East Palo Alto homeowner Wesley Yu lives 39 miles away from San Francisco, but he could blow a massive hole in SF’s already precarious budget for affordable housing.
Yu is suing in federal court to overturn an East Palo Alto law that requires new housing to include, or at least help pay for, some amount of homes set aside for lower-income residents.
The case could make its way up the legal ladder to the U.S. Supreme Court, and it wouldn’t be the high court’s first encounter with the subject. A ruling against East Palo Alto “would have a massive effect” on San Francisco law as well, says SF Planning Department spokesperson Annie Yalon.
“For nonprofit developers already struggling to finance projects, the loss of this stream would come at the worst possible time,” says Quintin Mecke, director of the Council of Community Housing Organizations, a coalition of SF tenant groups, neighborhood advocates, and affordable housing developers.
Yu believes funding other people’s subsidized homes isn’t his responsibility. He lives in a 1,000-square-foot home with his wife and daughter and wants to add two more units on his property: a single-family home and an accessory unit, sometimes known as an ADU or granny flat. He doesn’t plan to rent either of them, instead reserving them for immediate family and in-laws, according to the complaint filed by his lawyers on July 31.
Under East Palo Alto law, Yu must pay a nearly $55,000 fee to the city’s affordable housing fund. He could skip the fee by deeming one of the two new homes an affordable rental unit. Instead, he says the law violates his rights under the Fifth Amendment, which among other things forbids taking private property for public use without just compensation.
This may sound like small potatoes, but Yu’s suit could potentially have huge implications for every city in the country and especially for San Francisco, where roughly a quarter of affordable homes come from developers building them as part of market-rate development or paying into a city fund. SF “blows every other Bay Area jurisdiction out of the water” in its reliance on these developer contributions, says the Planning Department’s Yalon.
James Colin, spokesperson for the East Palo Alto city attorney’s office, tells The Frisc the city has no official statement at this time.
How market-rate pays for affordable
The use of market-rate development to fund affordable homes is called inclusionary housing. It stems from 20th-century policies meant to make up for the loss of federal dollars that once built new affordable housing in America.
Under these rules, market-rate developers must also create new affordable homes, either by including subsidized units directly on their property (hence “inclusionary”) or by paying a fee to help fund 100 percent affordable projects elsewhere.
SF’s law isn’t as stringent as East Palo Alto’s. In SF, building two extra homes, like Yu wants to do, would not trigger inclusionary requirements. (The rules kick in once a proposed building reaches ten units.)
On average, inclusionary homes usually make up between 20 and 25 percent of the affordable housing created each year in SF. In 2024, the city’s Housing Inventory tallied just 83 new inclusionary homes, representing a very bad year not just for affordable housing but housing in general.
With some of the highest housing costs in the country, SF has pledged to make room for tens of thousands of new homes in coming years, more than half of them affordable. The city is prioritizing construction in its wealthy, low-rise neighborhoods that haven’t built their fair share for decades.
But city and state budgets are strapped, and the federal government is about as likely to fund blue-state affordable housing as it is to fund Ivy League diversity training. With City Hall trying to unlock a wave of market-rate development, the inclusionary system is key to the city’s ambitious plans.
“More than losing dollars, we’d lose one of the few tools that ensure mixed-income, integrated communities. Without it, new development risks reinforcing segregation patterns,” says CCHO’s Mecke. SF’s 20th century redlining laws and, starting in the 1970s, widespread downzoning have led to the current stratification of many SF neighborhoods.
“The benefits of incorporating affordable homes [into market-rate projects] cannot be overstated,” says Anne Stanley, spokesperson for the Mayor’s Office of Housing and Community Development.
“The only other tool is to fundraise [from the] private sector,” says Planning’s Yalon, which Mayor Daniel Lurie wants to do. But if charitable giving could build hundreds of new affordable homes, let alone tens of thousands, wealthy cities like SF wouldn’t need inclusionary laws in the first place.
Like the Yu case, Sheetz v. El Dorado argued that for fees to be legal the county must prove they were using the funds to counter a problem caused specifically by his construction.
Some YIMBYs would prefer the city give developers incentives, such as tax breaks, to build affordable units. Some want the market to produce enough housing that prices would come down through supply and demand instead of subsidies.
Sonja Trauss, director of YIMBY Law, calls the inclusionary system a “tax on creating new housing, which is a big problem.”
If the federal courts capsize the inclusionary system, one likely outcome is that those homes just don’t get built at all. But even if Yu wins, there are outcomes that fall short of a total dismantling.
What happened in San Jose
So what’s likely to happen? A narrow ruling could favor Yu only in specific cases. Or it could call only for a slight amendment of the existing law.
It’s also possible the confrontation won’t get that far. When asked about the possibility of a settlement, Yu’s attorney David Deerson referred The Frisc to a previous case where the Sonoma County town of Healdsburg agreed out of court to refund a builder’s affordable housing fees. Such compromise avoids a long and costly legal showdown and doesn’t create sweeping and potentially tumultuous legal precedents.
In 2015, the US Supreme Court declined to take a similar case to Yu v. East Palo Alto. The California Building Industry Association sued the city of San Jose and lost. The builders tried to take the case to SCOTUS, but the justices didn’t take the appeal.
However, Justice Clarence Thomas added his opinion that inclusionary housing laws should be done away with. (He did agree with the decision not to take up the San Jose case for technical reasons.)
Thomas, of course, is still on the bench. In fact, he was part of a unanimous decision last year in another California housing case similar to Yu’s. In Sheetz v. El Dorado, another Fifth Amendment case where a builder, George Sheetz, objected to the California county’s fees on new construction.
Like Yu, Sheetz argued that for fees to be legal the county must prove they were using the funds to counter a problem caused specifically by his construction.
SCOTUS sided unanimously with Sheetz in 2024, but in the end the county had little trouble meeting the extra burdens the ruling put on them to justify their fees.
Sheetz could signal an appetite for more consequential decisions from the bench down the line. Corey Smith of SF’s Housing Action Coalition calls Sheetz “a little preview” of the Yu case, noting it was a matter of time before someone used the precedent of Sheetz to probe for weak points in this kind of housing law.
Michael Rawson, co-founder of the Public Interest Law Project in Oakland, advocates for affordable housing and public benefits. He considers the Yu case more likely to end up in settlement than a grinding, years-long crusade through high courts. But “anytime inclusionary zoning laws get attacked there’s a possibility the decision will end up at SCOTUS,” Rawson says. “That’s certainly one way this could turn out.”