On June 15, 2015, the California Supreme Court issued its decision in California Building Industry Association v. City of San Jose, No. S212072, unanimously upholding the validity of inclusionary housing programs in California. The closely watched case concerned the City of San Jose’s inclusionary housing ordinance, which the California Building Industry Association (CBIA) claimed was unconstitutional.

Under San Jose’s ordinance, new residential development projects of 20 or more units are required to sell at least 15 percent of the constructed “for-sale” units at a price that is affordable to low or moderate income households. While the ordinance includes alternative compliance options for developers – including construction of off-site affordable for-sale units, payment of an in lieu fee, or dedication of land – selection of one of the alternatives increases the inclusionary housing requirement to 20 percent, presumably to encourage on-site inclusionary housing.

CBIA brought suit in 2010, challenging the validity of the ordinance on its face. The primary argument advanced by CBIA before the California Supreme Court – after receiving a favorable decision at the Superior Court level followed by a reversal at the Court of Appeal – was that the conditions imposed by the ordinance were a “taking” without compensation, in violation of both the United States and California Constitutions.

In its unanimous decision, In its unanimous decision, written by Chief Justice Tani Cantil-Sakauye with two concurring opinions by Justices Werdegar and Chin, the California Supreme Court rejected CBIA’s argument and upheld San Jose’s ordinance. The Court found that the ordinance did not constitute an exaction that would bring it within the gambit of the unconstitutional conditions doctrine—and heightened scrutiny—in the first place, as “the ordinance does not require a developer to give up a property interest for which the government would have been required to pay just compensation under the takings clause outside of the permit process.”  Instead, the Court held that “the ordinance falls within what we have already described as municipalities’ general broad discretion to regulate the use of real property to serve the legitimate interests of the general public and the community at large.”  Noting the severe housing shortage facing cities and counties across California, the Court then held that San Jose’s ordinance was reasonably related to the city’s legitimate interest in alleviating the “significant and increasing need” for affordable housing to meet San Jose’s regional share of housing needs.

Despite the broad scope of the ruling, however, the Court did not give municipalities carte blanche to enact affordable and/or inclusionary housing programs without limitations. For instance, the Court left untouched the holding of Palmer/Sixth Street Properties, L.P. v. City of Los Angeles, which struck down an affordable housing mandate in Los Angeles that required a certain percentage of rental units to made affordable to low-income households. Additionally, the Court recognized that there are constitutional limits on the power of a municipality to impose price controls on developers, including ensuring that such controls are not confiscatory, i.e. that they are so onerous that “they deny a property owner a fair and reasonable return on its property.” 

This decision has immediate impacts on both San Jose and the other approximately 170 cities and counties throughout California with similar inclusionary housing ordinances, all of which would most likely defeat a takings-based legal challenge. Additionally, those cities and counties without inclusionary affordable housing programs are likely to face pressure from affordable housing advocates to enact them. However, CBIA’s legal counsel has stated that they are reviewing all legal options, and CBIA has the option of asking the United State Supreme Court for further review.