Accessory Dwelling Units (ADUs) and Owner Accessory Units (OAUs

Sean KendallAffordable Housing, Development, Diversity

PLAN (Peoples League for Action Now) – Boulder County applauds and strongly supports City Council’s effort to broaden opportunities for the creation of Accessory Dwelling Units (ADUs) and Owner Accessory Units (OAUs) for the purpose of increasing the affordable housing supply. We support, under certain circumstances, enabling OAUs in single family residential zoning districts.

However, we have substantial concerns about the policy recommendations currently before Council. The current approach, as manifested in the staff memo of 2.27.18, proposes major changes to ALL single family neighborhoods without opportunity for robust neighborhood input into policies that will forever change those neighborhoods and without a provision for permanent affordability for ADUs/OAUs.

What’s wrong with the current approach?

  • The combination of proposed expansions of limits (total number of units, unit sizes, their proximity to each other, minimum lot sizes, etc.) in the staff memo are beyond the “incremental” and “compatible” goals of the purpose statement and cause us to conclude that the memo represents a proposed de facto back door upzoning of single family neighborhoods. Upzoning should require more explicit community buy-in (as neighborhood, area, or subcommunity planning would elicit) and the subject should be broached in an open and transparent fashion. If implemented, these recommendations will fundamentally undermine any purpose for a future neighborhood planning process since substantial changes to neighborhoods will already be effected by this project.
  • The elements in the memo ignore the 2016 Boulder Valley Comprehensive Plan (BVCP) Update Survey that established preservation of neighborhood character as a high priority, as does the Comprehensive Plan itself. The work of the Public Participation Working Group is also ignored.
  • The universal application to all neighborhoods ignores the different challenges and impacts that exist in different neighborhoods.
  • There are no limitations on short term rentals (Air BnBs). Research indicates that short term rentals cause local market rental rates to increase, in part, because they reduce supply by removing dwelling units from the long term rental market. Thus, short term rentals are antithetical to the goals of expanding ADU and OAU and affordable housing opportunities.

Aside from the weak process, and overreach, there are also significant omissions in the staff recommendations.

  • Housing affordability and garnering the community diversity benefits that ensue is why we are having this conversation in the first place.  Yet there is no discussion in staff’s recommendations of DURABLY affordable ADUs and OAUs. What is affordable today will not be affordable in the future because of Boulder’s hyper-inflated real estate market.  The $1350/month median ADU/OAU rent is already not affordable to nurses and carpenters. Without controls on the rate at which rents may rise, ADUs and OAUs will primarily benefit property owners at the expense of renters; or in other words, benefit people higher on the economic ladder at the expense of those that are lower, or not even on the ladder.
  • Existing illegal ADUs and OAUs are not addressed. There is anecdotal evidence that these may outnumber legal units. Before any expansion of numerical limits for ADUs or OAUs are considered, the City must develop a way to bring unlicensed units into the system and ensure they operate under the same rules as everyone else.

Broadening of ADU and OAU opportunities is a good idea but must be developed on the basis of broad community buy-in and with broad community sharing of the benefits.  As City Council considers these legislative changes, PLAN-Boulder County recommends keeping existing limits on number of units, their proximity to each other, unit sizes and minimum lot sizes in place so that any changes to neighborhoods are truly “incremental” and “compatible”, rather than paying lip service to those concepts.  If the community wants to make broad changes in sweeping fashion to all single family residential neighborhoods as the staff recommendations promote, we should have that conversation.  But these significant changes must happen as part of a neighborhood planning process.

More detailed analysis of policy considerations follows:

PERMANENT Affordability: 

The reason why the community is engaged in this ADU/OAU discussion is to combat the erosion of affordable housing options and the hollowing out of middle and lower income households in Boulder. It is mystifying why “affordability” is not even mentioned in the project purpose and “why” statements. Affordability and its permanence are critical; what is affordable today will not be affordable in the future because of Boulder’s hyper-inflated real estate market. Housing costs rise at a much higher rate than inflation and incomes.

