Federal Judge Upholds San Diego's 10% Affordable Housing Mandate: What Property Owners and Developers Must Know in 2026

The Federal Court Ruling: March 13, 2026 Decision Removes Legal Uncertainty

Judge Sabraw's March 13, 2026 ruling represents a decisive victory for San Diego's affordable housing policies. The case involved G.H. Palmer Associates, a firm led by Los Angeles developer Geoffrey Palmer, who challenged the ordinance as unconstitutional. Palmer's team argued that requiring affordable units or fees amounted to an illegal taking of private property without just compensation. Judge Sabraw disagreed, writing that developers can choose whether to build housing, but if they do, they must comply with the city's development rules.

In his 26-page ruling, Sabraw noted that courts have long allowed governments to regulate housing, including through rent control and tenant protections, even when those rules affect property owners' profitability. City Attorney Heather Ferbert called it an important victory for San Diego that reinforces the city's ability to adopt and enforce policies that promote housing affordability and economic inclusion.

The ruling concluded litigation that began in 2023, initially dismissed as premature, but later deemed concrete enough for constitutional review. With no appeal filed before the February 2026 deadline, the ordinance is now firmly established law, removing any speculation that it might be overturned and forcing immediate compliance decisions for developers and property owners across San Diego.

Understanding the 10% Affordable Housing Requirement

San Diego's inclusionary housing ordinance, first enacted in 2002 and significantly strengthened in 2019 by then-City Council President Georgette Gomez, requires new residential developments to set aside 10% of units for low-income households earning up to 60% of the Area Median Income (AMI). For San Diego County in 2025, the AMI for a family of four is $130,800, meaning 60% AMI equals $78,480 for a single person, $79,380 for a two-person household, $89,340 for three people, and $99,240 for a family of four.

Rent for these affordable units is capped at approximately $1,737 per month for a one-person household and $2,481 for a four-person household, based on the guideline that housing costs should not exceed 30% of gross annual income. The ordinance applies to all new residential developments of 10 or more dwelling units outside the Coastal Overlay Zone, five or more dwelling units within the Coastal Overlay Zone, and all condominium conversions of two or more dwelling units.

This means virtually every significant residential development in San Diego must comply, affecting properties across all neighborhoods from downtown to North Park to Kearny Mesa.

These zoning changes are part of broader 142 zoning amendments approved in 2025 that created development opportunities across the city.

The $25 Per Square Foot In-Lieu Fee: What Developers Pay Instead

Developers who choose not to include on-site affordable units can instead pay an in-lieu fee of $25 per square foot into the city's affordable housing fund. This fee was phased in over five years starting July 1, 2020, progressing from $15.18 per square foot in year one to the current $25 per square foot as of July 1, 2024. Beginning July 1, 2025, the fee adjusts annually based on the Construction Costs Index published by Engineering News Record for Los Angeles, meaning it will continue rising with construction inflation.

For context, the previous version of the ordinance set the fee at $22 per square foot before Georgette Gomez's 2019 strengthening, which nearly doubled the original $12.73 per square foot requirement. To understand the financial impact, consider a typical 10-unit infill development in North Park where each unit averages 1,000 square feet. The total development is 10,000 square feet, triggering a $250,000 in-lieu fee ($25 x 10,000 sqft).

For a smaller five-unit project in the Coastal Overlay Zone at 800 square feet per unit (4,000 total sqft), the fee is $100,000. These fees directly impact developer profit margins, particularly on smaller infill projects where land costs are already high. In neighborhoods like University Heights, Golden Hill, and City Heights where developable lots are scarce and expensive, adding $250,000 to a 10-unit project can make the difference between profitable development and selling the property as-is to a cash buyer.

The 55-Year Affordability Restriction: How It Limits Developer Exit Strategies

The most significant aspect of San Diego's ordinance is the 55-year affordability restriction. Rental housing units designated as affordable must remain affordable for at least 55 years pursuant to the Inclusionary Housing Ordinance, one of the longest affordability periods in California affordable housing policy. This restriction fundamentally changes the economics of development by limiting exit strategies.

Traditional developers often plan to build, stabilize occupancy, and sell the property within 5-10 years to institutional investors or real estate investment trusts (REITs). However, a 55-year affordability covenant runs with the property, meaning any future buyer inherits the obligation to maintain 10% of units at below-market rents for decades. This makes the property less attractive to conventional buyers and reduces its resale value compared to unrestricted market-rate apartments.

