The City of San Jose has won an important round in a potentially landmark chase challenging the legality of inclusionary housing ordinances in California.
The California Building Industry Association has challenged San Jose's inclusionary housing ordinance, claiming that in adopting it the City did not make a necessary "nexus" finding. In essence, CBIA is arguing that an inclusionary housing requirement is an exaction and therefore cannot be imposed unless a reasonable relationship is proven between the development being approved (market-rate housing) and the impact being mitigated (the need for affordable housing).
Santa Clara County Superior Court Judge Socrates Monoukian ruled in favor of CBIA. On appeal, however, the Sixth District Court of Appeal ruled that the inclusionary housing ordinance is an exercise of the police power, not an exaction, and therefore the burden of proof lies with CBIA, not with the City. The Sixth District remained the case to the trial court.
It's a blow for the homebuilders, who have been trolling for a winning argument against inclusionary argument. Having lost Home Builders Ass'n of Northern California v. City of Napa (2001) 90 Cal.App.4th 188, 194 – in which the homebuilders claimed that inclusionary housing amounted to an unconstitutional taking – the builders now claim that inclusionary housing is an exaction.
Inclusionary housing ordinances – requiring housing developers to set aside a certain percentage of their units as affordable or else pay a fee in lieu of that set-aside -- have become more common in California in recent years. According to one study in 2006, at least 30,000 affordable housing units have been constructed as a result of inclusionary requirements. However, the building industry has consistently argued against inclusionary ordinances, saying that they increase the cost of all housing and therefore actually make housing less affordable. In a 2009 letter to CBIA, Lynn Jacobs – then the state housing director and a former president of the Los Angeles BIA – stated that local governments should analyze inclusionary housing ordinances as a potential constraint to affordable housing when preparing their housing elements.
San Jose adopted an inclusionary housing ordinance in 2010, which required residential developments of 20 or more units to set aside 15 percent for purchase at a below-market rate to households earning no more than 110 percent of the area median income. Developers had the option of providing the units off-site or paying a fee in lieu of providing the units.
Relying on standards laid down in San Remo Hotel L.P. v. City & County of San Francisco (2002) 27 Cal.4th 643, and Building Industry Association of Central California v. City of Patterson [(2009)] 171 Cal.App.4th 886,
CBIA filed a facial challenge to the ordinance, claiming that the City had failed to show a reasonable relationship between residential development projects and the inclusionary requirement, which it characterized as an exaction.
CBIA argued that the city's action lacked any "attempt to identify, much less to quantify, any 'deleterious public impacts' on City needs for affordable housing caused by new market rate development" and that the inclusionary percentages contained in the ordinance were arbitrary. Apparently seeking to distinguish this case from the Napa case, CBIA also went out of its way to make the point that it was not making a takings claim, which probably would have required an action for relief from a developer who had actually been subjected to the ordinances, rather than a facial challenge from a trade association such as CBIA.
Judge Manoukian bought CBIA's argument, concluding that "the challenged portion of the ordinance bears no reasonable relationship to permissible outcomes in the generality or great majority of cases."
The City and several affordable housing groups appealed the case to the Sixth District. They argued that the inclusionary housing ordinance should be considered a land use regulation enacted through as an exercise of the City's police power, not an exaction. For this reason, they claimed, the Court should have applied a difference standard of review -- giving great deference to the City – that required the Court to uphold the ordinance if it "merely has a reasonable relation to the public welfare" and also placed the burden of proof with CBIA, not the City.
The appellate court sided with the City, reversed Manoukian's decision on the standard of review, and sent the case back to the trial court.
CBIA argued that the inclusionary ordinance is an exaction because residential developers must "dedicate or convey property (new homes) for public purposes," or alternatively, pay a fee in lieu of "such compelled transfers of property."
However, the appellate court did not buy CBIA's argument. "This alternative portrayal of the inclusionary housing requirement misses the mark," the court wrote. "The IHO does not prescribe a dedication." The Court knocked down CBIA's arguments drawn from a whole series of exactions cases – most especially San Remo, which required hotel owners to provide affordable housing units as compensation for lost affordable housing when single-room occupancy hotels in San Francisco were converted to tourist use.
"We thus conclude that the standard articulated in San Remo is inapplicable here, and that the Ordinance should be reviewed as an exercise of the City's police power," the Court ruled.
The Court did caution that "this does not entail unthinking acquiescence to the City's stated goals." But it did review case law on exercise of police power at some length and reiterated that the burden of proof lies with CBIA, not with the City.
