The area around the Elfin Forest was subdivided into vacation home sites as early as 1889. There were few sales until the 1920s and very little development until the 1970s. By the early 1980s it became evident that one of the greatest assets of the area — its natural setting — was rapidly disappearing. Through community efforts in 1987, state legislation was passed that provided funding to purchase 51.2 acres along the northern edge of the Forest, bordering Los Osos Creek, as an addition to Morro Bay State Park.
In 1994, as a result of the joint efforts of the Small Wilderness Area Preservation (SWAP), San Luis Obispo County, the State Coastal Conservancy, and the California Department of Transportation additional funds were raised and the remaining 38.9 acres were acquired as an ecological reserve. Of this, a 7.2 acre area at the extreme western end of the Forest belongs to the State Lands Commission. The remainder, about 32 acres facing the street ends from about 12th street to South Bay Boulevard in Los Osos, belongs to the County of San Luis Obispo.
FEMEF has an "Adopt-A-Park" agreement with San Luis Obispo County Parks and is responsible for management, maintenance, and restoration of the reserve in conjunction with County Parks. The Elfin Forest also contains several archaeologically important sites, so any construction or digging requires prior inspection by an archaeologist.