Inclusionary Zoning Affirmed: California Building Industry Association v. City of San Jose. Tim Iglesias

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1 Articles Inclusionary Zoning Affirmed: California Building Industry Association v. City of San Jose Tim Iglesias I. Inclusionary Zoning Background II. Brief Overview of the Opinion III. Detailed Analysis of the Supreme Court Opinion A. Procedural History B. Placing Inclusionary Zoning in the Context of California s Housing Laws C. San Jose s Process and Ordinance D. CBIA s Attack E. Court s Reply to CBIA s Attack F. Inclusionary Zoning Is a Land Use Regulation Employing a Price Control G. Clarifying San Remo and Disapproving Patterson H. Sterling Park Distinguished IV. Open Issues and What s Next in California V. Reflections on the Possible National Implications of the Opinion and the Future A. Consequences of the Court s Denying Review in the CBIA v. San Jose case B. The Conflict About Court Review and Future Possibilities VI. Conclusion In a case with likely national implications, the California Supreme Court unanimously upheld a local inclusionary zoning ordinance against a Tim Iglesias (iglesias@usfca.edu) is professor of law at the University of San Francisco School of Law. This article is adapted from an article entitled California Supreme Court Unanimously Upholds Inclusionary Zoning as Land Use Regulation and Not an Exaction, which originally appeared in 38 REAL PROPERTY LAW REPORTER 116 (Sept. 2015), The Regents of the University of California, reprinted with permission of CEB. The author organized and co-authored an amicus brief supporting the City of San Jose in the case before the California Supreme Court. 409

2 410 Journal of Affordable Housing Volume 24, Number constitutional attack. San Jose is one of more than 170 localities in California that have enacted a mandatory set-aside inclusionary zoning ordinance. 1 In California Building Industry Association v. City of San Jose (CBIA v. San Jose), 2 the court held that inclusionary zoning is a constitutionally permissible strategy to produce affordable housing and promote economic integration that is subject to rational basis review and not heightened scrutiny. The complex, clearly drafted, and rigorously argued sixty-four-page opinion authored by Chief Justice Tani Cantil- Sakauye may be persuasive authority to other states courts that have not addressed this issue. 3 On September 14, 2015, the California Building Industry Association (CBIA) petitioned for certiorari to the U.S. Supreme Court on the issue of whether legislative enactments are subject to the unconstitutional conditions doctrine under Koontz v. St. Johns River Water Management District. 4 On February 29, 1016, the U.S. Supreme Court unanimously denied the writ of certiorari with Justice Thomas filing a brief concurrence. 5 In this article, I briefly describe inclusionary zoning, offer an overview of the CBIA v. San Jose opinion, and provide a detailed analysis of the opinion. I then give an analysis of open issues and next steps in California and conclude with my reflections on the possible national implications of this opinion. I. Inclusionary Zoning Background Inclusionary zoning programs encourage or require developers of private market rate housing to include a certain percentage of units that are affordable to low or moderate income residents. 6 As its name suggests, 1. Affordable by Choice: Trends in California Inclusionary Housing Programs 3, 40, Non-Profit Housing Ass n of N. Cal. (2007), available at wellesleyinstitute.com/wp-content/uploads/2013/01/nph-ihinca2006.pdf (last visited Dec. 10, 2015) Cal. 4th 435 (Cal. 2015), cert. denied, 84 U.S.L.W (No ) (Feb. 29, 2016). 3. For an analysis of other courts decisions about the constitutionality of inclusionary zoning, see Tim Iglesias, Framing Inclusionary Zoning: Exploring the Legality of Local Inclusionary Zoning and Its Potential to Meet Affordable Housing Needs, 36:4 ZONING & PLANNING LAW REP. (Apr. 2013) [hereinafter Framing Inclusionary Zoning]. 4. Cal. Bldg. Indus. Ass n v. San Jose, petition for writ filed, 2015 WL , at *1 (Sept. 14, 2015) (No ) (citing Koontz v. St. Johns River Water Mgmt. Dist., 133 S. Ct (2013)). 5. Cal. Bldg. Indus. Ass n, 84 U.S.L.W (No ) (Feb. 29, 2016). 6. For a general introduction to inclusionary zoning, see Inclusionary Housing Policy Brief, Cornerstone P ship (2015), available at org/docs/inclusionary-housing-policy-brief/ (last visited Dec. 3, 2015), and U.S. Dep t of Housing & Urb. Dev., Inclusionary Zoning and Mixed-Income Communities, EVIDENCE MATTERS (Spring 2013), available at periodicals/em/spring13/highlight3.html (last visited Dec. 3, 2015). For a more

