AD//HOC: Accessory Dwelling Units as a Conduit for Localized Economic Development
This piece is an abridged version of an article written for an economics publication in late 2022. This version may be edited up until 7/1/2023. For more information, contact the author at tom@prysmgroup.io
Accessory Dwelling Units (ADUs), also known as granny flats, in-law suites, or secondary suites, are self-contained residential units that are either attached or detached from the primary housing unit on a property. ADUs provide an opportunity for homeowners to create additional rental space, accommodate multi-generational households, or enhance property value. These attaches can come in various forms, including basement suites, garage conversions, additions above garages, or separate structures like cottages, sheds, or tiny homes. They typically feature a living space and can be outfitted to contain kitchens, bathrooms, and other amenities. These dwellings are intended to be smaller in size than the primary residence and are subject to local building codes and zoning regulations. This analysis explores the potential ADUs have to generate economic activity, and the prevailing public policies governing (and hindering) their development.
An important note is that different municipalities can define ADUs differently from others; this ahs an effect on the degree in which they can be leveraged by individuals as an economic driver. With the above outline in mind, this analysis will be utilizing code similar to that in Orange County, CA to make parameters around the types of ADUs and specifics regarding size and regulatory requirements. Below defines the distinctions between the types of ADUs and their requirements (more on Orange County ADU code can be found here):
Internal ADU
ADU within an existing single-family dwelling
Includes garage conversions
ADU shall provide independent exterior access
Fire sprinklers not required
Separate utilities are not required
Covenant required
Attached and Detached ADU
ADU as an attached addition to a single-family dwelling or as a
detached unit
Permitted on a residentially zoned parcel with one existing or
proposed single-family dwelling and in multi-family project.
Land Use Covenant required
Separate address required
Detached
Minimum size or ADU—220 square feet
Maximum size 850 square feet/ 1000 square feet if more than one bedroom provided
Attached
50% of the primary unit
Setbacks - 10 feet separation from house and 4 feet side and rear setback
Height - max 1-story, 18 feet
Junior ADU
ADU within existing single-family dwelling
220-500 square feet size limitation
Must include an efficiency kitchen
Shared bathroom with direct access to main house
These specificities run along other requirements, such as the need for the structure to have a foundation, serve as a secondary residence, and exist in residential zoning. While this may seem restrictive, there have been a number of real estate markets that allow, if not promote, the existence of these structures. The seminal paper Housing Changing Households: Regulatory Challenges For Microunits And Accessory Dwelling Units speaks at length about this — “Developers in a variety of jurisdictions have shown interest in both unit types. New York, Boston, Seattle, and San Francisco either allow or actively promote micro-units. A range of communities have changed regulations to permit construction of ADUs. Santa Cruz, California, for example, provides technical assistance to prospective ADU landlords, pre-approved designs, a low-interest loan program, and other resources. Supporters champion both ADUs and micro-units as a means of providing affordable housing, reducing sprawling development through urban infill, mitigating the energy usage and environmental impact of larger developments, and allowing seniors to age in place. City planners, business leaders, and local officials have embraced micro-units as a means through which expensive cities can attract and retain young professionals.” Given the relative modularity such dwellings allow for, it seems like this could be cited as a major source of economic activity, especially as secondary income for residents. It is surprising then, to state that analysis on the economic activity provided by ADUs is sparse, to say the least— the paper goes on how “given the nascent attempts to permit and encourage these housing types on a larger scale, there have not been comprehensive analyses of their actual effects.”
While ADUs offer a ‘blank slate’ for homeowners to develop secondary spaces, the ways in which this can be used to create new sources of (and in some cases, primary) income are more diverse than the limitations of jurisdictional code may imply. The economic benefit brought by ADUs doesn’t stop with the homeowners; in fact, these units can alleviate much of the pressure on a given location’s housing market and be used to generate increased spending amongst a population.
Rental Income and Homeowner Benefits
ADUs can provide homeowners with an additional source of income through rental payments. This extra income can help offset mortgage costs, property taxes, and maintenance expenses. Homeowners can also benefit from increased property value, as the presence of an ADU can make a property more attractive to potential buyers.
Job Creation and Economic Activity
The development of ADUs generates economic activity and job opportunities in multiple sectors. Construction and renovation activities associated with building ADUs create employment opportunities for builders, contractors, architects, and interior designers. Additionally, ADUs can stimulate the demand for building materials, furniture, appliances, and other household goods, thereby benefiting local businesses.
Increased Tax Revenue
The presence of ADUs can lead to an increase in property tax revenue for local governments. Homeowners generating rental income from ADUs may be subject to income taxes, while property tax assessments can be adjusted based on the increased property value resulting from the addition of an ADU.
Affordable Housing and Housing Availability
ADUs can help address the shortage of affordable housing by providing more options for rental housing. ADUs allow homeowners to create additional housing units without the need for extensive land or infrastructure development. This contributes to the diversification of housing stock, supporting a more inclusive and balanced housing market.
While the economic drivers of ADUs can prove to be extremely valuable to renters, homeowners, and regional economic performance, there exists a number of regulatory traps that can hinder their full potential.
Public policies regarding ADUs vary across jurisdictions, with different regulations and restrictions in place. However, recent years have seen a trend towards more lenient policies to encourage the development of ADUs.
Zoning and Land Use Regulations
Many local governments have revised zoning regulations to allow for ADU construction on single-family properties. This involves relaxing minimum lot size requirements, parking regulations, and setback restrictions. Some areas have implemented special zoning districts specifically designed to accommodate ADUs. In certain locations, policies impose onerous requirements and restrictions on ADUs, making it difficult for homeowners to generate income from them. These regulations may include high permit fees, excessive parking requirements, square footage limitations, or strict occupancy restrictions. These barriers discourage homeowners from pursuing ADU development or render it financially unviable.
Permitting and Approval Processes
Streamlining permitting and approval processes is essential to facilitate ADU development. Simplifying and expediting the permitting process, reducing fees, and providing clear guidelines help homeowners navigate the regulatory landscape more easily.
Some jurisdictions prohibit ADUs altogether, preventing homeowners from legally establishing these additional dwelling units on their properties. This prohibition is often driven by concerns related to zoning regulations, density, neighborhood character, or perceived negative impacts on local infrastructure and services.
Occupancy and Rental Regulations
Some jurisdictions impose restrictions on the occupancy and rental of ADUs to prevent potential negative impacts on neighborhoods, such as overcrowding or excessive demand for parking. These regulations may limit the number of occupants, require owner-occupancy, or establish minimum rental durations. Some cities enforce owner-occupancy rules, which mandate that either the primary dwelling or the ADU must be occupied by the homeowner. These requirements restrict the ability of homeowners to rent out their ADUs for income-generating purposes, as they must either reside in the main dwelling or the ADU themselves. To curtail the growth of short-term rentals, some municipalities impose restrictions on renting out ADUs for durations shorter than a specified minimum period, such as 30 days or longer. These regulations aim to preserve long-term rental housing and prevent the conversion of ADUs into transient accommodations.
It is important to note that the stance on ADUs and income generation can vary widely across different jurisdictions. Some cities and states have embraced ADUs as a means to increase affordable housing options, address housing shortages, and stimulate economic activity, implementing more lenient regulations and providing incentives to encourage ADU development.