October 16, 2013

California Supreme Court to Review Inclusionary Housing Requirements

Holland & Knight Alert
Chelsea Maclean

On September 11, 2013, the California Supreme Court granted the California Building Industry Association's (CBIA) petition for review challenging a San Jose ordinance that imposed "inclusionary" housing obligations on housing developers. California Building Industry Association v. City of San Jose (CBIA v. City of San Jose).

A series of disjointed legal opinions has resulted in a patchwork of inconsistent rules relating to affordable housing. The multitude of questions at issue and inconsistencies between district court decisions has created the type of storm that often prompts the Supreme Court's review, as has occurred here. If the court issues a narrow opinion, a large number of stakeholders across the state will be left with continued uncertainty surrounding inclusionary housing requirements. In fact, Governor Brown recently identified the need for clarification from the Supreme Court in his October 13 message vetoing AB 1229 (discussed below). There is much to be gained if the court provides guidance on some or all of the questions noted below.

This alert summarizes the questions presented for review in CBIA v. City of San Jose and discusses additional questions warranting further elucidation. These include clarification of the standards for imposing inclusionary housing obligations: (1) on "for sale" versus rental housing, (2) in an "ad hoc" versus legislative manner, and (3) through in lieu fees versus housing set-asides.

Background on Inclusionary Housing in California

Many counties and cities have adopted ordinances similar to San Jose's ordinance as a means to provide low-cost housing. The first such ordinances were adopted in the 1970s, gained prevalence in the 1980s and 1990s and rapidly increased in the 2000s. Developers have challenged such ordinances for years as presenting a number of legal issues. Affordable housing advocates argue that the need for affordable housing has grown dire given the elimination of redevelopment funding.

As the California residential market recovers, tensions run high between developers looking to ensure that obligations accurately reflect actual residential impacts, affordable housing advocates concerned about housing affordability and municipalities looking to achieve affordable housing targets. These affordable housing targets have gained additional scrutiny under SB 375's mandate to coordinate jobs, housing and transportation planning.

The San Jose Ordinance

As discussed in our earlier alert, the San Jose ordinance required developers of "for sale" residential units to set aside 15 percent of their project units as affordable units. In the alternative, developers could satisfy the obligation in three ways: (1) build inclusionary units offsite, (2) pay an in lieu fee, or (3) dedicate land suitable for construction of inclusionary units equal to the value of the applicable in lieu fee.

The trial court first declared the ordinance invalid since the city had been "unable to demonstrate ... the constitutionally required reasonable relationship between deleterious public impacts of new residential development and the new requirements to build and to dedicate the affordable housing or pay the fees in lieu of such property conveyances." In other words, the city had been unable to show that the new residential development increased the need for low-cost housing. This is the standard set forth in San Remo Hotel L.P. v. City & County of San Francisco (San Remo).

The Sixth District Court of Appeal reversed and held that the ordinance should be reviewed under a highly deferential standard of review as an exercise of the city's police power. Under this standard, the ordinance would be considered invalid only if it is arbitrary, discriminatory and without a reasonable relationship to any legitimate public interest. The appellate court then remanded to the trial court for review. Its deferential police power standard would have allowed cities to adopt and defend similar ordinances under most circumstances.

Questions Presented for the Supreme Court's Review

CBIA argued in the lower courts and in its petition for review that the ordinance must be subject to the higher "reasonable relationship" standard of review articulated in San Remo. Further, CBIA argued that the ordinance cannot meet the standard, thereby rendering the ordinance invalid. This standard, if selected by the court, could invalidate inclusionary ordinances throughout the state, at least temporarily.

Additionally, CBIA requested the court’s review of the extent to which a recent U.S. Supreme Court decision,Koontz v. St. Johns River Water Management District (Koontz), applies to development in lieu fees in California. Koontz was issued subsequent to the decision in CBIA v. City of San Jose. In Koontz, the justices extended the holdings in Nollan v. California Coastal Commission (Nollan) and Dolan v. City of Tigard (Dolan) to instances in which a jurisdiction denies a land use permit and where monetary exactions are imposed on a development proposal. The "Nollan/Dolan" requirements impose a high level of judicial scrutiny. The Nollan test requires an agency to demonstrate a "nexus," that is, a legitimate state interest in advancing the exaction. The Dolan test requires an agency to demonstrate "rough proportionality" between the magnitude of the exaction and the nature and extent of the project impact. CBIA argues that the U.S. Supreme Court's statement that all development fees are a type of land use exaction (and thereby subject to a high standard of review) undermines the CBIA v. City of San Jose appellate court's holding that inclusionary housing in lieu fees can be reviewed under the deferential police power standard.

Affordable Housing Questions Warranting Clarification

In addition to addressing questions posed in CBIA v. City of San Jose, there are a multitude of additional questions related to affordable housing law that warrant further clarification, although these questions are not squarely in front of the California Supreme Court.

"For Sale" versus Rental Housing

In addition to potentially clarifying the validity of inclusionary housing obligations imposed on "for sale" housing, the court could also address the imposition of such obligations on rental housing. The San Jose ordinance provided that it applied to rental housing only if the courts or Legislature authorized application of inclusionary housing ordinances to rental housing. On September 3, 2013, the Legislature approved AB 1229, which would have granted cities the authority to impose inclusionary housing obligations on rental development as a condition of approval. Specifically, AB 1229 would have expressly superseded the decision in Palmer/Sixth Street Properties, L.P. v. City of Los Angeles (Palmer). Palmer held that Los Angeles' inclusionary housing ordinance requiring affordable units to be subject to long-term rental restrictions violated state law provisions found in the Costa-Hawkins Act. This Act allows the owner, and not a city, to set initial rent levels.

