How Public and Private Incentives Can Strengthen the ADU Market

Public-Private Partnerships

Public-private partnerships balance risk so that municipalities can successfully deliver projects in the public interest and private companies can generate new sources of revenue. These kinds of partnerships are responsible for some of the most effective ADU programs in the state of California – and can be easily replicated elsewhere.

San Jose ADU Master Plan Program

The City of San Jose has implemented a new policy as part of the ADU Master Plan that creates favorable permitting conditions for participating private residential developers. The policy does not create traditional public-private partnerships, where the private party finances a project. Rather, developers are encouraged to submit designs for replicable ADUs to the City, which will in return approve that design for city-wide construction on eligible properties. It’s a true win-win-win situation. Homeowners and developers no longer have to waste the time and money spent going through the design and permitting process with architects and engineers, and the City can supply new housing quickly with minimal staff intervention.

The Backyard Homes Project

The Backyard Homes Project is an ADU Program led by La Mas, a non-profit housing equity organization in Los Angeles, and several private and public partners, including the City of Los Angeles. The program helps homeowners construct ADUs in exchange for affordably rented units. The program structure and homeowner agreements are quite intricate. But they result in an effective business model.

La Mas and their partners provide free project management services, discounted design and construction services, and the option to fund the project by refinancing an existing mortgage. In exchange, the homeowner needs to work with the Housing Authority of City of Los Angeles (HACLA) to ensure the unit is rented to a Section 8 tenant for a minimum of five years. The tenant pays 30% of their household income and HACLA covers the remainder of the unit rent.

The program currently expects five ADU projects to break ground this year, a modest amount. The hope, however, is that the success of these initial projects will help expand the program in Los Angeles and possibly beyond. La Mas believes that taking a thoughtful approach to affordable ADU development is better than quickly scaling up without considering affordability requirements. “As a mission-driven nonprofit, we’re committed to building ADUs affordably and making sure they’re affordably rented to people who are experiencing housing insecurity,” said Linda Reyes, program manager for the Backyard Homes Project. “A private development company can also do this, though they may not have a financial incentive or motivation to do so.”

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