Property Owners and Developers Take a Hit from Supreme Court

By Chuck Reed

The U.S. Supreme Court opened the door for a new form of exaction from property owners and real estate developers by refusing to hear an appeal from a decision by the California Supreme Court upholding San Jose’s inclusionary zoning ordinance. The ordinance requires developers of housing projects with more than 20 units to reserve 15% of the for-sale units for low income buyers at a below market price. 

Builders unsuccessfully argued that the inclusionary zoning was taking of property rights for public use without just compensation, in violation of the 5th Amendment of the U.S. Constitution. The California Supreme Court ruled that the San Jose inclusionary zoning ordinance was not an unconstitutional taking of property from builders and that the ordinance was a proper exercise of the city’s “police power” that allows a city to place limits on the way property is used to protect public welfare. The Court also found that the inclusionary zoning ordinance created a form of price control, rather than a mitigation fee required to be paid to the city. Accordingly, the Court ruled that the ordinance was not an extraction or mandatory dedication of property for public use.

More than 170 California cities and counties have already adopted inclusionary zoning ordinances. With a stamp of approval from the Courts, use of inclusionary zoning is likely to spread widely as it is one of the few tools available to local governments to deal with the need for more affordable housing.

Of greater concern, however, is the potential for the decision to be used to justify other types of zoning restrictions to promote important programs well beyond affordable housing. The only limiting factor appears to be the creativity of city attorneys and other government officials, and in my experience, they are a creative group when it comes to finding new revenue sources. At the risk of providing inspiration, let’s consider the road map outlined by the California Supreme Court. 

First, the Court said “there can be no valid unconstitutional-conditions takings claim without a government exaction of property.” An ordinance that “places nonconfiscatory price controls on the sale of residential units” is constitutional so long as it does not go “too far” in restricting the future use of the property. 

Second, the zoning has to have a “real and substantial relationship to a legitimate public interest” in promoting the health, safety and welfare of the community and apply to a broad class of permit applicants, but the ordinance may not be designed to mitigate adverse impacts of a project.

Third, the zoning cannot require a monetary fee or a dedication of a property interest for public use, but it may “place a limit on the way a developer may use its property.” After that limit has been created, the ordinance may include alternative “compliance options,” such as payment of fees or dedicating land to the city. 

Just how far is “too far” for the California Supreme Court remains to be seen, but I have no doubt that local governments will be pushing the envelope, placing more and more burdens on development projects. Local governments never have enough money, and the road map created by the Supreme Court leads to a treasure chest. Its pull will be irresistible. 

Since the U.S. Constitution is not going to protect property owners and real estate developers from this new form of exaction, property owners must get engaged in the political process at the local level to limit or stop the potential misuse of inclusionary zoning ordinances.

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