[*PG567]INCLUSIONARY HOUSING PROGRAMS: LOCAL GOVERNMENTS RESPOND TO CALIFORNIA’S HOUSING CRISIS

Cecily T. Talbert* & Nadia L. Costa**

Abstract:  As anti-growth sentiment increases across the country, two laudable goals—affordable housing and environmental protection—are coming into conflict. This tension is most evident in California. Nine of the ten least affordable communities in the country are in California. California also has one of the most complicated and expensive environmental regulatory processes for development. This results in builders being unable to produce housing to keep up with demand, and an increase in the cost of those units that are available. “Smart Growth” is often proffered as the answer to this dilemma: by promoting more compact development, mixed-use and mixed-income neighborhoods, and creating jobs near housing and transportation, housing production will be available to meet the demand at affordable costs. While these principles may serve as a valuable planning guide, they are not a panacea. In this respect, local governments have used inclusionary housing programs as one tool to respond to this escalation of housing costs and probably will continue to do so.

Introduction

As anti-growth sentiment escalates throughout this nation, two laudable goals—affordable housing and environmental protection—are being pitted against each other. Nowhere is this tension more evident than in California. Home to nine of the ten least affordable communities in the entire country, California also has one of the most complicated and expensive environmental regulatory processes for development.1 This results in a fundamental problem of supply [*PG568]and demand: the less housing builders are able to produce, the higher the cost for the available units. This imbalance affects every Californian, with housing prices continuing to soar.2 It is those with household incomes at the lowest end of the economic spectrum, however, who feel the impact the most.3

In the past decade, housing production in California has lagged behind population and job growth.4 According to the Little Hoover Commission, “between 1990 and 1997, annual production of housing as measured by statewide residential building permits averaged a mere 91,000 units.”5 Moreover, “in 1999, when national housing production was high, less than 140,000 residential permits were issued in California.”6 The year 2000 marked the eleventh consecutive year that housing production in the state failed to keep up with demand.7

The Little Hoover Commission reports:

This housing shortage will become even more pronounced as the state’s population continues to grow. The 2000 Census found just under thirty-four million people living in California, a 13.6 percent increase from 1990. The California Department of Finance projects growth will continue through the next twenty years, resulting in 40 million residents by 2010 and 45.5 million residents by 2020. These population figures translate into an additional 3 million households by 2010 and over 5 million additional households by 2020.8

An average of 220,000 housing units must be built each year between now and 2020 to accommodate this projected growth.9 If current housing production trends continue, then California will build [*PG569]less than sixty percent of the new housing units required to meet the projected 1997–2020 demand.10

This lack of adequate supply results in escalating housing prices, making home ownership out of reach for many. “Less than 56 percent of Californians own homes, compared to a national average of 67 percent.”11 The impact of this housing shortage is often felt most profoundly by those households with low incomes. Affordable housing is generally defined as housing that costs less than or equal to thirty percent of a household’s income.12 Yet, “[a]mong low-income renters, about two-thirds pay more than half of their income for housing and 91 percent pay more than the recommended 30 percent.”13

Faced with this crisis, there is growing consensus among local governments, citizen groups, planners, developers, and housing advocates that providing sufficient housing, particularly affordable housing, is a priority.14 Local governments, confronted with significant opposition to proposed residential projects because of environmental concerns, are placed in the untenable position of trying to reconcile these competing objectives.15 “Smart Growth” is often proffered as the answer to this dilemma. By promoting more compact development, mixed-use, and mixed-income neighborhoods, and creating jobs near housing and transportation, advocates of Smart Growth contend that housing will be available to meet the demand at affordable costs. Although these principles may serve as a valuable planning guide, they are not a panacea.16 Wherever there is development, there will be im[*PG570]pacts, environmental and otherwise; efforts to reduce these impacts will result in a restraint on housing production. Thus, housing prices can be expected to continue to escalate.

