A Northern California city has agreed to build more low-income housing and pay the state's legal costs to settle a fair housing lawsuit, Gov. Gavin Newsom and other state officials announced Wednesday.

The state sued the city of Elk Grove last year, alleging the city wrongfully rejected a 67-unit homeless housing development in a historic neighborhood despite the city having recently approved a similar market-rate development in the same area. Wednesday's settlement requires the city to identify another site in the high-resource community for low-income housing, accept state reporting and monitoring requirements for compliance with housing laws and pay $150,000 in attorneys' fees and costs.

The suburban Sacramento community of 178,000 people had already reached an agreement with developer Excelerate Housing Group to allow a low-income project elsewhere.

“We cannot solve California's homelessness problem without creating new housing and supportive services,” Governor Newsom said in a statement. “Elk Grove is not immune to this challenge. The City's decision to block these efforts, which will waste valuable time and resources, is particularly shameful. We expect Elk Grove to follow the law, and continued refusal will not be tolerated.”

Excelerate first proposed building Oak Rose Apartments on the vacant lot in 2021 under a state law aimed at streamlining approvals for low-income housing in areas that aren't meeting mandated housing construction goals. Under pressure from neighbors, city officials repeatedly rejected the development, saying it didn't fit with the character of the historic district, according to the state's lawsuit.

The developer is set to sue the city in 2022, and the state filed its own lawsuit last May. The city's previous settlement with Excelerate required the developer to abandon Oak Rose Apartments but allowed Excelerate to propose Coral Blossom Apartments, an 81-unit low-income project, on another vacant lot in the city. The city voted this summer to move forward with construction on Coral Blossom Apartments.

California Attorney General Rob Bonta said despite the agreement, the state needs to enforce the law against Elk Grove given the severity of the state's housing crisis.

“While I am pleased that this is over and the City of Elk Grove has finally approved the construction of more housing for those most in need, it does not obscure the fact that the City has repeatedly refused to do what is right,” Bonta said in a statement. “These are not normal times.”