The possible effects of the holding by the Supreme Court of California could have a far-reaching impact on the way municipalities combat affordable housing shortages. If such ordinances must only reasonably relate to a constitutionally permissible public purpose,11 as required under a deferential standard of review, the result may be an increase in the use of, and reliance on, inclusionary zoning to address affordable housing needs. While it may be true that inclusionary zoning policies are “politically appealing,”12 this article takes a critical look at ability of inclusionary zoning efforts to combat affordable housing shortages.
Part I of this article will begin with a brief introduction to inclusionary zoning, followed by examples of applied and challenged inclusionary zoning programs enacted across the United States. Part II will provide an analysis of California Building Industry Association v. City of San Jose, the holding of the Supreme Court of California, and the potential impact this case may have on future uses of inclusionary zoning. Part III will explore past challenges to various inclusionary zoning policies and whether the requirements of inclusionary zoning policies have been, or should be, subject to a Nollan/ Dolan “takings” analysis. Finally, Part IV will provide examples of past reliance on inclusionary zoning, why it has failed to achieve its intended results, and offer suggestions for alternative programs and policies to consider.
I. Inclusionary Zoning: Defining, Applying, and Challenging
“Zoning is the regulation by the municipality of the use of land within the community, and of the buildings and structures which may be located thereon, in accordance with a general plan and for the purposes set forth in the enabling statute.”13 Traditional zoning, recognized as early as the beginning of the twentieth century, provided municipalities with greater comprehensive planning and regulation of land at the local level.14 Specifically, the use of zoning was to prevent congestion, to secure residential districts, and produce an orderly segregation of industrial, commercial, and residential areas.15 This Part describes what inclusionary zoning is and its emergence; how it is generally applied; and examples of past challenges brought against inclusionary zoning efforts.
A. What Is Inclusionary Zoning?
The method by which the government imposes limits on what is and what is not a permissible use of land is through zoning ordinances.16 Ever since the seminal case Village of Euclid v. Ambler Realty Co., courts have held that zoning regulations are a valid use of a government’s police power.17 Specifically in Euclid, the U.S. Supreme Court held “that the exclusion of [certain types] of buildings … from residential districts bears a rational relationship to the health and safety of the community.”18 Thus, the application of zoning, from its inception, has been in an exclusionary manner.19 Through zoning, municipalities were able to separate and protect residential uses from the negative impacts associated with commercial and industrial uses.20 The effects of such exclusionary zoning efforts were large areas of low-density, single family detached housing, separated from needed commercial and work places.21 A derivative of “exclusionary zoning,” the use of the term “inclusionary zoning” described the early efforts of municipalities to fight against problems that arose from traditional land use law that resulted in patterns of segregation and isolation.22 While inclusionary zoning started as a method to address the problems created by exclusionary zoning by focusing on the density of housing, eventually, it progressed to include the price of housing as well.23
As stated by the United States Department of Housing and Urban Development (“HUD”), inclusionary zoning policies “require or encourage developers to set aside a certain percentage of housing units in new or rehabilitated projects for low and moderate income residents.”24 HUD further notes that this integration of affordable units into market-rate projects helps to develop diverse communities, and ensures access to similar community services and amenities regardless of socioeconomic background.25 Because inclusionary zoning leverages private-sector development, it requires fewer direct public subsidies than other state and federal programs, and therefore is an attractive way for municipalities to try to increase their supply of affordable housing.26
Inclusionary zoning programs often vary in design. They can be mandatory or voluntary, and require different amounts of housing that developers must “set- aside” as affordable units.27 Some programs may offer incentives such as density bonuses, expedited approval, and fee waivers. Others may “include developer opt-outs or alternatives, such as requiring developers to pay fees or donate land in lieu of building affordable [housing] units.”28 Furthermore, inclusionary zoning programs will vary in the number of required units planned for development before becoming effective (e.g. developments of five units or more), in the categories of developments covered (e.g. construction, condominium conversion, substantial rehabilitation), and in the income targets for the population to be served (e.g. developers may only charge 80% of the area median income).29 While the specifics of inclusionary zoning programs may vary, the numerous legal challenges brought against such programs as a result of their widespread use, have been consistent.
B. Examples of Challenges Brought Against Inclusionary Zoning
1. NEW JERSEY: IN-LIEU DEVELOPMENT FEE INCLUSIONARY ZONING ORDINANCE
In 1975, the New Jersey Supreme Court in Mt. Laurel I, held that developing municipalities are constitutionally required to provide a “realistic” opportunity and supply of affordable housing (low- and moderate-income housing).30 The court in Mt. Laurel II clarified and reaffirmed this requirement stating that, “municipalities and trial courts are encouraged to create other devices and methods for meeting fair share obligations [to provide affordable housing].”31 Furthermore, the court declared that, “[t]here are several inclusionary zoning techniques that municipalities must use if they cannot otherwise assure the construction of their fair share of lower income housing.”32 Suggestions to fulfill this obligation included incentive zoning through density bonuses and mandatory set-asides for affordable units.33 Subsequent to Mt. Laurel I and Mt. Laurel II, the New Jersey Legislature codified the holding of these cases through the enactment of the New Jersey Fair Housing Act.34 The purpose of the Act was to provide a comprehensive plan, enacted by the legislature, in response to the constitutional obligation of providing affordable housing for low and moderate-income families.35
Pursuant to the Act, the Townships of Chester, South Brunswick, Holmdel, Middletown, and Cherry Hill all enacted ordinances to provide for low- and moderate-income housing.36 As a result, several builders’ associations filed a string of lawsuits, claiming that the newly-enacted ordinances: exceeded the authority of the zoning and police powers and the fair housing act; acted as an invalid tax in violation of the uniform property taxation requirement of the New Jersey Constitution; effected a taking without just compensation in violation of both the United States and New Jersey constitutions; and denied them due process and equal protection rights.37 First, the trial courts in each case, except Cherry Hill, held the ordinance to be facially unconstitutional because “it imposed an unauthorized tax on a select group of individuals,” and thus granted summary judgment to the plaintiffs.38 The Township of Holmdel appealed the grants of summary judgment, and after consolidating all the cases on appeal, the New Jersey Appellate Court affirmed each case except Holmdel.39 The appellate division ruled that the ordinances of the Townships of Chester and South Brunswick, that required the payment of a mandatory development fee, were invalid as an unauthorized tax.40 The court further held Middletown Township’s ordinance invalid because it imposed either mandatory development fees or mandatory set-asides of affordable units, without providing any compensating benefit.41 The appellate division held in Holmdel that while mandatory provisions for inlieu development fees operated as an unauthorized revenue-raising device, the voluntary nature of Holmdel’s ordinance, and the optional provision for density bonuses — thereby compensating the developer — made it facially valid.42 Holmdel raised two substantive issues on remand: first, whether development-fee ordinances constitute an impermissible taking of property, violate substantive due process, or violate equal protection; and second, whether affordable-housing development fees result in an unconstitutional form of taxation.43
