Inclusionary housing ordinances may move to the front burner for many communities after the U.S. Supreme Court left intact the law in San Jose, Calif.

The high court’s recent decision “opens the way for cities across the state, and probably across the country, using the same legal theories to require developers to build affordable housing and sell it below market rate as part of any development project,” says Chuck Reed, former San Jose mayor and special counsel at the Hopkins & Carley law firm.

Chuck Reed

More than 170 communities in California have inclusionary housing laws, also known as inclusionary zoning, but there will be more coming, he tells Affordable Housing Finance.

An expert in real estate issues, Reed served as mayor of San Jose from 2007 to 2014. During this time, the city passed an inclusionary zoning law after the state killed redevelopment agencies across California. These agencies were a major funding source for affordable housing.

San Jose’s ordinance requires that all new for-sale residential developments of 20 or more units include housing affordable and price-restricted for moderate-income buyers. Developers may satisfy their inclusionary housing required by providing 15% affordable homes on site within their projects or through other options, including a payment in-lieu of building the affordable housing units.

“It was the only alternative we had that made any sense,” Reed says, who also had been a city and county planning commissioner for 14 years.

He did not support an alternative proposal that would have set a fee on all development, including commercial and industrial, to help generate affordable housing funds. "I thought that did not pass constitutional muster," he says. "I thought that's a tax, and those taxes should be approved by voters."

In Santa Clara County, where San Jose is located, there's an affordable housing deficit of 68,000 units, adds Kevin Zwick, CEO of Housing Trust Silicon Valley.

"That’s the difference between affordable homes needed for lower-income families and what we’ve built over the last generation of housing," he says. "On top of that, we’re going to need 35,000 homes in the next seven years."

That means the region needs more than 100,000 affordable homes. Inclusionary zoning is one of the tools that can be used to help meet this enormous demand.

San Jose’s law was scheduled to take effect in 2013, but its implementation has been delayed by litigation as the building industry vigorously fought the ordinance.

Although the Supreme Court declined to hear the case, Justice Clarence Thomas observed that the law remains unsettled. “Until we decide this issue, property owners and local governments are left uncertain about what legal standard governs legislative ordinances and whether cities can legislatively impose exactions that would not pass muster if done administratively,” he wrote. “These factors present compelling reasons for resolving this conflict at the earliest practicable opportunity.”

However, Thomas agreed that the San Jose case did not present an opportunity to resolve the conflict.

A big question going forward is what happens to the housing market if new costs are imposed on market-rate builders.

“The rights of all property owners were dealt a blow today, as San Jose’s punitive treatment of home builders was allowed to stand,” said Brian T. Hodges, attorney for the Pacific Legal Foundation, a group representing the California Building Industry Association, in a statement.

He argues that San Jose’s demands on home builders mean that fewer homes will be built and the price of market-rate homes will go up, squeezing more buyers out of the market.

“As a constitutional matter, there is no excuse for forcing property owners—in this case, the builders of new homes—to foot the bill for problems they didn’t cause, such as the affordable housing shortage,” Hodges said. “If anybody’s to blame for that shortage, it’s the bureaucracy itself, with its restrictive building regulations and expensive exactions.”

His foundation has vowed to continue fighting inclusionary zoning ordinances, and Thomas’ comments show that the issue is far from resolved.

On the other side, the court decision is good news for affordable housing advocates.

"It was great to see an important tool like inclusionary zoning preserved," says Zwick.

He points out that San Jose's ordinance is linked to for-sale development. Zwick hopes that the recent events will lead to changes at the statewide level that will allow inclusionary zoning requirements to be placed on new rental housing developments.

That would give affordable housing developers one more tool in the toolbox.