San Jose Case Could Change the Way Cities, Counties Adopt and Enforce Affordable Housing Ordinances

By Christopher J. Diaz
Best Best & Krieger LLP

Although the housing bubble may have burst a few years back, there is still one region in California where housing prices remained red hot. If you are reading this article on an iPhone or an iPad, or if it has popped up in your Facebook news feed, it should come as no surprise that Silicon Valley – home to many of the tech companies that brought you these gadgets and social networks – is that high-priced region. It should also come as no surprise that Silicon Valley is ground zero for the fight over affordable housing.

The California Supreme Court in September agreed to hear the California Building Industry Association’s challenge to San Jose’s inclusionary housing ordinance. The city’s ordinance requires developers proposing 20 or more residential units to set aside 15 percent of those units as affordable. The ordinance provides two alternatives to this set-aside requirement: Developers can construct the affordable units at another site, or pay a fee into the city’s affordable housing fund.

San Jose’s ordinance is not new or novel.  In fact, many cities and counties across California have adopted these so-called inclusionary housing ordinances in response to ongoing pressure from Sacramento requiring local government to do anything and everything to aid in the development of affordable housing. Thus far, cities and counties have primarily adopted these ordinances through their traditional zoning authority, and that’s where the trouble starts.

Many developers loath these requirements, and the development community as a whole has brought various legal challenges against them. In the San Jose case, in particular, the Building Industry Association, or BIA as it is widely known, is alleging these inclusionary housing requirements are not an exercise of the city’s traditional zoning authority. Instead, the BIA believes these requirements are exactions, which are typically lodged against developers to mitigate an anticipated negative impact of a development.

Why does this distinction matter? It matters because it can drastically affect how cities and counties adopt and enforce these ordinances. It also matters because this is the first time the California Supreme Court has agreed to weigh in on the issue of whether inclusionary housing requirements, as a whole, are exactions. If the state’s highest court sides with developers and determines the requirements are exactions, cities and counties will need to meet a more rigorous constitutional standard in order to adopt and enforce them.

Until now, cities and counties adopting these ordinances have relied on their zoning authority, which is derived by the police power contained in the California Constitution. This police power allows local governments to enact all laws necessary to protect public health, safety and welfare.  A city or county that elects to adopt an inclusionary housing ordinance through this authority need only show that imposing such a requirement protects public health, safety and welfare, or in other words, has a legitimate public purpose. This is a fairly low burden and it is exactly what San Jose documented when it adopted its inclusionary housing ordinance.

However, the BIA is insisting that any local law requiring them to build a certain percentage of affordable housing is an exaction, which usually takes the form of a fee that a developer must pay or a requirement that a developer dedicate land for public use. California courts have required that exactions be reasonably related, in amount and purpose, to the scope of the impacts of the proposed development. This is a higher constitutional hurdle for cities and counties to overcome.

The BIA is hoping that the U.S. Supreme Court’s recent decision in Koontz v. St. Johns Rivers Water Management District influences the California Supreme Court’s decision in San Jose. In the Koontz case, the nation’s highest court determined that in lieu development fees were land use exactions.

The California Legislature also attempted to weigh in on the issue through Assembly Bill 1229.  The bill would have amended state planning and zoning laws to make it clear that cities and counties could adopt and enforce inclusionary housing ordinances through their zoning authority.  Gov. Jerry Brown, however, vetoed the bill on Oct. 13, indicating that he wanted “the benefit of the Supreme Court’s thinking before … mak[ing] adjustments in this area.”

The California Supreme Court has not yet scheduled oral arguments in the San Jose case, but the justices recently gave an indication of how they may decide the issue. In Sterling Park, L.P. v. City of Palo Alto, the justices on Oct. 17 ruled that inclusionary housing requirements are “other exactions” as that term is used in the California Mitigation Fee Act, enacted in 1987.

If the BIA prevails in the San Jose case, cities and counties considering the adoption of an inclusionary housing ordinance should be prepared to conduct a more thorough and expensive impact or nexus study. This study would need to document how the inclusionary housing requirements are reasonably related to minimizing the negative impacts of building new housing and that the requirements are not larger than necessary to address those negative impacts.

In the meantime cities and counties may want to avoid imposing any inclusionary housing requirements, or adopting a pending ordinance, until the San Jose case is fully resolved.

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