Defendant — the municipality of Holmdel — contended that imposition of a development fee to provide affordable housing can “be considered a form of inclusionary zoning and thus bears a real and substantial relationship to the regulation of land.”44 The plaintiffs — Holmdel Builders Association — argued that the fees were a form of exaction because “they seek to require developers to provide for off-site public needs that have not been caused by their developments and furnish them no benefits.”45 The New Jersey Supreme Court held such fees permissible because they allow for the creation of “a realistic opportunity for the development of affordable housing[,]” that these fees are “the functional equivalent of mandatory set-asides[,] and that it is fair and reasonable to impose such fee requirements on private developers” when they use land which “constitutes the primary resource for housing.”46
2. CALIFORNIA: MANDATORY SET-ASIDE INCLUSIONARY ZONING ORDINANCE
In order to address the shortage of affordable housing in the City of Napa, the city formed the Napa Affordable Housing Task Force (“Task Force”) to “study the issues surrounding affordable housing in the City of Napa and — make recommendations to the Housing Authority Commission.”47 After studying the housing market, the Task Force recommended that the City of Napa enact an inclusionary zoning ordinance, which the City adopted and codified in the Napa Municipal Code in 1999.48 Section 15.94.05049 of the Napa Municipal Code required that at least ten percent of all new dwelling units in a residential development project must be affordable as defined by the ordinance.50 As alternatives, the ordinance provided that developers of single- family residential units may satisfy the inclusionary requirement through an “alternative equivalent proposal” including a dedication of land or construction of off-site affordable units, while developers of multifamily units could meet the requirement through an “alternative equivalent proposal” if the city council determines it satisfactory.51 A residential developer also has the option of paying an inlieu fee, placed in a housing trust fund that must be used to increase and improve the supply of affordable housing in the City.52
Home Builders Association of Northern California (“HBA”) sued the City of San Jose, asserting that the City’s inclusionary zoning ordinance was facially invalid as a violation of the takings clauses of the federal and state constitutions.53 The court of appeal held that while the inclusionary zoning ordinance imposed hefty burdens on developers, it also provided them with significant benefits if they chose to comply with the requirements.54 Such benefits included expedited processing, fee deferrals, loans or grants, and density bonuses.55 Moreover, because the ordinance allowed the City to waive the requirements imposed by the ordinance, the court stated that facially, it cannot, and does not, result in a taking.56 The court then noted that by requiring developers to build a “modest amount of affordable housing (or to comply with one of the alternatives) the ordinance will necessarily increase the supply of affordable housing,” and that, “creating affordable housing for low and moderate income families is a legitimate state interest.”57 Finally, the court held that the standard of review required by Nollan/ Dolan was inapplicable to “economic legislation that is generally applicable to all development in [the] city[,]” and declared the ordinance valid.58
3. MAUI: UNPRECEDENTED FIFTY PERCENT SET-ASIDE
In 2006, the County Council of Maui, Hawai’i, passed the Residential Workforce Housing Policy § 2.96.010 in an effort to respond to the rapidly rising cost of residential units. The council found that there was a “critical shortage of affordable housing,” and that “the resident workforce is leaving the county in search of affordable housing, and new employees are being deterred by the high cost of living.”59 The stated purpose of the ordinance was to “enhance the public welfare by ensuring that the housing needs of the County are addressed.”60 A development was subject to the requirements of the ordinance if it resulted in five or more dwelling units; five or more new lots; a combination of dwelling units and new lots totaling five or more; three or more lodging, dwelling or time share units in a hotel; a conversion of one or more hotel units to dwelling units or time share units; or any hotel redevelopment or renovation project that increases the number of lodging or dwelling units in the hotel.61 Prior to final subdivision approval or issuance of a building permit for a development, the ordinance required that if fifty percent of a new development is being offered for sale for $600,000 or more, then fifty percent of the total number of the units must be made “affordable” as defined by the ordinance.62 Finally, the ordinance offered the developer an alternative in-lieu fee per unit equal to thirty percent of the average projected sales price of the market rate dwelling units and/ or new lots in the development.63
In 2008, Kamaole Pointe Development LP (“Kamaole”) challenged Maui’s Residential Workforce Housing Policy Ordinance claiming that the ordinance, on its face, “effects an impermissible taking.”64 Specifically, Kamaole claimed that the ordinance resulted in “excessive and unwarranted exactions in violation of the federal and state constitutions.”65 Thus, Kamaole sought an injunction prohibiting enforcement of the ordinance, alleging: first, that the ordinance was an affordable housing exactions ordinance subject to the requirements established in Nollan and Dolan;66 second, that the ordinance, on its face, imposed an unconstitutional exaction as a ban on residential developments cannot rationally advance the County’s goal of increasing the supply of affordable housing; and finally, that the County had offered no basis to conclude that the requirements imposed by the ordinance were proportional to the impacts of new developments on the supply of affordable housing.67 After a lengthy discussion on takings jurisprudence, the Federal District Court for Hawai’i held that the plaintiff ’s claims were unripe because of plaintiff ’s failure to seek compensation in state court, and thus denied plaintiff ’s motion for summary judgment.68 The council and the developers subsequently reached a settlement agreement before the court could rule on the takings issue, leaving it unresolved.69
II. California Building Industry Association v. City of San Jose
On March 24, 2010, California Building Industry Association (“CBIA”) sued the city of San Jose alleging that the city’s inclusionary zoning ordinance was facially invalid.70 CBIA’s claim rested on the assertion that the city had failed to demonstrate a relationship between “adverse public impacts or needs for additional subsidized housing[,]” and “the new affordable housing exactions and conditions” imposed by the ordinance.71 This Part provides an overview of the San Jose ordinance that was at issue, a summary of discussion and holding of the Supreme Court of California, and the potential impact the case may have on inclusionary zoning.
