In a unanimous decision released last week, the California Supreme Court held that a city’s demand for a developer to set aside a certain portion of its units in a housing project as below market rate (“BMR”) or pay an equivalent in-lieu fee was an “exaction” for purposes of the California Mitigation Fee Act.
This ruling is significant because it allows developers to start construction of projects subject to inclusionary housing requirements, and then later challenge the imposition of BMRs and/or in-lieu fees when the project nears completion. It also sets the stage for future decisions requiring a city’s inclusionary housing program to meet a stricter standard of review, beyond that applied to most land use regulations.
The case, Sterling Park L.P. v. City of Palo Alto, involved a project to construct 96 residential condominiums on a 6.5 acre lot on West Bayshore Road in Palo Alto. The project was subject to Palo Alto’s inclusionary housing program, which required that all residential projects involving five or more acres to set aside at least 20 percent of its units as BMRs, or agree to alternate terms set by the city. The developer, Sterling Park, entered an agreement with the city to provide 10 units as BMRs and to pay additional in-lieu fees. However, when the project was being finished and Palo Alto requested conveyance of the BMRs over a year later, the developer filed suit to challenge the inclusionary housing requirements.
Palo Alto moved for summary judgment, arguing that the inclusionary housing requirement was not an “exaction” under the Mitigation Fee Act, but rather a land use regulation subject to the Subdivision Map Act, and that the developer’s lawsuit was time-barred. The trial court and appellate court both agreed with the city, but the Supreme Court reversed, holding that the inclusionary housing program requirements were “exactions” subject to the Mitigation Fee Act.
The Mitigation Fee Act was passed by the California Legislature in response to developers’ concerns that local agencies were imposing development fees that were unrelated to their projects. Before the Act, a developer was unable to challenge the validity of fees imposed on residential projects without refusing to pay them, and, since payment is often a condition of obtaining a building permit, a challenge would force the developer to abandon or significantly delay construction of the project. However, the Act established a procedure whereby a developer could pay the fees under protest (or provide satisfactory evidence of arrangements to pay in the future), obtain a building permit, and proceed with the project while pursuing a legal action to challenge the fees. The statute of limitations for appeals filed under the Mitigation Fee Act does not begin to run until a city issues a notice of the amount of fees and the right to file a protest.
The Sterling Park decision could have implications beyond the timeline for appealing BMR requirements – it could also set the stage for future decisions that invalidate or significantly restrict inclusionary housing ordinances throughout the state. This is because, if the validity of inclusionary housing requirements can be challenged as “exactions,” a city seeking to impose them would have to show both that an “essential nexus,” exists between the requirements and the state interest being advanced, and that there is a “rough proportionality” between the amount of the proposed exactions and effects of the proposed development. By contrast, most land use regulations are considered valid exercises of a city’s police power if it can be shown that they bear a reasonable relationship to the public welfare – a far more deferential standard.
The Supreme Court will have an opportunity to further clarify its interpretation of inclusionary housing programs in the near future, as it recently granted the Pacific Legal Foundation’s petition for review of California Building Industry Association v. City of San Jose. In that case, the CBIA sued to invalidate San Jose’s inclusionary housing ordinance, arguing that it imposed an exaction on developers and was facially invalid because the city had failed to show a “reasonable relationship between the requirements imposed. . . and any increased public needs for affordable housing caused by such new residential development . . .” In response, the city argued that the ordinance was simply a land use regulation, valid as long as it bore a reasonable relationship to the public welfare. The trial court ruled in favor of CBIA, and enjoined the City of San Jose from implementing the ordinance. However, in June the Court of Appeals reversed, holding that the inclusionary housing ordinance was a not an exaction, but instead a land use regulation subject to the more deferential standard of review.
The Supreme Court’s decision in CBIA v. City of San Jose should help to shed some light on the future standards applicable to a city’s inclusionary housing program, and could have some cities in the Bay Area scrambling to protect their programs against legal challenges.
The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.
