California’s decades-old strategy of leaning on developers to help solve the housing crisis is facing a serious legal threat—and this time, the challenge could change the affordable housing landscape statewide. A recent Supreme Court ruling has opened the door to a federal lawsuit that directly questions the constitutionality of inclusionary zoning and developer fees, the very backbone of how hundreds of California cities build affordable housing. If the courts side with the plaintiff, it could pull the rug out from under nearly every local housing affordability program in the state.
What’s at Stake?
Inclusionary zoning has become a go-to tool for local governments, requiring developers to either include a portion of affordable units in new housing projects or pay a substantial fee instead. That fee typically goes into a fund used by the city to build or support affordable housing elsewhere. But a homeowner in East Palo Alto is now challenging that requirement after being hit with a $54,891 fee for planning to build two homes on his property. He argues that the fee is unfair and unconstitutional.
This case isn’t just about one property owner. If the court rules in his favor, it could affect the 149 cities and counties across California that rely on similar ordinances. These rules have quietly created thousands of affordable homes over the years, making them one of the most common and relied-upon strategies in the state. A ruling that invalidates this system would leave a major hole in how cities plan and pay for affordability.
Constitutional Concerns & Legal History
At the heart of the case is the argument that these kinds of developer fees are unconstitutional “exactions” that violate the Fifth Amendment. The Pacific Legal Foundation, representing the homeowner, claims that unless a city can directly prove that a new development causes a measurable harm—like increased traffic or environmental impact—it can’t justify demanding money in exchange for a building permit. That argument got a major boost earlier this year when the U.S. Supreme Court ruled in Sheetz v. El Dorado County that a traffic impact fee on a single-family home didn’t pass constitutional muster.
Previously, courts viewed inclusionary zoning as a standard part of land-use regulation and didn’t apply the same legal scrutiny. But now, with Sheetz setting a new precedent, that firewall may no longer exist. If the federal court in San Francisco adopts the same reasoning, the entire foundation of inclusionary zoning could start to crumble.
Why Does It Matter—And Why Now?
California’s housing shortage is already one of the worst in the nation. The state set a target of building 3.5 million new homes by 2025, but with just 650,000 completed from 2019 to 2023, it’s falling short by a mile. Inclusionary zoning has been one of the few tools cities could use without needing to raise new taxes or beg the state for help. Critics argue that these mandates discourage new development, especially in markets where profit margins are already thin, and that the fees are a disincentive for building in the first place.
But the reality is more complicated. Without these requirements, many cities will have no mechanism at all to ensure affordable units get built. Developers are under no obligation to build below-market housing unless someone requires them to—or pays them to. If the courts strike down inclusionary zoning, municipalities may find themselves with their hands tied, trying to address a growing crisis with fewer tools.
What Comes Next?
The lawsuit is currently in federal court, and if the plaintiff prevails, it could set a precedent that forces dozens of cities to rewrite or repeal their inclusionary zoning laws. Cities might then have to pivot to offering direct subsidies, tax breaks, or publicly funded programs to get affordable units built—strategies that often take more time, more bureaucracy, and a lot more money.
At the same time, California is pushing hard to streamline and incentivize development through other means, such as CEQA exemptions and fast-tracking infill development through legislation like AB 130 and SB 131. But speeding up construction doesn’t automatically make housing affordable. Without a way to mandate affordability, many of the new homes being built could still be priced far out of reach for working families.
My Thoughts
This case is more than just a local zoning dispute—it could become a landmark moment that reshapes housing policy across California. If inclusionary zoning falls, it will leave cities scrambling to find new ways to deliver on the promise of affordability without developer mandates. The outcome could either push the state to innovate or cause it to retreat even further from addressing the housing crisis head-on. Either way, the decision that comes out of this courtroom could determine whether California’s affordability strategy gets rebuilt—or just dismantled.
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With over 9,000 published articles on modular and offsite construction, Gary Fleisher remains one of the most trusted voices in the industry.
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