On June 15, 2015, the California Supreme Court issued its ruling in California Building Industry Association v. City of San Jose, affirming that cities can rely on their general police powers to enact inclusionary requirements and in-lieu fees for affordable housing.

Background

In 2010, the City of San Jose adopted a citywide inclusionary housing ordinance that required all residential development projects creating 20 or more units to make 15 percent of their units available for sale at affordable housing prices. The ordinance provided developers with a number of alternatives for compliance, including off-site construction of affordable housing or the payment of in-lieu fees. Additional incentives such as density bonuses and reduced setback requirements were provided to facilitate compliance with the ordinance. The California Building Industry Association challenged the ordinance’s constitutionality on grounds that it created unlawful exactions and unconstitutional conditions of development approval.

Decision

In the beginning of its opinion, the Court stressed that California continues to confront an affordable housing crisis. The Court acknowledged that more than 170 municipalities have adopted inclusionary housing ordinances to address this issue. In issuing its ruling, this case addresses several important points for cities and developers to consider.

First, inclusionary housing ordinances are authorized under a city’s general police powers and do not constitute an “exaction” under federal or state takings law. This case clearly provides that inclusionary housing ordinances and in-lieu fees fall within a municipality’s broad discretion to regulate the use of property to serve the legitimate interests of the general public and the community at large, akin to zoning requirements, density requirements and other general restrictions. Such restrictions will be upheld so long as they do not deprive landowners of all viable uses of their land.

Exactions, on the other hand, are subject to greater scrutiny by the courts and therefore require more support for their adoption at the local level. Specifically, exactions are valid if they are reasonably related to impacts created by the development project itself.

Second, in-lieu fees to satisfy inclusionary housing requirements are not “fees” under the Mitigation Fee Act, which governs exactions and fees as conditions of development. Monetary exactions will only be held valid if they are imposed to address negative impacts of the project itself and ordinarily require cities to prepare a nexus study pursuant to the Mitigation Fee Act (Gov. Code § 66000 et seq.). In the case of inclusionary housing and in-lieu fees, however, the Court ruled that such ordinances should be construed as general land use restrictions imposed on proposed developments to further a city’s objective of providing affordable housing. Accordingly, no nexus study is required under the Mitigation Fee Act to impose in-lieu fees for affordable housing.

Finally, the Court overruled the Fifth District Court of Appeal’s earlier decision in Building Industry Association of Central California v. City of Patterson (2009) 171 Cal.App.4th 886. In that case, the court analyzed an in-lieu fee under the assumption that the Mitigation Fee Act should be applied to determine whether the fee was reasonable. The Court has now invalidated the City of Patterson opinion for erroneously relying on the Mitigation Fee Act for determining whether the City of Patterson’s in-lieu fee was reasonable.

Although this case provides clear support for inclusionary housing and in-lieu fees, we encourage all municipalities to review their existing ordinances.