Lawsuit takes aim at key strategy to create affordable housing in California

East Palo Alto, like cities across California, has a law on the books that forces developers of new housing projects to foot the bill for the state’s shortage of affordable homes.

New residential projects need to set aside a share of the units they plan to build for lower-income renters and homeowners under the terms of the city’s “inclusionary zoning” ordinance. Builders who refuse have to instead pay a fee, ranging from the tens of thousands to hundreds of thousands of dollars.

An East Palo Alto homeowner filed a lawsuit in federal court on Thursday challenging the constitutionality of that law, likening it to “extortion” — and he had a little help from the U.S. Supreme Court.

The implications of the lawsuit range far beyond the Bay Area. A 2017 report estimated that 149 cities and counties across California have some form of inclusionary zoning rule, though the specific terms vary. That makes it one of the most commonly used affordable housing programs both in California and in the country.

Now all that may be on the constitutional chopping block.

The case was filed in federal court in San Francisco by Wesley Yu, a husband and father between jobs, who was planning to build a home and backyard guest cottage for himself and his extended family on a neighboring parcel.

Because Yu was planning to construct two new structures, the city’s inclusionary zoning rules kicked in, requiring him to either sell or rent out one of the units at “affordable” rates or to pay a one-time fee of $54,891 to be deposited in the city’s affordable housing subsidy fund.

The core of Yu’s lawsuit, which was filed by the libertarian-oriented Pacific Legal Foundation, draws on a U.S. Supreme Court ruling from last year that also emerged from a heated California housing dispute.

That case was brought by Placerville septuagenarian, George Sheetz, who contested that the government of El Dorado County had not done enough to justify the $23,420 traffic fee it placed on his home construction project.

Sheetz’s case drew on the U.S. Constitution’s Fifth Amendment, which puts limits on when the government can take private property. Decades of court rulings have said that if a local government wants to base approval of a construction permit on certain conditions, those conditions have to directly relate to the costs associated with the development. A city, for example, might be able to hold off on approving a new dump until a developer pays an environmental clean up fee, but not a fee to fund local arts and recreation.

Courts have also ruled that such “exactions” on private development should be “roughly proportionate” to their cost. That is, the $23,420 that El Dorado County wanted to impose on Sheetz should match the cost of fixing the wear and tear his new home would leave on local roads.

The Supreme Court agreed that these standards ought to apply to the impact fee.

Now Yu and his legal team are asking a federal judge to apply that same rule to inclusionary zoning. For East Palo Alto’s program to pass constitutional muster, the city would have to show that the $54,891 fee or the requirement to set aside new units at a discount relates to and matches the cost that Yu’s development would impose upon the city.

The city won’t be able to show that, said David Deerson, the lead lawyer representing Yu.

“New residential development doesn’t have a negative impact on housing affordability. If anything, it has a positive impact,” he said.

A growing body of economic research has indeed found that local market-rate development puts downward pressure on neighborhood and city-wide rents.

Affordable housing in California zoning

In the past, California courts have ruled that the high constitutional bar set by the Fifth Amendment doesn’t apply to inclusionary zoning programs like the one in East Palo Alto. Requiring private developers to toss in some added affordable housing isn’t an “exaction,” the courts have found, but a standard land-use restriction akin to any other zoning rule.

Whether a city decides it needs more schools, apartment buildings, businesses or, in the case of inclusionary zoning, affordable housing, it has broad power under the constitution to “decide, for the good of the general welfare, that we’re going to require this,” said Mike Rawson, director of litigation at the Public Interest Law Project.

The state Supreme Court ruled as such most recently in 2015. The U.S. Supreme Court declined to weigh in, a tacit approval.

“They can always change their mind,” said Rawson. “I don’t see a basis for it, though obviously that doesn’t necessarily stop them.”

The composition of the court has changed since 2015, veering sharply to the right. The Sheetz decision from last year has offered new fodder for legal challenges to inclusionary zoning.

“Sheetz really helps out here a lot” in that campaign, said Deerson. He pointed to other challenges in Denver and Teton County, Wyoming. “I would expect them to keep coming.”

Tradeoffs in housing policy

If and when the nation’s highest court takes up the issue of inclusionary zoning, it will be wading into one of the more politically charged debates in housing policy.

Evidence on the impact of these laws is mixed. Requiring private developers to build affordable units can and regularly does result in more local housing options for lower income tenants at no additional cost to taxpayers. By putting affordable and market-rate units side-by-side, they also promote economic and racial integration, supporters argue.

But inclusionary requirements can also make any given housing project less profitable, meaning that fewer units get built, leading to higher prices and rents overall. In housing markets, like California’s, that see relatively little new development, the rate at which these programs add designated affordable units to the housing stock is also quite slow.

That policy debate isn’t relevant to the legal case, which will be fought and won over abstract constitutional principles. But for libertarian-leaning groups like the Pacific Legal Foundation, building industry groups and many “Yes In My Backyard” housing development advocates, an end to inclusionary zoning would be a win on both fronts.

“In addition to being illegal, I think that these inclusionary zoning policies are also frankly stupid,” said Deerson.