I.  Inclusionary Housing Programs

One tool that local governments have used, and presumably will continue to use, to respond to this escalation of housing costs is the development of inclusionary housing programs. These programs may serve to encourage development in general, and affordable housing in particular, by fostering the development of mixed-income, diverse, and integrated communities.17 Inclusionary housing programs18 have been in effect since the early 1970s, and are growing in popularity today as more jurisdictions view them as innovative ways to increase the supply of affordable housing as well as to combat exclusionary zoning practices.19 In general, localities enact such programs pursuant to [*PG571]their local police power, and are “typically effectuated through inclusionary housing ordinances, in zoning codes, policy statements, or a jurisdiction’s housing element.”20

Given the reality that inclusionary housing programs essentially transfer property from developers to less materially advantaged households, it is not surprising that such programs have been challenged in court.21

Overall, such efforts have not been successful. Indeed, most of the few published decisions have upheld inclusionary housing programs.22 Because these cases applied a relatively deferential standard of review, their continued viability became uncertain with the adoption of the heightened scrutiny standard enunciated by the United States Supreme Court in Nollan v. California Coastal Commission23 and Dolan v. City of Tigard.24 Recently, a California appellate court squarely addressed this issue, and upheld yet another inclusionary housing program. In Home Builders Ass’n of Northern California v. City of Napa,25 the court refused to apply the heightened standard of judicial review under Nollan and Dolan, and instead determined that an inclusionary housing ordinance that imposed a ten percent mandatory set-aside requirement on new development was constitutional.

[*PG572]II.  Judicial Treatment of Inclusionary Housing Programs

A.  In the Era Before Nollan and Dolan

There are few published decisions considering the legality of inclusionary housing programs. A court first addressed the issue in Board of Supervisors v. DeGroff Enterprises.26 In that decision, despite acknowledging the “urgent need for housing units for lower and moderate income families,” the Virginia Supreme Court invalidated a mandatory inclusionary housing ordinance requiring that fifteen percent of multifamily units be affordable.27 The court overturned the statute on the grounds that the ordinance exceeded the locality’s police power, as well as constituted a taking under the Virginia State Constitution.28

Subsequent cases, however, have not followed suit. The seminal case of Southern Burlington County NAACP v. Township of Mount Laurel (Mount Laurel I) was the first decision explicitly to recognize the importance of inclusionary housing programs as a means to combat exclusionary zoning practices.29 In Mount Laurel I, the plaintiffs, representing minority, low-income residents, attacked a local zoning ordinance that had both the intent and effect of excluding low- and moderate-income residents from the municipality.30 The New Jersey Supreme Court found this exclusionary zoning ordinance unconstitutional, holding that it violated basic principles of fairness.31 In so doing, the court imposed on all “developing” municipalities, through their land use regulations, an affirmative obligation to provide a realistic opportunity for affordable housing.32

In a later decision, Mount Laurel II, the New Jersey Supreme Court made clear that it would not back away from this position.33 [*PG573]Rather, it extended this obligation to all municipalities, and advocated mandatory set-aside programs as one way for localities to fulfill their Mount Laurel obligations.34 The court flatly rejected the argument that such programs constituted an impermissible taking, concluding that “the builder who undertakes a project that includes a mandatory set-aside voluntarily assumes the financial burden, if there is any, of that condition.”35

Several years later, the question arose whether the imposition of fees (to be dedicated to an affordable housing trust fund) on developers as a condition of approval was proper. Stressing the affirmative obligation upon municipalities to provide realistic housing opportunities for all income levels, the New Jersey Supreme Court in Holmdel Builders Ass’n v. Township of Holmdel found the requirement permissible under state law.36 The court did not directly reach the question whether the ordinance was unconstitutional.37 Nevertheless, the court emphasized that such arguments, with respect to a facial challenge, lacked merit.38

