Incentivizing Equitable ADU Development for Affordable Housing
By: Prince Osemwengie
Inclusive Action was contracted by LA County Supervisor District 3, from June 2020 - April 2021, to research accessory dwelling units (ADUs) and develop recommendations to incentivize homeowners to rent out their ADUs at an affordable rate. As part of the study, Inclusive Action analyzed the ADU development process, surveyed ADU homeowners and ADU tenants, interviewed experts, and analyzed permits from LA City and unincorporated LA County. This blog and linked ADU report uplifts the study findings, outlining ways local governments can simplify the ADU development processes and proposes programs to ensure ADUs retinal rates are affordable.
The County of Los Angeles Housing Market At Glance
Los Angeles faces an unprecedented housing and homelessness crisis, heavily tied to the lack of affordable housing options. Nationally, LA County sits among the top three most expensive real estate markets in the country, a trend that shows no sign of slowing down. In the past decade, the median price of a home in LA County soared by 96%, bringing it to $768,046 in 2021; in contrast, the national median price is $357,900. The residential rental market in LA County is no different. From 2011 to 2020, the median rental prices have increased by nearly 65%, today sitting at $2,471 for a 2-bedroom apartment. The high median rent is especially alarming when considering the renter household median income is $46,382, and 54% of LA County residents are renters (ACS 2018). Median income earners now pay 64% of their household income on rent alone when anything over 30% is considered rent-burdened.
Affordable housing options in LA County cannot come fast enough. The cost of purchasing and renting a property is increasingly outpacing household incomes for most LA County residents. Therefore the growing unhoused population should come as no surprise, given LA County is becoming increasingly less affordable. According to the Los Angeles Homeless Service Authority (LAHSA), the leading causes of homelessness are an inadequate stock of affordable housing units, income inequality, and systematic racism. For the past decade, homelessness in LA County grew significantly to 66,446 in 2020 and is still growing. Despite the historic passage of Measure H and Proposition HHH in 2016, which collectively allocates over 1.5 billion in bonds and capital to fund the construction of affordable housing and homeless sheltering, the demand for affordable housing significantly exceeds the rate of production to build much-needed housing; presently, LA County has an estimated deficit of 500,000 affordable units to meet the current housing demand.
ADUs as an Affordable Housing Option
The high demand for affordable housing has garnered interest in unconventional approaches to increasing affordable housing stock, such as accessory dwelling units. Accessory Dwelling Units (ADUs), commonly referred to as granny flats, second units, and guest houses, are small residential units ranging from 500 - 1200 square feet. ADUs can either be detached stand-alone structures or connected to a part of an existing residential structure. Thanks to recent state measures passed between 2016 and 2019, ADU development standards and regulations have been significantly eased. In unincorporated LA County, following the easing of ADU development restrictions, permitted ADUs increased 181% from 2017-2019 (County of LA Permit Data 2020).
A major benefit of ADUs is they are relatively inexpensive to build. For example, the average cost to convert an existing garage can range from $30,000 to $75,000 or $60 - $150 per square foot (PSF), while the average cost of developing a detached new build ADU can range from $150,000 - $300,000 or $125 PSF - $600 PSF. In contrast, the estimated cost per unit is $480,000, or $700 PSF for a new affordable multi-unit development, and on average $370,000 per unit for market-rate multi-unit in California. Thus, ultimately ADUs can be cheaper to develop per square foot than new multi-unit complex developments.
Due to the low cost of development and the significant increase in permitted ADUs across the county, local governments have become increasingly interested in incentivizing homeowners to utilize their ADU as an affordable long-term rental. For example, in the City and County of Los Angeles, ADU programs such as the Backyard Home Project and Second Dwelling Unit Pilot programs seek to supply low-income tenants or formerly homeless tenants with ADU housing. Outside of LA, localities such as Multnomah County (Portland), OR - “A Place for You” Program and Pasadena, CA - “Second Unit ADU Program,” are part of a growing list of cities with housing programs that utilize ADUs as an affordable housing option.
Challenges Developing ADUs for Homeowners
Despite the recent easing of ADU regulations and the rise in permitted ADUs, the process of developing an ADU is not straightforward for everyone. Homeowners are not developers or project managers and often lack the expertise and resources to navigate the complicated permitting process.
