Posted by: Patricia Salkin | June 26, 2015

California Supreme Court Dismisses “Unconstitutional Conditions” Claim Against Legislatively Authorized City Inclusionary Zoning Ordinance

Editor’s note: Specials thanks to Edward J. Sullivan for contributing this post.

California Building Industry Assn. v City of San Jose, S212072 (June 15, 2015) involved Plaintiff trade association’s challenge to Defendant City’s ordinance to require developments containing 20 or more units to make 15% of those units available for low or moderate income purchase. The ordinance was a product of several state legislative efforts beginning in 1975 and, although not mandated by law, was in effect in over 170 California cities. The law was passed to increase the number of affordable housing units and integrate various socioeconomic groups into the same development. Plaintiff brought a facial takings claim, though not a typical regulatory takings claim, alleging the ordinance violated the doctrine of “unconstitutional conditions,” by which a claimant seeks a public benefit, but is forced to give up or refrain from exercising a constitutional right (in this case the right to just compensation) in exchange for that benefit.

In particular, Plaintiff alleged the ordinance was not supported by a sufficient evidentiary basis to show a reasonable relationship between adverse public impacts or a need for additional subsidized housing caused by, or reasonably attributed to, developments of 20 units or more as required by the takings clauses of the state and federal constitutions. The trial court agreed with Plaintiff, but the District Court of Appeal reversed, concluding the trial court erred in finding that a developer was required to dedicate property to the public and that the state and federal constitutions did not limit conditions only to those that are reasonably related to adverse impacts that a development may impose on a city’s affordable housing problem. Instead such non-exaction conditions must only bear a real and substantial relationship to a legitimate public interest. The California Supreme Court granted review.

Since 1965, California cities have been required to adopt a General (comprehensive) Plan and make adequate provision for affordable housing. In 1980 and subsequently, the California Legislature has added to the requirement of, and provision for, such housing, including the authorization of inclusionary zoning regulations, such as the one now before the court. In 2010, in order to meet that need, Defendant enacted the challenged ordinance, which found a relationship between market rate development and affordable housing, as provision of market rate housing raised land costs and thus made affordable housing more difficult. Such housing also required more City employees to serve it and made it more difficult for such service employees to live in non-substandard housing in the City, and resulted in longer commutes and forced residents to pay a larger share of their incomes for housing. After setting forth its purposes, the ordinance set out a number of options for developments subject to its provisions to meet the need for affordable housing, including the 15% requirement, or to raise that requirement to 20% if such units are constructed offsite, payment of an “in lieu” fee, dedicating land with an equivalent value to the applicable “in lieu” fee, or acquiring and rehabilitating existing substandard housing. The Ordinance also contained incentives for compliance, such as density bonuses, off-street parking reductions, and City subsidies and assistance. Moreover, the ordinance provided for covenants and other safeguards to assure the price on resale was affordable. Finally, the Ordinance was not effective until after the end of the recent recession and provided for a waiver to the extent any provision operated as an unconstitutional taking.

The Court first turned to whether the Inclusionary Zoning requirements were “exactions” that implicated the “unconstitutional conditions” doctrine of Nollan, Dolan and Koontz. No taking challenge exists to a condition that is not also an exaction. Nollan and Dolan involved exactions of real property, while Koontz involved public works or money as a substitute for real property dedications.  The challenged ordinance did not exact property, public works or money and was thus not an exaction. Outside the exactions context, public agencies have broad authority under their legislative or “police” power to regulate land, so long as the restriction bears a real and substantial relationship to the public welfare. A regulation is presumed constitutional and is reviewed in a deferential way under the “fairly debatable” test.

The Court concluded that because there was no exaction, there was no unconstitutional condition — the 15% requirement does not bind a landowner to give up a property interest, or to provide public works or money in lieu of a property interest to the public. It simply places a use restriction on the land by limiting the return on that portion of the land, much like rent control or zoning regulations themselves. So long as the requirement does not constitute a physical taking or deprive the owner of all viable economic use, it does not violate the takings clause. If the test relates to Due Process, the increase of affordable housing to comply with state law, and locating such housing in economically diverse areas are constitutionally permissible objectives that may be achieved in multiple ways. The City could use price controls or a requirement to provide accessory housing units in every development. These would not violate the takings clause. Moreover, this case involves a facial attack and the ordinance uses a waiver mechanism to avoid an unconstitutional situation, which would require an application and a subsequent as-applied attack. On its face, however, the ordinance is not unconstitutional. Moreover, because Plaintiff did not bring a regulatory taking claim under Penn Central, the Court did not apply that test and concluded:

“As we have explained, an ordinance that places nonconfiscatory price controls on the sale of residential units and does not amount to a regulatory taking would not constitute a taking of property without just compensation even if the price controls were applied to a property owner who had not sought a land use permit. Accordingly, the inclusionary housing ordinance‘s imposition of such price controls as a condition of a development permit does not constitute the imposition of an exaction for purposes of the unconstitutional conditions doctrine under the takings clause.”

The Court then reviewed Plaintiff’s contention that the recent decision of the California Court of Appeals in Sterling Park L. P. V. City of Palo Alto, 57 Cal.App4th 1193, 1207 (2013) should be applied.  In Sterling Park, the validity of an exaction was challenged and the issue was the correct statute of limitations. However that case involved an exaction – an obligation to sell certain property to that city at a below-market rate, while the instant case did not involve an exaction. Moreover, the challenged ordinance in this case involved a number of incentives for the provision of affordable housing which must be considered in the individual case as an as-applied challenge. Further the Court noted that Koontz found that, so long as one of the alternative means of satisfying a condition were constitutional, the Fifth Amendment was not violated. In any event, the doctrine of unconstitutional conditions was not violated in this case.

