The City of San Luis Obispo faces an ongoing housing production shortage and housing affordability crisis that has been afflicting jurisdictions across State of California for a prolonged period of time. The City faces many of the same housing availability and affordability challenges as the rest of the State, but also has distinct characteristics that necessitate unique policies and strategies, such as the concurrent presence of both a large student and young professional population as well as a wealthy retirement community, which drastically drives up housing prices and demand. The Flexible Density Program is proposed by the City of San Luis Obispo as a potential strategy to facilitate growth of the City’s overall housing stock, incentivize development of smaller and potentially more affordable residential units, and provide a viable housing option for young professionals seeking to live in the City’s downtown. The City’s envisioned program approach allows flexibility in residential density limits to certain mixed-use residential projects in order to stimulate production of more, smaller, residential units in the Downtown and Upper Monterey areas of the City. This report describes the initial development of the proposed Flexible Density Program as follows. First, the report reviews the ongoing housing shortage and its impact on the City and the local demographic and housing context to identify community housing needs. Next, the report refers to relevant literature and research on small residential units as a housing typology, provides examples of inventive city development programs and mixed-use residential projects featuring small units. Research findings are used to develop the structure of the Flexible Density Program in alignment with the identified community housing needs. This culminating draft ordinance specifies the parameters of the program and imbeds the program in the City’s Zoning Regulations. Current conditions of the Downtown and Upper Monterey areas of the City are then analyzed to identify potential development constraints and evaluate the potential residential capacity of these areas to accommodate small residential units. The results of the residential capacity analysis indicate that the Downtown and Upper Monterey areas have a significant capacity to accommodate additional smaller residential units in addition to those that are able to be developed under standard maximum residential density limits. These results validate that the Flexible Density Program has the potential to help grow the City’s housing stock as well as to provide a unique housing typology option to community residents in these areas.