For smaller developers and individual property owners considering building 5-10 unit projects on developable lots, the 55-year restriction means they cannot simply build and flip for maximum profit. Instead, they must either commit to long-term ownership with permanently reduced cash flow on the affordable units, or pay the $25 per square foot in-lieu fee upfront, which reduces development feasibility. This dynamic creates motivated sellers: property owners with development-zoned parcels who realize the new economics make selling to cash buyers more attractive than developing under the current regulatory environment.

Who This Ruling Affects: Developers, Landlords, and Property Owners

The March 2026 federal court ruling creates immediate compliance pressure across three groups. Large-scale developers like G.H. Palmer Associates, who proposed 1,642 units in Kearny Mesa, must now incorporate either 164 affordable units (10%) restricted for 55 years or pay approximately $8 million in in-lieu fees (assuming 5,000 sqft average per unit x 1,642 units x $25/sqft = $205 million total project, with fees calculated differently). Mid-size developers working on 20-50 unit apartment projects in neighborhoods like North Park, where 3,670 apartments are expected to open across San Diego County in 2026, face similar calculations.

Small landlords and individual property owners represent the most affected group. If you own a 5,000-10,000 square foot lot in University Heights, Golden Hill, North Park, City Heights, or the College Area zoned for residential development, you now face a clear choice: develop with affordable housing compliance or sell to a cash buyer.

Consider a property owner in North Park who inherited a 7,020 square foot parcel zoned RM 3-7 (residential multi-family allowing up to seven units). Building seven units at 900 square feet each (6,300 total habitable sqft) triggers a $157,500 in-lieu fee. Alternatively, including one on-site affordable unit for 55 years reduces rental income permanently. For many small property owners, especially those who inherited property or own lots in areas that have been upzoned for higher density, selling to a cash buyer who understands development economics provides immediate liquidity without navigating complex compliance requirements.

Developer Math: How $25/Sqft Fees Impact Infill Project Profitability

To understand why the federal court ruling creates cash sale opportunities, examine the math on a typical San Diego infill development. Consider a 10-unit project in University Heights on a lot that cost $1.2 million. Each unit is 1,000 square feet, totaling 10,000 sqft. Hard construction costs in San Diego average $350-400 per square foot for multi-family projects according to recent San Diego Housing Commission cost studies, totaling $3.5-4.0 million. Soft costs (architecture, engineering, permits, fees, financing) add 25-30%, or approximately $875,000-$1.2 million. The inclusionary housing in-lieu fee is $250,000 ($25 x 10,000 sqft).

Total development cost: $5.825-6.4 million. At typical market rents of $3,000-3,500 per month per unit, annual gross income is $360,000-$420,000. Using a 6% capitalization rate (typical for San Diego multi-family), the completed property is worth $6.0-7.0 million. Developer profit: $600,000-$600,000 (9-10% return on cost).

Now remove the $250,000 in-lieu fee, and profit jumps to $850,000-$850,000 (13-14% return). That $250,000 fee represents 2-3 months of development carrying costs or the difference between a marginal project and a profitable one. For smaller developers operating on thin margins, especially on infill lots where land costs are high, the affordable housing fee can make the project infeasible. This creates motivated sellers: property owners who purchased development-zoned lots before the 2019 Georgette Gomez ordinance strengthening, expecting to build under the old $12.73/sqft fee, now face nearly double ($25/sqft), making their original pro forma obsolete and selling to cash buyers more attractive.

Motivated Sellers: Who Will Sell Rather Than Comply

The March 2026 federal ruling creates several categories of motivated sellers. First, small landlords with 2-4 unit properties on development-zoned parcels who face a choice: continue operating as-is with modest rental income, invest $2-4 million to develop additional units with affordable housing compliance, or sell to cash buyers. In neighborhoods like Golden Hill and City Heights where properties zoned RM-3-4 (allowing 3-4 units per lot) are common, many small landlords inherited these properties decades ago and lack the capital or expertise for new development.

Second, speculative land buyers who purchased vacant or tear-down lots between 2019-2023 expecting to develop are reassessing feasibility. With construction costs rising 8% in early 2026 according to recent San Diego construction industry reports, plus the now-permanent $25/sqft affordable housing fee, projects that penciled in 2022 no longer work in 2026.

