Inclusionary Housing Ordinance Withstands Facial Challenge in New California Court of Appeal Decision; California Building Industry Association v. City of San Jose

June 17, 2013

By Matthew Hinks

The California legislature has declared the availability of housing for every Californian to be a matter of "vital statewide importance." Thus, the legislature has charged local governments with facilitating the provision of housing for all economic segments of the community through the implementation of "housing elements" as part of the community's general plan. The components of those housing elements, including an assessment of housing needs for all income levels, the identification of adequate housing sites, and a program that assists in the development of such housing to meet the needs of low-income households.

San Jose's Inclusionary Housing Ordinance

To implement the state's inclusionary housing policy, the City of San Jose (the "City") passed in 2010 an Inclusionary Housing Ordinance ("IHO"). The IHO requires multi-unit residential developments including at least 20 units to 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. Alternatively, the developer could comply with the IHO by paying an in-lieu fee not to exceed the difference between the price of a market rate and affordable housing unit or dedicating land.

Trial Court Proceedings

The California Building Industry Association ("CBIA") filed suit against the City on March 24, 2010, seeking declaratory and injunctive relief and a writ of mandate to set aside the IHO. CBIA alleged that the City had adopted the IHO

[W]ithout demonstrating any reasonable relationship between the requirements imposed by the [IHO] and any increased public needs for additional affordable housing caused by such new residential development or any reasonable basis for the allocation of the burdens and public costs of providing additional affordable housing to such new residential development subject to the [IHO], and without substantial evidence in the public record purporting to demonstrate the necessary reasonable relationships to justify the IHO.

According to the CBIA, "cities seeking to establish inclusionary housing mandates such as the IHO must -- at least -- provide an evidentiary showing that the fees and exactions to be imposed on new development are 'reasonably related' and limited to the city's reasonable costs of addressing 'the deleterious public impacts' caused by the new development." CBIA's argument was based in large part upon the California Supreme Court decision in San Remo Hotel, L.P. v. City & County of San Francisco, 27 Cal. 4th 643 (2002), in which the Court considered the constitutionality of an in lieu fee imposed to mitigate the loss of housing as a result of the conversion of a residential hotel to a tourist hotel. In violation of the mandate of San Remo, CBIA argued, the City failed to provide the required evidentiary justification between the burden of the asserted exaction and impacts created by the development.

Following an extensive hearing and briefing upon a stipulated set of facts, the trial court determined that the IHO bore no reasonable relationship to permissible outcomes in the generality or great majority of cases. Thus, the court entered judgment in favor of CBIA, declared the IHO 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."

Court of Appeal's Analysis

The Court of Appeal disagreed with the reasoning of the trial court and CBIA and reversed. San Remo, the court noted, involved a constitutional takings challenge to an in lieu fee imposed to mitigate the loss of affordable housing units. By contrast, CBIA did not assert a takings challenge, but challenged the City's failure to provide a substantial evidentiary basis for the enactment of the IHO under its general police powers. Distinguishing a host of cases relied upon by BHIA for the contention that the City was required to demonstrate a nexus between the obligations of the IHO and the impact of the development of market rate residential units, the court held that the City' burden was less exacting.

Instead, according to the court, the IHO should be reviewed as an exercise of the City's police power. In that regard, "[a] land use ordinance is a valid exercise of the police power if it bears a substantial and reasonable relationship to the public welfare. . . . It is invalid only if it is arbitrary, discriminatory, and [without a] reasonable relationship to a legitimate public interest." Thus, a land use ordinance cannot be struck down as exceeding a municipality's police power so long as it is "fairly debatable" that the ordinance 'reasonably relates to the welfare of those whom it significantly affects.'" On the other hand, the court held, a local government's police power is not unlimited. The nexus between the ordinance and the public welfare must be "real and substantial". "[O]pressive and unreasonable" restrictions upon property rights will not be allowed.

Impact of Court's Decision

The court sent the case back down to the trial court to consider the matter in light of the court's opinion. Despite the "lip service" paid by the court to the limits upon a municipality's exercise of its police power in the land use context, given the direction that the IHO be analyzed in terms of its nexus to the "public welfare" rather than the impacts of development, CBIA faces a daunting task in the trial court. Nevertheless, even if the IHO ultimately withstands the facial challenge, it would not be surprising to see subsequent as-applied challenges to the IHO on takings grounds in individual cases.

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Matthew Hinks is a litigator with a wide-ranging practice that focuses primarily on the representation of real estate developers in difficult land use cases. Matt has extensive experience litigating complex mandamus actions and other claims involving signage disputes, governmental takings, CEQA challenges, planning and zoning law, civil rights violations, eminent domain issues, title disputes, lease disputes and community redevelopment and density bonus law. He has extensive experience in both federal and state courts, including trial courts and courts of appeal, as well as in arbitration, mediation and administrative settings. Contact Matt at MHinks@jmbm.com or 310.201.3558.