3 California Building Industry Association v. City of San Jose 411 inclusionary zoning or, more broadly, inclusionary housing policies, are intended to counter past and present exclusionary zoning zoning and planning practices that exclude housing that serve low-income households and people of color. 7 Thus, as a response to exclusionary zoning, inclusionary zoning policies generally have two goals: increasing the supply of affordable housing in the jurisdiction and promoting economic (and possibly racial) integration. 8 Of course, it is very controversial. 9 Local governments enacting an inclusionary zoning ordinance must decide numerous design issues: (1) whether the requirement should be voluntary or mandatory; (2) whether the requirement should apply to whole jurisdiction or just specified areas; (3) what type(s) of project(s) should be subject to the requirement (e.g., rental and/or for-sale) and what size of development triggers the ordinance; (4) what percentage of set-aside to require; (5) what depth of affordability to require; (6) what should be the length of required affordability; (7) whether the affordable housing units must be the same quality and amenities as the market-rate units; (8) whether to offer developers alternative compliance methods; and (9) how much to accommodate developers economic interests. Because of all of these design options, inclusionary zoning is a flexible device that each locality can shape to fit its needs and its housing extensive analysis, see CALIFORNIA INCLUSIONARY HOUSING READER (Inst. for Local Self Gov t 2003). 7. For a discussion of exclusionary zoning, see Ken Zimmerman and Arielle Cohen, Exclusionary Zoning: Constitutional and Federal Statutory Responses, in A LEGAL GUIDE TO AFFORDABLE HOUSING DEVELOPMENT 2d ed. (Tim Iglesias & Rochelle E. Lento eds., 2011). 8. See, e.g., Tim Iglesias, Maximizing Inclusionary Zoning s Contributions to Both Affordable Housing and Residential Integration, 54 WASHBURN L.J. 585 (Summer 2015); Amicus Brief on Behalf of the Leo T. McCarthy Center for Public Service and the Common Good and 45 Housing Scholars to California Supreme Court in California Building Industry Association v. City of San Jose (S212072) (Mar. 2014) (arguing that inclusionary zoning is a uniquely appropriate policy to address prior exclusionary zoning and its effects), available at (last visited Dec. 3, 2015). 9. Representative articles critical of inclusionary zoning include Robert C. Ellickson, The Irony of Inclusionary Zoning, 54CAL. L.REV (1981); James S. Burling & Graham Owen, The Implications of Lingle on Inclusionary Zoning and Other Legislative and Monetary Exactions, 28STAN. ENVTL. L.J. 397 (2009). Representative articles supportive of inclusionary zoning include Barbara Kautz, In Defense of Inclusionary Zoning: Successfully Creating Affordable Housing, 36 U.S.F. L. REV. 971 (2002); Andrew G. Dietderich, An Egalitarian s Market: The Economics of Inclusionary Zoning Reclaimed, 24 FORDHAM URB. L.J. 23 (1996); Laura M. Padilla, Reflections on Inclusionary Housing and a Renewed Look at its Viability, 23 HOFSTRA L. REV. 539 (1995). See also chs. 3 & 4, THE LEGAL GUIDE TO AFFORDABLE HOUSING DEVELOPMENT, supra note 7.

4 412 Journal of Affordable Housing Volume 24, Number market. 10 Approximately twenty-seven states 11 and 500 communities in the United States have adopted some form of inclusionary zoning. 12 Generally, it has been successful in both increasing the supply of affordable housing and promoting integration. 13 Given the geographical extent of 10. Importantly, however, these design options make a difference in how the ordinance favors one goal over another. For various analyses concerning these tradeoffs, compare Tim Iglesias, Maximizing Inclusionary Zoning s Contributions to Both Affordable Housing and Residential Integration,54WASHBURN L.J. 585 (Summer 2015) with Creating and Maintaining Inclusive Communities, Cornerstone P ship (2015), available at (last visited Dec. 3, 2015). 11. See, e.g. Robert Hickey, Lisa Sturtevant & Emily Thaden, Achieving Lasting Affordability Through Inclusionary Housing, Lincoln Inst. of Land Pol y Working Paper (2014) (naming twenty-seven states and the District of Columbia), available at July2014-LincLandInst.pdf (last visited Dec. 3, 2015). 12. Rick Jacobus, Inclusionary Zoning: Creating and Maintaining Equitable Communities, Lincoln Inst. of Land Pol y Working Paper 3 (2015), available at inhousing.org/wp-content/uploads/inclusionary-housing-report-2015.pdf; 13. See generally Inclusionary Housing Survey: Measures of Effectiveness, Innovative Housing Inst. (2010), available at InclusionaryHousingSurvey2010.pdf (last visited Dec. 3, 2015); Heather L. Schwartz et al., Is Inclusionary Zoning Inclusionary?, RAND Corp. (2012), available at RAND_TR1231.pdf (last visited Dec. 3, 2015). See also Jenny Schuetz, Vicki Been &RachelMeltzer,Silver Bullet or Trojan Horse? The Effects of Inclusionary Zoning on Local Housing Markets in the United States, URB. STUDIES ( June 2010); Jenny Schuetz, Vicki Been & Rachel Meltzer, 31 Flavors of Inclusionary Zoning: Comparing Policies from San Francisco, Washington, D.C., and Suburban Boston, 75J. OF AM. PLANNING ASS N 4 (Sept. 2009); Amy Armstrong, Vicki Been, Rachel Meltzer & Jenny Schuetz, The Effects of Inclusionary Zoning on Local Housing Markets, FURMAN CENTER FOR HOUS. POL Y AT N.Y. UNIV. SCH. OF LAW (Mar. 2008), available at pdf (last visited Mar. 3, 2016); After the Downturn: New Challenges and Opportunities for Inclusionary Housing, NAT L HOUS. CONFERENCE (Feb. 2013) available at (last visited Dec. 3, 2015). But see generally Robert A. Johnston et al., Selling Zoning: Do Density Bonus Incentives for Moderate-Cost Housing Work?, 36WASH. UNIV. J. OF URB. &CONTEMP. L. 45 (1989). The primary critics of the effectiveness of inclusionary zoning (besides Professor Ellickson) are Benjamin Powell and Edward Stringham, who publish through a libertarian policy organization called The Reason Foundation. They argue that inclusionary zoning ordinances increase the prices for other homebuyers and renters and reduce the supply of housing in the community because the ordinance deters developers from building housing in that community. For a response to the analysis and methodology employed by many of the inclusionary zoning critics, see David Rusk, He Who Pays the Piper: An Assessment of Research on Inclusionary Zoning, INNOVATIVE HOUS. INST. (2008), available at

