How a California city has penalized affordable housing

San Luis Obispo has a housing crisis. Anyone who has tried to rent or buy there lately already knows.

The central California college town remains among the most expensive housing markets in the country. It invites young professionals, young families, and anyone who hasn’t put down roots there in years.

Something has to change.

So when three longtime friends decided to be part of the solution, you’d think the town would have opened its arms.

John Ruda, a virologist, Rami Zarnegar, an ophthalmologist, and Jordan Knauer, a real estate agent, pooled their resources and entrepreneurial spirit to buy a run-down, vacant lot on Johnson Avenue.

They tore it down, divided the lot, and built four new houses, each with an attached living space.

There were no habitable houses, there were eight of them. That’s exactly the kind of independent cities they say they want.

What they got instead was a bill for nearly $100,000.

Under San Luis Obispo’s “Inclusionary Housing Policy,” the city informed Ruda, Zarnegar, and Knauer that they must pay $98,900 to the city’s affordable housing fund, or foreclose on the deed of one of their newly constructed homes and foreclose.

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Each house costs about $1,325,000 to build. Faced with that choice, the three friends paid the money under protest in September 2024 and continued to build.

Later, they asked for a refund. The village said no.

Now they wonder, and I am their counsel.

The case is worth following closely.

The legal argument at the center of their case is not complicated.

The US Supreme Court has long held that when the government requires people to give up money or property as a condition of obtaining a development permit, that requirement must be related to some harm caused by the development.

Otherwise, as the Supreme Court has said, the provision is nothing more than an “in-and-out robbery scheme.”

As recently as 2024, the court unanimously reaffirmed, in Sheetz v. County of El Dorado, that these protections apply to all permit payments, regardless of whether the payments are imposed by the legislature or administrative process.

So the question is simple: Are you building eight new homes in San Luis Obispo cause affordable housing crisis?

The plaintiffs, represented pro bono by the Pacific Legal Foundation, say the answer is clearly no. Adding more homes to the market when homes are scarce makes housing More affordable, not less.

The city’s own research, which authorized it to justify its spending, is based on an absurd assumption: New homes bring in more residents, those residents spend money, that spending creates jobs, those jobs are filled by workers, those workers need a place to live, so the new homebuilders owe the city money.

In that sense, you might think that commercial development – which is directly related to work – should be addressed more funds rather than residential programs. But for some reason, commercial development funds are low.

The city’s policy of building more homes makes housing more affordable and can be economically regressive and constitutionally reprehensible.

Anyone who enjoys studying economics knows that the more you build, the cheaper it usually is. That’s true of cars, food – and, yes, even houses.

New market-rate units relieve pressure on older, cheaper stock by absorbing higher-income residents who would otherwise compete for cheaper apartments.

A cockamamie study of the city could not account for any of this.

There is also something special about the rest of the city that it has to offer. Ruda and his partners were told they could avoid the money by selling one of their homes for about a third of its cost – with a buyer chosen by the city, and deed restrictions lasting at least 45 years (no maximum).

That’s not really an alternative. Choosing between paying $100,000 and giving away a million dollars is not an option; it is a double door trap.

None of this is to say that affordable housing isn’t a real concern. That’s right. But you can’t make housing affordable by making it more expensive to build.

Instead of raising costs for developers, the city should make their jobs easier by removing regulatory barriers to creating new housing.

The city’s goal is to eliminate the private investment needed by its residents. And if money has no significant relationship to any harm the project causes, it crosses the constitutional line.

Ruda, Zarnegar, and Knauer did something really good for their community. They replaced unlivable eyesores with eight new homes in a city that desperately needed them.

As a result, they were fined $100,000. San Luis Obispo can do better than that — and the courts may soon agree.

David Deerson, representing the plaintiffs in the Ruda v. City of San Luis Obispo, is an attorney in the Pacific Legal Foundation’s property rights practice.