On October 13, 2013, Governor Brown vetoed AB 1229. His veto message stated the following: "[a]s mayor of Oakland, I saw how difficult it can be to attract development to low and middle income communities. Requiring developers to include below-market units in their project can exacerbate these challenges, even while not meaningfully increasing the amount of affordable housing in a given community." His veto message also explained: "the California Supreme Court is currently considering when a city may insist on inclusionary housing in new developments. I would like the benefit of the Supreme Court's thinking before we make adjustments in this area." Accordingly, the court may heed the governor's direct request for clarification regarding inclusionary housing requirements for rental housing.

"Ad Hoc" Versus Legislative Conditions

Courts have generally made a distinction between an agency's ability to impose conditions on an "ad hoc" basis (i.e., on a specific development project or permit) and legislative requirements (imposed via a generally applicable ordinance). Courts have generally applied the heightened Nollan/Dolan test to conditions imposed in an ad hoc manner. This heightened standard is imposed based on the rationale that there is a greater potential for abuse when conditions are imposed on a particular development project or permit. Some lower courts, however, have applied the more relaxed "reasonable relationship" standard in instances where an exaction is imposed through generally applicable legislation.

Interestingly, the Koontz decision did not emphasize the ad hoc/legislative distinction. The Koontz dissent noted: "[m]aybe today's majority accepts that distinction; or then again, maybe not. At the least, the majority's refusal to 'say more' about the scope of its new rule casts a cloud on every decision by every local agency to require a person seeking a permit to pay or spend money." The blurring of this distinction potentially opens the door for courts to apply the heightened Nollan/Dolan standard when considering both ad hoc and legislative exactions. This is yet another issue that warrants clarification by the court.  

In Lieu Fees Versus Housing Set-Asides

The court may also discuss the distinction between standards for in lieu fees versus housing set-asides. Set-asides refer to obligations to provide inclusionary units or dedicate land suitable for the construction of inclusionary units. The court could confirm whether in lieu fees and housing set-asides, like other development impact fees and exactions, are subject to AB 1600, also known as the California Mitigation Fee Act. The Mitigation Fee Act applies Nollan/Dolan-like standards1 to the consideration of both ad hoc and legislative fees and exactions and allows a developer to challenge a fee, dedication or other exaction provided the developer follows a specific protest procedure. Opining on the availability of the Mitigation Fee Act's protest procedures in the affordable housing arena could require an interesting balancing of statewide policies. On the one hand, the court may consider the policy of granting developers the right to challenge fees and exactions, one of the Act's purposes.2 On the other hand, the court may consider the policy of providing "decent housing and a suitable living environment to every Californian," demonstrating that affordable housing is a matter of "vital statewide importance."3

Applicability of the Mitigation Fee Act was given surprisingly little consideration in the CBIA v. City of San Jose appellate decision. A related question is currently under review by the California Supreme Court in Sterling Park, L.P. v. City of Palo Alto (Sterling Park).Specifically, the Sterling Park petition for review challenges the Sixth District Court of Appeal's holding that the Mitigation Fee Act's protest procedures are available only if disputed development fees are imposed for the "purpose of defraying all or a portion of the costs of public facilities related to the development project." This test was first announced in the highly disputed Trinity Park v. City of Sunnyvale opinion which considered a challenge to a below market housing set-aside requirement. This test was extended to the imposition of below market rate housing in lieu fees in Sterling Park. The Sterling Park petition for review raises the question of whether the "purpose of the exaction" test will be extended to all development fees, further limiting the availability of the Mitigation Fee Act's protest procedures, or whether the court will do away with the test altogether to preserve the Act's protest procedures.

The Stakes for Cities, Affordable Housing Advocates and Developers

In the wake of Palmer, cities have been preparing nexus studies to support their inclusionary housing ordinances. They may now delay adopting inclusionary housing ordinances during the court's review. Further, cities may altogether suspend imposing affordable housing obligations on rental housing given the governor's veto of AB 1229.

Depending on how proactive the court decides to be, it could provide needed clarification addressing the patchwork of constitutional, legislative and judicial mandates to date. Alternatively, the court could leave inconsistencies and holes in this body of law.

If the court provides guidance on some or all of the questions noted above, a number of parties could benefit. Cities and affordable housing advocates might receive guidance to ensure that affordable housing obligations will stand on solid legal ground and developers might gain comfort that affordable housing obligations will accurately reflect actual residential development impacts.


1 Specifically, the Act requires an agency in any action establishing, increasing or imposing a fee as a condition of approval of a development project to do the following: identify the purpose of the fee; identify how the fee will be used; determine how there is a reasonable relationship between the fee's use and the type of development project on which a fee is imposed; determine how there is a reasonable relationship between the need for a public facility and the type of development project on which the fee is imposed; and determine how there is a reasonable relationship between the amount of the fee and the cost of the public facility or portion of the public facility attributable to the development on which the fee is imposed. Gov't. Code §66001.

2 This legislative intent has been recognized by several courts. (See, e.g., Shappell Industries Inc. v. Governing Board (1991) Cal.App.4th 218, 241).

3 Gov't. Code §65580(a).

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