“As a general matter, so long as a land use restriction or regulation bears a reasonable relationship to the public welfare, the restriction or regulation is constitutionally permissible.”
In California Building Industry Association v. City of San Jose, the California Supreme Court upheld the City of San Jose’s inclusionary housing ordinance against a takings challenge.
The inclusionary housing ordinance imposed a citywide requirement that developers commit 15% of new units to price limits: they must be sold as “affordable units” to lower income purchasers. (Alternatively, developers could avail themselves of alternatives for compliance, like building a greater number of units off-site or paying an “in lieu fee” for the city’s affordable housing fund.)
Generally, economic/land use regulations are given deference by the courts, where “a party challenging the facial validity of a legislative land use measure ordinarily bears the burden of demonstrating that the measure lacks a reasonable relationship to the public welfare”. Courts will find these regulations constitutional so long as they have a real and substantial relationship to the public welfare and are not “confiscatory”.
The California Building Industry Association urged the court to adopt a heightened standard of judicial review. If the city of San Jose conditioned the granting of permits upon the exacting of a benefit unrelated to mitigation of the harm inflicted by the proposed development, it would constitute an unconstitutional condition and a taking of property without just compensation.
The California Supreme Court found that the inclusionary housing price limits fell within the “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”. It found that the inclusionary housing ordinance did not constitute an “exaction” – where a city conditions discretionary approval upon the surrendering of a property right, unrelated to the project, in a manner that would, on its own, constitute a taking of property.
While the ordinance required developers to, e.g., commit certain units to under market prices, the court found that this manner of price constraints was similar to many other, constitutional applications of police power affecting pricing and profitability, like zoning particular types of businesses, imposing height and density restrictions, and and instituting rent control.
On the subject of rent control, the court took note of an interesting provision of the inclusionary housing ordinance that applied to newly constructed residential units. In Palmer/Sixth St. Properties, L.P. v. City of Los Angeles, the Second District Court of Appeals found that the Costa-Hawkins Rental Housing Act preempted a Los Angeles inclusionary housing ordinance that required a certain portion of newly constructed rental units to be offered below market, as affordable housing units. The San Jose City Council, aware of Palmer, included a similar provision, but made it self-executing in the event that the case was judicially overturned or the law was legislatively modified.