Commercial Real Estate in Carmel Highlands: Coastal Inns, the Carmel Area Plan and Septic Rules

By Matthew Martinez, Founder, CEO & Managing Broker, Diamond Real Estate Group. California DRE #01869679.

Carmel Highlands is a residential coastal community south of Carmel-by-the-Sea, between Point Lobos and the start of the Big Sur coast. Commercial property here is almost all visitor-serving: a few hillside inns and restaurants on the Highway 1 corridor, plus home-based businesses. The area is unincorporated and entirely in the Coastal Zone, so Monterey County and its Local Coastal Program control every change. Confirm the zoning, permits and water and septic status of each parcel with County Housing and Community Development before relying on this page.

Who controls the parcel

Carmel Highlands is not part of the City of Carmel-by-the-Sea. It falls under the County’s coastal zoning code, Title 20, and the Carmel Area Land Use Plan. The Board of Supervisors adopted that plan on October 19, 1982, and the Coastal Commission certified it on April 14, 1983, with an amended certification on January 22, 1985; the County’s copy carries amendments indexed through 1999. The plan says it built on the earlier Carmel Highlands-Riviera Master Plan, which aimed to keep Highway 1 a scenic two-lane road.

Because the area is in the Coastal Zone, many County approvals can be appealed to the Coastal Commission. Highway 1 encroachments go through Caltrans. Point Lobos State Natural Reserve sits at the north end, and the plan treats its waters as an Area of Special Biological Significance, which drives the area’s strict wastewater policies. See our Monterey County commercial guide and our Carmel-by-the-Sea commercial guide for the city next door.

Carmel Highlands zoning for commercial and visitor uses

Title 20’s Section 20.08.010 sets the coastal base districts. The plan’s land use chart shows about 740 acres of Low Density Residential in Carmel Highlands, so residential zoning dominates. The districts most relevant to a commercial buyer are below; confirm each parcel on the Sectional District Map.

What VSC allows. Under Chapter 20.22, changing between visitor-serving uses inside an existing building needs only a coastal administrative permit if the nature and intensity of use do not change. One caretaker unit for on-site security is allowed at the same level. Hotels, inns, restaurants and accessory employee housing need a coastal development permit from the Zoning Administrator. Alcohol service or live entertainment within 200 feet of a residential district also needs one, which matters for inns surrounded by homes. Building coverage is capped at 50%, at least 10% of the site must be landscaped, and the minimum lot is one acre on septic.

Home-based business. LDR allows home occupations in existing structures with a coastal administrative permit, under Chapter 20.14. Bed and breakfasts need a coastal development permit.

Viewshed and height rules on the Highway 1 corridor

Visibility. Key Policy 2.2.2 of the Carmel Area plan requires development in the viewshed to be clearly subordinate to the natural scenery. Policy 2.2.3.3 singles out Carmel Highlands, saying new development there must be carefully sited and designed to minimize visibility. Policy 2.2.4.6 keeps the forested corridor along Highway 1 as a scenic screen, with new development set back from it. Overhead lines along the highway are to be undergrounded or moved out of view, and private signs are generally discouraged, which limits business signage.

Yankee Point height. Recommended Action 2.2.5.2, as amended in 1995, sets height limits in the Yankee Point area of Carmel Highlands-Riviera at 20 feet for seaward properties and 26 feet for others. Check whether a site falls in that area before planning an addition.

Unlike Big Sur. Carmel Highlands is governed by the Carmel Area plan, not the Big Sur Coast plan, so its visual standard is minimizing visibility rather than the Big Sur prohibition on development visible from Highway 1. Confirm which plan area a parcel south of the Highlands is in.

Water and septic: the real constraint

• Septic history. Section 2.4.1 of the plan names septic and leachfield failures in the Carmel Highlands area as a pollution source. Policy 2.4.4.B.6 requires dual leach fields for any new development in Carmel Highlands, and Policy 2.4.4.B.5 bars new onsite systems on slopes over 30%. Recommended Action 2.4.5.3 calls for an onsite wastewater management program for the area. Commercial intensification, such as added rooms or seats, depends on septic capacity.
• Water. Policy 2.4.4.A.1 requires proof of an adequate water supply for new development, and Policy 2.4.4.A.2 requires showing no harm to existing users in the driest year. Where a parcel is served by Cal Am inside the Monterey Peninsula Water Management District, a District water permit is required to set a meter or intensify use on an existing connection, and commercial tenant changes may trigger one. Confirm the parcel’s water provider first.

Transfer tax, business tax and property tax

• Lodging tax. The County Treasurer-Tax Collector applies a 10.5% transient occupancy tax in the unincorporated County to hotels, motels and owner-rented homes.
• Vacation rentals. The County’s short-term rental page says existing coastal rules apply until the Coastal Commission certifies its new ordinance, and a coastal vacation rental now needs a coastal development permit estimated at about $12,000. The Board approved coastal Ordinance 5439 on September 23, 2025.
• Transfer tax. Monterey County Code Chapter 5.32 sets the county documentary transfer tax at $0.55 per $500 ($1.10 per $1,000); who pays is a matter of contract and local custom. No city tax applies outside city limits. Confirm on the escrow estimate.
• Property tax. A sale generally triggers Proposition 13 reassessment.

Due diligence that matters in Carmel Highlands

Start with our commercial due diligence checklist, then add:

• Confirm the Title 20 district, any height suffix and whether the site is in the Yankee Point height area.
• Pull every coastal permit; the approved room count, seats and alcohol service are the asset.
• Inspect septic and leach fields and confirm dual-field capacity for any expansion.
• Confirm the water provider, any MPWMD water credits and meter capacity.
• Review viewshed exposure from Highway 1 before planning exterior work or signs.
• Check slope, landslide and fire hazards on hillside sites.
• Confirm TOT registration for lodging.

Questions people ask

Sources & notes

1. Monterey County, Carmel Area Land Use Plan
2. Title 20, Section 20.08, coastal districts
3. Title 20, Chapter 20.22, VSC district
4. Title 20, Chapter 20.14, LDR district
5. MPWMD, water permits
6. County HCD, short-term rentals and vacation rental ordinances
7. County Treasurer-Tax Collector, TOT
8. Monterey County Code Chapter 5.32, Documentary Transfer Tax

Note: The plan’s public services and land use sections were not in the text we could read. We did not verify the zoning of individual inns, the MPWMD boundary or the Carmel Coastal Implementation Plan.

This page is general information, not legal or tax advice. Last reviewed October 2026 by Matthew Martinez.

Related: Carmel Highlands real estate guide · Multifamily property in Carmel Highlands · Commercial real estate services