POLITICS: How a California city punished affordable housing

San Luis Obispo has a housing problem. Anyone who’s tried to rent or buy there lately already knows it.

The central California college town consistently ranks among the most expensive housing markets in the country. It prices out young professionals, young families, and anyone who didn’t plant roots there years ago.

Something has to change.

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

John Ruda, a chiropractor, Rami Zarnegar, an ophthalmologist, and Jordan Knauer, a real estate agent, pooled their resources and their can-do spirit to purchase a run-down, uninhabitable property on Johnson Avenue.

They tore it down, subdivided the lot, and built four new homes, each with an attached accessory dwelling unit.

Where there had been zero livable homes, there were now eight. That’s exactly the kind of private initiative cities 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 had to either pay $98,900 into the city’s affordable housing fund, or deed-restrict one of their newly built homes and get rid of it in a compelled sale.

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Each home cost roughly $1,325,000 to build. Facing that choice, the three friends paid the fee under protest in September 2024 and kept building.

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

Now they’re suing, and I’m their counsel.

The case is worth following closely.

The legal argument at the heart of their lawsuit isn’t complicated.

The U.S. 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 demand must actually relate to some harm the development creates.

Otherwise, as the Supreme Court has said, the condition is nothing more than “an out-and-out plan of extortion.”

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

The question, then, is simple: Does building eight new homes in San Luis Obispo cause an affordable housing problem?

The plaintiffs, represented at no cost by Pacific Legal Foundation, say that the answer is obviously no. Adding more homes to a market where homes are scarce makes housing more affordable, not less.

The city’s own study, which it commissioned to justify its fee, rests on absurd reasoning: New homes bring more residents, those residents spend money, that spending generates jobs, those jobs are filled by employees, those employees need someplace to live, and therefore new homebuilders owe the city money.

By that logic, you might think that commercial development — which is more directly related to employment — should face higher fees than residential projects. But for some reason, commercial development fees are lower.

The city’s position that building more homes makes housing less affordable manages to be both economically backward and constitutionally suspect.

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Anyone enjoying a basic familiarity with economics knows that when you build more of something, it generally gets cheaper. That’s true for cars, food — and, yes, even housing.

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

The city’s cockamamie study failed to account for any of this.

There’s also something fundamentally off about the alternative the city offered. Ruda and his partners were told they could avoid the fee by selling one of their homes at roughly a third of its cost — with the buyer selected by the city, and with deed restrictions lasting a minimum of 45 years (there is no maximum term).

That’s not really an alternative. A choice between paying $100,000 and giving away a million-dollar asset isn’t a choice; it’s a trap with two doors.

None of this means that affordable housing isn’t a real concern. It absolutely is. But you can’t make housing more affordable by making it more expensive to build.

Instead of raising costs on developers, the city should be making their jobs easier by removing regulatory barriers to creating new housing stock.

The city’s policy only discourages exactly the private investment that its residents need. And when the fee bears no meaningful relationship to any harm the project causes, it crosses a constitutional line.

Ruda, Zarnegar, and Knauer did something genuinely good for their community. They replaced an uninhabitable eyesore with eight new homes in a city that desperately needed them.

For that, they were handed a $100,000 penalty. San Luis Obispo can do better than that — and the courts may soon agree.

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