5 California Building Industry Association v. City of San Jose 413 our nation s affordable housing crisis and persistent residential segregation, the scope for broader application of inclusionary zoning is immense. At least two national organizations offer assistance to local governments and housing advocates interested in exploring inclusionary zoning. 14 II. Brief Overview of the Opinion The City of San Jose s ordinance requires all new residential development projects of twenty or more units to sell at least 15 percent of the for-sale units at a price that is affordable to low- or moderate-income households. 15 In the latest of many legal attacks on inclusionary zoning, the California Building Industry Association argued that because inclusionary zoning was an exaction, intended to mitigate the negative effects of market rate housing development on the need for affordable housing, the proper standard of review was the heightened standard described in San Remo Hotel v. City and County of San Francisco. 16 That test would require the city to demonstrate a reasonable relationship between the exaction and the deleterious effect of the proposed development on its need for affordable housing. No doubt, CBIA s hopes were buoyed by recent cases. The California Court of Appeal in Building Industry Association of Central California v. City of Patterson 17 had applied the San Remo test to an inclusionary requirement. And in Sterling Park, L.P. v. City of Palo Alto, 18 the California Supreme Court found an in lieu fee provision of an inclusionary zoning ordinance to be an exaction for purposes of the pay under protest provisions of the Mitigation Fee Act s statute of limitations. 19 The California Supreme Court unequivocally rejected CBIA s interpretation of the ordinance and the law. Instead, the court placed inclusionary zoning squarely in the context of local governments longstanding statutory obligation to make adequate provision for the housing needs of all economic segments of the community 20 and decided that inclusionary zoning is a type of land use regulation subject to the rational basis test, i.e., Rusk-CHBAcritique-_fin2_-2008.pdf (last visited Dec. 3, 2015); see also Victoria Basolo & Nico Calavita, Policy Claims with Weak Evidence: A Critique of the Reason Foundation Study on Inclusionary Housing Policy in the San Francisco Bay Area 11 (2004), available at download/ih_countering_ critics.pdf (last visited Dec. 3, 2015). 14. Innovative Housing Institute, (last visited Dec. 3, 2015); Cornerstone P ship, inclusionary-housing/ (last visited Dec. 3, 2015). 15. San Jose Mun. Ordinance No , SAN JOSE MUN. CODE ch (2010) P.3d 87 (Cal. 2002) Cal. App. 4th 643 (Ct. App. 2009) P.3d 925 (Cal. 2013). 19. CAL. GOV T CODE 66020, CAL. GOV T CODE 65580(d).

6 414 Journal of Affordable Housing Volume 24, Number that the ordinance bears a real and substantial relationship to a legitimate public interest and is invalid only if it is arbitrary, discriminatory, and without a reasonable relationship to any legitimate public interest. The court found that the ordinance does not impose any exactions making it subject to the unconstitutional conditions doctrine on which CBIA relied 21 and so that judicial review standard does not apply. Affirming the appellate court below, the court effectively remanded the case to the trial court to determine whether the city s ordinance was valid under the rational basis standard. In a model of judicial excellence, the court also elucidated the meaning of prior inclusionary zoning cases, thereby clarifying California s law on inclusionary zoning, which had become complex and arguably inconsistent in the last several years. Two concurrences add additional insights. III. Detailed Analysis of the Supreme Court Opinion A. Procedural History CBIA challenged San Jose s ordinance before it took effect, arguing it was invalid on its face because the city had failed to provide sufficient evidence in the record to meet the relevant legal standard. 22 Over CBIA s opposition, the trial court allowed six nonprofit affordable housing organizations and a low-income resident of San Jose to intervene in support of the city s ordinance. 23 Finding that the ordinance failed under San Remo, the trial court found for CBIA, interpreting the ordinance as amounting to an exaction because it required a dedication of property for public purposes or payment of fees in lieu of such property conveyances, thus triggering heightened scrutiny under San Remo. 24 San Jose had not prepared a nexus (or reasonable relationship) analysis showing that building new market-rate homes caused or worsened the city s existing need for affordable housing, which would justify the exaction, so its record did not satisfy that standard. Thus, the court enjoined San Jose from enforcing the ordinance. The court of appeal reversed and remanded the case to the trial court. 25 CBIA sought review by the California Supreme Court to determine the proper standard of review for inclusionary zoning ordinances CBIA s reliance on the unconstitutional conditions doctrine did not become clear until the case was before the California Supreme Court. At the trial and appellate levels, CBIA appeared to rely solely on California state law, viz. the San Remo case. Cal. Bldg. Indust. Ass n, 61 Cal. 4th at Id. at Id. at Id. at Id. at Id. at

