Last week, in a case with national significance for multifamily housing developers, housing advocates, and local governments, the California Supreme Court upheld the City of San Jose’s inclusionary housing ordinance.  The ordinance requires new residential projects containing 20 or more units to provide at least 15% of the units at prices affordable to low- and moderate-income families as a condition of development approval.  The ruling in California Building Industry Association v. City of San Jose (CBIA) disproved many observers’ predictions regarding the constitutionality of inclusionary housing ordinances and the outcome in the case may pave the way for courts in other states to uphold similar affordable housing mandates.

In an attempt to remedy severe shortages of affordable housing, many local governments around the country have adopted inclusionary housing ordinances requiring developers to deed-restrict a certain number or percentage of units in new residential projects to make these units affordable to low- and moderate-income families.  For example, the City and County of Denver’s inclusionary housing ordinance, which was most recently amended in 2014, requires 10% of new units in for-sale housing to be made affordable to low- and moderate-income families.

The CBIA’s challenge asserted that San Jose’s mandatory affordable housing set-asides were unconstitutional “exactions” resulting in an uncompensated taking of private property  Exactions occur when a governmental permitting authority demands a dedication of property, money, or services—such as an easement for public use—in exchange for granting a property owner’s request for development approval (i.e., site plan approval, conditional use permit, rezoning, etc.).  In situations where the government conditions development approval on a property owner’s dedication of property for public benefit, the government must demonstrate (1) an essential nexus, or tailoring, between the condition imposed and the government’s purpose in imposing the condition, and (2) a rough proportionality between the nature and extent of the required dedication and the proposed development.  This analysis, commonly known as “heightened scrutiny,” derives from a pair of U.S. Supreme Court cases, Nollan v. California Coastal Commission and Dolan v. City of Tigard.

Refusing to apply Nollan and Dolan to inclusionary housing, the California Supreme Court held instead that the inclusionary housing ordinance was simply a valid land use regulation.  Unlike exactions, zoning and other land use regulations—such as use, height, bulk, and setback restrictions—are given deference by courts, and the burden generally falls on the challenger to prove such regulations invalid.  Zoning regulations are not typically viewed as exactions because they do not require a property owner to give anything to the government as a condition of approval.  The California court reasoned, that because the San Jose’s inclusionary housing ordinance simply places restrictions on the way a property owner can use land and does not require a dedication of property, money or services to the city, the San Jose inclusionary housing ordinance was not subject to heightened scrutiny and was therefore a valid land use regulation.  In so ruling, the court said:

It is well-established that the fact that a land use regulation may diminish the market value that the property would command in the absence of the regulation—i.e., that the regulation reduces the money that the property owner can obtain upon sale of the property—does not constitute a taking of the diminished value of the property.  Most land use regulations or restrictions reduce the value of the property; in this regard the affordable housing requirement at issue here is no different from limitations on density, unit size, number of bedrooms, required set-backs, or building heights.

CBIA is significant because it is the first state supreme court decision addressing inclusionary housing ordinances since the U.S. Supreme Court’s 2013 decision in Koontz v. St. Johns River Water Management District.  Koontz held that the government’s conditioning of development approval on a property owner’s payment of money or providing services—in addition to required dedications of land as in Nollan and Dolan—was subject to the essential nexus and rough proportionality analyses.  Following Koontz, many legal scholars and practitioners predicted that inclusionary housing ordinances might fail the essential nexus and rough proportionality requirements because of the difficulty of establishing a causal link between the creation of new housing supply and increased demand for affordable housing.  The CBIA decision, in rebuking that view, reaffirms two other state supreme court cases that also upheld mandatory inclusionary housing requirements.

If presented with a case similar to CBIA, it is not clear that the current justices of the U.S. Supreme Court would agree with the California ruling.  Yet while CBIA has precedential value only in California, the court’s decision may provide direction to other state courts reviewing the validity of inclusionary housing ordinances, meaning that multifamily developers interested in challenging inclusionary housing ordinances may have an uphill battle.

Special thanks to Otten Johnson law clerk Brittany Wiser for her assistance in preparing this post.  Brittany is a rising third-year student at the University of Denver Sturm College of Law.