The State of California has enacted various laws to address its one million-unit housing shortfall. One set of laws targeted the growth of Accessory Dwelling Units (ADU’s) and were passed in 2016 and later in 2019.

Key elements of the law include:

  • Doing a general override of various local setback ordinances. Now, regardless of the city that the ADU is being built in, only 4-foot setbacks are required at the back and the side of a house
  • The laws enable the building of multiple ADU’s on a single property
  • The ability to convert garages and storage units into ADU’s. If a garage had previously been built within the new setback limits of an ADU, the laws now grandfather this building.
  • The law prevents the local city’s ability to require a minimum ADU size
  • To ensure that cities do not discourage the building of ADU’s by charging high fees for utility connections, the law restricts how much cities can charge for these connections
  • The law creates less stringent parking requirements for an ADU. Parking requirements for ADUs shall not exceed one parking space per unit or bedroom, whichever is less. These spaces could also be provided as tandem parking on a driveway.

People have embraced the laws that enable the proliferation of ADU’s. Some homeowners have built ADU’s with the goal of providing extended families to be near one another while maintaining privacy. Others have used ADU’s as a way to create an additional source of rental income, especially in cities/localities where the schools are good. 51% of the new ADU’s built were rental units and 16% were no-cost units for family members.

The enactment of these state laws has resulted in a sharp increase in the number of permits granted for ADU’s in the State. The graph below highlights this growth.

Financing for ADU’s

In a low-interest rate environment, a logical way of financing an ADU would have been to do a refinance of one’s existing mortgage to include the cost of the ADU. However, in light of the increase of mortgage interest rates since late 2021, refinancing an old mortgage with current new rates does not make sense.

However, there are fixed-rate second-position loans for ADUs. This is a type of loan that is taken out in addition to the primary mortgage on a property. They are called “second position” loans because they are taken out after the primary mortgage and are “secondary” to it in terms of priority for repayment. Unlike construction loans, fixed-rate second-position loans do not require a refinance of the entire property at the end of the ADU construction process. This means that homeowners can keep their existing mortgage rates, even if they were locked in at a particularly low rate a few years ago.

ADU’s Construction and Costs

The explosive growth in the number of ADU’s has resulted in a significant reduction in ADU construction costs.

According to the UC Berkeley Center for Community Innovation, the median statewide construction cost of an ADU is $150,000, or $250/square foot. 37% of all built ADU’s cost less than $1,00,000 and 71% cost less than $200,000.

The San Francisco Bay Area was the most expensive region to build ADU’s in with a median construction cost of $177,500 ($329/square foot).

The average size of a built ADU was 615 square feet.

Another aspect of ADU construction is the modular nature; more and more units are being built off-site and then transported via crane to their ultimate destination.