7 California Building Industry Association v. City of San Jose 415 B. Placing Inclusionary Zoning in the Context of California s Housing Laws The opinion begins by reciting the legislature s 1979 finding that California suffers from a serious shortage of decent, safe, and sanitary housing which persons and families of low or moderate income... can afford. 27 Recognizing that the ongoing affordable housing crisis has reached epic proportions in many areas of California, the court places inclusionary zoning in the context of several longstanding state laws regulating how local governments must use their land use authority to support the provision of affordable housing. All California local governments must adopt a general plan to exercise their land use authority constitutionally. 28 The general plan must include a housing element that consists of a housing inventory; a housing needs analysis; and a program of plans and policies, including zoning and planning policies, that makes adequate provision for the housing needs of all economic segments of the community, in particular extremely-low, very low-, lower-, and moderate-income households. 29 The court identified other state housing policies that promote the production of affordable housing, including the Least Cost Zoning Law, 30 the Housing Accountability Act, 31 and the Density Bonus law. 32 The court noted that the California legislature had previously adopted statutes mandating inclusionary zoning for both redevelopment areas 33 and for the coastal zone. 34 The court concluded that the California legislature is clearly aware of local inclusionary zoning ordinances and that existing state legislation is neither inconsistent with nor intended to preempt these local measures. 35 C. San Jose s Process and Ordinance The court recounts in great detail the thoroughness of the San Jose s collaborative process in developing the inclusionary zoning ordinance over a period of several years as a deliberate part of fulfilling its duty under California s housing laws. 36 San Jose conducted several rounds of extensive outreach and consultations, both formal and informal, with stakeholders, including housing developers. San Jose commissioned an extensive economic feasibility study with input from developers, housing advocates, community organizations, and other stakeholders that found 27. Id. at Id. at 444 (citing CAL. GOV T CODE et seq.). 29. Id. at Id. at 445 (citing CAL. GOV T CODE ). 31. Id. (citing CAL. GOV T CODE ). 32. Id. (citing CAL. GOV T CODE 65915). 33. Id. at 446 (citing CAL. HEALTH & SAFETY CODE 33413(b)(1), (2)(A)(i)). 34. Id. (citing CAL. GOV T CODE 65590(d)). 35. Id. 36. Id. at

8 416 Journal of Affordable Housing Volume 24, Number an inclusionary zoning policy could be economically feasible with certain developer incentives and under improved economic conditions. 37 In view of the difficult housing conditions in January 2010 when the ordinance was adopted, its operational date was delayed. 38 Like most inclusionary zoning ordinances, San Jose s ordinance requires and incentivizes developers to construct affordable housing units on the same site as the market rate units. The economic incentives include a density bonus, enabling the developer to build more units on a given plot of land than the regular zoning would authorize; a parking space reduction; a minimum set-back reduction; and additional financial subsidies and assistance from San Jose. 39 (Notably, CBIA and inclusionary zoning critics generally do not mention economic incentives included in these ordinances.) And, as most inclusionary zoning ordinances do, San Jose s ordinance offered developers alternative ways to comply, including: (1) building affordable units off-site; (2) paying an in lieu fee based on the median sales price of housing unit affordable to a moderate-income family; (3) dedicating to the city land of equal value to the in lieu fee; or (4) acquiring and rehabilitating a comparable number of inclusionary units that are affordable to low- or very low-income households. 40 The ordinance requires San Jose to create guidelines to ensure that the affordable housing units are not lost when the original buyers sell them and are effectively preserved for at least forty-five years. 41 Under the ordinance, as part of the consideration for the privilege of buying an affordable unit, purchasers of such units would be required to agree to maintain the affordability of the units. 42 The ordinance lists some possible documentary means to effect this goal, including granting the city options to purchase. In addition, it requires documents that enable San Jose to recapture ill-gotten gains if an affordable unit homebuyer violates her agreement to maintain the affordability of the unit by selling it at market price. 43 Finally, the ordinance allows San Jose to adjust, reduce, or entirely waive the inclusionary requirement on a showing by the developer that application of the ordinance to its project would violate the Takings Clause of the U.S. or California constitution Id. at Id. at Id. at California s density bonus law (CAL. GOV T CODE 65915) independently requires cities to offer certain regulatory relief to developers that build affordable housing units in some situations. 40. Id. 41. Id. at Id. at Id. 44. Id. at 452.

9 California Building Industry Association v. City of San Jose 417 D. CBIA s Attack CBIA never denied San Jose s need for affordable housing. Instead, it presented inclusionary zoning outside of the context of the state s housing policies and contested the type of judicial scrutiny that inclusionary zoning must meet if cities want to use it as a means to deal with the housing crisis. CBIA s theory was that, despite San Jose s characterization of its ordinance as an ordinary land use regulation, the court should interpret the ordinance as an exaction intended to mitigate the effect of new market rate housing on San Jose s need for affordable housing. CBIA argued that a passage in San Remo should be interpreted to require San Jose to demonstrate that its inclusionary zoning requirement is reasonably related to the adverse impacts on the city s affordable housing that are caused by or attributable to the proposed market rate residential development. E. Court s Reply to CBIA s Attack The court identifies the challenge as sounding in the prong of regulatory takings law called the unconstitutional conditions doctrine, which imposes special restrictions upon the government s otherwise broad authority to condition the grant of a privilege or benefit when a proposed condition requires the individual to give up or refrain from exercising a constitutional right. 45 This doctrine derives from the U.S. Supreme Court s decisions in Nollan v. California Coastal Commission 46 and Dolan v. City of Tigard. 47 Nollan and Dolan apply when a government regulation requires a developer to dedicate a property interest for public use as a condition of receiving a land use permit in a situation where it would clearly be a taking if the government had simply required the dedication of the property outside of the permit process to serve its objective. In Nollan, the property interest was an easement; in Dolan, it was a dedication of a strip of land in fee simple. Under Nollan and Dolan, the government may impose such a condition only when the government demonstrates that there is an essential nexus and rough proportionality between the required dedication and the projected impact of the proposed land use. 48 In Koontz v. St. Johns River Water Management District, 49 the U.S. Supreme Court extended the application of the unconstitutional conditions doctrine beyond recognized real property interests to apply to government demands for the payment or expenditure of money. Acknowledging that the scope of Koontz s application to monetary land use permit 45. Id. at U.S. 825 (1987) U.S. 374 (1994). 48. Cal. Bldg. Indust. Ass n, 61 Cal. 4th at S. Ct (2013).

