73-Unit ADU Mega-Project Approved Before San Diego's Regulatory Crackdown: Why These Developments May Become Distressed Assets

Just days before San Diego slammed the door on mega-scale accessory dwelling unit (ADU) projects, a 73-unit development in Encanto squeezed through—the largest single-parcel ADU project ever approved in the city. Two other major projects followed: a 19-unit complex in Pacific Beach and a 15-unit development in North Park. All three received approval between June 16 and August 22, 2025, during a narrow window before new regulations took effect.

These grandfathered mega-projects represent a unique moment in San Diego real estate history. They also signal a potential wave of distressed asset opportunities for cash buyers. Developers who rushed approvals now face construction financing in a cooling market where 46.1% of homes sit on the market for 60 days or longer, and sales volume reached just 25,920 transactions in 2024—the second-slowest year since 1988.

For property owners with stalled ADU developments and investors seeking opportunities, understanding what happened during this regulatory transition could prove valuable in the months ahead.

The ADU Gold Rush That Just Ended

San Diego's ADU bonanza began as a well-intentioned housing solution. The city created incentive programs allowing developers to build multiple ADUs on single-family lots, hoping to address the region's severe housing shortage. For a time, it worked—perhaps too well.

The old regulations essentially had no cap on ADU density. Developers could theoretically build dozens of units on a single parcel, transforming quiet residential streets into multi-unit complexes overnight. This created what Councilmember Kent Lee called a race against the clock, warning that "every single day there is a lack of any action means another day that additional permits will be submitted."

On June 16, 2025, the City Council voted 5-4 to roll back the incentive. Following a required second vote on July 22 and a mandatory 30-day waiting period under state law, the new regulations took effect August 22, 2025. That 9-week window became a gold rush for developers with projects in the pipeline.

The new rules impose strict limits: lots under 8,000 square feet can have maximum 4 ADUs; lots between 8,001-10,000 square feet max out at 5 ADUs; and lots over 10,001 square feet can't exceed 6 ADUs. Additional requirements include infrastructure fees, parking mandates for non-transit locations, a 1,200-square-foot maximum per unit, two-story height limits, and greater setback requirements.

The Three Mega-Projects That Made It Under the Wire

Developer Christian Spicer of SDRE secured approval for all three of the largest projects during the transition period:

The 73-unit project at 698 Leghorn Ave in Encanto stands as the crown jewel—or white elephant, depending on your perspective—of the expiring incentive program. Located in what city planners classify as a moderate-resource area in southeastern San Diego, the project sparked intense backlash from Encanto residents who argued their neighborhood lacks sufficient infrastructure and quality jobs to support such density. This single project became the poster child for opponents' claims that the ADU incentive created "ugly," "egregious" developments that "exploit" well-meaning housing policy.

The 19-unit project at 4844 Pacifica Ave in Pacific Beach represents the second-largest approval. Pacific Beach has become ground zero for ADU controversy, with residents filing lawsuits to block other large projects in the neighborhood. The area's popularity and proximity to the coast make it attractive for development, but neighborhood groups have organized fierce resistance to what they see as overdevelopment threatening community character.

The 15-unit project at 2847 Nutmeg St in North Park rounds out the trio of major approvals. Additional grandfathered projects include a 12-unit development in Linda Vista and a 9-unit complex in the College Area, all approved during the same window.

Importantly, San Diego's Development Services Department noted that "many of the referenced projects are still early in the review process." In other words, having approval doesn't mean construction has started—or that it ever will.

Why These Projects May Become Distressed Assets

Securing approval and breaking ground represent two entirely different challenges. The developers who rushed to get grandfathered under old regulations now face a brutal reality: construction financing in 2025 looks nothing like the market conditions when these projects were conceived.

San Diego's housing market has fundamentally shifted. According to Redfin data from late 2024, 46.1% of San Diego homes had been on the market for 60 days or longer—a dramatic change from the bidding war environment of previous years. Inventory jumped 28.9% compared to 2023. By March 2025, available homes surged 67% year-over-year, climbing from 2,611 listings to 4,351 properties.

Sales volume tells an even starker story. San Diego County recorded 25,920 home sales in 2024, making it the second-slowest year in records dating back to 1988. Only 2023 was worse, with 25,317 sales. For context, even during the 2007 housing crash, San Diego saw 33,020 sales—significantly more than recent years.

