California Building Industry Association v. City of San Jose (2016)

Issue

Whether a California law mandating that all new housing buildings with 20 or more units reserve 15% of the total units to be sold below market value constitutes a violation of the Takings Clauses of the United States Constitution and California Constitutions.

Facts

The California Legislature has noted that California suffers from shortages of available housing for those of lower and middle incomes. In response, the Legislature expressly declared that affordable housing for every Californian is of “vital statewide importance.”  To address this, local governments have been charged with the responsibility of dealing with this issue since they are best able to determine what measures would best address this problem in their own jurisdictions. The City of San Jose decided to implement Ordinance No. 28689, which mandated that all new residential developments consisting of 20 or more units must reserve 15% of their units to be sold at below market value, or meet other qualifications which included: building low income units elsewhere, paying a steep fine, dedicating land for affordable units, or acquiring and rehabilitating existing affordable units.  

In response to this ordinance, the California Building Industry Association CBIA, a legal advocacy group for construction companies, filed suit against the City of San Jose.  The CBIA alleged that the ordinance in question violated the Takings Clauses of both the United States and California Constitutions and sought immediate injunctive relief and a writ of mandate to set aside the ordinance.

The Courts Below

The Santa Clara County Superior Court was the first to hear the case. The court ruled in favor of the CBIA, , relying on a previous California Supreme Court case, San Remo Hotel L.P. v. City and County of San Francisco 2002, which held that a permitting condition violates Takings Clause rights if the government cannot demonstrate an essential nexus and reasonable relationship between the permitting condition and a deleterious public impact of the development. Since the city failed to present evidence of a relationship laid out in San Remo, the court held the ordinance invalid. See opinion below:

Cal. Bldg. Indus. Ass’n v. City of San Jose, No. 110CV167289 Cal. Super. Ct., 2012

The City of San Jose then appealed the case, which was heard by the Court of Appeal for the Sixth District of California. The court ruled in favor of San Jose because it distinguished San Remo from the current case and thus found that the ordinance was facially valid. See opinion below:

California Building Industry Association v. City of San Jose, 157 Cal.Rptr.3d 813 Ct. App., 2013

The CBIA then appealed the case to the California Supreme Court, who upheld San Jose’s ordinance because by its determination, the 15% reserve requirement was not an unconstitutional exaction in violation of the Takings Clause of the California Constitution. It also ruled that the ordinance’s validity is not dependent on a showing that the restrictions are reasonably related to the impact of any particular housing development to which the ordinance applies. See opinion below:

California Building Industry Association v. City of San Jose, 61 Cal.4th 435 Cal., 2015

Question before the Court

1. Does the State have freedom to take property without compensation as a condition of a development permit approval when it acts pursuant to its general police power and is not mitigating harm that would be caused by the development?

2. When a city creates a housing cost problem, may it seek to solve that problem by singling out housing developers to give the city an interest in the developed property as a condition to gaining approval for the development?

CCJ filed an amicus curiae brief in support of CBIA

Summary:

California has a long-standing antipathy toward the notion of individual rights in private property. Since at least 1949 the state has clung to the view that its “police power” allows it to demand real estate in exchange for a building permit. The California Supreme Court reasoned in

Ayers 1949 that there was no taking involved in such a demand. The developer sought the “advantages” of a subdivision and the state had the sovereign power to compel the property owner to “yield to the good of the community” in exchange for those advantages. The California Supreme Court reaffirmed the holding of Ayers in Associated Home Builders v. City of Walnut Creek 1971. There the court ruled that local government could demand that home builders give up a portion of their property for recreational facilities even if the development did not create a need for those facilities. The court ruled that the exaction “can be justified on the basis of a general public need for recreational facilities caused by present and future subdivisions.” In California’s view, this limited resource belongs to the state — or at least the people in common —­ rather than the property owner.

California went beyond its contempt for personal property rights when it tried to shield cities from the Fifth Amendment requirement of compensation for taking property. Even where the exaction is unconstitutional, the California court ruled that no compensation was an available option for the state in Agins v. City of Tiburon 1979. In the present case, the California Supreme Court relied on Ayers and Associated Home Builders to rule that “so long as a land use restriction or regulation bears a reasonable relationship to the public welfare, the restriction or regulation is constitutionally permissible.” This is the same rationale that this Court rejected in Nollan v. California Coastal Commission 1987. In Nollan, the California court had ruled as the California Supreme Court ruled in the case at hand that “the justification for required dedication is not limited to the needs of or burdens created by the project.” This Court ruled, however, that the Nollan family could not be singled out “to bear the burden of California’s attempt to remedy” existing problems.

The importance of individual rights in property predates the Declaration of Independence and the American Constitution. English jurist William Blackstone noted that property is an “absolute right, inherent in every Englishman . . . which consists of the free use, enjoyment, and disposal of all his acquisitions, without any control or diminution, save only by the laws of the land.” From the pronouncement that “a man’s house is his castle” to William Pitts’ argument that the “poorest man” in the meanest hovel can deny entry to the King, the common law recognized the individual right in the ownership and use of private property. The individual rights in private property are part of the common law heritage that our founders brought with them to America. In the Slaughter-House Cases 1872, the Court recognized that “Individual rights in private property are foremost among those individual rights “which have at all times been enjoyed by citizens of the several States.” The fundamental nature of individual rights in property has been noted in other cases as well. California, however, is openly hostile to this notion of individual rights in property.

There is no doubt that San Jose has a housing affordability problem. There is also no doubt that it is a problem of San Jose’s own making. The California Legislative Analyst’s Office issued a report shortly after the California Supreme Court ruled on this case, and announced that the cost of a home in urban areas, including San Jose, is over four times the national average. While the cost of “fees” and taxes to build a new house hits a national average of $6,000, in California, the cost is $22,000 per home. This is only a small part of the problem, unfortunately. The real problem is that “far less housing has been built in California’s coastal metro areas than people demand.”

The California Supreme Court acknowledged that one feature of the San Jose ordinance is that the city will gain an interest in the houses that home builders are required to sell at below market rates. This interest, similar to a deed of trust, will ensure that the original purchaser-beneficiary of the below-market mandate cannot simply flip the property in a windfall profit sale for its true market value. Indeed, under the ordinance the city claims a portion of the property appreciation for itself. Nonetheless, the California court ruled that this property transferring scheme “does not effect an exaction.” For the reasons outlined above, the Court should take the current case and resolve the misconstruing of the Court’s precedent.

Final Outcome

The Supreme Court decided not to hear the case on appeal from the California Supreme Court, thus upholding that court's ruling that the legislature can effectively confiscate private property without compensation, which opposes CCJ’s argument.