10 418 Journal of Affordable Housing Volume 24, Number conditions is at least somewhat ambiguous, 50 the California Supreme Court finds that the Nollan/Dolan/Koontz line of cases apply only when the government demands an exaction, meaning the conveyance by the developer of some identifiable protected property interest to the government for public use as a condition of a land use approval. Nothing in Koontz suggests that... Nollan and Dolan would apply where the government simply restricts the use of property without demanding the conveyance of some identifiable protected property interest (a dedication of property or the payment of money) as a condition of approval. It is the governmental requirement that the property owner convey some identifiable property interest that constitutes a so-called exaction under the takings clause and that brings the unconstitutional conditions doctrine into play. 51 The court considers and rejects in turn each of CBIA s contentions regarding how the ordinance requires a conveyance or dedication of a property interest to San Jose as a condition of development. To CBIA s argument that the requirement to sell some units at below-market prices divests the owner of the difference, in money, between the market value of the property and the affordable price of the property, the court responds that, given the nature of the attack as a facial challenge, there is no evidence that the ordinance will necessarily reduce a developer s revenue or profit in the great majority of cases or in any instance at all. 52 This is particularly true because of the various economically beneficial incentives that developers that produce affordable units on-site receive under the ordinance. Moreover, the court notes that a reduction in the value of property alone does not amount to a required dedication of property since most land use regulations have the incidental effect of diminishing the value of regulated property. 53 To CBIA s argument that the controls contemplated in the ordinance to preserve the affordability of the inclusionary units constitute an exaction of the developer s property, the court responds that these controls merely place an agreed-upon restriction on the unit buyers use of their property in the future and do not place any restriction, much less impose an exaction, on the developer s property. 54 The ordinance lists a variety of potential documents, including an option to purchase, that may be used to preserve the affordability of the inclusionary units, but it does not require that any specific one be used. 55 The court distinguishes the requirement in Palo Alto s inclusionary zoning ordinance (challenged in Sterling Park) that the developer grant the city an option to purchase each affordable housing 50. Cal. Bldg. Indust. Ass n, 61 Cal. 4th at 459 and accompanying note Id. at Id. at Id. 54. Id. at Id. at

11 California Building Industry Association v. City of San Jose 419 unit when the unit is up for sale because this is an identifiable property interest granted to the city. 56 Finally, to CBIA s argument that the ordinance s requirement that the documents preserving the long-term affordability be recorded against the property constitute a property interest possessed by the city, the court explains that requiring recordation of documents merely provides notice to would-be purchasers of the affordability requirements and does not amount to the taking of a property interest. 57 Under the court s reading of Koontz, if the government offers a developer at least one alternative to satisfy the condition that does not violate the Takings Clause, the government has not violated the unconstitutional conditions doctrine. 58 Since the court finds that ordinance s primary requirement of selling 15 percent of the units at an affordable price does not violate the Nollan/Dolan test because it is not an exaction, the court reasons that the ordinance as a whole does not violate the unconstitutional conditions doctrine. 59 The court rejected the contention that San Jose s offering developers alternative methods of compliance (i.e., in lieu fees, land dedication, and off-site construction of the affordable units) as additional choices could transform the ordinance into an exaction Id. at 467. In light of this holding, California cities with inclusionary zoning ordinances that require developers to transfer such property interests to the city should consider revising them. 57. Id. at Id. 59. Id. at Id. Inclusionary zoning critics frequently seize upon one or more of the alternative compliance options to frame an inclusionary zoning ordinance as a regulatory taking. See Framing Inclusionary Zoning, supra note 3, at 3. This analysis is important because, in contrast, the California Court of Appeal in Palmer/Sixth St. Props., L.P., 175 Cal. 4th 1396 (2009), found that the in lieu fee compliance option in that regulation was so inextricably intertwined with the preempted provisions of the ordinance that severing the fee provision was not a viable option, rendering the whole ordinance invalid. Id. at See also Cal. Bldg. Indust. Ass n, 61 Cal. 4th at 476: Finally, the fact that the San Jose ordinance provides a developer with the option of paying an in lieu fee instead of providing the required on-site affordable housing units does not provide a basis for applying the test advocated by CBIA to the ordinance s affordable housing requirements as a whole. No developer is required to pay the in lieu fee and may always opt to satisfy the ordinance by providing on-site affordable housing units. Because an in lieu fee option is often included in inclusionary housing ordinances to satisfy the demands of developers who seek the flexibility that an in lieu fee alternative affords, CBIA cannot properly rely upon the inclusion of such an option as a basis for challenging the validity of the San Jose inclusionary housing ordinance as a whole. Id.