Third, older homeowners sitting on large lots in areas that have been upzoned for higher density, particularly in North Park, University Heights, and Normal Heights where single-family zones have been converted to allow duplexes, triplexes, and fourplexes. The March 2026 ruling removes any hope that the affordable housing requirement might be overturned, forcing these owners to decide now: develop, continue as-is, or sell. Cash buyers specializing in development opportunities can close in 7-14 days compared to 30-60 days for traditional financed sales, offering immediate liquidity to sellers who decide compliance costs exceed the value of developing.

Cash Buyer Opportunities: Development Parcels at Discount

The federal court ruling creates specific cash buyer opportunities across San Diego. Strategic cash buyers targeting development parcels can acquire properties at discounts from motivated sellers who decide not to comply with affordable housing requirements. In Kearny Mesa, where G.H. Palmer's 1,642-unit project faced the lawsuit, other developers may see opportunities to acquire entitled or partially-entitled development sites from sellers who cannot absorb the affordable housing compliance costs.

In North Park, where 432-unit and 531-unit apartment complexes opened in 2025-2026, smaller infill opportunities remain, but many small developers lack the scale to efficiently manage 10% affordable units for 55 years, creating acquisition opportunities for cash buyers. In University Heights, Golden Hill, and City Heights, properties zoned for 5-10 units that trigger affordable housing requirements represent prime targets. Similar development opportunities are emerging in Mission Valley and Point Loma, where mixed-use and transit-oriented projects face the same affordable housing compliance calculations.

Cash buyers can offer sellers immediate liquidity, closing in 7-14 days without financing contingencies, appraisal requirements, or inspection negotiations. For sellers who have been holding development-zoned lots hoping the affordable housing ordinance would be overturned, the March 2026 federal ruling removes that possibility, creating urgency to sell before property taxes and carrying costs accumulate further. According to San Diego real estate investor data, cash buyers typically structure offers at 70-85% of development value, accounting for the time, expertise, and capital required to navigate compliance. For motivated sellers, this discount is acceptable compared to the alternative of spending 18-24 months and $100,000-500,000 in soft costs navigating the development process themselves.

For investors evaluating opportunities, understanding the best San Diego investment properties in 2026 is essential in this changing regulatory landscape.

Regulatory Cost Burden: Why Timing Matters for Sellers

The March 2026 federal ruling creates time-sensitive decisions for property owners. With the $25 per square foot in-lieu fee now indexed to annual construction cost inflation starting July 1, 2025, every year property owners delay selling or developing, the compliance cost increases. The Construction Costs Index published by Engineering News Record for Los Angeles has averaged 3-5% annual increases over the past decade, meaning the in-lieu fee could reach $26.25-26.75/sqft by July 2026 and $27.00-28.00/sqft by 2027. For a 10,000 square foot development, that represents an additional $10,000-30,000 in fees over 1-2 years.

Beyond the in-lieu fee escalation, other regulatory burdens are increasing. Starting January 1, 2026, AB 628 requires landlords to provide and maintain working stoves and refrigerators as part of habitability standards, with 30 days to fix or replace broken appliances. The deadline for balcony, deck, stairway, and walkway inspections has been extended to January 1, 2026, with non-compliance carrying steep daily penalties of $100 to $500, which can accumulate to over $180,000 in just one year.

The San Diego City Council is considering a $5,000 per-bedroom annual tax on short-term rentals and unoccupied second homes, which if passed in 2026, could force thousands of properties into different use categories. The City Planning Department's 2026 Land Development Code Update, expected to be approved in Spring 2026, may introduce additional requirements. For property owners sitting on development-zoned parcels, the regulatory environment is becoming more complex and expensive, making the certainty and speed of cash sale increasingly attractive compared to navigating an evolving compliance landscape.

Property owners facing these mounting regulatory burdens can explore alternatives to tax auctions or learn about cash sale options during financial distress.

Comparison to Other California Cities: San Diego's Requirements in Context

San Diego's 10% affordable housing requirement and $25 per square foot in-lieu fee exist within a broader California context where more than 170 communities (cities and counties) have inclusionary housing laws. However, requirements vary significantly. San Francisco and Santa Monica have some of the strictest policies, with Santa Monica implementing a 20-30% inclusionary set-aside requirement for projects with 10 or more units in its downtown area in 2017. As in San Francisco, high set-aside percentages and lack of density bonus incentives have been criticized for reducing overall housing production.