Permanent affordability can be achieved by employing rent caps as a condition of licensing for ADUs and OAUs. By virtue of the license being privilege, rather than right, rent caps are not subject to the State prohibition of rent control. The rationale for making it a condition of licensing is that by expanding ADU and OAU options, the City is using a community-owned resource (increased use of property) and granting that increased use to property owners. That increased use has value and the increased value, being the result of a community action and not actions on the part of property owners, should be captured by the community in the form of a community benefit (in this case, PERMANENTLY affordable housing). By not capturing that value, the city would be forfeiting the community benefit of permanent affordability and handing a windfall to property owners, which in essence, would be a public subsidy for property owners and investors. This means that property owners and investors gain wealth at the public’s expense and still, the public’s goal is not achieved.

Capping the rate at which rents may rise to some fraction of the market rise while still enabling landlords to capture some portion of that market rise, can achieve permanent affordability while still maintaining the economic incentive for the creation of ADUs and OAUs.

Some who oppose rent caps, want to maximize earnings for property owners. However, that maximization comes at the expense of OAU or ADU renters whom are generally lower on the economic ladder than property owners. We need to be clear about our priorities and where the benefits are concentrated. Otherwise, the policy will just promote continued inequality as this graph by Thomas Picketty illustrates.

If an indexed rent cap is applied with an appropriately calibrated factor that affords a return greater than inflation, property owners can still achieve substantial year over year increased profits from rents while renters increasingly benefit over time. (Figure 2) Even with rent caps, ADUs and OAUs are highly competitive investments.

What Would Warren Say?

The chart (Figure 2) graphs the 5 year average ROI of ADUs or OAUs subject to a rent cap of 66% of the median rent increase in Boulder (for all rentals) between 2013 and 2017 and compares it to the average of multiple US stock market index returns, to Warren Buffet’s Berkshire Hathaway returns for that same period and the average annual S&P 500 return for the past 90 years.  The range of $/sf for unit creation is $40/sf-$350/sf for a 500sf unit and corresponds with the unit creation costs in the chart.

Unit creation costs vary widely. Some spaces require only minimal modification for conversion to an ADU. Others require complete interior finishing and provision of utilities. Similarly, OAUs might be added on top of a garages obviating the need for foundations, or might be conversions of garages requiring only interior finishes, or might be entire new structures. Thus, a wide range of unit creation costs are included in the chart.

ROI factors monthly income from rents, operation costs and appreciation. Appreciation of basis cost is based on annual rise of median home price in Boulder. Interest is the mid-term of 4.625%, 30 yr. fixed rate mortgage. Median sale price data is from Trulia.com.     Rental income increase is based on the median rent change for all Boulder rentals in each year from 2012 through 2016. Rent change data is from the American Community Survey.

 

With respect to who may benefit from ADUs and OAUs, there are several common scenarios with ownership and how that relates to lot redevelopments.

  1. Someone must sell their house because they can no longer afford it. If they sell it, the economics will likely dictate that the purchaser will put up the largest house possible. An alternative outcome is for the owner to be enabled to build an ADU or OAU and that income enables them to stay in their home.
  2. Someone dies and their heirs sell the house to a young family or couple that may rely on the ability to rent an ADU or OAU in order to comfortably afford the house.
  3. Someone dies and the heirs sell the house or, someone’s job transfers them to another city, or for some other reason they move from Boulder and sell.  The economics will likely dictate that the purchaser will put up the largest house possible.

ADUs and OAUs will not resolve this last scenario. With so with many people with a lot of money who want big houses, the market is defined and developers seek to satisfy that market. The solution lies elsewhere. If we don’t want McMansions, we will need to tighten the compatible development standards and energy and resource consumption standards or consider incentive based zoning options.

ADUs and OAUs can be beneficial to homeowners like those described in scenarios A and B above. The goal is to have owners and renters equitably share the benefits. By controlling ADU/OAU rents so that market rents and ADU/OAU rents rise at divergent rates, ADUs and OAUs become increasingly affordable over time, relative to the market. (Figure 3) Even with a rent cap, building an ADU/OAU is a very good investment – a rent cap is not a disincentive to ADU/OAU creation. That said, ADU/OAU rents today are not even affordable to many middle class workers earning decent wages. Note in the graph, (Figure 3) that the median 2017 ADU/OAU rent is higher than a rent that would be affordable to a carpenter or nurse. Even the capped rent is higher than a rent that would be affordable to a carpenter or nurse, the ostensible target demographic for middle income affordable housing.

