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San Diego’s affordable housing law, which requires homebuilders to subsidize affordable housing, is unconstitutional, a judge ruled Wednesday.

Superior Court Judge John Meyer’s ruling could end the city of San Diego’s affordable housing law and force the city to return millions of dollars that builders have been paying into an affordable housing trust fund since the law took effect in 2003.

The ruling comes years after the case was filed by the Building Industry Association of San Diego County and just months after the conflict between the city and developers hit a fevered pitch, as a tentative settlement between the council and the builders became unhinged weeks ago.

City officials said they were frustrated with the city’s loss after nearly reaching a deal with the BIA that would have preserved the law – albeit a weaker one that produced less money for the trust fund.

“This could bankrupt the affordable housing fund,” said Pam Hardy, spokeswoman for Council President Scott Peters. “Rather than get something, we get nothing.”

The law being challenged, known as the “inclusionary zoning ordinance,” requires that 10 percent of a residential developer’s project fit be deemed affordable housing. To avoid that benchmark, developers can also pay what’s known as the in-lieu fee, a surcharge that is used to construct affordable housing throughout the city.

The judge ruled that the law is unfairly cumbersome to builders, as developers who would be damaged by the law are forced to jump through too many hoops to acquire a waiver.

A deputy city attorney said City Attorney Mike Aguirre will ask the City Council on Tuesday to tweak the law so it complies with the court’s wishes. The move, the city attorney hopes, would also allow the city to continue to require developers to build affordable units on-site or pay an in-lieu fee that goes toward the construction of affordably-priced homes elsewhere. If the changes are approved, the city can ask the judge to keep the updated law on the city’s books, Deputy City Attorney David Karlin said.

The judge ordered the BIA’s lawyers to prepare a court order that will state what the trade group is seeking from the city. Paul Tryon, chief executive officer Building Industry Association of San Diego County, said he is hoping that the council scraps the law altogether.

“I hope they don’t have the desire to resuscitate inclusionary zoning by changing it just enough to stave off a lawsuit,” Tryon said. “Instead of slapping a Band-Aid onto a questionable public policy, we should take the time to address our affordable housing needs better.”

Tryon and other builders have contended that there are better ways to deal with affordable housing, such as streamlining the building permit process, subsidizing the construction of affordable units with state and federal grants and institutional homebuyers programs for low-income households.

The BIA won the case by proving to the judge that a builder should be able to simply ask the city to get a waiver from the law in the event that the builder’s compliance – either by including affordable units onsite or paying the fee – doesn’t help solve the affordable housing problem in the city. BIA general counsel Jerry Livingston said in an interview Friday that a developer should be able to argue that the law doesn’t produce enough units for low-earning families and that it punishes new buyers of market-rate homes who absorb the added cost of the law.

“What do the effects of these laws have to do with affordable housing?” Livingston said.

Currently, a builder can make that request under city law. However, developers must also meet three other separate criteria to get the waiver.

The city must allow a builder to be granted a waiver if it can make the argument that its compliance doesn’t help fix the affordable housing problem, the judge ruled.

Aguirre had argued that the city’s law was sufficient, as it did indeed take the BIA’s argument into account when pondering the waiver.

At the hearing, the judge said his initial opinion was that the BIA’s challenge was insufficient, but concluded Wednesday that the city’s law was “an unconstitutional taking.” Citing a similar case in Napa, Meyer ruled that a developer must be permitted to ask the city for an out because of “an absence of any reasonable relationship or nexus between the impact of the development and the [law].”

Several local governments, including some in San Diego County, have similar laws on the books. Tryon said he didn’t know whether the judge’s ruling could set a precedent for overturning affordable housing laws everywhere, but affordable housing advocates said it does not.

“I think it’s a very specific instance for the city of San Diego,” said attorney Cory Briggs, who represents the Affordable Housing Coalition. “The law is clear, you can have this type of statute, but it appears the court decided that the city didn’t write it as precisely as it could have.”

The verdict calls into question at least $7.7 million in fees that the city has already collected, according to the city’s Development Services Department. Because the law was deemed illegal, the BIA could be able to force the city to refund in-lieu fees to developers or compensate builders who included affordable units that hurt the profitability of their projects.

“We are determining how to treat the money that was illegally collected,” Tryon said. “Our counsel is reviewing the law concerning that refund.”

More than $1.7 million of in-lieu fees has already been spent to construct affordable housing around town. Todd Phillips, the Housing Commission’s chief of policy, said it’s unclear what will happen to the affordable housing trust fund in light of Wednesday’s ruling.

In April, the City Council approved a settlement that the Mayor’s Office negotiated with the BIA to change the time when in-lieu fees are reassessed, which was advantageous to builders who were facing a drastic rate hike in July. The compromise would have potentially cost the affordable housing trust fund between $9 million and $43 million, the Housing Commission estimated.

Aguirre originally argued that the building industry’s lawsuit was defensible and scoffed at the City Council’s approval of the settlement. He did not return calls seeking comment Wednesday.

The council tentatively approved the settlement April 3, but balked at an additional request of the BIA, which was that the builders group could revive the lawsuit if the council changed the ordinance in the next two years. As a result, the lawsuit moved forward to a court hearing last Friday where the BIA was able swayed the judge.

“That was the jeopardy the city put itself in when not resolving the matter in a favorable way through a settlement,” Tryon said.

Please contact Evan McLaughlin directly at evan.mclaughlin@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or write a letter to the editor.

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