The California ADU. You can create it, you can build it, but you cannot sell it. 

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The bureaucrats who looked at such evocative names as granny flat, backyard cottage, and mother-in-law apartment wanted to coin a technical term that describes the essence of it all.

By combining a word that evokes criminal associations (accessory) with one nobody ever uses (dwelling), and one which is misleading (unit), they came up with the officious sounding “Accessory Dwelling Unit (ADU)”.

If you now think, I get it, a unit is the smallest independent part of a whole, you are on the wrong track. Why? Legally the ADU has no independence from the primary structure to which it inseparably belongs. An ADU may be a partition, but hardly a unit. Legally speaking, an ADU is not divisible, descendible, or alienable. It means that an ADU cannot be passed on by a last will, intestate succession, or sale. For estate planning it means that an ADU (by itself) cannot be put into a trust. It further means, if you take out a mortgage to construct an ADU, the whole primary residence is encumbered. In case of default, you could lose your residence. Indeed, research has shown that ADU development is lowest amongst low to moderate income homeowners who do not have access to cash savings and cannot leverage home equity (Reaching California’s ADU Potential).

An ADU is not at all like a condominium. So why are they all the rage? What is the essence of all these ADU laws and ordinances? California has a severe housing crisis which could be improved by creating more ADU-type living space. Local ordinances must not prevent this by being arbitrary, excessive, or burdensome, thereby unreasonably restricting the ability of homeowners to create accessory dwellings (GOV § 65852.150).

Nationwide, California has been most aggressive in enacting legislation to move local obstacles for ADU creation out of the way.  Affluent homeowners see the possibility of creating living space for relatives or renters at a lower cost than traditional home construction and with fewer restrictions. Results have been impressive: In 2016, the year the laws passed, California’s largest metro areas issued permits for 654 ADUs. In 2017 that number jumped to 3,126. In 2018, the state issued 6,000 ADU permits. In 2019: 16,000 (Going Statewide to Boost ADU Development).

Let us briefly revisit the issue of salability of the ADU. Earlier I said, ADU’s cannot be sold (“not divisible, descendible, or alienable”). Recent California legislation created a very limited exception that is very specific GOV § 65852.26. Broadly, the exception only applies if the ADU was built by a non-profit, land use restrictions are agreed upon, the ADU (now a true property ‘interest’) is held in a tenancy in common, there are affordability restrictions for any sale coupled with a right of first refusal for the non-profit, etc. For most individuals, this has no relevance.

For comprehensive information about ADUs look at the California Department of Housing and Community Development ADU Handbook (updated July 2022).

If you are interested in creating additional housing on your property that you can sell and pass to your descendent as a ‘unit’ – and, as we have learned, you cannot do this with an ADU –, Senate Bill 9, which was signed into law in September 2021, effective 1 January 2022, may spell relief GOV § 65852.21. You may have up to two dwelling units on one single family zoned parcel, or split the lot into two. In theory nothing prevents you from creating additional ADU’s in the same process. Please follow this link for details and concerns regarding the response of mortgage lenders (Duplex and Lot Split Legislation).

Not surprisingly, SB 9 has created quite a lot of opposition. At least one organization claims that the incentives favor developers resulting in neighborhoods losing their character (Our neighborhood voices). Perhaps their concerns are not so far-fetched. For example, an ADU Opportunity Zone Fund seeks to construct multi-family affordable housing using accessory dwelling units and micro-units to produce residual income through the monthly rental cash flow and equity appreciation upon sale in 10-15 years (ADU OZ Fund).

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