Developers can be required to include affordable housing, California high court rules

Reporting from San Francisco —  Citing an affordable housing crisis of “epic proportions,” the California Supreme Court made it easier Monday for cities and counties to require developers to sell some housing at below-market rates.

The unanimous decision, written by Chief Justice Tani Cantil-Sakauye, follows study after study documenting a lack of affordable housing in the state, especially in California’s coastal regions.

“It will come as no surprise to anyone familiar with California‘s current housing market that the significant problems arising from a scarcity of affordable housing have not been solved over the past three decades,” the chief justice wrote.

“Rather, these problems have become more severe and have reached what might be described as epic proportions in many of the state‘s localities.”

The decision clears the way for Los Angeles and other cities to require developers to sell a percentage of the units they build at below-market rates as a condition of a building permit. Developers also could be given the option of paying into a fund for low-cost housing.

“I applaud the California Supreme Court’s decision,” Los Angeles Mayor Eric Garcetti said in a statement. “This gives Los Angeles and other local governments another possible tool to use as we tackle our affordable housing crisis.”

The ruling came in a challenge to an affordable housing ordinance passed by San Jose five years ago.

The state building industry, backed by real estate groups, sued the city, blocking it from enforcing the law. Developers contended it was unconstitutional “taking” of private property.

The law required developers building 20 or more housing units to offer 15% of them at below-market rates or pay into a city fund. Nearly 200 other cities and counties in the state have similar ordinances.

Monday’s ruling said municipalities have “broad discretion to regulate the use of real property to serve the legitimate interests of the general public.”

“Just as it would be permissible for a municipality to attempt to increase the amount of affordable housing … by requiring all new residential developments to include a specified percentage of studio, one-bedroom or small-square-footage units,” Cantil-Sakauye wrote, “there is no reason why a municipality may not alternatively attempt to achieve those same objectives by requiring new developments to set aside a percentage of its proposed units for sale at a price that is affordable to moderate- or low-income households.”

The decision, a sweeping victory for cities and counties, came only months after the state’s Legislative Analyst reported that California’s housing was among the costliest in the nation.

The report found the shortage was generally worse in coastal regions, but said that high prices along the coast have also forced up prices in the interior of the state.

“Between 1970 and 1980, California home prices went from 30% above U.S. levels to more than 80% higher,” the report said. “This trend has continued. Today, an average California home costs $440,000, about two and a half times the average national home price ($180,000).”

The report blamed the shortage on a variety of factors, including high land and labor costs, complex environmental reviews and local laws that restrict development. Los Angeles, the report said, needed more housing than any other region in the state to stop the cost from rising.

“On top of the 100,000 to 140,000 housing units California is expected to build each year, the state probably would have to build as many as 100,000 additional units annually — almost exclusively in its coastal communities — to seriously mitigate its problems with housing affordability,” the report said.

Legal analysts said Monday’s court decision probably would encourage other cities to adopt similar programs. Many have been concerned about the legal uncertainty, they said.

Andrew L. Faber, who represented San Jose before the court, said the California Building Industry Assn. has aggressively challenged such ordinances, and “this decision is quite a rebuff to their arguments.”

Tony Francois, who represented the building industry, called the decision “very disappointing.”

“The ruling allows government to impose financial penalties on providers of new housing — a penalty that can only deter efforts to ease the state’s housing shortage and make it even harder and costlier for average families to afford a home in California,” said Francois, a senior staff attorney with the Pacific Legal Foundation, a conservative, property-rights group that represented the building industry.

Edgar Khalatian, a land-use entitlement lawyer who is co-chairman of Los Angeles’ advisory committee on zoning, predicted the city would have a law similar to San Jose’s within a year. He noted that West Hollywood, Santa Monica and Pasadena already have such ordinances.

The laws tend to be “political hot potatoes,” said Khalatian, a partner at law firm Mayer Brown. “Although everyone wants affordable housing, not everyone wants it in their backyard.”

Such ordinances should be drafted with flexibility, he said, allowing the lower-cost units to be smaller than the others and permitting developers to pay into a housing fund instead of building. Otherwise, developers may decide not to build at all or may compensate for the cheaper units by pricing the others at rates the middle class cannot afford.

“To me, that has always been the rub,” Khalatian said. “If the ordinance isn’t drafted well, you will have lower-income housing and very expensive housing, which of course hurt the middle class.”

Hasan Ikhrata, executive director of the Southern California Assn. of Governments, said Monday’s decision underscored a problem that is forcing the millennial generation — generally those born in the years from the early 1980s to the early 2000s — to leave the state. He citied the high cost of housing in Los Angeles, San Francisco and San Jose in particular.

“It just simply highlights the fact that we do not have enough housing at the right price to house the new millennial generation, which is the largest generation,” Ikhrata said. “Affordability is the reason that many millennials are leaving California.”

Los Angeles previously had an ordinance that required builders of rentals to set aside some units for below-market rents. An appeals court overturned that ordinance in 2009, ruling that it conflicted with a state law that allowed owners of empty units to set the rents, a practice known as vacancy decontrol.

Monday’s ruling applied to housing for sale and did not overturn the earlier decision, which many activists and lawyers said made L.A. reluctant to pass another strong affordable housing ordinance.

“Los Angeles was sort of shellshocked by that ruling,” said Larry Gross, executive director of the Coalition for Economic Survival, a grass-roots tenants rights’ organization.

Los Angeles has tried to promote affordable housing in other ways, lawyers said. It has taken advantage of state law that gives developers the option of building lower-cost units in exchange for certain benefits, including higher density and relaxed parking requirements. It also helps provide financing for affordable housing projects.

In deciding the San Jose case, Justice Ming W. Chin warned in a concurring opinion that the outcome might have been different if the law had forced developers to lose money on affordable units.

He noted that San Jose’s ordinance permitted developers to spend less on units that were to be sold at below-market rates.

“Providing affordable housing is a strong, perhaps even compelling, governmental interest. But it is an interest of the government,” Chin wrote. “The community as a whole should bear the burden of furthering this interest, not merely some segment of the community.”

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