Affordability Challenge

A case now before the state Supreme Court could disable a key tool that numerous California cities and counties use to encourage affordable housing development-and satisfy the state's 1969 mandate to plan for it.

The court will consider whether San Jose's requirement that developers set aside a percentage of new housing for low-income residents is an exercise of the city's police powers, or an unconstitutional exaction. (California Bldg. Indus. Ass'n v. San Jose, 216 Cal. App. 4th 1373 (2013) pending as No. 5212072 (Cal. Sup. Ct.).) A ruling is expected soon.

A lawyer for the builders' group, Anthony L. Francois, a senior staff attorney with the Pacific Legal Foundation, says the ordinance is an exaction because it takes rights and property interests away from builders and home buyers. "These include the right to buy a home in the first place, the right to sell it to whom you wish, and the right to benefit from any increase in price after you purchase a home," he says. "Housing assistance calls for shared responsibility among the entire community. It cannot constitutionally be placed entirely on those few who happen to buy new homes ... when new homes do not cause an increased need."

Andrew L. Faber, a partner at Berliner Cohen and lead counsel for San Jose, counters that the requirement is routine. "It's no different than saying a developer can only build 50 feet high. Cities are under mandate from the state to provide housing for all sectors of society, and the court should allow them to solve that as best they can."

Such ordinances-known as inclusionary zoning-proliferated in California during the housing bubble: 170 cities and counties had them by 2006, up from 107 in 2003, according to surveys by two housing nonprofits. Advocates say they're better than alternative tools at preventing economic stratification when prices soar. But critics argue that the laws are inefficient and ineffective: Statewide between 1999 and 2007, they resulted in an estimated 29,300 affordable units, an average of just 3,700 per year, out of the 170,000 permits issued annually in roughly the same period.

"Inclusionary zoning ordinances don't require a lot of additional funding, so they're an important tool in a fiscal climate where there are less dollars to spend," says Brandon Weiss, a fellow at UCLA School of Law, who specializes in housing policy.

Affordable housing advocates argue that inclusionary zoning is not an exaction because it addresses the legitimate government purpose of meeting existing housing needs. Exactions are subject to the tighter Nollan/Dolan standard, named for two often-cited U.S. Supreme Court cases requiring that an exaction both have a direct connection to proposed development and be proportionate in impact. (Nollan v. California Coastal Comm., 483 U.S. 825 (1987); and Dolan v. City of Tigard, 512 U.S. 374 (1994).)

The challenge to San Jose's ordinance may be the most formidable among many that builders have filed statewide over the years, says Bryan W. Wenter, a former Walnut Creek city attorney and a shareholder with Miller Starr Regalia in Walnut Creek specializing in land use.

"If the court says the higher standard of review is needed," Wenter says, "it will immediately invalidate every ordinance where the city regulation doesn't draw a connection between market-rate and affordable housing."

A 2001 ruling paved the way for inclusionary ordinances in California (see Home Builders Ass'n v. City of Napa, 90 Cal. App. 4th 188 (2001)). But subsequent decisions have thrown them into doubt. The Fifth District Court of Appeal found that any in-lieu fee must be justified by a reasonable relationship with the specific development's impact. (Bldg. Indus. Ass'n of Cent. California v. City of Patterson, 171 Cal. App. 4th 886 (2009).) And the Second District found that Los Angeles's requirement for affordable units in new rentals illegally regulated the initial rent on the buildings. (Palmer/Sixth St. Props., L.P. v. City of Los Angeles, 175 Cal. App. 4th 1396 (2009).)

In 2013 California's Supreme Court ruled that an inclusionary ordinance was an exaction when the city required the developer to give it an option on property. (Sterling Park, L.P. v. City of Palo Alto, 57 Cal. 4th 1193 (2013).) Also in 2013, the U.S. Supreme Court, ruling in Koontz v. St. Johns River Water Mgmt. Dist. (133 S. Ct. 2586 (2013)), applied the Nollan/Dolan standard to ad hoc, project-specific exactions and suggested they were analogous to takings.

"If the [state Supreme Court] follows Koontz" when it rules in San Jose, says William Devine, a partner with Allen Matkins Leck Gamble Mallory & Natsis in Orange County, "it will be very difficult for cities to adopt new mandates, because they'd have to do so much more analysis."

---