Lawsuit questions legality of San Luis Obispo’s inclusionary housing fee

March 10, 2026

Photo by Jeff Specht

By KAREN VELIE

As part of its attempt to promote affordable housing, the city of San Luis Obispo requires an inclusionary fee to develop in the city. A civil rights lawsuit was filed last week against the city that argues increasing the cost of building homes does not lead to more affordable housing.

Three friends – John Ruda, Shahriar “Rami” Zarnegar, and Jordan Knauer – purchased an uninhabitable home on Johnson Avenue near Orcutt Road in San Luis Obispo. The trio then tore down the home with plans to build four homes, each with an accessory dwelling unit, on the lot.

City staff then demanded the trio “pay nearly $100,000 into the city’s housing fund or sell one of the units at a little over half the cost of construction to the city’s chosen buyers,” according to the lawsuit. The developers paid the $98,900 fee and built the eight units.

The Pacific Legal Foundation, a nonprofit public interest law firm, filed a federal lawsuit against the city on March 4 that argues fees without determination of cost equal extortion. Previously, the foundation won similar cases against Healdsburg and East Palo Alto, which led to refunds.

“The city presented plaintiffs with two bad choices: give up their property rights by acquiescing to a deed-restricted inclusionary unit, or pay nearly $100,000,” according to the lawsuit. “Of course, there was an unspoken third option: don’t build at all.”​

The lawsuit argues the city’s inclusionary housing policy does not create nor contribute to the need for affordable housing or cause anyone to be unable to afford housing. However, a new development “alleviates housing affordability problems by creating new housing.”

“As a matter of logic, the city cannot make housing more affordable by making it more expensive,” according to the lawsuit. “As a matter of law, it 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.”

The lawsuit asks the court to rule San Luis Obispo’s Inclusionary Housing Ordinance is unconstitutional and that the developers are due a refund of fees along with an award for attorney fees and court costs.

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