A. The San Jose Inclusionary Zoning Ordinance
In the late 1970s, the California Legislature enacted Health and Safety Code section 50003 that expressed the concern regarding the shortage of “decent, safe, and sanitary housing which persons and families of low or moderate income … can afford.”72 To address this shortage of low- and moderate-income housing, more than 170 California municipalities have enacted inclusionary zoning programs that require mandatory set-asides for new developments as a means to provide affordable housing.73
As required by California Government Code section 65584, and prepared by the Association of Bay Area Governments, the 2000 – 2007 Regional Housing Needs Plan for Santa Clara County noted that fifty-six percent of new housing in the City of San Jose should be affordable to “extremely low,” “very low,” “lower,” and “moderate income households.”74 Furthermore, as reported in the most recent 2007 – 2014 regional housing needs plan, the City of San Jose has a total housing need of 34,721 units through the year 2014.75 In order to ensure that sixty-percent of the needed housing units are affordable, the plan stressed the need for the City of San Jose to substantially increase the development of affordable units.76
On January 26, 2010, the council for the City of San Jose adopted Ordinance No. 28689 in an effort to address its lack of affordable housing.77 The City Council declared that, “[r]ental and owner-occupied housing in San Jose has become steadily more expensive[,]” and that, “[a]s a result, there is a severe shortage of adequate, affordable housing for Extremely Low, Very Low, Lower, and Moderate Income Households[.]”78 Section 5.08.020 of the ordinance declares that the ordinance’s purpose “is to enhance the public welfare by establishing policies which require the development of housing affordable to households of very low, lower, and moderate incomes[.]”79 An additional purpose of the ordinance is to achieve the goal of residential integration of lowand moderate-income households with households in market rate neighborhoods by dispersing the inclusionary units throughout the city.80
Any residential development is subject to the ordinance if the development is being constructed within the city, and it creates twenty or more new, additional, or modified dwelling units.81 When such a development occurs, the ordinance requires that fifteen percent of the total number of units in the residential development is available for purchase at an “affordable housing cost.”82 The ordinance relies on California Health & Safety Code section 50052.5 to define “affordable housing cost” as thirty percent of the area median income of the relevant income group.83 The ordinance also offers a number of incentives for developers who comply with the requirements through the construction of on-site inclusionary units, as well as alternatives for compliance.84 Finally, the ordinance contains a provision that allows for the waiver, adjustment, or reduction of the requirements if the applicant is able to show, based on substantial evidence, that there is “no reasonable relationship between the impact of a proposed residential development and the requirements”; or, that applying the requirements of the ordinance “would take property in violation of the United Sates or California Constitutions.”85
B. The San Jose Case
On March 24, 2010, CIBA86 sued the city of San Jose, alleging that the ordinance was facially invalid because the city had failed,
[T]o demonstrate a reasonable relationship between any adverse public impacts or needs for additional subsidized housing units in the City ostensibly caused by or reasonably attributed to the development of new residential developments of 20 units or more and the new affordable housing exactions and conditions imposed on residential development by the ordinance.87
Its complaint asserted that the enacting of the ordinance was “unlawful, unconstitutional, and in violation of controlling state and federal constitutional standards governing such exactions and conditions of development approval[.]”88 Six nonprofit affordable housing organizations and one low-income resident of San Jose intervened in support of the city’s challenged ordinance.89 The city and the interveners maintained that, contrary to CIBA’s claims, the standard of review applicable to legislative land use regulations — such as the San Jose ordinance — is “simply that the regulation’s requirements must be reasonably related to the municipality’s interest in promoting the health, safety, and welfare of the community.” After the superior court held for CBIA, the court of appeal reversed the judgment and remanded the case to the trial court to review the case under the standard of review as set forth by the city.90 The court of appeal held that the superior court had erred: first, in finding that the San Jose ordinance required a developer to dedicate property to the public in a manner within the Takings Clause; and second, by interpreting San Remo Hotel as limiting the conditions that may be required through a citywide ordinance to only those that are “reasonably related to the adverse impact the development projects that are subject to the ordinance themselves impose on the city’s affordable housing problem.”91
CBIA sought review in the Supreme Court of California in order to challenge the appellate court’s ruling.92
1. THE SAN JOSE INCLUSIONARY HOUSING ORDINANCE: A REGULATION OF LAND, NOT AN EXACTION OF PROPERTY
The court began by reaffirming two established principles: first, that a municipality has “broad authority, under its general police power, to regulate the development and use of real property … [in order] to promote the public welfare”; and second, in order to be a constitutionally permissible land use restriction, the ordinance must bear a “reasonable relationship to the public welfare.”93 Furthermore, the court reaffirmed that such legislatively enacted ordinances are presumed to be constitutional, that they “come before the court with every intendment in their favor,”94 and that the party challenging the facial validity of a legislative land use ordinance ordinarily bears the burden of proving the lack of a reasonable relationship to the public welfare.95 The court qualified their statement, however, by noting that while legislative land use regulations are generally entitled to judicial deference, “judicial deference is not judicial abdication[,]” and that, “[t]he ordinance must have a real and substantial relation to the public welfare.”96 After observing that the purpose and objective of the ordinance, which is to increase the amount of affordable housing in San Jose and disperse the inclusionary units throughout the city, constitutes a “constitutionally permissible purpose[,]” the court turned to the issue of CBIA’s “takings” claim.97
As a threshold question, the court first addressed whether the requirements of the ordinance resulted in an exaction of property.98 The court declared that “there can be no valid unconstitutional-conditions takings claim without a government exaction of property, and the ordinance in the present case does not affect an exaction.”99 Instead of characterizing the ordinance as an exaction, the court found it to be a permissible regulation of the use of land under San Jose’s broad police power.100 Thus, the court held that the requirements imposed by the ordinance did not require developers to dedicate any portion of their property to the public, or pay money to the public.101 Rather, the requirements simply restricted the manner in which the developer could use its property by limiting the price developers could charge for certain units.102 Moreover, the court declared that the ordinance’s objectives, increasing the supply of affordable housing and ensuring that the placement of affordable housing is within economically diverse developments, were “unquestionably constitutionally permissible purposes.”103 In sum, the court held that the San Jose ordinance, requiring that at least fifteen percent of a development’s housing units be offered at an affordable price, did not “impose an unconstitutional condition in violation of the takings clause.”104
2. CBIA’S MISTAKEN RELIANCE ON THE SAN REMO HOTEL CASE
CBIA next submitted that a passage in the case of San Remo Hotel, regarding legislatively imposed development mitigation fees, should apply to the San Jose ordinance.105 This is the precise sentence that CBIA relied upon: “As a matter of both statutory and constitutional law, such fees must bear a reasonable relationship, in both intended use and amount, to the deleterious public impact of the development.”106 CBIA argued that when applying the passage from San Remo Hotel, the requirements imposed by the San Jose ordinance were valid only if they “bear a reasonable relationship, in both intended use and amount, to the deleterious public impact of the development.”107