This cooling market creates several problems for ADU developers:

Construction costs for ADUs in San Diego typically range from $300,000 to $450,000 for site-built units, with total project costs often exceeding initial estimates. Developers frequently underestimate expenses, thinking a project will cost $100,000 when the actual figure approaches $300,000—a gap that can "stop the loan process in its tracks," according to financing experts.

Lenders have grown cautious. Construction loans carry higher interest rates than traditional mortgages due to increased risk. In a market where homes take 41 days to sell on average (compared to 28 days the previous year), lenders see extended timelines and uncertain exit strategies. For mega-projects with 19 or 73 units, financing becomes exponentially more complex.

Developer cash flow presents another hurdle. Most ADU construction loans fund in draws tied to completion milestones. If the market softens further or construction delays occur, developers must continue making loan payments on partially completed projects with no rental income or sales proceeds coming in.

The affordability crisis compounds these issues. San Diego's median home price stood at $975,000 in September 2025, with only 29% of homes selling above asking price—down from 71% in April 2022. If developers plan to sell completed ADUs as condos or rent them at market rates, they're betting on a market that shows clear signs of weakness.

What Happens When ADU Developers Can't Complete Projects

When ADU developments stall, several scenarios typically unfold:

Construction loan defaults occur when developers can't make payments during the building phase. Unlike traditional mortgages, construction loans have short terms (usually 12-18 months) with interest-only payments and balloon payments due at completion. If a 73-unit project takes longer than expected or cost overruns drain reserves, the developer faces default.

Bank takeovers and foreclosure follow default. Lenders who financed ADU construction want to minimize losses. They'll work with developers initially, but if the project can't be salvaged, the bank forecloses and takes possession of a partially completed development. These bank-owned (REO) properties often sell at significant discounts because traditional lenders won't finance properties in poor condition.

Fire sales to avoid foreclosure represent a common exit strategy. Developers facing cash flow problems often prefer selling at a loss rather than letting projects go to foreclosure, which destroys their credit and reputation. These motivated sellers need buyers who can close quickly without financing contingencies—exactly what cash buyers offer.

Partner disputes and legal complications frequently arise in multi-unit developments. When projects involve multiple investors or partners, financial stress can trigger lawsuits, liens, and title issues that make traditional financing impossible. Cash buyers who can navigate these complications gain access to properties other buyers can't touch.

Permit and regulatory problems compound financial stress. Projects grandfathered under old rules still must meet building codes and other requirements. If inspections reveal issues or if neighbors file legal challenges (as happened with other Pacific Beach ADU projects), construction stalls and carrying costs mount.

Cash Buyer Opportunities in the Distressed ADU Market

The confluence of grandfathered mega-projects and deteriorating market conditions creates several opportunities for cash buyers:

Buying stalled ADU projects at a discount allows investors to acquire properties with existing approvals and partially completed infrastructure. A 73-unit project that's 30% complete represents significant sunk costs for the original developer but potential value for a buyer with cash reserves to finish construction. The hardest part—securing approvals under old regulations—is already done.

Purchasing from overleveraged developers before foreclosure offers advantages to both parties. Developers avoid the credit damage of foreclosure, while buyers acquire properties below market value. Cash offers provide certainty that stressed sellers desperately need. No appraisal contingencies, no financing falling through, no 30-60 day closing periods that require additional loan payments.

Acquiring bank-owned ADU properties after foreclosure creates opportunities to buy at steep discounts. Banks want these properties off their books. They aren't in the development business and will often accept lowball offers just to move the asset. Traditional buyers can't get financing for properties in poor condition, giving cash buyers a competitive advantage.

Completing projects with existing cash reserves positions buyers to capitalize once the market stabilizes. San Diego's housing shortage hasn't disappeared—affordability remains the primary constraint, not lack of demand. Buyers who can finish stalled projects at reasonable costs can eventually rent or sell units when market conditions improve.

The key advantage in all these scenarios is speed and certainty. Distressed sellers don't have time to wait for buyers to secure financing or navigate lengthy due diligence periods. Cash offers close in days, not months, providing immediate relief from mounting debt and stress.

For Property Owners: When to Sell ADU Properties Quickly

Property owners with ADU developments should watch for warning signs that indicate it's time to consider a quick sale:

Construction loan payment problems signal immediate danger. Missing payments or struggling to cover interest-only obligations means the project is underwater financially. Waiting rarely improves the situation—costs continue mounting while the property generates no income.