Los Angeles takes a different approach through its Transit-Oriented Communities (TOC) program, which focuses on density bonus incentives rather than strict mandates. Prior to adoption, Los Angeles was one of few major U.S. cities with housing affordability concerns that lacked either a permanent local funding source for affordable housing or an inclusionary housing policy. The city has since implemented an Affordable Housing Linkage Fee that applies to new developments, but the incentive-based TOC program offers developers additional density in exchange for including affordable units rather than mandating set-asides.

Oakland, San Francisco, San Diego, Seattle, and Boston all have inclusionary housing fees, but San Diego's combination of a 10% on-site requirement with a $25/sqft in-lieu fee and 55-year affordability restriction represents a middle ground: stricter than Los Angeles's incentive-based approach but less restrictive than San Francisco's 20-30% requirements. For San Diego property owners, this context matters because it demonstrates the ordinance is legally defensible (as confirmed by the March 2026 federal ruling) and unlikely to be weakened, making compliance or sale decisions permanent rather than temporary.

Small Landlords Face Choice: Build or Sell to Cash Buyers

The March 2026 federal ruling creates particularly acute pressure for small landlords who own 2-4 unit properties in development zones. Consider a landlord in Golden Hill who owns a duplex on a 5,000 square foot lot zoned RM-3-4, allowing up to four units. Current rental income is $3,000-3,500 per month from the two existing units ($36,000-42,000 annually). The property was purchased in 2010 for $450,000, now worth approximately $900,000-1.0 million as a duplex. The lot would support four units under current zoning, potentially doubling rental income to $72,000-84,000 annually if developed. This scenario is common in Clairemont and other neighborhoods where small landlords hold development-zoned parcels but lack the capital for major projects.

However, developing four new units requires demolishing the existing duplex, spending $1.4-1.8 million on construction (4 units x 1,000 sqft x $350-450/sqft), paying $100,000 in inclusionary housing in-lieu fees (4,000 sqft x $25/sqft), plus soft costs, financing, and 18-24 months of lost rental income during construction. Total investment: $1.5-2.0 million beyond the existing property value.

For a small landlord in their 60s or 70s, this represents significant risk, debt, and complexity compared to continuing to operate the duplex as-is or selling to a cash buyer. Cash buyers targeting these situations can offer $950,000-1.1 million for the property as-is, closing in 7-14 days with no inspection or financing contingencies. The landlord receives immediate liquidity to retire, invest conservatively, or pursue other opportunities without taking on development risk. According to data on San Diego cash home buyer activity in 2026, this scenario represents a growing share of transactions as small landlords age out of property management and decide not to pursue development opportunities that require navigating the post-2019 affordable housing compliance environment.

Frequently Asked Questions

Conclusion: Making Informed Decisions After the Federal Ruling

The March 13, 2026 federal court ruling upholding San Diego's 10% affordable housing requirement creates a definitive regulatory environment for property owners and developers. With the legal challenge dismissed and no appeal filed, the ordinance requiring either 10% affordable units for 55 years or $25 per square foot in-lieu fees is now permanent law. For developers of large-scale projects like the 1,642-unit Kearny Mesa development, this means incorporating compliance costs into every pro forma.

For small property owners with development-zoned lots in North Park, University Heights, Golden Hill, City Heights, and other upzoned neighborhoods, the ruling creates an urgent decision point: develop with compliance, continue current use, or sell to cash buyers. With the in-lieu fee now indexed to construction cost inflation, regulatory burdens increasing through new 2026 ordinances, and the Spring 2026 Land Development Code Update on the horizon, the cost and complexity of development continue to rise.

For many small landlords, aging property owners, and those who inherited development-zoned parcels, selling to cash buyers offers immediate liquidity, 7-14 day closings, and freedom from navigating complex affordable housing compliance. If you own property in San Diego zoned for residential development and are evaluating your options following the March 2026 federal ruling, San Diego Fast Cash Home Buyer provides no-obligation property evaluations, fair cash offers, and fast closings that eliminate development risk and regulatory complexity. Contact us today to discuss your specific property and timeline.