First, the court rejected CBIA’s argument and instead held that nothing from the passage relied upon by CBIA suggests that it was meant to apply to conditions outside of mitigation fees, such as the “price controls” imposed by the San Jose ordinance.108 Second, the court stressed that because the passage relied upon by CBIA referred to mitigation fees — fees enacted in order to mitigate harmful effects — the “means-ends analysis” employed in San Remo Hotel was the proper test in that case, but not the proper test for “price-controls.”109 Finally, in contrast to the mitigation fees in San Remo, the court noted that the San Jose ordinance’s purpose “goes beyond mitigating the impacts attributable to the proposed developments that are subject to the ordinance.”110 Specifically, the court acknowledged that the purpose of the ordinance is to increase the amount of affordable housing and to assure that distribution of the new affordable housing takes place throughout the city.111 Furthermore, in order to be a lawful use of a municipality’s police power, the validity of such a broad ordinance does not require that the restrictions imposed be reasonably related to the impact of a particular development; rather, the restrictions must only be reasonably related to the “broad general welfare purposes for which the ordinance was enacted.”112 Thus, the court held that CBIA’s contention, that the ordinance was facially invalid due to the city’s failure to show that the requirements imposed by the ordinance were reasonable related to the impact on affordable housing attributable to developments subject to the ordinance, had no merit.113 After distinguishing the San Jose ordinance from the mitigation fee imposed in San Remo, the court went on to distinguish City of Patterson.114
In City of Patterson, the court was ruling on a legislatively enacted in-lieu fee, offered to developers, as an alternative to building affordable housing.115 After the developer, Morrison Homes, Inc., had obtained a development agreement — a contract specifying standards and conditions that govern the development of property — for the construction of two residential subdivisions, the in-lieu fee required per house was increased, and Morrison Homes, Inc. sued.116 After examining the affordable housing in-lieu fee, the court of appeal found it to be similar in character to the mitigation fee imposed in San Remo.117 Specifically, the court noted that, “[b]oth are formulaic, legislatively mandated fees imposed as conditions to developing property, not discretionary ad hoc exactions.”118 The court of appeal proceeded to apply the same “means-end” test as applied in San Remo, and found that the fee to be paid by the developer lacked a reasonable relationship to “any deleterious impact associated with the project.”119 Therefore, because the increase in the in-lieu fee could not be “reasonably justified” as required by the development agreement, the court held that the city had violated the agreement.120
The court in San Jose concluded that they disapproved with City of Patterson as far as it indicated that the conditions imposed by an inclusionary zoning ordinance may only be upheld if they are “reasonably related to the need for affordable housing attributable to the projects to which the ordinance applies.”121 The court distinguished City of Patterson from San Remo by noting that the in-lieu fee imposed in City of Patterson was not imposed to mitigate an adverse effect — as had been done in San Remo — but rather to increase the supply of affordable housing.122 Stated differently, the court held that in-lieu fees, as opposed to mitigation fees, are not considered exactions, and do not require heightened scrutiny or proof of a reasonable relationship to the individual developments that they are imposed upon.123 Rather, similar to affordable unit set-asides, in-lieu fees fall within the city’s broad police power, and simply require a showing that they relate to the “broad general welfare purposes for which the ordinance was enacted.”124
3. THE HOLDING OF THE SAN JOSE CASE
Emphasizing that its decision was not to be read as an opinion on the “wisdom or efficacy” of the San Jose inclusionary zoning ordinance, the court affirmed the judgment of the court of appeal, thereby agreeing with the City regarding the standard of judicial review applicable to the San Jose ordinance.125 The court held that the ordinance’s requirement of mandatory set asides for affordable housing was not an exaction on the developer’s property, and therefore did not require the heightened judicial scrutiny applied to unconstitutional “takings” claims.126 Rather, that the ordinance was subject to the ordinary standard of judicial review, and afforded the judicial deference traditionally applied to legislative land use regulations and restrictions.127
C. The Effect of San Jose on Inclusionary Zoning Ordinances
By affirming the court of appeal, the court in San Jose has granted municipalities throughout California the authority to impose inclusionary housing requirements as a regulation of land use under their “police power.”128 Thus, municipalities will only be required to show a need for affordable housing — which the court has already declared as reasonably related to the public health, safety, and welfare — without having to show that the need for the required affordable housing is a result of the new housing development that is subject to the ordinance.129 Furthermore, the court held that in-lieu fees in inclusionary housing programs are not exactions, and are similarly justifiable as an exercise of the municipalities’ police power.130
As neither the mandatory set-aside requirements, nor the in-lieu fees, are considered exactions, there need not be a showing of the required “nexus” and “proportionality” — as stated in the seminal cases of Nollan and Dolan which will be discussed in part IV — in order to uphold the conditions being imposed upon developers.131 This does not mean that it has become impossible to challenge inclusionary housing ordinances. Certain types of inclusionary zoning ordinances may still be vulnerable to attack, specifically those which are solely fee-based, or those which through their conditions, result in an economic loss for the developer.132 Moreover, while this case may allow for a wider application of citywide inclusionary zoning ordinances in California, whether all jurisdictions will generally accept or enact such ordinances is far from certain.
On February 29, 2016, the Supreme Court of the United States denied CBIA’s petition for writ of certiorari. Justice Thomas, in his written concurrence of the denial of the writ, stated that San Jose “implicates an important and unsettled issue under the Takings Clause.”133 Specifically, Justice Thomas noted, “[f]or at least two decades … lower courts have divided over whether the Nollan/ Dolan test applies in cases where the alleged taking arises from a legislatively imposed condition rather than an administrative one.”134 While Justice Thomas conceded that this uncertainty provides a compelling reason for the conflict to be resolved, he ultimately found that this is not the case to do so.135 His decision was based on three reasons: first, San Jose had raised questions regarding the timeliness of the petition which may have resulted in the court being unable to reach the Takings Clause question; second, CBIA had disclaimed any reliance on Nollan and Dolan in the proceedings below; and finally, the Supreme Court of California’s decision did not address the level of constitutional scrutiny applicable for an administrative act, as opposed to a legislative act, that results in a taking.136 Therefore, Justice Thomas concluded that San Jose was not the proper case to resolve such unsettled issues regarding the Takings Clause.137
III. Inclusionary Zoning and the Takings Analysis
Inclusionary zoning ordinances continue to exist as unsettled law. Some view inclusionary zoning ordinances as a restriction or regulation governing the use of land, while others view them as an exaction of property requiring just compensation.138 While the Supreme Court of California chose to classify San Jose’s inclusionary zoning ordinance as the former, there remains uncertainty regarding the application of the established Nollan/ Dolan “takings” analysis to such inclusionary zoning ordinances. This section provides: first, an overview of the takings doctrine; second, a review of the seminal exaction cases Nollan and Dolan; third, a look at the unresolved issue of whether legislative acts, in addition to administrative acts, should be subjected to the requirements of Nollan and Dolan; and finally, why Nollan and Dolan should be applied to inclusionary zoning ordinances.
