In litigation with broad impact for residential real estate development and affordable housing, the Building Industry Association has appealed their loss in CBIA v. City of San Jose, 61 Cal. 4th 435 (2015), to the U. S. Supreme Court. In that decision, the California Supreme Court sided with the City of San Jose, saying that the City’s affordable housing ordinance, which requires that new developments sell 15 percent of their units at reduced prices, is not an “exaction” triggering a strict analysis under the California and U.S. Constitutions, as to whether a government has taken property without compensation (takings). Instead, the ordinance and its development conditions would be analyzed like any other municipal ordinance.
While the California Supreme Court’s decision is not a substantial departure from the current statewide “takings” trend, it gives new support for cities and counties that adopt ordinances specifying conditions for development. For developers, real estate investors, and property owners, it reinforces the need obtain vested entitlements and build sooner, rather than later.
There are several key take-aways from the decision, which also make it unlikely the current U.S. Supreme Court would reverse:
1) The affordable housing requirement was an ordinance, and not an “ad hoc” development condition. “Ad hoc” conditions are imposed on a whim, without a specific ordinance, and receive strict review if challenged in court, because they have a potential for abuse.
2) This was a “facial” challenge, not an “as applied” challenge. “As applied” challenges are where a developer or property owner actually file a development application, test the City or County process, and document evidence of how a condition, as applied to their specific project, would be unfair or cause a taking. Facial challenges are difficult, because they have to claim an ordinance, as written, is unlawful or certain to cause injury.
3) The CBIA did not claim that as a price control, the ordinance was certain to deny property owners a fair and reasonable return. The California Supreme Court has previously decided cases involving price control on takings and due process grounds. Kavanau v. Santa Monica Rent Control Bd., 16 Cal. 4th 761 (1997). However, in a “facial” case the denial of a fair return has to be “certain”.
4) The CBIA may have lost the chance to claim a “regulatory taking” when it denied the application of the Penn Central case. Penn Cent. Transp. Co. v. New York City, 438 U.S. 104 (1978). Penn Central offers a broader takings analysis for cases when government regulation goes too far, but falls short of causing a “total taking” or “Lucas” taking (meaning the denial of all use of the land). While “exactions” cases, like Nollan, Dolan, and Koontz are generally more favorable to developers and property owners, they also have a much narrower scope than “regulatory takings” and Penn Central.
5) The CBIA argued that the City bore the “burden of persuasion.” The California Supreme Court notes that the challenger (CBIA) typically bears the burden of convincing a court that an ordinance does not bear a reasonable relationship to a legitimate government purpose. This means that the CBIA probably would have have had to commission its own, costly study in the face of the study by the Association of Bay Area Governments and the City’s hearings in 2008 and 2009.
6) The City of San Jose started this process with opportunity for public comment. Accordingly, developers would be well advised to monitor developments in their own cities, participate in the legislative process, and apply for entitlements early on. Our Land Use practice strives to be proactive, and support developers in this regard.
Alex Maniscalco is an attorney with The Loftin Firm. For questions relating to this blog post or any other California real estate, land use, corporate, or estate planning matter, contact The Loftin Firm at 760-814-9649.