How Inclusionary Zoning Survives the 'Nexus' Test and Avoids Unconstitutional Takings

A municipality can only force a private developer to build affordable housing if the requirement regulates how the land is used, rather than demanding a specific piece of property as a toll for a building permit. This distinction is the binding constraint of inclusionary zoning. If a city crosses the line from regulating a development to exacting a fee or property without a direct connection to the project's impact, the policy violates the Fifth Amendment's Takings Clause. Currently, this constraint holds firm in most jurisdictions, provided the local ordinance is drafted as a legislative zoning rule rather than an ad-hoc permit condition.[2]

The legal framework governing this boundary stems from two Supreme Court cases: Nollan v. California Coastal Commission in 1987 and Dolan v. City of Tigard in 1994. Together, these rulings created the "nexus" and "rough proportionality" tests, which dictate how governments can extract public benefits from private developers.

Under the Nollan and Dolan framework, if a city wants something from a developer, the demand must be directly connected to the specific impact of the proposed development. For example, if a new 500-unit subdivision will demonstrably increase local traffic, the city can legally demand that the developer pay for a new turn lane. The exaction is proportional to the impact.

Inclusionary zoning forces developers to sell or rent a percentage of their new units—typically between 10 and 20 percent—at below-market rates. Property rights advocates argue this constitutes an unconstitutional taking because the construction of a new market-rate apartment building does not directly cause the pre-existing shortage of affordable housing in the broader community.

"When a municipality requires a builder to dedicate 15 percent of their units to low-income buyers, they are effectively shifting a societal burden onto a single property owner," notes the National Association of Home Builders in their 2023 legal guidance on the subject. The organization argues that without a direct nexus, the mandate fails the constitutional test.

Municipalities defend these policies by changing the legal classification of the requirement. The blueprint for this defense was solidified by the California Supreme Court in 2015 with California Building Industry Association v. City of San Jose. The city had passed an ordinance requiring developers of 20 or more residential units to set aside 15 percent of those units for affordable housing.[1]

The court ruled that San Jose's ordinance was not an exaction subject to the strict Nollan and Dolan tests. Instead, the justices classified the mandate as a standard land-use regulation, legally indistinguishable from a height limit, a setback requirement, or a ban on industrial uses in a residential neighborhood.[1]

"The ordinance does not require the developer to dedicate any portion of its property to the public," the Harvard Law Review summarized in its 2016 analysis of the ruling. "It simply places a restriction on the way the developer may use its property by limiting the price for which a certain percentage of the units may be sold."[1]

This legislative versus adjudicative distinction is the mechanism that keeps inclusionary zoning alive. When a city council passes a blanket, legislative rule that applies uniformly to all developments of a certain size, courts grant the municipality broad deference. When a planning board imposes a specific, negotiated condition on a single permit, it triggers strict constitutional scrutiny.

Relying on this legislative shield, local governments have rapidly expanded these programs. The American Planning Association tracks these ordinances nationally, noting that as of 2021, more than 1,000 jurisdictions across 31 states had adopted some form of inclusionary housing policy to address local affordability gaps.

To ensure economic viability and avoid separate "regulatory takings" claims, cities routinely pair these mandates with density bonuses. If a developer complies with the 15 percent affordable requirement, the city allows them to build 25 percent more total units than the underlying zoning normally permits, offsetting the financial loss of the price-capped units.

The current legal frontier involves "in-lieu fees." Many ordinances allow developers to pay a cash fee instead of physically building the affordable units. In 2013, the Supreme Court ruled in Koontz v. St. Johns River Water Management District that monetary exactions are also subject to the nexus and proportionality tests, raising questions about the legality of these fees.

The threshold for survival remains the legislative shield. As long as the in-lieu fee is calculated using a predetermined, legislatively enacted formula rather than operating as a negotiated toll for a specific permit, appellate courts have largely allowed them to stand. The legal durability of inclusionary zoning rests entirely on municipalities writing the rules before the developer ever buys the land.[2]