A. A Review of the Takings Doctrine
The Takings Clause of the Fifth Amendment to the United States Constitution declares that “private property [shall not] be taken for public use, without just compensation.”139 This amendment, made applicable to the States through the Fourteenth Amendment, “does not prohibit the taking of private property, but instead places a condition on the exercise of that power.”140 The Supreme Court of the United States has often emphasized the importance of this doctrine as the protection of people from the government forcing those “to bear public burdens which, in all fairness and justice should be borne by the public as a whole.”141 While the Takings Clause does not specify the types of governmental actions that qualify as a taking, the Supreme Court has identified three types: physical invasions, regulatory takings, and land use exactions.142
Traditionally, in order to effect a taking requiring just compensation, the government had to appropriate or physically invade private property.143 Early cases, involving telegraph lines, wires, and underground pipes, established that permanent occupation of land, even if such occupation involves insubstantial amounts of space and does not interfere with the landowner’s use of the rest of their land, results in a “takings.”144 Indeed, the United States Supreme Court has declared that when the “character of the governmental action”145 is a “permanent physical occupation of property,” a taking has occurred, regardless of the public benefit or economic impact on the owner.146 This taking occurs not only because of the physical effects on the land itself, but also through the effects such occupation has on a landowner’s property rights.147
The Supreme Court has described property rights in a physical thing as “the right to possess, use and dispose of it.”148 When the government permanently occupies physical property, the result is the destruction of each of these rights.149 The owner of the property has no right to possess the occupied space, nor the power to exclude the occupier from possession and use of the space.150 Furthermore, while the owner may retain the right to dispose of the occupied space through transfer or sale, the occupation will “ordinarily empty the right of any value, since the purchaser will also be unable to make any use of the property.”151 While the dispossession of the right to use and earn a profit from property is not, in all cases, sufficient to establish a taking, it is plainly relevant.152 Moreover, “[t]he power to exclude has traditionally been considered one of the most treasured strands in an owner’s bundle of property rights.”153 A permanent physical occupation essentially destroys the landowner’s fundamental right to exclude others, and therefore, the Government must provide compensation.154
It was not until Penn Coal Co. v. Mahon that the Supreme Court recognized that, in some instances, the government might effect a “taking” through regulations, without actually appropriating or physically invading private property.155 In Penn Coal Co., the Supreme Court held that, “while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.”156 Specifically, the Supreme Court has held that when a regulation leaves the owner of land without any “economically beneficial or productive options for its use … [such regulations] carry with them a heightened risk that private property is being pressed into some form of public service under the guise of mitigating serious public harm.”157 Furthermore, the Court has held that if a state wishes to enact a regulation that results in a total deprivation of all economically beneficial use of land to the owner, the state may only avoid compensation if it is shown that the “proscribed use interests were not part of his title to being with.”158 For example, the Supreme Court has held that “harmful or noxious uses of property may be proscribed by the government regulation without the requirement of compensation.” 159 However, when a regulation denies an owner all economically beneficial use of its land, from the landowner’s position, this is equivalent to a physical appropriation requiring just compensation.160
Thus, the two generally accepted ways in which a governmental action or regulation results in a per se “taking” under the Fifth Amendment are: first, when the government imposes upon an owner of private property a physical invasion;161 and second, when a governmental regulation requires an owner of private property “to sacrifice all economically beneficial uses” of their property.162 If a takings claim does not qualify as a physical invasion or a regulatory denial of all economically beneficial use, the claim is subject to the standards set forth in Penn Central Transportation Co. v. New York City.163 The Court in Penn Central confessed that while it “has been unable to develop any set formula,” one might weigh several factors in order to determine whether a taking has occurred.164 These factors are the economic impact of the regulation on the property owner, particularly, the extent with which the regulation has interfered with “distinct investment-backed expectations[,]” and the “character of the governmental action.”165 However, the same Court has also declared that, “[g]overnment hardly could go on if to some extent values incident to property could not be diminished without paying for every such change in the general law.”166 Therefore, if the governmental action does not result in physical invasion, or a denial of all economically beneficial use, the analysis to determine whether a taking has occurred becomes subject to what the Court has described as “essentially [an] ad hoc factual inquir[y][.]”167
Finally, the last type of governmental action that may result in a taking, and is the basis for many of the challenges brought against inclusionary zoning ordinances, is through a land use exaction. Such exactions, in the context of development, generally require “that developers provide, or pay for some public facility or other amenity as a condition for receiving permission for a land use that the local government could otherwise prohibit.”168 Such land use exactions may include: infrastructure, such as streets and sidewalks; dedications of land for parks, schools, and other uses; in-lieu-fees-of-dedication; impact fees; and set-aside requirements for affordable units.169 The reasons for imposing a land use exaction vary greatly, and may include: shifting the costs of public infrastructure, required by the development, to the developer; mitigating the negative effects a development may have on a neighborhoods, such as increased traffic and environmental degradation; serving as a growth enabler by providing public facilities in areas that are expanding too rapidly for the government to keep up with; and, depending on whether one classifies affordable unit set-asides as a land use exaction, to provide an adequate supply of affordable homes for the public.170 While there are many justifiable reasons to impose land use exactions upon developers, such exactions are limited.
The Unconstitutional Conditions Doctrine provides protection for landowners by limiting the conditions that the government may impose for their permission to develop land.171 This doctrine prevents the government from requiring a person to give up a constitutional right in order to receive a discretionary privilege or benefit from the government.172 Therefore, in the development context, the Unconstitutional Conditions Doctrine ensures that developers are not required to relinquish their constitutional right to just compensation when the government takes their private property for a public use. By conditioning a landowner’s approval to develop land by requiring an exaction (e.g. dedication of land, fees, etc.), the government may effect a taking that requires just compensation.173 Therefore, landowners challenging ordinances that require mandatory set-asides for affordable units are likely to argue such requirements are land use exactions effecting a taking.174
According to the California Supreme Court in San Jose, to challenge an inclusionary zoning program as a violation of the Unconstitutional Conditions Doctrine, a claimant must show first that there has been an exaction of property as a threshold matter.175 Furthermore, as expressly acknowledged in Koontz v. St. Johns River Water Management District, “[a] predicate for any unconstitutional conditions claim is that the government could not have constitutionally ordered the person asserting the claim to do what it attempted to pressure that person into doing.”176 This naturally raises two questions. First, do affordable unit set-asides effect an exaction of property and second, may the government constitutionally order developers to provide affordable housing by restricting the price they may charge for a prescribed number of units? According to the Supreme Court of California, inclusionary zoning ordinances requiring a prescribed number of units in a housing development be made affordable do not effect an exaction of property, nor do they require a developer to give up a property interest requiring just compensation.177 Rather, the court held the San Jose inclusionary zoning ordinance’s affordable set-aside requirements acted as a means of price control by limiting the price that developers may charge for a set number of units in their development.178
Even if a developer is able to successfully argue that an inclusionary zoning ordinance effects a taking, there remains uncertainty as to what level of scrutiny a court would apply to an exaction of property effectuated by an administrative act as opposed to a legislative act.179 What is directly at issue is whether legislative acts, such as the citywide ordinance in San Jose, require heightened scrutiny or are afforded judicial deference. If a claimant were able to argue successfully that an inclusionary zoning program does in fact effect an exaction of property, and additionally, that heightened scrutiny should be applied, the court would apply the analysis established in the seminal cases of Nollan v. California Coastal Commission and Dolan v. City of Tigard.180
