Procedural and zoning barriers appear to be just the beginning of the challenge of adding new housing supply to America’s hungry communities.
While removing red tape and outdated zoning laws could formalize more housing on paper, local rate structures still decide whether those homes actually get built.
California is an example of this tension.
Gov. Gavin Newsom and state lawmakers sought an abundance of housing to improve affordability. The state desperately needs more units. Still, lawsuits in California federal court reveal clashes between local reimbursements and state reforms
These clashes – and the fees at their center – threaten themselves as rights, business and project risks if they delay projects or pile up new costs beyond the point where their sponsors can keep their initial dollar investments in place.
The latest challenge focuses on inclusive zoning charges in San Luis Obispo. This Central Coast city is located halfway between San Francisco and Los Angeles.
The Pacific Legal Foundation sued the city on behalf of developers. The nonprofit public interest law firm is challenging fees for a project that will add eight units. The plan includes four houses, each with an outbuilding
The developer paid nearly $100,000 in inclusive fees. Developers faced an alternative: a single-lot deed restriction for income-limited housing. That lot — with a house and ADU — would have to sell for $450,000 with the city restriction. According to the lawsuit, each cost $1.325 million to build.
“The city has presented plaintiffs with two poor choices: give up their property rights by agreeing to a deed-restricted IU, or pay nearly $100,000,” the March 4 lawsuit argued. “Of course there was an unspoken third option: not building at all.”
The foundation argues that the fees violate the U.S. Constitution. It points to Supreme Court rulings calling it “racketeering.” The group has won similar cases in Healdsburg and East Palo Alto, resulting in reimbursement of fees.
City ordinance
San Luis Obispo passed its inclusionary housing ordinance in 1999. The city revised it in 2022 in response to state housing reforms. The purpose of the ordinance is to ensure the development of permanently affordable units in new housing developments as part of mixed-income and anti-segregation efforts.
Residential or mixed-use developers for sale must build inclusionary units equal to 10% of the total number of units, or pay replacement fees based on square footage of habitable space.
The ordinance supports the city’s Affordable Housing Fund, which uses replacement fees and other sources to finance non-profit, non-profit projects. Since 1999, it has helped create more than 1,300 freehold or affordable housing units through planning, entitlement or construction.
Compensation impact
Developers say fees often stall projects before they are publicly reviewed. Included fees and set-asides look like fixed costs pro formas. They require coverage of limited rental or sales prices.
Lenders and equity partners require a minimum return, such as 5% on fees or 15% margins in San Luis Obispo. Projects that do not achieve this return after reimbursements freeze.
Costs are a heavy burden, especially for affordable housing. According to one study by the Terner Center for Housing Innovation at the University of California Berkeley, these fees have increased significantly in recent years.
Additional in-leuu dollars or below-market units reduce debt service income. Developers cannot always increase rents or prices in expensive markets. They offer less for land, but owners often refuse discounts.
Projects then stall or die before hearings take place. Ambitious rates dilute the housing pipeline. Red ink on spreadsheets reveals the stopping point.
YIMBY Push
California YIMBY is advocating for legislation to reduce fees that hinder housing development, and this year they’re taking another step in the right direction. Last year the group achieved major victories.
One bill would standardize housing applications across the state. The state housing department must develop the form by July 1. Cities and provinces can accept it from October 1.
The measure prohibits additional costs for using the form. It prevents ‘fines’ or filings that increase costs. Existing impact or inclusion fees remain unlimited.
Another bill, passed by the General Assembly, awaits Senate action. It directs state officials to study simpler codes for multifamily projects of 3 to 10 units. It also requires reports on the cost impacts of construction standards.
National tension
California lawmakers have overhauled zoning laws and approval processes to promote “housing abundance.” Cities like San Luis Obispo manage these outcomes through complex reimbursement structures.
Three small builders from San Luis Obispo are invoking state laws, including ADU regulations, for a vacant lot. Local requirements increased costs.
The lawsuit highlights national tensions. States streamline housing processes.
Local reimbursements are once again creating barriers, meaning that projects are only on paper.
“Unfortunately, that is an all-too-common attitude among America’s city councils,” said David Deerson, attorney for the Pacific Legal Foundation. The builder’s newspaper.
