A group of homebuilders has filed a federal lawsuit against the city of San Luis Obispo, California, challenging a policy that requires developers to either pay steep fees or give up housing units to meet the city’s affordable housing requirements.
The lawsuit was filed by homebuilders John Ruda, Jordan Knauer, and Rami Zarnegar, who argue the city’s inclusionary housing policy violates their constitutional rights by forcing developers to accept costly conditions before receiving building permits.
Their attorneys at Pacific Legal Foundation contend the policy effectively penalizes new housing construction by adding significant financial burdens to development projects.
David J. Deerson, an attorney with the foundation, described the rule as counterproductive.
“It’s a strange sort of policy,” Deerson said. While it aims to improve housing affordability, he argued the requirement ultimately increases the cost of building homes in the city.
San Luis Obispo, located along California’s Central Coast between Los Angeles and San Francisco, has a population of roughly 47,000 residents and is known for tourism, nearby wine country, and its annual international film festival.
According to Deerson, the three developers — longtime friends and residents of the Central Coast — planned a project that would replace a deteriorating, uninhabitable house with eight new housing units.
The proposed development included four single-family homes and four attached accessory dwelling units.
However, before issuing building permits, city officials required the developers to comply with the city’s inclusionary housing policy. Under that rule, developers must either sell one unit at a deeply discounted price to a buyer selected by the city or pay a fee to offset affordable housing requirements.
In this case, the city required the developers to either surrender one of the homes under a deed restriction or pay a fee of approximately $100,000.
The developers chose to pay the fee, viewing it as less burdensome than giving up control of one of the homes. Even so, their attorneys argue the requirement amounts to an unconstitutional condition tied to land-use approval.
The lawsuit, titled Ruda v. San Luis Obispo, has been filed in U.S. District Court for the Central District of California.
The case is one of several similar challenges brought by Pacific Legal Foundation following a recent Supreme Court ruling that opened the door for developers to contest certain development fees.
Deerson pointed to the 2024 Supreme Court decision in Sheetz v. County of El Dorado, a case also handled by the foundation, which clarified that impact fees imposed through city ordinances can be challenged if they are not directly tied to the impact of a development.
Since that ruling, the legal group has filed similar lawsuits in the California cities of Healdsburg and East Palo Alto.
Both cases were resolved quickly after the cities involved agreed not to require the developers to pay the contested fees.
Housing policy experts say the San Luis Obispo case highlights broader challenges facing home construction in California.
Steven Greenhut, a senior fellow at the Pacific Research Institute in Pasadena, said government fees and regulations have become a major factor driving up housing costs across the state.
He noted that while certain development fees can be justified when they address infrastructure impacts — such as funding roads or utilities required by new housing projects — many local governments impose additional charges that go far beyond those purposes.
“The California courts over the years have allowed these fees to just get totally out of hand and not totally be tied to the impact of the project on the local infrastructure,” Greenhut said.
He added that in some cases government fees can account for as much as 40 percent of the total cost of building a new single-family home.
San Luis Obispo officials said the city has not yet been formally served with the lawsuit and is reviewing the claims.
City Attorney Christine Dietrick emphasized that the complaint represents the developers’ allegations and has not yet been evaluated in court.
“A complaint is merely a statement of the plaintiffs’ assertions and does not reflect any affirmed legal conclusion,” Dietrick said.
She added that the city’s inclusionary housing policy has not previously been challenged and remains a key tool in addressing housing affordability.
City leaders say the program helps ensure that new development contributes to housing options for residents who live and work in the community.
Dietrick warned that losing the policy could undermine local efforts to address housing costs.
“Any threat to this integral tool to support affordable housing in our community is obviously concerning,” she said, adding that removing it could have broader consequences for communities across California facing similar affordability pressures.