B. A Review of the Exactions Cases: Nollan and Dolan
Nollan and Dolan describe the manner in which the Supreme Court will analyze whether or not an unconstitutional taking has occurred by means of a land use exaction. These two cases stand for two propositions: first, when the government requires a condition to be met before approving a development permit, the condition imposed must have a “nexus” to the reason or justification for requiring the development permit;181 and second, the city must make some sort of determination that the condition imposed has a “rough proportionality” to the development.182
In Nollan, the petitioners sought to demolish and replace their beach bungalow.183 To do so, they were required to obtain a coastal development permit from the California Coastal Commission.184 The commission approved the permit subject to the condition that the petitioners allow a public easement across their property.185 The petitioners then claimed that the condition the commission was imposing upon them violated the Takings Clause of the Fifth Amendment.186 The Supreme Court first noted that had California simply required the petitioners to provide the government with a public easement, rather than conditioning their permit to rebuild on their fulfillment of the request, there would have unquestionably been a “taking.”187 The Court then held that without a “nexus” between the reasons for the denial of the permit and the condition imposed for approval, a taking has occurred for which the government must pay.188
In Dolan, the petitioner owned a plumbing and electric supply store that she wished to redevelop.189 The City Planning Commission granted the petitioner’s permit subject to a dedication of open land that was within the 100-year floodplain, as well as a dedication of an additional fifteen-foot strip of land to be used as a pedestrian and bicycle pathway.190 As in Nollan, petitioners claimed that the requirements imposed resulted in an uncompensated “taking” of property under the Fifth Amendment.191 The Supreme Court held that while, “[n]o precise mathematical calculation is required,” there must be “rough proportionality” between the conditions imposed and the impact of the proposed development.192 Specifically, the Court declared that “the city must make some sort of individualized determination that the required dedication is related both in nature and extent to the impact of the proposed development.”193
C. Nollan and Dolan: Legislative Acts v. Administrative Acts
Courts requiring heightened scrutiny for land use exactions posit that such scrutiny is required “to protect against the danger of government leveraging[.]”194 Such leveraging may occur when the government imposes a condition for a use of land that is “unrelated or disproportionate” to the desired use, or by imposing a condition that should be satisfied by the public as a whole.195 For example, in Seawall the court found a critical feature of the ordinance, leading to its invalidation, was the imposition of an exaction:
[B]y equating the “cure” with dollars — i.e., permitting “buy-out” payments of $45,000 per [hotel] unit … — the terms of [the ordinance] itself demonstrate that the obligation placed on a few property owners are just the kind which could and should, be borne by the taxpayers as a whole.196
In contrast, Courts applying deferential scrutiny to legislative acts assert that the democratic political process affords property owners protection from such leveraging.197 For example, in San Remo II, the court relied on the rationale that while the democratic political process may not suffice to protect property owners subject to ad hoc individual exactions, exactions imposed through legislative enactments are subject to such political process.198 Specifically, the court noted that, “[a] city council that charged extortionate fees for all property development, unjustifiable by mitigation needs, would likely face widespread and well-financed opposition at the next election.”199
There currently remains discord regarding whether the court may subject exactions imposed by legislative acts to heightened scrutiny. Specifically, what remains unsettled is whether courts must make a distinction between exactions imposed as part of a legislative process and those enacted pursuant to an administrative process.200 For example, state courts in New York, Texas, Ohio, Illinois, Washington, and federal courts in the First and Fourth Circuits have applied heightened scrutiny to exactions imposed through legislation.201 State courts in Colorado, Oregon, Arizona, North Dakota, Georgia, and a federal court in the Tenth Circuit, however, have applied a more deferential level of scrutiny requiring a mere reasonable relationship to the public welfare.202
This decision regarding the level of scrutiny to apply is often critical to the outcome of the case. For example, in San Remo Hotel L.P. v. City of San Francisco, the Supreme Court of California applied deferential constitutional scrutiny, traditionally applicable to legislatively enacted land use regulations, and found that a citywide ordinance making it unlawful to eliminate a residential hotel unit or rent the unit for less than seven days without meeting conditions imposed by the ordinance was valid.203 The court concluded that, “individualized development fees warrant a type of review akin to the conditional conveyances at issue in Nollan and Dolan, while generally applicable development fees warrant a more deferential type of review.”204 Specifically, the court noted that no government discretion enters into either the imposition or calculation of the in-lieu fee, that the city did not single out plaintiffs for payment of the fee, and finally, that the “sine qua non for application of Nollan/ Dolan scrutiny is … the discretionary deployment of the police power in the imposition of land-use conditions[.]”205
However, in Seawall Associates v. City of New York, the Court of Appeals of New York chose to apply heightened scrutiny to an almost identical ordinance, which made it unlawful to convert, alter, or demolish a single room occupancy (“SRO”) unit without meeting the conditions imposed by the ordinance.206 The court held that because of the lack of a nexus — as required by Nollan — between the problem of low-income housing and the landowner’s use of its property for purposes other than those allowed by the ordinance, the ordinance effectuated a taking.207 The court specifically held that the imposition of forced refurbishing and rent-up provisions on the owners of SRO properties did not substantially advance the goal of alleviating the homelessness problem.208 The fact that the SRO units were not “earmarked for the homeless or for potentially homeless low-income families[,]” and that there was no assurance that the units would go to members of either group, supported this finding.209
Even courts that have declined to apply heightened scrutiny to legislatively imposed fees have still looked for some indication of a relationship between the condition imposed and the development in question. In San Remo Hotel L.P. v. City of San Francisco, for example, the Supreme Court of California held that while legislatively imposed impact fees will not be subject to the heightened scrutiny of Nollan/ Dolan, there still must be “a reasonable relationship” between the impact of the development and the imposed fee.210 Similarly, in Holmdel Builders Association v. Township of Holmdel, the Supreme Court of New Jersey declared, first, that they did not require a “strict rationalnexus standard that demands a but-for causal connection or direct consequential relationship between the private activity that gives rise to the exaction and the public activity to which it is applied.”211 However, it noted that the finding of a “reasonable relationship” was still required, and that in this case, it was the “indirect and general” impact that the nonresidential development has on the need for lower-income residential development.212 Moreover, the court concluded that, “[i]nclusionary zoning itself is based on that relationship[,]” and that inclusionary zoning policies effectuated through development fees are allowed because “such fees are conductive to the creation of a realistic opportunity for the development of affordable housing[.]”213
Finally, there are cases in which courts have chosen to apply the Nollan requirement of an “essential nexus” to a legislatively enacted inclusionary zoning ordinance, and have gone on to uphold the ordinance. For example, in Commercial Builders of Northern California v. City of Sacramento, the court held that the ordinance satisfied the “nexus” requirement.214 The ordinance imposed a fee in connection with the issuance of permits for nonresidential developments that would generate jobs.215 These fees, paid into a fund, assisted with the financing of low-income housing.216 The court held, first, that Nollan does not stand for the proposition that the only way an exaction ordinance will be upheld is when it is proven that the development “is directly responsible for the social ill in question.”217 Second, the court held that the ordinance satisfied the Nollan requirement of an “essential nexus” because enactment of the ordinance occurred only after “a detailed study revealed a substantial connection between development and the problem to be addressed.”218 Going into significant detail describing the city’s study, the court noted specifically that the nexus between the fee provision, designed to further the city’s legitimate interest in producing affordable housing, and the burdens caused by commercial development was sufficient under Nollan.219 With such uncertainty regarding whether the tests articulated in Nollan and Dolan are applicable to legislatively enacted inclusionary zoning ordinances, this article takes the position Nollan and Dolan should apply to conditions imposed by inclusionary zoning ordinances.