Contractor disputes and work stoppages can derail entire projects. If contractors walk off the job due to non-payment or disagreements, completing the project becomes exponentially more difficult and expensive. Finding new contractors to finish someone else's work often costs more than the original bid.

Cost overruns exceeding 20-30% of the original budget indicate serious trouble. Construction costs in San Diego run $375-$600 per square foot for ADUs. If actual costs exceed projections by significant margins, the project's economics may no longer work. Holding on hoping costs decrease rarely pays off.

Permit problems or compliance issues that require expensive corrections can kill a project's viability. If building inspectors identify code violations or if neighbor complaints trigger additional regulatory scrutiny, resolution costs can spiral quickly.

Market conditions deteriorating faster than construction timelines create underwater situations. If you planned to sell or rent completed units at certain prices, but the market has dropped 5-10% during construction, your exit strategy may no longer work.

Partner or investor pressure to exit represents another warning sign. Multi-party ownership of development projects works smoothly until it doesn't. If partners want out or investors demand returns the project can't deliver, complexity and legal costs multiply.

Cash sales solve these problems by eliminating financing gridlock. Traditional buyers need appraisals, which require completed construction. They need lender approval, which requires perfect permits and clear title. Cash buyers can close on properties with issues that would disqualify conventional financing, providing an exit when no other options exist.

The Broader San Diego Market Context

The challenges facing grandfathered ADU mega-projects reflect broader market dynamics affecting all San Diego real estate:

Inventory has surged 67% year-over-year in San Diego, the highest growth among major U.S. metros, outpacing Los Angeles (52%), Atlanta (44%), Phoenix (39%), and Miami (40%). Available homes jumped from 2,611 in March 2024 to 4,351 in March 2025—levels not seen since 2020.

Days on market have extended significantly across all property types. Single-family homes now take 41 days to sell on average, compared to 28 days the previous year—a 46% increase. The percentage of homes sitting unsold for 60 days or longer reached 46.1%, indicating reduced buyer urgency and increased negotiating power for purchasers.

Sales volume at near-record lows creates uncertainty for developers planning exit strategies. The 25,920 sales in 2024 represent the second-slowest year since 1988. Through September 2025, San Diego County recorded just 20,504 sales, putting the year on track to potentially break the all-time low set in 2023.

Price appreciation has slowed dramatically. The San Diego metropolitan area experienced a 0.85% annual price decrease in September 2025, according to S&P Case-Shiller Indices. While the median home price remained elevated at $975,000, the trajectory shifted from rapid gains to flat or declining values.

The percentage of homes selling above asking price plummeted from 71% in April 2022 to just 29% in September 2025—a clear signal of reduced competition and cooling demand.

Affordability constraints continue squeezing the market. As one economist noted, "Affordability is the biggest constraint in the market right now." High home prices combined with elevated mortgage rates near 7% keep many potential buyers on the sidelines.

This environment creates particular stress for ADU developers who assumed strong rental demand and quick sales would support their projects. In a market where even single-family homes take 60+ days to sell, moving inventory of multiple small rental units becomes significantly more challenging.

FAQ: San Diego ADU Regulations and Distressed Property Opportunities

Conclusion

San Diego's 73-unit ADU mega-project in Encanto, along with the 19-unit Pacific Beach and 15-unit North Park developments, represent the final wave of high-density projects approved before regulatory changes took effect August 22, 2025. While these grandfathered approvals seemed like victories when secured, they now face harsh market realities: construction financing challenges, a cooling sales market where homes take 60+ days to sell, inventory up 67%, and sales volume at the second-lowest level since 1988.

For developers struggling with these projects, quick action often prevents worse outcomes. Construction loan defaults, foreclosures, and legal complications multiply the longer problems persist. Cash sales provide an exit strategy that traditional financing can't match—no appraisals, no lender approval, and closing in days instead of months.

For cash buyers and investors, the coming months may bring opportunities to acquire partially completed ADU projects, foreclosed developments, and properties from motivated sellers at below-market prices. The hardest part—securing approvals under old regulations that no longer exist—is already done. Buyers with capital to complete construction can position themselves to profit when San Diego's market stabilizes.

If you're a property owner facing challenges with an ADU development, or an investor seeking opportunities in distressed real estate, the time to act is now. Market conditions change quickly, and the best opportunities go to those who move decisively.