A Ninth Circuit decision addressed the question left unanswered by Holmdel—whether such ordinances could survive constitutional challenge. In Commercial Builders of Northern California v. City of Sacramento, the court held that an ordinance conditioning certain types of nonresidential building permits upon the payment of a fee dedicated to an affordable housing trust fund did not amount to an unconstitutional taking.39 The plaintiff, Commercial Builders, did not argue that Sacramento lacked a legitimate interest in increasing the supply of affordable housing.40 Rather, citing Nollan, Commercial Builders argued that the ordinance constituted an impermissible means of advancing that interest, because it placed a burden of paying for low-income housing on nonresidential development without establishing a sufficient nexus between such development and the need for affordable housing.41

[*PG574] The court, however, was not persuaded. Refusing to require a direct causal relationship,42 it held that Nollan did not materially change the level of scrutiny in the case.43 Further, because “the Ordinance was implemented only after a detailed study revealed a substantial connection between development and the problem to be addressed,” this nexus was sufficient to pass constitutional muster.44

Most recently, the New Jersey Supreme Court case of Toll Bros. v. Township of West Windsor,45 emphasized the continued vitality of the Mount Laurel I and II decisions. This case was brought in the context of a developer seeking a builder’s remedy46 against a municipality for failing to adhere to its Mount Laurel obligations.47 After conducting a site-by-site evaluation, the court found for the developer, holding that the township’s ordinances, regulations, and policies prevented a realistic opportunity for development of affordable housing.48

B.  A Facial Constitutional Challenge in the Era After Nollan and Dolan: Home Builders Ass’n of Northern California v. City of Napa

Despite the increasing prevalence of various kinds of inclusionary housing programs, the above decisions represented the world of caselaw on this point for some time. Although some questions had been answered, no case had faced the issue of how Nollan and Dolan affected the constitutional analysis. Then, in June, 2001, a California appellate court in Home Builders Ass’n of Northern California v. City of Napa made it clear that inclusionary housing ordinances could withstand a facial constitutional challenge.49

[*PG575]1.  Napa’s Inclusionary Housing Ordinance

In an effort to address the escalating problems resulting from a lack of affordable housing within the City of Napa and surrounding areas, Napa enacted an inclusionary housing ordinance.50 The primary mandate imposed was a requirement that ten percent of all newly constructed units be “affordable,” as that term was defined in the ordinance.51

The ordinance also offered developers two alternative means of compliance. First, developers of single-family homes could, at their option, satisfy the inclusionary requirements through an “alternative equivalent proposal,” such as the “dedication of vacant land [or] the construction of affordable units on another site.”52 Developers of multifamily units also could satisfy the ten percent requirement through a similar mechanism, but only if the city council determined that the proposed alternative would result in affordable housing opportunities equal to or greater than those created by the basic inclusionary requirement.53

As a second alternative, a residential developer could choose to satisfy the inclusionary requirement through payment of an “in-lieu-of” fee.54 Developers of single-family units could choose this option by right, whereas developers of multifamily units were permitted this option only upon city council approval.55 All in-lieu fees generated were required to be deposited in a housing trust fund. This fund then could be used by the City only for the purposes of increasing and improving affordable housing in Napa.56

The ordinance also contained an administrative relief clause, permitting city officials to reduce, modify, or waive the requirements contained in the ordinance “based upon the absence of any reasonable relationship or nexus between the impact of the development and . . . the inclusionary requirement.”57

[*PG576] In September of 1999, the Home Builders Association of Northern California (HBA), an association of professionals in the residential construction industry, sued the City of Napa, contending that the ordinance was facially invalid because it: (1) was an impermissible taking under both state and federal law; and (2) violated the Due Process Clause of the United States Constitution.58 After the trial court entered judgment in favor of Napa, HBA appealed.59 In ruling for Napa, the court affirmed the trial court’s decision and upheld the ordinance against the facial constitutional challenges.60

With respect to the takings claim, although acknowledging that the ordinance imposed significant burdens on developers, the court found relevant that it also provided benefits to those complying with its terms.61 Moreover, the court found the fact that the ordinance contained an administrative relief clause, allowing for a complete waiver of its requirements, dispositive.62 The court held that “[s]ince [the] City has the ability to waive the requirements imposed by the ordinance, the ordinance cannot and does not, on its face, result in a taking.”63