D. Why Nollan and Dolan Should Apply to Inclusionary Zoning
According to the Supreme Court of California, a threshold question asked to determine whether one may bring a valid unconstitutional conditions takings claim against a mandatory affordable set-aside inclusionary zoning requirement, is whether such a requirement effects a land use exaction.220 This is not an easy question to answer, as local governments consistently frame mandatory set- side inclusionary zoning ordinances as a form of land use regulation, while opponents consistently frame inclusionary zoning ordinances as exactions of property.221 This decision regarding the classification of an inclusionary zoning ordinance, either as a regulation of land or an exaction, has had a major impact on whether courts will uphold or invalidate an inclusionary zoning ordinance.222 Furthermore, the decision regarding the level of scrutiny to apply to an inclusionary zoning ordinance — either judicial deference or subjecting such ordinances to Nollan/ Dolan — is determined in part by how the ordinance is classified, with broad land use regulations traditionally afforded judicial deference.223 Therefore, inclusionary zoning opponents have also long requested that courts require a showing of Nollan’s “essential nexus” and Dolan’s “rough proportionality” between the conditions imposed by inclusionary zoning ordinances and the relevant development.224 If the court declines to apply Nollan and Dolan to inclusionary zoning legislation, the government will have the power to exact property in a variety of ways without the necessary constitutional limitations.225 For example, the statutes authorizing the governmental actions in Nollan and Dolan allowed local land use authorities to impose unconstitutional conditions; they did not require the conditions as most inclusionary zoning ordinances do.226 Thus, in some circumstances, inclusionary zoning legislation afforded judicial deference may be much more oppressive than the administrative acts that have traditionally been subject to Nollan and Dolan.227 It makes little sense to offer the protection provided by the Unconstitutional Conditions Doctrine and allow for challenges against administrative exactions, but impede challenges to similar exactions imposed legislatively that violate the same constitutional principles.228 Furthermore, there are instances where judicial deference regarding legislative acts may be inappropriate, and the courts must look not from the perspective of the legislature, but rather, from the perspective of the right holder and the imposed burden.229
Finally, this language from the Supreme Court must be considered: “The Fifth Amendment’s guarantee that private property shall not be taken for a public use without just compensation was designed to bar Governments from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”230 Who then bears the burden of addressing the affordable housing shortage many states are facing? Many opponents of inclusionary programs argue that developers struggle to make a profit on affordable housing, and thus are unfairly burdened by, and may even be blamed in some cases for, the lack of affordable housing.231 When considering where the burden of providing affordable housing ultimately falls, there are three possibilities. First, the developer may accept the loss in profits from having to sell units as affordable and pay themselves or in the alternative, choose not to develop; second, the developer may pass the cost forward to the buyers of the units; and third, the costs may be passed backward to landowners as developers adjust the price they are willing to pay based on the requirements imposed by an inclusionary zoning ordinance.232 It is clear that if the developer is unwilling to suffer such a loss in profits, the burden, the extent of which will vary depending on the requirements imposed by the different inclusionary zoning policies, will be passed on to consumers (higher prices for the market-rate units) or the landowners (developers paying less for land).233 In all three scenarios, clearly the burden is not being borne by the public as a whole.
IV. The Problem With Inclusionary Zoning
Inclusionary Zoning policies have failed in other jurisdictions … Inclusionary zoning reduces the number of “affordable” housing units and raises prices and reduces the quantity of “market-priced” housing units … Requiring developers to sell housing units at below-market rates reduces their revenues. Lowing the incentives for developers to produce housing will deter them from starting new projects, all else equal.234
First, this section examines the economics of inclusionary zoning. Second, this section summarizes several studies of a variety of inclusionary zoning programs implemented across the United States, and the results of such programs. Finally, this section ends by offering alternatives to inclusionary zoning policies that may work to address the affordable housing shortages states face.
A. Economics of Inclusionary Zoning
The economics of inclusionary zoning is similar to the economics of rent control in many ways.235 Inclusionary zoning essentially creates two separate markets for new homes; the price-controlled homes (below-market homes), and the non-price-controlled homes (marketrate homes).236 Generally, inclusionary zoning programs will require builders who wish to produce non-price- controlled units to provide an established number of price-controlled units.237 Without subsidies provided by the government or a private charity, these price-controlled units become an economic burden on a development.238 This measureable burden, referred to by economists as opportunity cost, is the difference between the selling price of the price-controlled unit, and the selling price of the unit at the market rate.239 Thus, inclusionary zoning and the resulting opportunity costs, may in many ways be regarded as a tax imposed on developers in order to fund the affordable housing supply.240 This tax ultimately results in diminished financial returns that developers could have realized through the sale of additional market rate units. Developers are therefore required to use a portion of their property that, while “serv[ing] the City’s interests, bears no relation to any economic purpose which could be reasonably contemplated by a private investor.”241
Forcing developers to incur a reduction in revenue, by requiring them to produce units sold at below market-rates, inflicts an unfair burden upon development.242 The effect of such a burden naturally increases the cost for developers to build, and as previously noted, developers will likely react to this burden in three different ways.243 They may internalize the lost profit from the affordable units, they may raise the prices on the market-rate units in order to make up for lost profit, or they may lower the price they are willing to pay for land.244 While many factors influence how the developer will respond to the imposed burden, what is true under each alternative is that the production of housing is likely to fall.245 As the development of housing units is limited, both the supply of market-rate units and affordable units will drop. Logically, due to the law of supply and demand, if production decreases and demand and other market factors remain constant, housing prices will begin to rise.246 Thus, inclusionary zoning may have the opposite effect on the housing supply than what it was intended to achieve.
Moreover, there still remains the possibility that some developers will cease to develop if the burden becomes unbearable. For example, in Madison, Wisconsin, developers produced 3,257 units in the two years immediately before the enactment of an inclusionary zoning ordinance in 2004.247 After Madison enacted its inclusionary zoning ordinance, from 2004 – 2006 when the nation was experiencing high levels of housing development, developers produced only 1,954 units, a forty-percent decrease.248 This downturn in new construction caused the housing supply and vacancy rates to decline, increased the net rents, and achieved the “opposite effect of what the city intended,” leading to the program’s abandonment in 2009.249 While inclusionary zoning policies are “politically appealing,” requiring that developers shoulder the burden of producing affordable homes instead of relying on government subsidies, they depend on the equivalent of taxing housing development in an effort to encourage more of it.250
The results of a drop in the supply of housing may have even more damaging effects when considering the process referred to as “filtering.”251 “Filtering” is the effect of households with higher incomes demanding new units, as opposed to trying to redevelop or expand their smaller, older units.252 The construction of new market-rate units increases the supply available to the higher income households, which in turn provides a supply of older, less-desirable housing to those looking for affordable units.253 Malepzzi and Green found, “to the extent that a city makes it easy for any type of housing to be built, it will also enhance the available stock of low-cost housing.”254
Yet another benefit of an increase in the overall supply of housing is with the downward pressure it inflicts on the prices of all homes.255 When high-income families no longer participate in the market for existing homes, and instead enter the market for new homes, they “no longer bid up the price of existing homes.”256 In the alternative, if regulations burdening development decrease the overall housing supply, high-income families will naturally bid up the price of the existing housing market, thereby reducing the supply of affordable homes.257 If one accepts these theories, then the natural result of building new units — even those that are sold at a higher cost or even at market rate — will in turn increase the supply of housing for those with lower incomes.258 Clearly, with the continued implementation of new inclusionary zoning programs across the United States, not everyone agrees that inclusionary zoning has such negative effects. What then, have we learned from the use of inclusionary zoning?
