California Building Industry Ass'n v. City of San Jose
351 P.3d 974, 189 Cal. Rptr. 3d 475, 61 Cal. 4th 435 (2015)
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Rule of Law:
A municipal ordinance conditioning new residential development permits on a requirement that a percentage of the development's for-sale units be sold at an affordable price is a legitimate exercise of the police power to regulate land use, not a property "exaction" subject to heightened judicial scrutiny under the Takings Clause.
Facts:
- For decades, California has faced a serious and growing shortage of affordable housing for low- and moderate-income families.
- The City of San Jose determined it had met only a small percentage of its regionally allocated need for new affordable housing units.
- After extensive study and public input, the City of San Jose enacted an inclusionary housing ordinance to increase its stock of affordable housing and promote economically diverse communities.
- The ordinance applies to new residential development projects of 20 or more units.
- The ordinance's primary requirement is that developers must make at least 15 percent of their for-sale units available at a price affordable to low- or moderate-income households.
- The ordinance provides developers with several alternative compliance options, such as building affordable units off-site or paying an in-lieu fee, though these options carry a higher 20 percent requirement.
- To incentivize on-site compliance, the ordinance offers developers economic benefits, including density bonuses, reduced parking requirements, and potential financial subsidies from the city.
Procedural Posture:
- Plaintiff California Building Industry Association (CBIA) filed a facial challenge to the ordinance against the Defendant, City of San Jose, in the superior court (trial court).
- Several nonprofit housing organizations and a low-income resident intervened in support of the city's ordinance.
- The superior court granted judgment for CBIA, finding the ordinance unconstitutional and enjoining its enforcement.
- The City of San Jose (as appellant) and the interveners appealed to the California Court of Appeal.
- The Court of Appeal reversed the superior court's judgment, holding that the ordinance was a valid exercise of the city's police power subject to deferential review.
- CBIA (as petitioner) sought review from the California Supreme Court.
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Issue:
Does a municipal inclusionary housing ordinance that requires developers to sell a percentage of new residential units at below-market, affordable prices constitute an unconstitutional 'exaction' under the Takings Clause, thereby triggering heightened judicial scrutiny under the Nollan/Dolan test?
Opinions:
Majority - Cantil-Sakauye, C. J.
No, the ordinance does not constitute an unconstitutional exaction. An inclusionary housing requirement that places a price restriction on a portion of new development is a permissible land use regulation under a municipality's police power, not a compensable taking of property. The unconstitutional conditions doctrine, articulated in Nollan and Dolan, applies only to 'exactions,' which are government demands for a property interest (like a dedication of land or payment of money) that would otherwise require just compensation if imposed outside the permit process. The San Jose ordinance does not require developers to dedicate property or pay money to the public; it merely restricts the use of their property by limiting the sale price of some units. This is analogous to other valid regulations like zoning, density limits, and rent control, which are evaluated under the deferential standard of whether the law bears a real and substantial relationship to the public welfare. The passage in San Remo Hotel relied upon by the challenger applies only to development mitigation fees, not to broader land use regulations that serve general welfare purposes beyond mitigating the direct impacts of a specific project.
Concurring - Werdegar, J.
I concur fully with the majority. I write separately to clarify that the 'reasonable relationship' test from my opinion in San Remo Hotel, which was decided before the U.S. Supreme Court's decision in Lingle v. Chevron, is best understood today as a due process standard, not a takings standard. After Lingle abandoned the 'substantially advances a legitimate state interest' test for takings, the San Remo Hotel test should be viewed as a deferential inquiry into whether a regulation is arbitrary or irrational. This means the burden is on the challenger to prove the regulation lacks a reasonable relationship to the public welfare, which is generally equated to the rational basis standard.
Concurring - Chin, J.
I concur with the majority's conclusion. I agree the ordinance is a valid land use regulation because, on its face, it does not require a developer to provide subsidized housing by selling units below cost. The ordinance allows developers to build the affordable units more cheaply than market-rate units (e.g., using functionally equivalent but different interior finishes), meaning they can still potentially earn a profit on those units. An ordinance that did require selling units at a loss would present an entirely different constitutional question, as it would appear to be an exaction forcing a small group to bear a public burden that should be borne by the community as a whole.
Analysis:
This landmark decision solidifies the authority of California municipalities to use inclusionary housing ordinances as a primary tool to combat the affordable housing crisis. By classifying these ordinances as traditional land use regulations rather than property exactions, the court shields them from the heightened scrutiny of the Nollan/Dolan test, making them much harder to challenge on their face. This ruling clarifies a critical distinction in takings jurisprudence, distinguishing between regulations on property use (which receive deferential review) and the forced conveyance of a property interest (which triggers heightened scrutiny). The decision provides a strong legal foundation for existing inclusionary housing programs and will likely encourage more cities to adopt similar measures.
