Court Of Appeal Upholds San Jose Inclusionary Housing Ordinance As Legitimate Exercise Of Local Police Power

David Preiss is a Partner and Melanie Sengupta an Associate in our San Francisco

In a recent decision, California's Sixth District Court of Appeal reversed a trial court order and upheld the City of San Jose's Inclusionary Housing Ordinance as a legitimate exercise of the local police power. California Building Industry Association v. City of San Jose (2013) 157 Cal.Rptr.3d 813. The court held that the city was not required to provide evidentiary justification that the affordable units set-aside or alternative in-lieu fee requirements of the ordinance bore a reasonable relationship to the deleterious impact of new market-rate residential development. Rather, the court ruled that the ordinance was an exercise of the city's police power, subject to a highly deferential "reasonable relationship" standard of judicial review.

This opinion still leaves critical issues regarding affordable housing requirements unresolved and exacerbates the confusion surrounding a city's ability to require residential developers to provide affordable housing as part of their projects. In fact, both the petitioner and San Jose have filed petitions for rehearing. The ruling fans the flames of an already-heated debate around affordable housing requirements in California, teeing up these issues for resolution by the California Supreme Court, particularly in light of the subsequent U.S. Supreme Court decision in Koontz v. St. Johns River Water Management District (June 25, 2013, 2013 WL 3184628). (See Holland & Knight's alert on the Koontz ruling.)

San Jose's Inclusionary Housing Ordinance

At the heart of the Sixth District's opinion is the ordinance, which was adopted by San Jose in January 2010 based on its "legitimate interest" in alleviating the shortage of affordable housing in the city. It applied to residential developments of 20 or more units and provided three ways for developers of "for sale" residential units to fulfill the city's inclusionary housing requirement: (1) set aside 15 percent of the units for purchase at a below-market rate to households earning no more than 110 percent of the area median income on-site, although the units could be sold to households earning at most 120 percent of the area median income; (2) construct affordable housing on a different site at specified percentages; or (3) pay an "in-lieu fee" not to exceed the difference between the median sale price of a market-rate unit in the prior 36 months and the cost of an "affordable...