Sixth District Court of Appeal Remands for Further Review Trial Court Decision Invalidating City’s Inclusionary Housing Ordinance.

In California Building Industry Association v. City of San Jose (2013) __Cal.App.4th__ (Case No. H038563) the Sixth District Court of Appeal rejected the strict standard of review applied by a trial court decision finding the City of San Jose’s inclusionary housing ordinance invalid and remanded the matter to the trial court for further consideration under a more deferential standard of review. This ordinance required developers of housing projects to construct affordable housing or otherwise pay an in-lieu fee.

Factual and Procedural Background

The state Legislature, in the Housing Accountability Act, emphasized the need for affordable housing to address a severe state-wide shortage. The act places the responsibility of facilitating the provision of affordable housing on local governments and directs that general plans include a “housing element.”

In January 2010, the City of San Jose addressed this state policy by adopting Ordinance No. 28689, the Inclusionary Housing Ordinance, which required residential developments of 20 or more units to reserve 15 percent of the units for purchase at below-market rate. The requirement could also be satisfied by constructing affordable housing on different sites at specified percentages. The ordinance also offered incentives for affordable housing units constructed on the same sites as market-rate units. Finally, developers could instead pay an in-lieu fee to satisfy the ordinance, with collected fees being directed to the City’s Affordable Housing Fee Fund.

The California Building Industry Association (CBIA) challenged the ordinance. In July 2012, a trial court declared the ordinance invalid and enjoined the City from enforcing it until the City could provide an evidentiary showing to demonstrate justification for the ordinance and a reasonable relationship between exactions and impacts caused by new residential development. The City appealed.

The Court of Appeal’s Decision

The primary issue on appeal involved the appropriate standard of review for the court to apply to the City’s challenged ordinance. The City argued that the CBIA relied on the wrong standard of review. The City characterized the ordinance as a land use regulation adopted pursuant to the City’s police power. Such ordinances must be upheld as valid if the terms “are reasonably related to purposes protecting or advancing the public welfare” subject to an arbitrary and capricious standard of review.

CBIA argued for stricter review of the ordinance because, in their opinion, it imposed an exaction that was neither a zoning ordinance nor a regulation of the use of property. Since the exaction, such as payment of an in-lieu fee or dedication and conveyance of property for public purposes, constituted a compelled transfer of property, the CBIA argued the ordinance required stricter scrutiny review, similar to that applied in takings cases.

The appellate court sided with the City, characterizing the ordinance as an exercise of the City’s police power with the express purpose of enhancing the public welfare by establishing affordable housing policies. The court emphasized that the ordinance was not enacted for the purpose of mitigating housing loss caused by new residential development, which could implicate a different standard of review.

The court cautioned that a municipality’s police power is not unlimited, and it declined to accept the City’s stated goals without further review of the record. Since the trial court formerly applied the incorrect standard of review, the Court of Appeal remanded the matter to the trial court to consider evidence offered by CBIA under the proper standard of review: whether the ordinance has a real and substantial relation to the public welfare supported by basis in fact.