Why Does Small Business Care about San Jose’s Inclusionary Zoning Ordinance?

Date: October 20, 2015

Yesterday the Hill reported on NFIB Legal Center’s recent amici curiae filing, in which we urged the Supreme Court to review an inclusionary zoning ordinance from the City of San Jose, California. These sort of affordable housing mandates are increasingly common, as municipalities throughout the nation have begun restricting the right of landowners to develop their properties, except on the condition that they must dedicate a portion of any newly constructed homes, or apartments, to the community’s stock of affordable housing. Advocates argue that these mandates are necessary to ensure affordable housing options for low income families; however, the reality is that—good intentions aside—these sort of restrictions actually further accelerate inflation of real estate prices, and therein price-out many middle class families from the housing market.

In other words, the economics of affordable housing mandates actually further exacerbate affordable housing problems in the community. And, as we noted in our brief, a large part of the affordable housing crisis in California is due to over-regulation. For that matter, California imposes extreme regulatory requirements on landowners seeking to make any significant changes on their properties—including complicated environmental assessments, which can easily result in litigation. All of that red tape means added costs for developers and ultimately inflated prices for anyone looking to purchase developed property. And in some cases it makes the prospect of building on one’s land economically unfeasible. 

But setting aside those policy considerations, there is a constitutional problem with mandating that a property owner must dedicate a portion of his or her property for public use—as part of the community’s stock of affordable housing units—without compensation. Indeed, the Takings Clause of the Fifth Amendment prohibits government from taking private property without paying fair market value for it. Yet, the California Supreme Court saw no constitutional problem with a municipal ordinance requiring landowners to set-aside a portion of their land for public use, to be sold at below-market rates.

In California Building Industry v. San Jose, the Pacific Legal Foundation argues that the Takings Clause prohibits municipal authorities from conditioning building permits on the requirement to dedicate property to the public. The Supreme Court has already made clear, in previous cases, that government may not leverage its permitting authority to get “goodies.” But San Jose argues, in this case, that the usual rules should not apply when a City has passed an ordinance requiring landowners to surrender property because legislative enactments are somehow beyond reproach. Yet as we point out in our brief, an uncompensated taking is no less repugnant to the Constitution when done through legislation than when done through administrative actions. Our Takings Clause jurisprudence begins and ends with the proposition that government must pay for anything it takes. There are no exceptions.

Our hope is that the Supreme Court grants review in this case because many jurisdictions still hold that an extortionate permit condition is permissible if imposed by legislation. That means small business landowners are vulnerable to quid pro quo demands anytime they seek a permit to expand their business operations, or to build anything new on their land. For that matter, there is also a risk that scheming lawmakers may seek to impose exorbitant fees on business licenses, to fund public programs. In fact, NFIB is currently suing the Secretary of State in Colorado for a similar scheme, wherein incorporated businesses have been forced to finance the costs of elections with their annual filing fees. We argue, in that case, that the Colorado Constitution forbids such exorbitant fees; however, we could just as well have invoked the Takings Clause—which likewise prohibits government from conditioning a permit or license approval on a requirement to pay money, disproportionate to any impact that the business might have on the public.

So why has the NFIB Small Business Legal Center made advancing the Takings Clause a top-priority?

The answer is simple. The Takings Clause’s explicit protections for private property rights stand as a bulwark against unfettered regulation. Given that the New Deal era courts managed to destroy other substantive protections for economic liberties, it’s essential that we defend the principles enshrined in the Takings Clause—and advocate for their robust application. And without doubt, advocates of Big Government are continually seeking to chip-away at those protections.

Of course, we have a long ways to go because, under modern precedent, a regulatory restriction rarely will be deemed a taking. Yet, if we can succeed in clarifying that the Takings Clause prohibits regulations that demand owners must dedicate property as a condition of using their property—or as a condition of engaging in economic activity—we will be making real in-roads in our efforts to push back against over-regulation. On the one hand, a win would be only a modest step forward. But it would still be a significant victory in our effort to restore meaningful protections for the small business community.

For more commentary on our filing, check out Inversecondemnation.com, and the PLF Liberty Blog.

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