Supreme Court Rules in Favor of Inclusionary Housing Zoning

In a loss for the building industry, the California Supreme Court upheld local jurisdictions’ police power to adopt inclusionary housing ordinances, which are laws that encourage or require developers to set aside a certain percentage of housing units in new projects for low- or moderate-income housing.  The court, in a unanimous decision (with concurring opinions by Justice Werdegar and Justice Chin) rejected the California Building Industry Association’s (CBIA’s) challenge to San Jose’s affordable housing law.

The City of San Jose’s ordinance requires developers creating at least 20 new homes to make 15% of those residences available for purchase by lower-income households, or else pay an in-lieu fee or dedicate land. As an apparent incentive to encourage developers to choose on-site inclusionary units, where the developer chooses one of the off-site options, the required low-income housing percentage rises to 20%. As an additional incentive to encourage developers to comply with the ordinance by providing affordable units on site, the ordinance permits a developer who provides all of the required affordable units on the same site as the market rate units to apply for and obtain a variety of economic benefits, including a density bonus, a reduction in the required-number of parking spaces, a reduction in minimum set-back requirements, and financial subsidies and assistance from the city in the sale of the affordable units.

CBIA filed a lawsuit seeking invalidation of the ordinance. The complaint alleged that the ordinance constituted a facially invalid exaction, in violation of the state or federal constitutions. The trial court agreed with CBIA’s legal position, concluding that the city had failed to show that there was evidence in the record demonstrating the constitutionally required reasonable relationships between the deleterious impacts of new residential development and the new requirements to build and dedicate the affordable housing or pay in-lieu fees.

The Court of Appeal reversed. The appellate court agreed with the City of San Jose that the ordinance’s inclusionary housing requirements must properly be evaluated under the deferential standard ordinarily applicable to general, legislatively imposed land use regulations—i.e., whether the ordinance’s requirements bear a real and substantial relation to the public welfare. CBIA petitioned for review before the California Supreme Court and the court granted the petition.

The Supreme Court affirmed the Court of Appeal’s judgment. The court held that San Jose’s ordinance does not constitute an exaction. Instead, the ordinance only regulates the uses to which property owners may put their lands. Cities and counties have broad authority, under their police powers, to regulate the development and use of real property within their jurisdictions to promote the public welfare and the courts must uphold such regulations provided the bear a reasonable relationship to the public welfare. With regard to the in-lieu fee payment component of the ordinance, the court held that as long as the ordinance provides property owners with at least one alternative means of satisfying the condition, the fee does not constitute an unconstitutional taking.

As noted by the Supreme Court, more than 170 localities in California already have some version of an inclusionary housing ordinance. The decision will make it much more difficult for developers to succeed in challenges to affordable housing requirements in that the decision makes clear that a local agency’s adoption of an inclusionary housing ordinance represents an appropriate exercise of the agency’s police powers, provided that the ordinance bears a reasonable relationship to the public welfare.