The California Building Industry Association (CBIA) was dealt a final blow by the U.S. Supreme Court in February 2016, ending their years-long battle against a new San Jose zoning ordinance. The ordinance dictates San Jose developers are required to reserve 15% of units in for-sale housing developments of 20 units or more for low- to moderate-income buyers.
The ordinance was originally intended to take effect January 1, 2013; however, the CBIA ravaged the ordinance via lawsuit almost immediately. After an injunction on the ordinance issued by the Santa Clara County Superior Court was overturned in the 6th District Court of Appeal, the CBIA pushed the case through to the California Supreme Court. The Supreme Court ultimately declared the ordinance valid in June 2015. The CBIA ushered in one final effort at resistance, petitioning the U.S. Supreme Court, which declined to hear the case in late February 2016.
Now cleared from the injunction, the ordinance is poised to take effect. However, local developers in the San Jose area are less than pleased.
San Jose developers resist the ordinance
The San Jose City Council elected to give developers a grace period for acclimating to the new ordinance. Developers with projects approved before June 30 need to apply for an exemption to the new ordinance and submit a compliance plan, outlining their plans to adapt the existing project to the new requirements, to qualify.
Developers unhappy with the ordinance’s requirements may choose one of two alternatives to allocating 15% of their units:
- building low- and moderate-income units elsewhere; or
- paying a $122,000 in-lieu fee to the city.
Still, the ordinance may have unintended consequences.
Developers unable or unwilling to meet the city’s requirements may choose to abandon projects entirely rather than take a hit to their profits. Sellers of raw land who ordinarily receive hefty paydays for space ripe for development may also suffer losses as developers cinch purchase costs in order to fund construction under the ordinance’s limits. This may motivate sellers to sit on their land until higher prices can be caught, which itself runs contrary to the objectives of the ordinance.
However, the “hits” developers take are laughable to the rest of the U.S. “Moderate-income” residents – the top rung of buyers for the 15% of reserved units – in San Jose earn roughly $74,000 – $89,000 annually.
Resistance festers the massive inventory problem in California’s urban markets. As sellers and developers flee San Jose in search for more lucrative opportunities elsewhere, the lack of construction on new units will further undermine California’s consistently decreasing inventory. San Jose in particular is among the top national cities with the lowest inventory, clocking in at only 1,788 available homes in January 2016 — fewer even than the notoriously poorly-stocked San Francisco.
Benefits of urban inclusionary zoning
Despite discontented developers, the new ordinance has potential to bring benefits that flourish in areas with forward-looking and progressive zoning. Patience and the passage of time are required for everyone to mellow out after a nasty fight.
Higher urban density allowing residents to live closer to their workplaces phases out extensive commuting expenses incurred by those who can’t afford to live in the costly city. Further, increasing the amount of housing units available to residents of all income tiers restores equilibrium to excessive rental rates and home prices in the vicinity. Also, the proximity of residential accommodations to commercial and recreational facilities, known as mixed-use zoning, decreases crime rates and facilitates economic growth.
However, none of these benefits can take root unless developers cooperate with the new ordinance. Whether developers continue to challenge inclusive measures and abandon more expensive — but more equalized — housing projects remains to be seen. Once the grace period is lifted and the ordinance finds its permanent footing in San Jose’s housing market, the future of San Jose’s caricature home sales market will be revealed.