New California Laws Increase Value of ADUs and Make Financing Easier  

Governor Gavin Newsom concluded the 2023 legislative session by signing bills to promote the leasing and sales of Accessory Dwelling Units (or ADUs), and to provide funds for homeowners wanting to construct the units. Combined, the bills represent a transformation of the financing and economic potential of ADUs, incentivizing greater ADU construction to help address California’s housing crisis.

What Occurred? 
Newsom approved AB 976 and AB 1033, introduced by Assemblymember Phil Ting, D-San Francisco, to facilitate the leasing and ownership of ADUs.

  1. Homeowners may now lease their ADUs to third parties without restriction

AB 976 addressed an impending statewide ADU owner-occupancy requirement, that in January 2025, would have banned ADU rentals. Ting’s bill permanently permits ADUs to be rented to third parties, allowing homeowner/ADU developers to leverage forecasted rental income in obtaining ADU construction loans.

“Although the Legislature has worked to reduce obstacles to ADU construction, financing options remain very limited,” according to a statement from Ting’s office. “AB 976 creates predictability and stability for the ADU financing market ….”

  1. Repeal of State ban on sale of ADUs separate from main property

A second Ting bill, AB 1033, enables a parcel with a primary residence and ADU to be treated like a condominium, allowing for the separate sale of each residence. The bill authorizes local governments to determine whether and how to permit such sales.
The law encourages ADU development and lower-cost homeownership options. It simplifies financing for owners who may face challenges raising money to build an ADU. And, because ADUs are smaller and less expensive than single-family homes, it allows property owners to offer a separate lower-cost ownership alternative to family members or third parties otherwise priced out of the housing market.

In a nationwide trend that appears to be gaining momentum, Austin, Portland, and Princeton also allow ADUs to be sold as condominiums.

  1. More funds allocated to assist homeowners in planning their ADU

An additional shot in the arm for ADUs came from budget bill SB 104, which adds an additional $25 million to the existing and successful state ADU grant program. The bill provides homeowners with up to $40,000 for pre-development costs such as design and site prep.

ADU Legal Questions
Constructing, renting or selling ADUs raises new, but manageable legal questions in the areas of

  • Permitting
  • Financing
  • Leasing & Purchase and sale
  • Condominium governance

Selna Partners can be reached at robert@selnapartners.com or (415) 601-5385

Background on California ADU Law
In 1982, California allowed the construction of ADUs statewide, but gave local governments control over where to locate and how to regulate them. That changed in 2016 when the State Legislature approved bills requiring cities and counties to allow ADUs on most residential lots, preempting local zoning. More than 24,000 ADUs were permitted in 2022, up from 1,000 in 2016. State data indicates that currently 20% of the housing units built annually in California are ADUs, which is the equivalent of 20,000 new homes.
But, more state control has not stopped local efforts to impede widespread ADU development over issues such as parking and neighborhood character.

Accordingly, in 2022, the Legislature passed yet another round of bills to combat local resistance. The most impactful were those that enabled “mandatory” ADUs: structures that met specific, basic criteria essentially could not be denied by a local government.

“Mandatory” ADUs
2022 bills, AB 2221 and SB 897 resulted in amendments to the California Government Code dictating that an ADU with the following characteristics, must be approved by the local planning and building department(s) with no discretion from a zoning board or planning commission:

  • A detached structure that does not exceed four-foot side and rear-yard setbacks for a lot with an existing or proposed single-family dwelling.
  •  800 square foot floor area limit.
  • 18-foot height limit, plus two feet for a single family residential zoned parcel to accommodate a roof pitch aligned with the pitch of the existing house.

A critical piece to the mandatory ADU laws is that there is no mention of front yard setbacks, meaning that local front yard setback rules do not apply to ADUs that meet the three basic criteria. The mandatory ADU provisions now reside in Government Code Section §65852.2(e)(1)(B).

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