Without rent caps, ADU and OAU rents will become increasing unaffordable to these workers.

Market rent is projected backwards from the 2017 median rent for ADUs and OAUs based on the median rent change for all Boulder rentals in each year from 2012 through 2016.       Rent change data is from the American Community Survey.

Capped rent and inflation adjusted rent are projected forward from 2012 based on the median rent change for all Boulder rentals in each year from 2012 through 2016. They are projected forward from 2017 through 2020 based on the median rent change for all Boulder rentals in each year from 2012 through 2016

Wages are from Bureau of Labor Statistics for Colorado nurses and carpenters.

Affordable rent is 30% of wages (the benchmark for determining what is an affordable housing cost.

The rent cap recommendation presumes a property enters the rent market at market rate. Rent caps apply to each year thereafter. If a property changes ownership, the rent caps apply based on when the property originally entered the rent market.

 

 

It is worth noting that ADUs and OAUs will inescapably increase the overall value of properties because of their income potential. Non-ADU/OAU properties can be sold at prices that purchasers (in example B described above) can still afford. With ADUs or OAUs added, they will sell at prices beyond the reach of the many of those example B households.

Grandfathering:

Because Boulder is proposing changing the rules in the middle of the game, existing legal ADUs and OAUs should be grandfathered and exempt from rent caps for a period of time, but only until such properties change ownership. Existing short term rentals should be allowed to continue as such until the properties change ownership.

Short Term Rentals (such as Air BnB):

Research indicates that short term rentals cause local market rental rates to increase, in part, because they reduce supply by removing dwelling units from the long term rental market. Thus, short term rentals are antithetical to the goals of expanding ADU and OAU and affordable housing opportunities. No short term rentals should be allowed for new ADUs and OAUs, or existing legal ADU and OAUs once they change ownership.

Compatible Development:

Properties with ADUS and OAUs must comply with current bulk, mass, scale, floor area and lot coverage standards (compatible development standards).

Expanded limits to OAU and ADU total numbers, unit sizes, their proximity to each other and minimum lot sizes:

PLAN-Boulder County supports expanding the option to have OAUs to include detached single family residential zoning districts with certain caveats as explained below.

In general, PLAN-Boulder County recommends no substantial changes to ADU or OAU sizes, or proximity of units to each other in detached single family dwelling zoning districts unless as part of adopted neighborhood, area, or subcommunity plans.  We recommend no reduction to the minimum 6000 sf lot size required for ADUs or OAUs unless as part of adopted neighborhood, area, or subcommunity plans. We recommend no increase to the factor limiting ADUs to 10% of the single family lots in the zoning districts where they are currently allowed, unless as part of adopted neighborhood, area, or subcommunity plans.

The combined ADU and OAU total should be subject to the 10% limitation factor currently applied only to ADUs. The proximity limitations that currently apply to ADUs should also be applied to OAUs. Additionally, no lot should be allowed to have both an ADU and OAU.

We make these recommendations because substantial changes to unit sizes, or proximity of units to each other, or reduction in minimum lot size, or increases to total number of units, fundamentally alter the character of single family neighborhoods to be more like multifamily zoning districts and that starts to look a lot like defacto upzoning.

To clarify what we mean by “substantial”, we would, for example, consider as not substantial, a size increase for detached OAUs from to 450 sf, to 600 sf**.  However, increasing the allowable proportion of a structure that could be an ADU or OAU from 1/3 to 1/2 of the principle structure’s floor area would be substantial because it fundamentally alters the character of single family residential zones.  We do not support increasing the 1000 sf size limit for attached OAUs.

                                                                                                                                                           

**Such an increase would enable a small family with a child to live in an ADU or OAU.  However, because units larger than 600 sf will accommodate even more people, such a change fundamentally changes the character of single family neighborhoods to be more like a multifamily neighborhood.

