Inclusionary Housing Ordinance That Did Not Include Findings of a Nexus Between a Development Project and The Need for Additional Affordable Housing Upheld by California Supreme Court

I. Summary
Relying on a city’s broad power to regulate land use, the California Supreme Court recently upheld the City of San Jose’s inclusionary housing ordinance that requires new developments to set aside 15% of for-purchase units at affordable housing. In California Building Industry Assn. v. City of San Jose, 61 Cal. 4th 435 (Cal. 2015), the Court rejected the argument that the ordinance must be justified by a “nexus” between the development project and the need for additional affordable housing, instead holding that affordable housing requirements are valid so long as they bear a real and substantial relationship to the public welfare.

II. Discussion


Inclusionary housing ordinances are designed to increase the availability of affordable housing for low and moderate income residents. Such ordinances encourage developers to set aside a certain percentage of housing units in new or rehabilitated projects to be sold or rented at below market rates. In 2010, the City of San Jose adopted an inclusionary housing ordinance (“Ordinance”) that requires new residential development projects of 20 or more units to set aside at least 15% of the for-sale units for purchase at below market rates. The Ordinance also contains an in-lieu provision which gives developers the option of paying a fee instead of dedicating units for below-market sales. Finally, the Ordinance provides financial incentives to developers who choose to comply with the 15% set aside requirement.

The California Building Industry Association (“CBIA”) challenged the constitutionality of the Ordinance, alleging it was not justified by findings of a “nexus” between the need for additional affordable housing that is caused by new residential development. This “nexus” is required when a government “exacts” some type of property interest from a property owner in exchange for a land-use approval. An “exaction” occurs when a government agency conditions approval of a land use authorization upon dedication of a portion of the property for public use. The United States and California constitutions require heightened scrutiny of exactions, which are only permissible if 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. This same analysis applies when the government exacts payment of money in lieu of a property dedication. The trial court ruled in favor of CBIA, finding the city failed to demonstrate the required nexus, but the Court of Appeal reversed and the Supreme Court affirmed.


In ruling for the City of San Jose, the California Supreme Court rejected CBIA’s contention that the Ordinance should be treated as an exaction and therefore subject to the requirement that the City demonstrate that the need for more affordable housing is connected to new developments with 20 or more residential units. Rather, the Court held that the Ordinance is simply a regulation on how a property owner can use his/her land and not an exaction because the Ordinance does not require dedication of a portion of the property nor does it require the payment of money in lieu thereof. The Court rejected CBIA’s argument that the diminished value of a development property subject to the Ordinance amounted to an exaction because there is no guarantee that developers will lose money complying with the ordinance due to the numerous financial incentives available when the 15% set aside requirement is complied with.

Instead of applying the heightened scrutiny applicable to exactions, the Court instead applied the more deferential standard applicable to all land-use regulations, specifically, whether the regulation has a real and substantial relationship to the public welfare. Courts have long upheld price controls as a valid land-use regulation, along with numerous other land-use regulations that are well within a city’s broad authority to impose. Because an inclusionary housing ordinance is a land-use regulation comparable to numerous other valid types of regulations (price controls, commercial zoning, lot size restrictions, setbacks requirements, etc.), an inclusionary housing ordinance need only be reasonably related to the public welfare. Accordingly, the Court upheld the Ordinance because the City demonstrated a significant need for affordable housing and that the public interest would be best served if such housing was integrated into economically diverse development projects.

III. Conclusion

The decision in California Building Industry Assn. v. City of San Jose strengthens a city’s ability to adopt an inclusionary housing ordinance so long as the city demonstrates the ordinance is rationally related to a legitimate public interest. It is also worth noting that this decision did not address a city’s authority to impose affordable rental prices under an inclusionary housing ordinance. Currently, cities do not have the authority to impose affordable housing requirements on rental units under Palmer/Sixth Street Properties, L.P. v. City of Los Angeles, 175 Cal. App. 4th 1396 (2nd Dist. 2009), but a legislative response with respect to rental units may change this in light of the California Building Industry Assn. v. City of San Jose decision.

The above information is for general use and is not legal advice. This J&M Legal Alert is not intended to create, and receipt of it does not constitute an attorney – client relationship. Should you have any questions or require further clarification of the above, please contact Keith F. Collins at (714) 446-1400 or