the effect that the covered development projects will have on the city's affordable housing problem but also to serve the distinct, constitutionally legitimate purposes of meeting the City's regional share of housing needs and providing for residential integration among low and market rate households. According to the Court, these constitutionally legitimate purposes warrant the most deferential standard of review.

Notably, in drawing this conclusion, and emphasizing the distinction between an ordinance intended to mitigate an impact versus fulfill a greater constitutional purpose, the Court holds that the City of Patterson decision was incorrect in applying San Remo standard to an inclusionary housing ordinance. Because the affordable-housing in lieu fee in City of Patterson was imposed to further the public purpose of increasing the stock of affordable housing the Court disapproved the decision in City of Patterson, "to the extent it indicates 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."

Moreover, in drawing a distinction between the San Remo and City of Patterson cases, the Court diminishes the importance of whether a condition is imposed on an ad hoc basis (i.e., on a specific development project or permit) or as a legislative requirement (imposed via a generally applicable ordinance). Courts have generally applied the heightened Nollan/Dolan test to conditions imposed in an ad hoc manner. Some lower courts, however, have applied the more relaxed "reasonable relationship" standard in instances where an exaction is imposed through generally applicable legislation. In both San Remo and the City of Patterson, the challenged requirements were formulaic and legislatively mandated. Despite the similarity, the Court added another layer of distinction to the takings jurisprudence depending on purpose of the requirement.

Inclusionary Housing Is More Like a Land Use Restriction Subject to the Police Power Test

After reviewing the Ordinance's stated purpose, the Court characterizes the Ordinance as falling within a "municipalities' general broad discretion to regulate the use of real property to serve the legitimate interests of the general public and the community at large." The Court likens the conditions to other land use restrictions such as height limitations, set-back requirements, and density limits. Like other land use regulations, the Court explains that this Ordinance 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 notes that a price control is permissible unless the restriction rises to a "confiscatory" control or constitutes a regulatory taking. Future affordable housing challenges are likely to focus on the bounds of these controls.

No Clarification for Rental Residential Development

One topic on which the Supreme Court does not opine is in relation to rental residential development. The opinion includes only one footnote (footnote 6) on the topic. It notes that the San Jose ordinance provided that it applied to rental housing only if the courts or Legislature overturn, disapprove or depublish the decision in Palmer/Sixth Street Properties, L.P. v. City of Los Angeles (Palmer). Palmer held that Los Angeles' inclusionary housing ordinance requiring affordable units to be subject to long-term rental restrictions violated state law provisions found in the Costa-Hawkins Act. This act allows the owner, and not a city, to set initial rent levels. Since the Palmer decision remains applicable, the rental provisions in the San Jose Ordinance have not come into effect and the Supreme Court did not address the issue.

Implications for Residential Development

Given the Court's emphasis on the purpose of a condition and the advantage of the more deferential standard afforded by the police power test, cities will have an incentive to characterize inclusionary housing requirements as serving a legitimate general public purpose rather than as mitigation for the impacts of market rate housing. Interestingly, cities have begun to characterize ordinances, particularly those that involve fees for rental residential development, precisely as mitigation for market rate housing impacts in order to distinguish the fees from those admonished as "inextricably intertwined" with the type of rental inclusionary housing requirements overturned in Palmer.

Cities that have held off on enforcing their ownership inclusionary housing programs during the pendency of the San Jose case are expected to reevaluate and begin enforcing their programs once again. Cities that commissioned detailed "nexus studies" in order to justify in lieu fees may now abandon those efforts or characterize requirements not as impact fees but as serving a legitimate public purpose.

Nonetheless, while adoption and implementation of inclusionary housing requirements move forward, CBIA is likely to appeal to the U.S. Supreme Court. Further, challenges to inclusionary housing requirements "as applied" to actual developments could still determine the bounds of the relaxed standard. Despite the low bar, many developers maintain that the costs associated with inclusionary housing requirements can determine the economic feasibility of a project, and determine whether a project will "pencil" or not in this climate of heated land value. Time will tell whether additional inclusionary housing requirements will result in the desired affordable housing units or whether they will tip the infeasibility scale such that fewer residential developments, and therefore affordable homes, will be built as an unintended consequence.

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.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

Registration

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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Emails

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 .

Security

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.