Further, because the ordinance substantially advanced a legitimate state interest, it did not result in a taking.64 First, the court noted that both the California Supreme Court and the state legislature had recognized that creating affordable housing for low- and moderate-income families was a legitimate governmental purpose.65 Second, the court stated that it was “beyond question” that the City’s ordinance would substantially advance this important governmental interest.66 The court reasoned that “[b]y requiring developers in [the] City to create a modest amount of affordable housing (or to comply with one [*PG577]of the alternatives) the ordinance will necessarily increase the supply of affordable housing.”67

HBA’s principal constitutional claim was that the City’s ordinance was invalid under the heightened scrutiny standard required by Nollan and Dolan.68 HBA contended that there was no “essential nexus” or “rough proportionality” between the exaction required by the ordinance, and the impacts caused by development of the property.69

The court rejected this argument, however, holding that Nollan and Dolan were inapplicable to the facts of this case.70 The court stated that the standard of judicial scrutiny formulated by the U.S. Supreme Court in Nollan and Dolan was intended to address land use “bargains” between property owners and regulatory bodies, in which the local government imposes project-specific conditions on approved future land uses purportedly to offset the impact of the proposed development.71 The City of Napa court noted, “It is in this paradigmatic permit context—where the individual property owner-developer seeks to negotiate approval of a planned development—that the combined Nollan and Dolan test quintessentially applies.”72 The court held that because the ordinance was generally applicable to all development in Napa, the more deferential standard of scrutiny applied “because the heightened risk of the ‘extortionate’ use of the police power to exact unconstitutional conditions is not present.”73

The court also rejected HBA’s due process challenge.74 In so doing, it stated that such a claim is tenable only if the regulation “will not permit those who administer it to avoid an unconstitutional application” of its terms.75 If such provisions exist to allow for the exercise of discretion by the authorities, the court must presume that those [*PG578]implementing the regulations will exercise their authority in conformity with the Constitution.76 Thus, “when an ordinance contains provisions that allow for administrative relief,” a claim of facial constitutional invalidity must fail.77

Here, the City’s ordinance contained exactly the type of opportunities for administrative relief that preclude an assumption that the ordinance will be unconstitutionally applied.78 Because it included a provision that gave the City the authority to waive the developer’s obligations completely in the absence of any reasonable relationship between a project’s impacts and the ordinance’s affordable housing requirements, the court held that it must presume that the City would, in fact, exercise that authority in such a way as to avoid unconstitutional application of the ordinance.79 In the event that the City subsequently applied the ordinance in violation of a particular individual’s constitutional rights, the applicant’s recourse at that time would be to bring an as-applied challenge.

The Future of Inclusionary Housing Ordinances

The California Court of Appeal’s sound rejection of HBA’s arguments in Home Builders Ass’n of Northern California v. City of Napa reaffirms the continuing viability of inclusionary housing ordinances when confronted with facial takings and due process challenges. Moreover, it creates a framework within which city and county legislatures can formulate new and creative means of addressing the affordable housing issue, as well as ensuring that their current ordinances can withstand constitutional challenge.

Inclusionary housing ordinances, such as those in City of Napa, are legislative acts entitled to deference from the courts. Therefore, the challenger bears a heavy burden to establish that the law is arbitrary or capricious. If a locality has properly adhered to all procedural requirements in enacting an inclusionary housing ordinance, it will likely pass constitutional muster.

There are several ways to enhance the legal defensibility of such ordinances. First, establish clear policy bases for the ordinance, which are supported by a well-developed factual record. Second, adopt generally applicable rather than ad hoc requirements. Third, provide [*PG579]some flexibility. In particular, including an administrative relief provision will go far in establishing the constitutionality of the ordinance.80 Finally, providing benefits to the developer, such as density bonuses, expedited processing, fee deferrals, and loans or grants, elicits compliance while also providing further support for the argument that the requirements do not constitute an impermissible taking.81

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