California "In Lieu" Affordable Housing Fees Withstand Constitutional Challenge

The U.S. Supreme Court on Oct. 30, 2017, denied a petition for certiorari filed by the developers of an 11-unit residential condominium project in the City of West Hollywood seeking to challenge the application by the City of West Hollywood to their project of an "in lieu" affordable housing fee in excess of $500,000. In so doing, the Supreme Court left undisturbed the California Court of Appeal decision in 616 Croft Ave., LLC, et al. v. City of West Hollywood (2016) 3 Cal.App 5th 21 (West Hollywood) that upheld the constitutionality of the fee imposed by the city on the building permit for the project pursuant to the city's inclusionary housing ordinance.

In reaching its decision, the Court of Appeal relied heavily upon the California Supreme Court decision in California Building Industry Assn. v. City of San Jose (2015) 61 Cal.4th 435 (CBIA), in which the Court upheld the constitutionality of a similar "inclusionary housing" ordinance against a facial challenge that focused on the requirement to "set aside" a percentage of for-sale affordable units within residential developments. (See Holland & Knight's alert, "California Supreme Court Paves the Way for Ownership Inclusionary Housing," June 23, 2015). In CBIA, the Court announced that such ordinances are not subject to a heightened standard of judicial review (based upon a required finding of appropriate "nexus" between a proposed development and mitigation of its public impacts) but instead are subject to a highly deferential standard of review (one that need only find a reasonable relationship between the ordinance and enhancement of the public welfare).

According to the Court of Appeal in West Hollywood, the purpose of the "in lieu" fee, just like the "set aside" of affordable units at issue in the CBIA case, was not for the purpose of mitigating the impact of new development "but rather to enhance the public welfare" by promoting the use of land for the development of affordable housing. As such, the fee also was not an "exaction" subject to the restrictions of California's Mitigation Fee Act (Gov. Code §§66000-66025).

Conclusion and Considerations

Key takeaways from the U.S. Supreme Court's denial of review in West Hollywood include the following.

• California cities are now relatively unrestricted in their adoption of inclusionary housing ordinances as they apply to "ownership" projects, both as to "set aside" and "in lieu fee" provisions, and they probably do not need to conduct any formal "nexus" studies to support them.
• The question still remains as to whether inclusionary requirements imposed "ad hoc" on a particular development project will be subject to the same deferential standard of review as such requirements broadly imposed on all projects by local legislation.
• The question still remains whether such ordinances can validly – and will – be extended to rental residential projects in light of current California statutory provisions preserving a landlord's right to set initial rent levels.
• The question still remains whether the deferential standard announced in CBIA will be applied to other types of "in lieu" fees or whether the Mitigation Fee Act will still control the adoption or imposition of such fees.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.