B. Past Application of Inclusionary Zoning and the Results
Supporters of Inclusionary Zoning programs often emphasize that such programs require less direct public subsidies, thereby resulting in a more fiscally sustainable method to approach the lack of affordable housing.259 Furthermore, proponents argue that a natural result of requiring affordable and market-rate units to be located in the same development is greater economic and racial integration.260 Finally, even those who concede that developers may lose money on the affordable units required by many inclusionary zoning programs contend that incentives, such as density bonuses, will allow developers to recoup these lost profits.261
Those who are opposed to such inclusionary zoning programs argue that developers will ultimately choose to build in areas that do not impose required affordable unit set-asides.262 Therefore, by reducing the number of developers willing to build housing, critics contend that the inclusionary zoning programs will instead reduce the overall supply of housing thereby causing the prices of the market rate housing to rise and reducing overall affordability.263 Furthermore, critics often equate inclusionary zoning mandates with a tax on new development, especially when they offer no compensating benefits to the developers to cover the full cost of providing the affordable units.264 Thus, a major contention regarding the effectiveness of inclusionary zoning programs is that they tax, or burden, those who supply affordable units, in an effort to increase the supply of affordable units. While there are numerous arguments for and against inclusionary zoning, there is quantifiable data that reveals the actual effects inclusionary zoning has on housing.
A study conducted by the Furman Center for Real Estate & Urban Policy at New York University School of Law studied the effects of inclusionary zoning on housing markets in San Francisco, Washington DC, and Suburban Boston. First, the study found that the different inclusionary zoning programs studied varied tremendously.265 These variations suggest that inclusionary zoning refers to a broad range of policies, all of which have different effects on the number of affordable housing units produced and the price and supply of market-rate homes.266 Second, the study found that the different inclusionary zoning programs achieved varied success in increasing the supply affordable units, with some producing thousands, while others produced very few or none at all.267 While this varied success was to be expected, the study found that even the jurisdictions that had produced the greatest number of affordable units through inclusionary zoning programs were unable to satisfy their need for affordable housing.268 This finding suggests that when considering inclusionary zoning programs, cities must implement them as part of a comprehensive plan to address affordable housing shortages, as opposed to regarding such programs as the answer to affordable housing shortages.269 Finally, the study found that within San Francisco, the more flexible the inclusionary zoning policies were — those that granted density bonuses or exempted smaller projects — the greater the number of affordable units produced.270 The study concluded that a municipality might mitigate the adverse impacts of inclusionary zoning programs on the price and supply of market-rate homes by offering incentives to offset the profit developers loose on affordable units.271
Another study, conducted and published by the U.S. Department of Housing and Urban Development, analyzed the effects of inclusionary zoning policies in California from 1988 through 2005.272 The report found that the data collected on the inclusionary zoning policies implemented in California indicated that these policies had the effect of raising housing prices by approximately 2.2 percent.273 The report also found that housing prices in cities that had adopted inclusionary zoning increased approximately two to three percent faster than the cities that chose not to.274 Finally, the report found that the effects of such inclusionary zoning policies were greater in higher priced housing markets.275 The data relied upon to support this finding revealed that the price of housing that sold for less than $187,000 (in 1988 dollars) was lowered by about 0.8 percent by inclusionary zoning programs; while the price of housing that sold for more than $187,000 was increased by about five percent by inclusionary zoning programs.276 Therefore, the study concluded first, that developers did not necessarily slow their rate of construction, choosing instead to pass the cost of reduced profits, resulting from the required affordable units, onto the consumers; and second, that developers were better able to pass these costs along to the higher priced housing markets rather than the lower priced housing markets.277 These findings are consistent with an economic theory that alleges such inclusionary zoning policies do not come without a cost.278
C. Alternative Policies/ Programs to Consider
To avoid the aforementioned negative impacts of inclusionary zoning programs, a municipality might consider other policy objectives, rather than mandating affordable unit set-asides. For example, New York has shown that maintaining and restoring affordable rentals has worked to increase the supply of affordable units.279 There, a group of banks and insurance companies worked together to sponsor a nonprofit organization that offered low cost loans for construction and rehabilitation of multifamily homes.280 Through their combined efforts, they have provided more than 100,000 affordable units over the course of thirty years.281 The City and County of Honolulu might consider providing greater flexibility in building, permitting, and restoration codes, thereby increasing the ability and desire of private investors to rehabilitate older units.282
Yet another policy movement that may increase the supply of housing is to increase the land available for affordable home construction.283 In Hawai’i, even though land is a scarce resource, increasing land available for housing development will have the effect of lowering the costs to builders, thereby increasing their potential profit margins.284 With all else equal, increasing land availability has the potential to drive down housing prices for both affordable units, and market rate units.285 Execution of such a plan would require the modification of zoning restrictions, which could lead to an increase in availability of sites on which developers could build affordable housing at a greater density. For example, Fairfax County, Virginia, rezoned an area near the site of a planned mass transit stop for high-density development. Instead of the sixty-five homes and five-acre parking lot that the original planned called for, 2,000 condominium units and 500,000 square feet of office and retail space was built, providing approximately 100 affordable homes.286
Another possible alternative to inclusionary zoning would be to implement policies that expedite the review and permitting process of affordable units.287 It is possible that a reduction in the regulatory burdens that developers face could influence the housing market by reducing home prices.288 For example, Glaeser and Gyourko in their report titled The Impact of Zoning on Housing Affordability, contend that zoning and land use controls contribute directly to high housing costs.289 According to their report, high housing cost areas arise primarily due to artificial limits and costs imposed on construction, created by the regulation of new housing.290 Therefore, they argue that “[b]uilding small numbers of subsidized housing units is likely to have a trivial impact on average housing prices … However, reducing the implied zoning tax on new construction could well have a massive impact on housing prices.”291 While the results of implementing such alternative programs might not be certain, regardless of the approach taken, it is unlikely that any policy restricting or taxing development will work to increase the supply of housing.
V. Conclusion
With the Supreme Court declining to review the San Jose case, there remains great uncertainty regarding how municipalities in other jurisdictions will apply inclusionary zoning programs. Furthermore, there remains uncertainty regarding not only the level of scrutiny appropriate for legislatively enacted inclusionary zoning programs, but also the result of a successful “takings” challenge. On its face, San Jose seems to stand for the proposition that cities, at least within California, will have broad discretion in the implementation of inclusionary zoning programs enacted to address affordable housing shortages. However, as previously noted, municipalities must use caution when exercising this discretion.
Furthermore, while there is still debate regarding the effectiveness of inclusionary zoning programs, there is substantial evidence that such programs, standing alone, are inadequate to solve the growing housing problem that many states face today.292 As noted by the study on inclusionary zoning conducted by the Center for Housing Policy, “[e]ven those ordinances that have produced the most affordable housing units, however, have not solved the community’s housing challenges.”293 Therefore, states considering new inclusionary zoning policies should regard such policies as mere pieces of a broader and more comprehensive housing strategy, rather than an answer.294 Unquestionably, the affordable housing shortage many states face demands attention; however, inclusionary zoning policies may not be the easy solution that some may believe it to be.