12 420 Journal of Affordable Housing Volume 24, Number The court reasons that because nothing in the San Jose ordinance requires the conveyance or dedication of any identifiable protected property interest, the ordinance does not amount to an exaction. And because it does not trigger the unconstitutional conditions doctrine as an exaction, that doctrine does not apply to the ordinance; thus, the ordinance does not violate it. 61 F. Inclusionary Zoning Is a Land Use Regulation Employing a Price Control The court finds that the unconstitutional conditions doctrine does not apply to the ordinance because no provision of the ordinance constitutes an exaction. Rather, the ordinance s principal requirement restricts the use of property, requiring a developer subject to the ordinance to sell 15 percent of its on-site for-sale units at an affordable housing price. 62 In support, the court cites Yee v. Escondido 63 for the rule that a mobile home park rent control ordinance was a regulation of [the mobile home park owners ] use of their property. 64 The court reviews California s long tradition of deferential review of localities exercise of police power in land use regulations and the wide variety of types of land regulation to which it has been applied, recalling that judicial deference is not judicial abdication because the regulation must have a real and substantial relation to the public welfare with a reasonable basis in fact. 65 Citing Associated Home Builders, Inc. v. City of Livermore, 66 the court notes the heavy burden of a party challenging the facial validity of a legislatively enacted land use measure to demonstrate that it lacks a reasonable relationship to the public welfare. 67 Although the findings recited in the ordinance included alleviating the effects of market rate housing developments on San Jose s need for affordable housing, the court emphasized that in the purposes section of the ordinance, San Jose articulated two distinct and constitutionally legitimate purposes for the ordinance: (1) increasing the number of affordable housing units in the city in recognition of the insufficient number of existing affordable housing units in relation to the city s current and future needs, and (2) assuring that new affordable housing units that are constructed are distributed throughout the city as part 61. Cal. Bldg. Indust. Ass n, 61 Cal. 4th at Id. at U.S. 519, 532 (1992). 64. Cal. Bldg. Indust. Ass n, 61 Cal. 4th at To understand the concept of affordable housing as a specific use of land, consider that cities regularly zone areas for senior housing, residential care facilities, emergency shelters, and transitional housing in other words, housing for specific groups. 65. Id. at P.2d 473 (Cal. 1976). 67. Cal. Bldg. Indust. Ass n, 61 Cal. 4th at 456.

13 California Building Industry Association v. City of San Jose 421 of mixed-income developments in order to obtain the benefits that flow from economically diverse communities and avoid the problems that have historically been associated with isolated low-income housing. 68 The court found those two stated objectives for the ordinance to increase the community s stock of affordable housing and to promote economically diverse residential developments are unquestionably constitutionally permitted purposes. 69 The court also found that the means the ordinance employs, i.e., imposing use restrictions in the form of price controls, is generally a constitutionally permissible means. 70 Interestingly, the court hypothesized that San Jose could have pursued those purposes using different means, e.g., requiring all new residential developments to include a specified percentage of studio, one-bedroom, or small-square-footage units because these would likely be affordable. 71 Analogizing to the validity of price controls in the rental context that was approved by the U.S. Supreme Court in Pennell v. City of San Jose, 72 the court reasons that the same principle of using price controls to respond to excessive prices applies to for-sale housing. 73 The court notes that price controls can violate the Due Process and Takings Clauses if they are confiscatory, meaning that they deny a property owner a fair and reasonable return on its property. 74 In this case, a facial challenge, there was no evidence that the application of the ordinance would be confiscatory, especially given the economic incentives and regulatory relief provided to developers that built affordable units on site. 75 Justice Chin s concurrence speculates that an as-applied challenge to the ordinance could succeed if the ordinance required a developer to sell the affordable units below its cost because the ordinance would then constitute an exaction rather than a reasonable price control. 76 However, because on a facial attack it is not clear if developers might still make a profit on the affordable units under the ordinance, he agrees with the majority that the ordinance is not an exaction. G. Clarifying San Remo and Disapproving Patterson After finding CBIA s legal theory that the ordinance violates the unconstitutional conditions doctrine lacked merit, the court considers 68. Id. at 444 (emphasis in original). 69. Id. at Id. 71. Id U.S. 1 (1988). 73. Cal. Bldg. Indust. Ass n, 61 Cal. 4th at Id. 75. Id. 76. Id. at 487. Because Justice Chin does not cite any cases or other legal authority for his definition of an exaction, it is difficult to identify what legal theory he has in mind.

