At the end of last month, the U.S. Supreme Court announced a decision that could have far-reaching effects in the residential building industry. The High Court refused to hear an appeal from a decision by the California Supreme Court upholding an inclusionary zoning ordinance in San Jose, Calif. The ordinance requires developers of housing projects bigger than 20 units to reserve 15% of the for-sale units for low income buyers at a below market price.
The California Supreme Court ruled that the San Jose inclusionary zoning ordinance was not an unconstitutional taking of property from builders. The court found that it was a proper exercise of the city’s police power that allows the city to place limits on the way property is used to protect public welfare. The inclusionary zoning was a form of price control, not a fee to be paid to the city, and, therefore, not an extraction or a mandatory dedication of property for public use.
San Jose will now implement the ordinance, which had been scheduled to go into effect in 2013, but was delayed by the litigation.
The decision is expected to have a huge impact on Bay Area market-rate builders and beyond. More than 170 California cities and counties have adopted inclusionary zoning ordinances. With the California Supreme Court’s stamp of legality and the U.S. Supreme Court not taking up the issue, housing experts say that the use of inclusionary zoning is likely to spread widely since it is one of the few tools available to local governments to deal with the need for more affordable housing.
Here, BUILDER presents reaction to the ruling from Chuck Reed, who was mayor of San Jose from 2007 to 2014, a member of the city council from 2000 to 2006, and a city and county planning commissioner for 14 years. He believes that the Supreme Court's recent action will inhibit residential development in the city.
Q: How will the ruling affect builders and developers in San Jose?
The San Jose ordinance requires developers to sell some of their housing units at below market rates. The losses on below-market sales will have to be made up from profits on the remaining units or lower prices for land acquisition. Some projects may no longer be economically viable and will have to be dropped or renegotiated with land sellers and financial partners.
To the extent that land prices cannot be negotiated downward, the cost of meeting the inclusionary zoning requirements will make some projects not viable and residential development will be inhibited. Projects that are not under construction could be stopped.
Q: Many believe that the shortage of affordable housing in the U.S. is at a crisis point. Why are builders opposed to measures such as the one in San Jose?
Builders are generally opposed to the inclusionary zoning because it places a cost burden on their projects that should be borne by the entire community. Builders did not create the affordable housing crisis.
Building housing is part of the solution to not having enough housing. Inclusionary zoning will result in less housing being built.
Builders should not be burdened by these costs just because builders are a convenient target. Builders see this burden as a taking of property rights for public use without just compensation, a violation of the 5th Amendment of the U.S. Constitution.
Q: What are some other ways to alleviate the housing crisis?
Other ways that the affordable housing crisis could be alleviated are:
1. Allow demand to drive the market place by removing numerous restrictions that constrain supply and drive up prices.
2. Provide subsidies for developers to pay for the cost of building affordable housing. The money could come from the following areas:
--charge impact fees on development projects, commercial and residential. (Some locations have them or are considering them.)
--levy a tax on real property document recordings. (Such bills have failed to pass the California Legislature.)
--approve special taxes in local jurisdictions. (Some are being considered)
--approve some form of redevelopment style tax increment financing that is dedicated in part to affordable housing. (Such bills have failed to pass the California Legislature.)