New Laws for Accessory Dwelling Units (ADUs) Bring New Opportunities to Multifamily Property Owners

Accessory Dwelling Units (a/k/a, ADUs) have been a hot topic of conversation over the past few years as California tackles the challenge of building new housing in areas that are high in demand and low in supply. California regulators have found ADUs to be a newfound solution to this housing crisis as they provide a potential income opportunity for current homeowners while providing an affordable place to live for renters. As a result, “ADU law has been revised to improve its effectiveness at creating more housing units, reducing barriers, better streamlining of approval processes, and expanding capacity to accommodate the development of ADUs and Junior Accessory Dwelling Units,” said David Crompton, Chief of Planning at the City of Danville, California in a report to that City’s City Council.

Whether you are looking to build an ADU or rent one, here’s what you need to know about the major changes that went into effect January 2020. The biggest opportunity for multifamily owners is found in Government Code Section 65852.2(e), which was expressly amended to provide for the ministerial and administrative (e.g., environmental barriers per CEQA or public hearings) approval of ADUs for multifamily owners in the following two instances (with no local limits):

• The conversion of unused space within existing multifamily structures to ADUs, such as storage rooms, boiler rooms, passageways, attics, basements, or garages, for a total increase of up to 25% of the existing multifamily dwelling units, and
• The addition of two detached ADUs on the same lot containing existing multifamily dwellings, which ADUs can be up to 16 feet in height and must have at least 4-foot rear and side setbacks.

Another major change includes a faster review process. Local agencies must act on an application within 60 days (reduced from 120 days) and the application is deemed approved if not acted upon within such timeframe. Local agencies also cannot impose a minimum lot size or, until January 1, 2025, an owner-occupant requirement to construct an ADU.

How Do ADUs Increase YOUR Property Value?

Adding ADUs to your apartment building is an excellent way to add value and make the highest and best use of your existing multifamily property investment. In fact, ADUs are one of the safest investments you can make as they provide financial security in a slowing housing market or economic downturn. While construction may be somewhat expensive, the value created based on increased rental income makes it profitable investment. Imagine increasing the number of your rental units by 20% – 40% without buying any new properties! It is also a great opportunity to make other improvements that will make your overall property more attractive to potential tenants.

• Increased Income – By adding an accessory dwelling unit or “ADU” to your property, you are adding another rentable unit and increasing your monthly rental income and cash flow.
• Increased Property Value – As a result of increased rental income and cash flow, you can increase the overall value of your property. For example, if you were to install one new ADU and rent it out at $2,500 per month, you can increase your property value by approximately $450,000 based upon approximately capitalization rates! Here is a breakdown:
  
  • +$2,500 per month x 12 months = $30,000 per year (Increase In Gross Operating Income)
  • +$30,000 less $7,500 (25% expense ratio) = $22,500 (Increase In Net Operating Income)
  • +$22,500 divided by 5.0% (capitalization rate) = $450,000 (Increase In Property Value)

When done correctly, detached ADUs have the potential to increase your property value by a whopping 20%-30%, which can be a greater return on investment than a traditional remodel. Furthermore, an ADU can practically give you a instant return – we have seen some projects add double to the property value compared to the building costs!

• Optimizes Existing Space – ADUs are built in a wide range of configurations that fit seamlessly into the size and design of existing structures (e.g. above parking garage, basement conversions, second-story additions, etc.); this allows property owners to add extra living space without the hassle of new construction. These smaller residences also allow neighborhoods to grow without dramatically changing the overall character of the neighborhood (e.g., decreases need to expand infrastructure like roads).
• Lower Carbon Footprint and Maintenance Costs – Since ADUs are smaller than the average single-family home, they have less of an environmental impact than other housing options. This type of housing requires less energy use in their construction and maintenance, thereby decreasing your expenses and increasing your net cash flow. Construction also requires fewer materials to build ADUs, and residents use less energy to heat and cool them.

Prefabrication Expands ADU Options

The cost and availability of skilled labor has been one of the top challenges that builders face in recent years, as well as long construction timelines. As a result, homeowners are turning to prefabricated (prefab) ADUs instead of traditional “stick” builds. Prefabricated ADUs are built to statewide standards set by the California Department of Housing and Community Development, which are meant to streamline the permitting process of construction at the local level. Once a prefab ADU design is approved by the state, it may be replicated on any qualifying property.

• Project timeline reduction of as much as 50%, often from 18 months to 9 months.
• Investment cycle (e.g., acquisition vs. capital expenditure) can be reduced from 2-years to 1-year.
• Streamlined ADU permitting of just 60 days under new state law.
• Fewer defects and enhanced durability with automated quality control
• Lower labor costs due to efficiencies built into the indoor manufacturing and construction processes: less waste in construction materials; cost-savings from large purchase volume of standard materials and fixtures; and fewer construction workers and hours needed for on-site work.
• Sustainability and waste reduction – Reduce, Reuse, Recycle (the three “R’s”).

Basil Starr is the Chief Executive Officer of the Palari Group, a development company dedicated to re-imagining real estate through innovative sustainable building strategies focusing on the development of 3D-printed ADUs. Palari Group’s ADUs are designed specifically for multifamily properties and represent the quintessential Los Angeles area garage apartment. The Palari Group has joint ventured with Mighty Buildings to create two-story designs for this new type of ADU ranging from 650 square feet to 1,150 square feet. These ADU designs optimize space by building vertically and allowing an owner to add two units while retaining and improving existing parking. For more information visit www.palari.com or contact Basil Starr at (310) 461-8181.