14 422 Journal of Affordable Housing Volume 24, Number CBIA s contentions regarding the applicability of a certain passage in San Remo and the appellate court ruling in Patterson. First, the court clarifies that neither of these cases referenced or relied on the unconstitutional conditions doctrine, as CBIA contended. 77 Second, in response to CBIA s argument that the passage in San Remo on which it relies should be interpreted to require San Jose to demonstrate that its inclusionary zoning requirements are reasonably related to the adverse impacts on the city s affordable housing that are caused by or attributable to the proposed development, the court provides an extended exegesis clarifying the meaning of the passage in the context of that case. 78 The court explains that the holding of San Remo was that San Francisco s legislatively adopted affordable housing mitigation ordinance did not violate the constitution because it was reasonably related to mitigating the impact that the landowner s proposed conversion of a residential hotel to a tourist hotel would have on the preservation of long-term rental housing in that city. The court notes that CBIA s selected passage from San Remo concerns a hypothetical posed by the plaintiff in that case, which raised the specter that in the absence of heightened scrutiny cities could use restrictive zoning combined with purported mitigation fees to put its zoning up for sale and fill its coffers. 79 The court corrected CBIA s misconstruction of the passage and the case. First, the passage in context applies to permit conditions that require the payment of monetary fees, not all permit conditions or those that regulate the use of property via price controls. 80 Second, the passage applies only to development mitigation fees and not to price controls or other land use regulations that serve purposes unrelated to the impacts of proposed development. 81 The ordinance at issue in San Remo needed to be reasonably related to the deleterious effect of the developer s proposal in that case precisely because the sole purpose of that ordinance was to mitigate the effects of hotel conversions. 82 The rule in San Remo is that an ordinance s requirement must bear a reasonable relationship to the intended purpose of the ordinance at issue; it was not announcing a rule that subjected all land use requirements to heightened scrutiny. 83 The court reaffirmed its prior distinction regarding judicial review requirements between general welfare legislation and mitigation requirements stated in Ehrlich v. City of Culver Id. at Id. at Id. at Id. at Id. at Id. at Id. 84. Id. (citing 911 P.2d 429 (Cal. 1996)).

15 California Building Industry Association v. City of San Jose 423 Applying this understanding to the San Jose case, San Remo demands only that the ordinance s requirement bear a reasonable relationship to its intended purposes. Despite the fact that the findings and purposes of San Jose s ordinance mention the alleviation of the negative effects of market rate housing on the city s housing policies and goals, San Jose s ordinance was not primarily or purely a mitigation ordinance, but rather an ordinance with two distinct purposes that are intended to serve the broad general welfare. 85 The court rejected CBIA s attempt to use the in lieu fee compliance option as a justification for applying a mitigation type analysis to the entire ordinance. It pointedly noted that in lieu fees are typically included in inclusionary zoning ordinances precisely to satisfy the demands of developers who seek the flexibility that an in lieu fee alternative offers and that they are only paid as a choice by the developer. 86 Since the in lieu fee is, by definition, in lieu of the developer fulfilling the 15 percent affordable housing building requirement, which is not a mitigation requirement, the in lieu fee is not a mitigation fee. 87 The court acknowledged that the Patterson court had applied the San Remo passage to an inclusionary requirement in the way that CBIA argued. 88 However, the court concluded that Patterson was incorrect to the extent it indicates that the conditions imposed by an inclusionary zoning ordinance are valid only if they are reasonably related to the need for affordable housing attributable to the projects to which the ordinance applies. 89 The Patterson court incorrectly interpreted the fee at issue in the development agreement as similar to the mitigation fee in San Remo and thus applied San Remo s test for the validity of that fee. 90 But that fee, like San Jose s inclusionary zoning ordinance, is intended to further the public purpose of increasing the city s stock of affordable housing. 91 Thus, properly understood, the inclusionary requirements do not conflict with the San Remo passage. The court also criticized the Patterson court for legally evaluating the in lieu fee in insolation from the city s affordable 85. Id. at Id. at Inclusionary zoning opponents often confuse (or intentionally conflate) in lieu fees (the option for a developer to pay money instead of fulfilling an ordinance s primary requirement) with impact fees (money required by an ordinance specifically to mitigate the negative effects of a proposed development on community). See the distinction as applied to calculating in lieu fees in contrast to impact fees explained in Barbara E. Kautz, Rick Judd & Vincent L. Brown, Local Government Financing Powers and Sources of Funding, in A LEGAL GUIDE TO AFFORDABLE HOUS- ING DEVELOPMENT 2d ed., supra note Cal. Bldg. Indust. Ass n, 61 Cal. 4th at Id. at Id. at Id. at 479.

16 424 Journal of Affordable Housing Volume 24, Number housing condition as a whole, which offered the developer the option of building the affordable housing units. 92 CBIA contended that San Remo required judicial scrutiny similar to Nollan/Dolan. Explicitly writing in dicta, Justice Werdegar s concurrence 93 explains her understanding of the current status and meaning of the reasonable relationship standard in San Remo in light of the U.S. Supreme Court s decision in Lingle v. Chevron U.S.A. Inc. 94 In Lingle, the Court clarified that the substantially advance legitimate state interests meansends test articulated in Agins v. Tiburon 95 was not a regulatory takings test, but rather a due process standard. 96 In light of Lingle, in Justice Werdegar s view the reasonable relationship standard in San Remo is best understood as a due process test, and, as such, is likely to be equivalent to the deferential level of judicial scrutiny applicable to regular land use regulations. 97 H. Sterling Park Distinguished CBIA argued that the California Supreme Court s finding in Sterling Park, L.P. v. City of Palo Alto 98 that an inclusionary ordinance was an exaction bolstered its argument that San Jose s similar inclusionary zoning ordinance was an exaction. 99 In 2013, the court ruled that Palo Alto s inclusionary zoning ordinance was an exaction under California s Mitigation Fee Act for purposes of the Act s statute of limitations when a developer challenges a fee. 100 In Sterling, the court had specifically left open the question whether forcing the developer to sell some units below market value, by itself, would constitute an exaction under [the relevant provision of the MFA]. 101 The CBIA v. San Jose court found that the Sterling Park decision did not support CBIA s position because it [bore] no relationship to the issue presented here. 102 In Sterling Park, a developer entered into a development agreement with the City of Palo Alto to comply with its ordinance by constructing some affordable units and paying a partial in lieu fee. 103 When Palo Alto sought to enforce the agreement more than a year after it was 92. Id. The court did not express any view on the validity of the fee at issue in Patterson or the methodology employed to compute it. 93. Id. at U.S. 528 (2005) U.S. 255 (1980). 96. Cal. Bldg. Indust. Ass n, 61 Cal. 4th at Id. at P.3d 925 (Cal. 2013). 99. Cal. Bldg. Indust. Ass n, 61 Cal. 4th at Id Id. at 482, citing Sterling Park, 310 P.3d at Cal. Bldg. Indust. Ass n, 61 Cal. 4th at Id.