The Court then considered Plaintiff’s contention that the challenged ordinance was a taking under a portion of its decision in San Remo Hotel v. City of San Francisco, 27 Cal4th 643 (2002), first noting once more that there was no exaction in this case, but then turned to the passage that appeared to say that a condition is valid solely if it alleviates adverse impacts caused by or attributable to a development. The Court pointed out that the context of the passage responded to a hypothetical ordinance in which a city might use a mitigation fee on an ad hoc basis to “sell” development approval, distinguishing that instance from “legislatively mandated formulaic mitigation fees” which would be subject to a public and political process. The passage read: (quote from pp. 46-47)

“Nor are Plaintiffs correct that, without Nollan/Dolan/Ehrlich scrutiny, legislatively imposed development mitigation fees are subject to no means-ends review. As a matter of both statutory and constitutional law, such fees must bear a reasonable relationship, in both intended use and amount, to the deleterious public impact of the development. * * * Plaintiff’s hypothetical city could only ‘put [its] zoning up for sale’ in the manner imagined if the ‘prices’ charged, and the intended use of the proceeds, bore a reasonable relationship to the impacts of the various development intensity levels on the public resources and interests.  While the relationship between means and ends need not be so close or so thoroughly established for legislatively imposed fees as for ad hoc fees subject to Ehrlich, the arbitrary and extortionate use of purported mitigation fees, even where legislatively mandated, will not pass constitutional muster.” (citations omitted) San Remo Hotel, supra, 27 Cal.4th at p. 671.  (Emphasis in original)

Plaintiff read this passage to say that the challenged ordinance could be valid only if the conditions “bear a reasonable relationship, in both intended use and amount, to the deleterious public impact of the development.”  The Court responded that San Remo did not apply to permit conditions that placed use limitations on property rather than solely to conditions requiring an applicant to pay an unrelated fee to secure a permit and, read in context, is consistent with Koontz.  Moreover that passage related only to mitigation fees to limit impacts and not to price controls or other land use regulations that serve a permissible broader constitutional purpose, unrelated to the impacts of the proposed development. There is no ends-means analysis to use restrictions imposed by zoning regulations — rather those regulations are permissible to serve broader public welfare considerations.

The Court cited the California Court of Appeals decision in Ehrlich v. City of Culver City, 12 Cal4th 854 (1995), in which a developer challenged a recreation facility replacement fee successfully under Nollan and Dolan and also a public art fee, which required donation of a work of art or payment of a fee at 1% of the valuation of a building, which was not subject to that analysis, but rather whether the requirement were reasonably related to a constitutionally legitimate purpose of increasing public access to art, which is also a common test for land use controls. So long as price controls are not confiscatory or constitute a regulatory taking, they should be evaluated under the reasonable relation test. Moreover, a developer is not obliged to pay a fee if other non-monetary options may be taken. The 15% requirement is not related to any individualized assessment of housing impacts of a given development, but rather under the reasonable relation test.

Lastly the Court addressed Plaintiff’s contention that Sterling Park supports a Nollan-Dolan analysis. But that case only dealt with the applicable statute of limitations– either 90 days under the Subdivision Map Act or 180 days from a notice of required payment under the Mitigation Fee Act –to an Inclusionary Zoning Fee. The court chose the 180-day limitation applied, but did not reach the merits of the case and left open the grounds for challenging inclusionary zoning requirements. The Court thus upheld the decision of the Court of Appeals, observing:

“As noted at the outset of this opinion, for many decades California statutes and judicial decisions have recognized the critical need for more affordable housing in this state. Over the years, a variety of means have been advanced and undertaken to address this challenging need. We emphasize that the legal question before our court in this case is not the wisdom or efficacy of the particular tool or method that the City of San Jose has adopted, but simply whether, as the Court of Appeal held, the San Jose ordinance is subject to the ordinary standard of judicial review to which legislative land use regulations have traditionally been subjected.” California Homebuilders Association at 64.

There were two concurring opinions. Justice Werdegar observed that Plaintiff limited itself to an unconstitutional conditions challenge, so it was not necessary to deal with the reasonable relation test and that the intervening Supreme Court decision in Lingle v. Chevron USA, Inc., 544 US 528, 540-45 (2005) had adopted a more deferential standard, which was not applicable under the takings clause in any event, but rather was tested under the due process clause. Justice Chin also concurred, but on much narrower grounds that the ordinance does not require subsidized housing. While the ordinance does require that the same quality of exterior design, comparable square footage and bedroom count, it does allow for other (and less expensive) attributes. In this facial challenge, it is not clear that a developer could not turn a profit from these affordable housing units. If a developer were required to subsidize these units by selling them below cost, Justice Chin would apply the Fifth Amendment.

This unanimous decision upholding the City’s inclusionary zoning regulations in this facial unconstitutional conditions challenge may not be the last word and it is probable that the Plaintiff will seek certiorari to get a definitive answer to the correct constitutional test to be applied.

California Building Industry Assn. v City of San Jose, S 212072 (6-15-15)

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