Inclusionary housing ordinance
Addressing this brutal environment in 2010, the City of San Jose, like many other cities in Silicon Valley and throughout California, attempted to mitigate its below-market-rate (“BMR”) housing deficit by adopting an inclusionary housing ordinance designed to increase the stock of affordable housing, which was immediately contested in the courts. In June, the California Supreme Court upheld this law, but its fate was once more cast into doubt when a challenge was brought in the U.S. Supreme Court in September. Regardless of the outcome of this litigation, one conclusion is clear—the ultimate resolution of this dispute will have a lasting and significant impact on how California cities can address affordable housing issues.
Most expensive residential real estate
Most of us who live here in Silicon Valley are all too aware that it is now the most expensive residential real estate market in the U.S. It is also no surprise, regrettably, that we have one of the highest rates of homelessness in the nation, although this situation, thankfully, has improved somewhat in recent months. The cold, harsh reality in this region is that demand for affordable housing far outstrips supply.
Set aside 15% of those units
As enacted by the City of San Jose, this inclusionary housing ordinance requires developers of new housing projects having more than 20 units to set aside 15% of those units to be sold at below market rates, or pay an in-lieu fee. In adopting this ordinance, however, the City of San Jose did not examine the relationship between the level of market rate housing being built and the demand for BMR housing. While not directly on point, a recent appellate court decision had held that an in-lieu fee constituted an “exaction,” and would thus have to meet the Nollan and Dolan nexus and proportionality requirements under the takings clause of the Constitution.
CBIA brought suit
Following this analysis, the California Building Industry Association (the “CBIA”) brought suit against the City of San Jose to challenge its inclusionary housing ordinance. This lawsuit alleged that the ordinance was an unconstitutional taking of the developer’s property interests on the grounds that the City of San Jose had not confirmed a relationship between the “low levels of BMR housing” and the “high levels of market rate housing” in San Jose. While the CBIA prevailed in the trial court, the case was overturned by the Sixth District Court of Appeal in 2013.
At that time, the CBIA turned to Pacific Legal Foundation, a public interest legal organization advocating for property rights, to represent it in its efforts to seek review by the California Supreme Court of the Sixth District’s decision. On June 15, 2015, in a unanimous decision, the California Supreme Court upheld the City of San Jose’s inclusionary housing ordinance. In its opinion, the Court rejected the CBIA’s argument that the inclusionary housing ordinance was an unconstitutional taking, and ruled that the ordinance was instead a proper exercise by the City of San Jose of its police power authority to address its lack of affordable housing. Writing for the Court, Chief Justice Tani Cantil-Sakauye concluded that the ordinance “falls within…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.”
Subsequently, on September 14, 2015, the Pacific Legal Foundation filed a petition for writ of certiorari on behalf of the CBIA with the U.S. Supreme Court, seeking review of the California Supreme Court’s decision in their efforts to apply “takings” analysis to such ordinances. Initial briefing in this matter has now been scheduled; whether the Court will ultimately agree to accept this case for argument and decision remains to be determined.
The ultimate resolution of this case is of critical interest for California municipalities, as these types of ordinances have been adopted in 170 cities across California in order to attempt to increase their stock of affordable housing. ) In addition, the City of San Jose was considering legislation (currently on hold) that would allow the City to apply inclusionary housing rules to projects designed for the rental market, effectively negating prior court decisions restricting such ordinances.
Finally, the disposition of this case will bear on efforts by the State of California to help cities address chronic shortages of affordable housing. In a 2013 veto message regarding state legislation that would have overturned appellate court decisions that restricted the use of “inclusionary housing” ordinances, California Governor Jerry Brown indicated that he wanted to have the benefit of a court decision in this matter before signing any such legislation. In view of these facts, there is a great deal at stake riding on the outcome of this litigation.