Increasing the factor limiting the total number of ADUs to 10% of the single family lots in a zoning district should be based on an understanding of the number of existing legal and illegal ADUs and OAUs relative to the total potential available under current rules. To our knowledge, such an analysis has not been done but would seem to be the rational basis for increasing limits. If current utilization is near the current limit, then increases may be justified. If not, why would increased limits be necessary?

Further, the total number of ADUs and OAUs, their proximity and their sizes, all have impacts on the neighborhoods in which they are embedded.  To consider expanding current limits without factoring existing illegal units ignores the existing impacts. That said, a mechanism should be adopted to regularize illegal ADUs and OAUs and bring them into compliance with licensing requirements.  However, such regularization should not ignore their previous non-compliance and in essence, incentivize non-compliance.  There should be some penalty.

Enforcement:

The City has been lax in its enforcement of occupancy limits, ADUs, OAUs and short-term rentals, and has placed an uncomfortable complaint burden on neighbors to report non-compliant properties. Much more robust enforcement is a prerequisite for any expansion of limits.

Occupancy limits

We recommend a change in occupancy limits on OAU/ADU properties so that a family plus an ADU/OAU household of three can live.  That would entail an increase from the current limit in certain zoning districts, of three unrelated people to four. That would enable occupancy by 3 roommates of an ADU or OAU unit in addition to a family on the property.

Parking

We recommend a limit of one street-parked vehicle associated with an ADU or OAU. However, given the City’s history of ineffective enforcement of occupancy limits, illegal ADUs, OAUs and short term rentals, and the difficulty of enforcing such a street parking regulation, we doubt that this limit will result in satisfactory mitigation of parking impacts.  Thus, in addition to this limit, landlord provided Ecopasses for the tenants should be a requirement of licensing where neighborhood Ecopasses are available. We do not support offstreet parking within front yard setbacks.

Process

The February 27, 2018 City Council study session memo contains a purpose statement “…. will craft a proposal for incremental changes to the relevant regulations addressing accessory units (i.e., Accessory Dwelling Units (ADUs) and Owner’s Accessory Units (OAUs)) to simplify the regulations and remove apparent barriers to the construction of this housing type in ways that are compatible with neighborhoods

The combination of proposed elements in the staff memo are beyond “incremental” and “compatible” and cause us to conclude that the memo represents a de facto back door upzoning of single family neighborhoods. The elements in the memo ignore the 2016 BVCP Update survey that established preservation of neighborhood character as a high priority, as does the Comprehensive Plan itself.

As stated earlier in this document, upzoning should require more explicit community buy-in (as neighborhood, area, or subcommunity planning would elicit) and the subject should be broached in an open and transparent fashion. In 2015, ballot measure 300 was initiated because of planning department talk of changing single family residential neighborhoods to allow du-, tri- and quad-plexes – in other words, de facto upzoning. When the staff memo proposes expanding the allowable floor areas of ADUs or OAUs from 30% to 50% of principal structures’ floor areas, they start to resemble said duplexes.

It is unfortunate that the Public Participation Working Group’s (PPWG) work has been ignored. Council members Jones and Young, on separate occasions, perhaps presciently, suggested that the PPWG report be applied to the ADU/OAU project but were rebuffed because the “the project was too far along”. Yet the project online survey had not even been posted at the times they made their suggestions. Further, the leading and non-contextualized questions in the online ADU survey, combined with the memo’s recommendations cause PLAN-Boulder County to be concerned that the survey responses are providing distorted and statistically invalid information that is being used as substantiation for the memo’s recommendations. This is particularly troubling given that a statistically valid survey was conducted as part of the Comprehensive Plan update and provided a basis of understanding for policy directions that would be likely to receive broad community support. The survey and process would have benefitted from employment of the PPWG’s work.

PLAN-Boulder County’s recommends that the ADU/OAU process pay greater attention to the Comprehensive Plan, the Comprehensive Plan Update Survey and the Public Participation Working Group’s work.

Expansion of ADU and OAU opportunities is a good idea but it must be developed on the basis of broad community buy-in and with broad community sharing of the benefits. The current approach and the results so far, as manifested in the staff memo, is standard zero-sum policy making.