One often-overlooked impediment to housing construction is something known as “inclusionary zoning,” which requires builders to set aside lower-income housing in order to gain a project’s approval — or pay a large fee to the local government.
A July study from the University of California Irvine (UCI) finds that these policies reduce housing construction by as much as a third, but the best way to understand their pernicious effect is to focus on a particular example.
This despicable story begins with a trio of investors who decided to buy a ramshackle home, bulldoze it and use the parcel it was located on to build four new homes, each with its own auxiliary dwelling unit, sometimes known as an ADU or “granny flat.” Where one home stood, there would be eight. But, says the Pacific Legal Foundation, “no good deed goes unpunished.”
In September 2024, the city of San Luis Obispo hit the three men, who according to court documents “discovered an opportunity to work together to do well for themselves by doing good for their community,” with an inclusionary housing fee of nearly $100,000. This was done under a policy the city “had adopted to respond to the high cost of housing,” says the foundation, which represents the men.
The close friends had little choice. They could pay the fee or they could surrender a portion of their work to the city, which meant “giving away one of the homes to be sold for half its worth” to buyers that were picked by the city. They paid. Then they sued. PLF said the city’s demand wasn’t merely poor policy; it is also unconstitutional.
The lawsuit argues it isn’t possible for a city to make housing more affordable if it is making housing more expensive to build. There is also the disruptive — and spiteful — act of monetarily penalizing “property owners for problems they didn’t create.”
“Rather than embrace the efforts and can-do attitude of plaintiffs,” the filing says, the city of San Luis Obispo “makes their work more difficult — and much more costly — by inverting a fundamental law of economics: more supply means lower prices. Turning that axiom on its head, the city reached the remarkable conclusion that its housing shortage is caused by building more homes.”
The fee, which is in effect a fine, makes the city look petty. The plaintiffs complain that “as a matter of law,” the city “cannot abuse its land-use permitting authority to take money or property from applicants in order to address problems that those applicants do not create.” It can do so only when the fee or property that it is demanding is to be used to reconcile a public problem that would be created by the development in question. Far from creating a public problem, the investors were trying to resolve one that is not of their making.
Inclusionary fees are government takings. Terms used to disguise the reality can’t change the fact that constitutional rights are violated by inclusionary fees. The Fifth Amendment clearly says private property cannot “be taken for public use, without just compensation.” The only compensation that the investors get in return is permission to build — which isn’t compensation at all when they should have the right to use their property as they see fit without being punished by government.
Let’s just call it what it plainly is: classic extortion.
Homebuilding should not be a racket in which developers have to fund political agendas in return for producing a commodity in hot demand, especially when the agenda never produces the promised outcomes. Demanding more from developers only results in less.
Economic sectors deliver “the goods,” whatever they might be in any given circumstance, when markets are allowed to operate without government intrusion. Though it’s treated as if it’s a unique class by itself, the housing market is no different. Producers need incentives to produce. “If you care about housing abundance,” writes Andy Boenau, publisher of Urbanism Speakeasy, liberate the market.
No one is expecting California governments to fully retract their tentacles from the housing market. Certainly not in the current political environment, in which dozens of housing-related bills have been passed and signed but haven’t yielded significant new home construction because they are laced with political mandates.
One caveat: A November ballot initiative (Proposition 45) by the California Chamber of Commerce would provide streamlining for a wide range of CEQA projects, which offers some hope for broader reform. While a full correction would be welcome, even modest reforms toward a freer market are useful, which is why San Diego County is building, while Los Angeles County just to the north falls further behind.
The real but unspoken reason for San Luis Obispo’s inclusionary fee is to discourage building and choke growth in a city that doesn’t want outsiders moving in and ruining its carefully crafted ambience. But if California wants to jump-start housing construction, it’s going to need to roll back an inclusionary-zoning process that is mainly about excluding new housing.
Kerry Jackson is the William Clement Fellow in California Reform at the Pacific Research Institute.