17 California Building Industry Association v. City of San Jose 425 executed, the developer submitted a notice of protest, claiming it had signed the agreement under duress and the ordinance was legally invalid. 104 Palo Alto sought summary judgment on the basis the claim was time-barred under the statute of limitations. 105 The developer claimed the longer statute of limitations under the Mitigation Fee Act, which allows developers to pay fees under protest and litigate their validity while the project is being built, was applicable. 106 The city prevailed in both at trial and in the appellate court. 107 But the California Supreme Court reversed, interpreting the and other exactions clause in the Section of the Mitigation Fee Act to apply to Palo Alto s inclusionary zoning requirement because in lieu fees are similar to impact fees (for purposes of a developer challenging a city s permit requirement) and because the Palo Alto ordinance required the developer to give the city an option to purchase. 108 The CBIA v. San Jose court distinguished its Sterling Park decision on the law that it concerned solely procedural issues and did not address any substantive legal standard about the validity of inclusionary zoning. 109 It noted that the decision did not mention San Remo or any other substantive legal standard. 110 It also distinguished Sterling Park on the facts that it applied to Palo Alto s inclusionary zoning ordinance because that ordinance required developers to give the city a recordable option to purchase the affordable housing units to enforce their affordability restrictions with the understanding that an option to purchase is a specific type of property interest. 111 In conclusion, the California Supreme Court found that San Jose s inclusionary zoning ordinance was not an exaction subject to the unconstitutional conditions doctrine but rather a land use regulation employing a price control to promote two constitutionally permissible purposes. The opinion also explained and harmonized several other prior cases, notably San Remo, Patterson, and Sterling Park. IV. Open Issues and What s Next in California The primary holding in this case that inclusionary zoning is a land use regulation is consistent with Home Builders Association v. City of Napa, 112 a prior California Court of Appeal case in which the court upheld 104. Id Id. (citing CAL. GOV T CODE ) Id. (citing CAL. GOV T CODE 66020) Id. at Id. at Id Id. at Id. at Cal. App. 4th 188 (Ct. App. 2001).

18 426 Journal of Affordable Housing Volume 24, Number a similar inclusionary zoning ordinance against numerous facial constitutional and statutory challenges as a land use regulation subject to rational basis review. Yet while the court resolved many inconsistencies in California s law of inclusionary zoning, several legal issues are still open. And, because of fundamentally different perspectives on property rights and the exercise of government power between housing advocates and local governments (on the one hand) and some developers and property rights advocates (on the other), litigation on inclusionary zoning will continue. First, since this case decided only a facial attack, there could be asapplied challenges. In practice, if there is a conflict between a developer and a city concerning the application of an inclusionary zoning ordinance to a proposed development, most developers will probably reach a negotiated deal with localities to avoid such lawsuits. However, if such challenges are brought, plaintiffs are likely to claim the price controls are confiscatory as applied. Cities can avoid negative outcomes in these cases by conducting economic feasibility studies before adopting an inclusionary zoning ordinance, as the City of San Jose did, and setting the parameters of their ordinances accordingly. And, in enforcing their ordinances, cities should be careful to consider the actual economic impact of their ordinances on a particular development and provide waivers as appropriate. Second, it is unresolved whether the Mitigation Fee Act s protest procedure and statute of limitations applies to all inclusionary zoning ordinances or only to those like Palo Alto s that require a conveyance by the developer to the city of a recognizable property interest. 113 It is also unclear how the constraints imposed by the federal or state constitutions on legislatively mandated mitigation fees compare with constraints imposed by the Mitigation Fee Act. In particular, Justice Werdegar s concurrence casts some doubt on CBIA s contention that San Remo required judicial scrutiny similar to Nollan/Dolan. 114 Government lawyers in California now have a clear roadmap for enacting inclusionary zoning ordinances that they can be confident will withstand judicial scrutiny in the state. Cities should ensure that their findings and statement of purposes are clear that they are adopting an inclusionary zoning ordinance under their police power to promote general welfare and to respond to their obligations under state laws promoting affordable housing and economic integration. Cities with existing for-sale inclusionary zoning may begin to enforce it after making any necessary tweaks to meet the opinion s requirements that the ordinance does not create an exaction under Sterling Park. Importantly, this case concerned only for-sale inclusionary zoning. Rental inclusionary zoning has been largely stalled by Palmer/Sixth St Cal. Bldg. Indust. Ass n, 61 Cal. 4th at See discussion of Justice Werdegar s concurrence supra at notes and accompanying text.