How Public and Private Incentives Can Strengthen the ADU Market

Public Incentives

Lightening regulatory burdens is more politically palatable than dedicating funds to a relatively novel housing strategy. But the goal should be to distribute resources responsibly and if ADUs can provide affordable housing quickly, then financial subsidies to jump-start ADU development are a wise use of public funds. Cities like Portland, San Francisco, San Jose, and Los Angeles have taken steps to create a more favorable market for ADUs. This has partially encouraged or strengthened the existence of multiple non-profit and private organizations exclusively providing ADU design and construction services – providing their own value to homeowners not seen in other cities.

Fee Waivers

The simplest financial incentive a municipality can provide homeowners interested in building an ADU is to waive all development fees for construction. In most cases, new construction must pay development – or impact – fees to help the local government provide services to the property. Think water, sewer, roads, and stormwater. Often, development fees have a minimum base cost that is disproportionate to the size and budget of an ADU. In Oakland, for example, fees for a single unit start at $28,000. For an ADU construction project estimated to cost around $200,000 that’s a 14% increase in cost. Since ADUs are being built on properties that already have access to public services, charging a development fee on ADUs imposes an unnecessary additional cost.

Along with allowing more ADU-eligible properties, cities are already beginning to waive development fees as an easy first step. Portland, Oregon waived their system development charges (SDCs) for new ADU construction in 2010 and recently voted to make it a permanent policy. Since 2010, new ADU construction in Portland has skyrocketed – from around 50 new ADUs a year to 500 a year. The waiver doesn’t come without strings attached, though. Homeowners who receive the waiver are required to not lease the unit to short-term renters for ten years. That essentially means the unit can’t become an Airbnb; units remodeled for Airbnb use have become a syphon on available housing stock in many urban communities.

Low interest construction loans

Homeowners don’t have the same kind of equity at their disposal as large developers. Even at an average cost of $200,000 per accessory dwelling unit (large-scale residential developments in the Bay Area cost an average of $600,000 per unit), that’s a significant sum that most homeowners won’t be able to afford up-front. There are several borrowing options available but the interest rates vary. Some cities, like Santa Cruz and San Francisco, have started low-interest ADU loan programs to help homeowners better meet the costs of design and construction.

Santa Cruz offers loans up to $40,000 to homeowners who construct an ADU that is rented out to low-income households at an affordable rate for 20 years. The loan is repaid with a 3% simple interest rate and, if the unit has met the low-income requirement for 20 years, the loan is forgiven. San Francisco’s loan program is nearly identical. $40,000 won’t pay for the entire project – homeowners will have to front the other costs or apply for a different loan – but it’s a significant portion of project cost that can be borrowed with significantly lower interest than a short-term construction loan.

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