Inclusionary housing ordinances in counties and cities across the United States have been enacted to address the affordable housing needs of the region while promoting effective economic integration. Indeed, the California affordable housing program has been one of the most successful in the nation, yielding over 10,000 affordable housing units, as opposed to states such as Massachusetts that are yet to produce even one.

In the wake of the housing bubble, an acute shortage of affordable housing in upmarket San Jose, California prompted a spate of executive action, most notably San Jose’s inclusionary housing ordinance in 2010. Slated to come into force in January 2013, the municipal housing ordinance mandates that (a) 30% of residential development projects of 20 or more units be made available at varying below-market rates, as per the notified pricing slab, or (b) such affordable housing be constructed at a different location as a proportion of the total project, or (c) an “in-lieu” development fee, equal to the surplus of the median market price (over the past 3 years) over the government-specified market rate, be paid into the city affordable housing fund.

However, the legality of this particular ordinance is currently sub judice in the appeal against the decision of the Sixth District Court of Appeals in California Building Industry Association v. City of San Jose ((2013) 157 Cal.Rptr.3d 813) pending before the California Supreme Court expected to have far-reaching implications on similar ordinances promulgated throughout the state of California in 2014. The bone of contention that emerges from the controversy is whether this ordinance, which compels the real estate industry to provide affordable housing, amounts to an arbitrary allocation of a societal burden of the state.

In the various cases in which the validity of these ordinances has been considered, three rationales emerge, with the judiciary having overturned validity on two of those grounds in two of the very first successful challenges in 2009. In Palmer/Sixth Street Properties v. City of Los Angeles (175 Cal. App. 4th 1396 (2009)), (where the court invalidated the ordinance in respect of rental units as violative of a lessor’s freedom to set initial rent under a rent “de-control” legislation) and Building Industry Association of Central California v. City of Patterson (171 Cal. App. 4th 886 (2009)) (where the court characterized the aforementioned “in-lieu development” fee to escape compliance with the ordinance as an exaction which failed the “reasonable relationship” test) the judiciary used very different analyses – rent/price control and exactions, respectively – to arrive at the same fundamental result.

Furthering the line of reasoning adopted in Patterson, the jurisprudence on the California Mitigation Fees Act 1987 that invalidates such “in-lieu development” fees as being “exactions” was reaffirmed by the California Supreme Court as recently as October 2013 in Sterling v. City of Palo Alto (Cal. S. Ct. No. S204771). The verdict followed the June 2013 ruling of the United States Supreme Court in Koontz v. St. Johns River Water Management District (568 US ___ (2013)) where the Court held that the land use ordinances imposing such fees would have to survive the nexus test of “rough proportionality” between the exaction and the impact of a proposed development.

The controversy was further heightened when the California legislature unsuccessfully attempted to reverse the result of Palmer and Patterson through the passage of Assembly Bill 1229, which would accord statutory backing to these inclusionary housing ordinances. However Governor Brown vetoed the Bill, given that the matter is still pending before the California Supreme Court, and until then, Palmer and Patterson continue to hold as good law.

It remains to be seen whether the California Supreme Court’s opinion in San Jose will bring closure to this legal controversy, and whether it will choose to overrule or reconcile its decision with Palmer, which specifically applies to “rental” projects, and is not based on the “exactions” rationale.