Background
California Building Industry Association v. City of San José (2015) 61 Cal.4th 435 is the definitive California Supreme Court ruling on the constitutionality of inclusionary housing ordinances — local requirements that residential developers set aside a percentage of units at below-market prices as a condition of approval. The decision resolved a question that had divided lower courts and created uncertainty for cities seeking to use inclusionary housing as an affordable housing tool.
The Facts
In 2010, the City of San José enacted an inclusionary housing ordinance requiring all new residential developments of 20 or more units to make at least 15 percent of for-sale units available at prices affordable to moderate-income households. Developers who did not want to build the affordable units on-site could instead pay an in-lieu fee or build the required units off-site.
The California Building Industry Association (CBIA), representing homebuilders, challenged the ordinance as an unconstitutional taking. CBIA's central argument was that the requirement — conditioning development approval on selling a portion of units at below-market prices — was an exaction subject to the heightened constitutional scrutiny established by Nollan v. California Coastal Commission (1987) and Dolan v. City of Tigard (1994). Under that standard, the city would need to demonstrate both an essential nexus and rough proportionality between the inclusionary requirement and the harm created by new development.
The Legal Question
Does the Nollan/Dolan heightened scrutiny test apply to an inclusionary housing ordinance? Or is inclusionary housing a general land use regulation subject to the more deferential rational basis review that courts apply to ordinary zoning and planning decisions?
The Court's Holding
The California Supreme Court, in an opinion authored by Chief Justice Tani Cantil-Sakauye, unanimously held that inclusionary housing conditions are not exactions subject to Nollan/Dolan scrutiny. They are land use regulations reviewed under the ordinary standard applicable to other zoning decisions: whether the regulation bears a reasonable relationship to a legitimate public interest.
San José's ordinance easily satisfied rational basis review. The city identified a clear legitimate interest — the shortage of affordable housing created in part by new market-rate development's effect on housing demand and land costs — and the ordinance bore a reasonable relationship to addressing that interest.
The Court's Reasoning: Exaction vs. Regulation
The central analytical move in the opinion is the distinction between an exaction and a land use regulation:
- Exaction (Nollan/Dolan scrutiny applies): A condition that requires the developer to dedicate property — land, an easement, a fee — to the public as a condition of approval. The government is extracting something of value from the developer for public use.
- Land use regulation (rational basis applies): A condition that regulates how the developer may use the property — what it may build, how many units, at what prices. The developer retains the property; the government is simply defining the permissible scope of development.
Inclusionary housing requirements fall on the regulation side of this line. The developer is not required to hand over property to the government or to the public. The developer simply cannot sell all of its units at market rate — it must include some affordable units as part of what it builds. The property remains private; the government is regulating the terms of development, not extracting property.
What This Means for California Cities
The decision gave California cities a clear legal foundation to enact and defend inclusionary housing programs for for-sale residential development. After CBIA v. San José, a city adopting an inclusionary ordinance for for-sale projects needs to show only that the requirement is rationally related to a legitimate interest — affordable housing production, preventing displacement, maintaining socioeconomic diversity. Courts have not required cities to conduct detailed proportionality studies.
Important limitations remain:
- Rental housing is different. The Costa-Hawkins Rental Housing Act imposes separate constraints on rent-restricted rental units. Prior to Costa-Hawkins' potential modification by future ballot measures, mandatory below-market rental requirements for new construction have faced preemption arguments under the Act.
- In-lieu fees are still subject to the Mitigation Fee Act. If the ordinance allows developers to pay an in-lieu fee instead of providing on-site units, that fee must comply with the Mitigation Fee Act — including reasonable relationship findings. The Court expressly noted this issue but did not resolve it in the context of the San José ordinance.
- The decision applies to land use conditions, not monetary demands alone. Koontz v. St. Johns River Water Management District (2013), a federal case decided shortly before CBIA, held that Nollan/Dolan scrutiny applies to monetary demands. The interaction between Koontz and California's inclusionary housing framework remains an area of legal development.
Practical Guidance for Planning Staff and City Attorneys
- For-sale inclusionary requirements are constitutionally permissible in California under rational basis review — the CBIA decision provides solid authority.
- Any in-lieu fee provision should be analyzed separately under the Mitigation Fee Act. Findings must be documented and the fee amount must be supported by a nexus study.
- Cities should consult with counsel on the interaction between inclusionary requirements and the Density Bonus Law — developers may be entitled to incentives or waivers if inclusionary requirements affect project feasibility.
- The CBIA decision does not insulate inclusionary requirements from challenge under federal constitutional law — it resolves the question under California law. Federal constitutional challenges based on Koontz remain theoretically available, though they have not succeeded in the California context.
CBIA v. City of San José is the legal foundation for California's inclusionary housing programs. Understanding the boundary it drew — between regulation of development and extraction of property — is essential for any city operating an inclusionary program or considering one. Legislaide helps planning departments draft inclusionary ordinances and fee programs that stay within that boundary.
Published April 5, 2026 by Legal Team at Legislaide.