In a survey of 52 ADU homeowners, three key themes emerged relating to the challenges of developing an ADU:
Design, Construction, and Permitting
The most common challenge cited by surveyed homeowners was navigating the permitting process. According to an interviewed homeowner with project management experience and connections to experienced general contractors, the permitting process was incredibly challenging - primarily due to the permit check delays and lack of communication from city departments. The homeowner recalled being delayed 4-5 months to begin the ADU development process because they had to wait for easement review from the Department of Water and Power (DWP). Then, after completing the construction of the ADU, they were delayed an additional year from being able to utilize the ADU because they had to obtain a permanent certificate of occupancy from the Department of Building & Safety. In both circumstances, there was a burdensome lack of clarity and communication. This will often prolong the permitting and construction phases. Delayed ADU projects leave homeowners susceptible to loss of economic opportunities because homeowners cannot use their ADUs to generate income as a rental property or use as home office space for a home business and save renting outside office space.
Financing
Besides complications with the permitting process, homeowners cited financing their ADU as the second biggest obstacle endured. It’s important to note zero respondents of the 52 surveyed homeowners financed their ADUs through conventional loans because large banks tend to avoid providing construction financing for ADUs, especially for low-income households. Instead, homeowners resorted to funding their ADU through a combination of refinancing and cash-out options based on their primary home value, cash savings, or loans from family members and friends. Provided there are no readily viable conventional financial products to finance ADUs; the opportunity to construct a permitted ADU tends to be reserved for households with access to capital. Not surprisingly, 57.7% of the 52 surveyed homeowners earn $100,000 or above, or 14% above LA County’s median homeowner household income of $87,534. Whereas less than 23% of the homeowners surveyed earn equivalent or below $75,000, which suggests low-income households are less likely to have the means to finance an ADU.
Technical Assistance & Case Management
Homeowners cited not having access to readily available technical assistance support from government agencies during the permitting process, which impacted their ability to manage their ADU development. Additionally, homeowners cited the need for a property manager to support them to fulfill their duties as a landlord and maintain a healthy relationship with their ADU tenant.
Incentivizing ADU Development
While the allure of creating government housing programs that utilize ADUs as an affordable housing option is enticing, local governments must first create compelling incentives to encourage homeowners to join such programs and to keep their ADU below market rate. One approach to accomplishing these is to develop incentives that eliminate the challenges homeowners face when developing an ADU. At the bare minimum, incentives should streamline the ADU construction/permitting process and provide financial products to fund the construction of the ADU. All programs and incentives should also be holistic and done with the guidance of the County Anti-Racism, Diversity, and Inclusion Initiative.
Streamlining the Permitting Process
Streamlining the permitting process can help homeowners better manage their ADU development and ultimately help save time, cost, and stress. Local governments can streamline the permitting process by providing technical assistance, creating a clear step-by-step guide to build an ADU, and establishing a division amongst the building departments to address all ADU-related inquiries. Last, the local government can also formalize a system connecting housing voucher holders to ADU homeowners seeking to house lower-income tenants.
Creating Financial Products
Incentives for homeowners must avoid a one-size-fits-all approach. Instead, targeted incentive packages must differentiate between homeowners’ socio-economic class and homeowners’ willingness to contribute to increasing the affordable housing supply. For example, for low to moderate-income homeowners who do not qualify for traditional refinancing or home equity line of credit (HELOC) options, the County should offer a County-guaranteed loan. Whereas for homeowners eligible for conventional refinancing tools, the County should partner with traditional lenders to leverage funds to provide low-interest loans tailored to ADU development and the specific needs of someone building an ADU. Provided the overall goal is to increase affordable housing stock, accessing these financial products must require homeowners to house a qualified voucher holder/ lower income tenant for a set period of time.
***
Accessory Dwelling Units offer a unique opportunity for local governments to increase affordable housing stock without having to fund the acquisition of expensive land to develop. The County can take advantage of the recent surge in permitted ADU development and incentivize homeowners to construct ADUs to rent below market rate. Tomorrow, the County Board of Supervisors will be voting on a motion to consider the creation of financial programs, incentives, and technical assistance to increase the production of ADUs. Incentives around streamlining the ADU development process and providing financial products can ultimately help increase the affordable housing stock and help build wealth and equity for low to moderate-income homeowners. Of course, ADUs alone will not solve the housing crisis. However, the prospect of developing thousands of these affordable units in our region can undoubtedly have a positive impact that we shouldn’t ignore.
Inclusive Action shared our ideas about being a good ADU landlord with Redfin, check it out here!