Accessory dwelling units (ADUs) are a popular tool for addressing the nation’s affordable housing crisis. Every homeowner with an attic, basement, or large backyard adding a second unit would inject additional units into the market without affecting the physical character of neighborhoods – so called “gentle density.” Some estimates place the yield at nearly 3.3 million new units if just 10% of single-family lots were modified to accommodate an additional unit. In Atlanta, the need for such solutions is dire: a 2018 analysis by Bleakly Advisory Group placed the affordable housing deficit within the City of Atlanta at 72,799 units. While the cost of housing is going up, household incomes are roughly staying the same. Overall housing production since the 2008 recession is down, and what housing is being built is concentrated at the upper end of the market. ADUs can be a critical part of the solution to the affordable housing problem.
While ADUs seem like a no-brainer on paper, they are harder to deploy in real life than one might imagine. At KUA we’ve been bullish on ADUs for some time: after advocating for ADUs as a way to expand housing choice in Atlanta, we helped the City of Atlanta make ADUs allowable in certain zoning categories in 2017. The following year we launched a sister company, ATL ADU Co, as a one-stop-shop mechanism to deploy ADUs at scale in Atlanta and boost the city’s housing stock. While the ADU Co, now under new ownership, continues to build ADUs for homeowners, we have yet to see the high volume of ADU construction we initially expected based on the high demand that we’ve observed among Atlanta homeowners. What we’ve learned is that there is a critical disconnect between the city’s zoning code and standard financing options, making it difficult for homeowners without cash on hand to fund an ADU project. Luckily, a handful of quick adjustments to the zoning ordinance would make financing an ADU as straightforward as financing a single-family house, clearing the way for Atlanta homeowners to start boosting the city’s housing stock. The key: making ADUs fee simple.
Fee Simple vs. Leasehold
Fee simple means that the homeowner owns the house, the land it sits on, and the air above it. In that sense, it is the most complete form of homeownership. Leasehold, on the other hand, means that the homeowner owns the house, but someone else owns the land and collects a fee (lease) for the use of the land.
According to Atlanta’s current zoning code, when a homeowner decides to build a detached ADU in their back yard, that ADU can only be rented, not conveyed separately. That has important financial implications for both the homeowner and the renter: the homeowner cannot sell that ADU outright, and the renter has no ability to build equity through their monthly payments.
Fee Simple ADUs Are Easier to Finance
If you don’t have the cash, you will need to borrow to build your ADU. But in cities where ADUs are limited to leasehold status, conventional loan products are extremely difficult to secure. In past posts we’ve advocated for home equity line of credit (HELOC) as a way to pay for a new ADU. For some homeowners HELOCs are a viable option, but it requires that the homeowner already has sufficient equity to qualify.
The American lending industry is largely built around providing standardized loan products for single family homes, which are fee simple. The risk on these conventional loans is low for banks, because the majority of conventional loans in America are sold on a secondary market. This means that the originator of the loan, the bank or mortgage broker, is not responsible for the loan if the borrower fails to make payments - they offload that risk to a third party. In addition to this risk shedding, fee simple single-family loans carry less risk to begin with largely because it is easy to foreclose on a property when the land and house are bundled together, more so in some states that others. It is particularly easy to foreclose on homeowners in Georgia. This creates additional downside risk for borrowers, but also reduces costs for them as it reduces the impact of non-payment for loan holders.
Despite an ADU’s exceptional ability to quickly pay for itself through monthly rent payments, lenders typically won’t offer conventional loan products for leasehold ADUs, partially because it’s hard to foreclose on an ADU in someone’s backyard, but not the main house or the land. In contrast, if it were possible to subdivide a property so that the detached ADU sits on its own separate parcel (making it fee simple), a lender can now treat it the same as a single family home, giving the homeowner much easier access to financing. Doing so in many places, including Atlanta, would require a few simple modifications to the zoning code.
1) Make ADUs Allowable By Right in All Residential Zoning Categories
In Atlanta, ADUs are currently only allowed outright in R-4, R-4A, and R5 properties. Guest houses are allowed in all single family zoning categories (R1-R5), but they are restricted to temporary housing in a number of ways for anyone other than servants, an exemption which in most cases isn't very helpful, to say the least. As we’ve discussed before, 60% of the land within Atlanta city limits is zoned for single family use (R1-R5).
If this isn’t politically possible, there is a potential workaround. All Atlanta residential zoning categories currently allow guest houses – a holdover from the days when wealthy residents needed a place for their servants to live. Guest houses differ from ADUs in a few key aspects that make them ill-suited for long term habitation: first off, they cannot be occupied by anyone other than temporary guests, unless they are full-time servants (!). Second, they cannot have independent kitchen facilities (i.e. stoves), and they are limited in size to 30% or less than the SF of the primary dwelling. By changing the definition of “temporary” to a period of 12 months for non-servants, the guest house could be used as a typical rental unit. Additionally, the city could implement a stove permit fee to allow homeowners to install kitchen facilities in the unit for a nominal fee.
2) Allow Subdivision of Residential Lots
Picture an Atlanta homeowner who owns a single-family home and wants to build a new ADU in their back yard. They have the design in hand, a builder lined up, but they can’t secure financing and don’t haven’t paid off enough of their mortgage to qualify for a HELOC.
Now imagine that our Atlanta homeowner is allowed to subdivide their lot, separating it into two parcels: one with the existing home at the front, and a second lot in the rear accessed from the street via a narrow drive with street frontage. They’ve just created a narrow-pole flag lot. Establishing a separate lot means that the homeowner can now access more conventional loan products to build an ADU on the rear property. They can then simply rent out the ADU, or they can sell the rear lot outright, instantly providing access to equity that was previously tied up in the land. For homeowners who are short on cash, that could mean providing critical income that allows them to stay in place rather than being displaced by rising housing costs. If you live on a corner lot and non an inner-block lot, even better: each new lot will have optimal frontage and access.
This new small lot created through subdivision will be more affordable for a first-time homebuyer – or the original homeowner can move into the ADU and sell the main house, which would also mean a reduction in property taxes relative to the main house.
Opponents to these policy changes imagine formerly single-family neighborhoods suddenly overwhelmed with density and irreversibly changed for the worse, but remember: if just 10% of single-family lots added a second unit, the result would be a gain of 3.3 million new units into the market. Imagine a block with ten houses, and one adds an ADU in the backyard. Chances are you will never know it’s there, but the net impact on the nation’s housing crisis will be dramatic.
Subdivision of residential lots is not currently allowed by Atlanta’s zoning code. Doing so would require an additional change:
2) Reduce Minimum Lot Size
Among Atlanta’s single-family residential zoning categories, R-4B allows the smallest allowable lot size at 2,800 SF*. At the other end of the spectrum, the R-1 category requires a minimum lot size of two acres (87,120) and 200 feet (!) of street frontage. It is critical to note that minimum lot size as a regulatory tool was developed in the early years of zoning codes explicitly to segregate racial and economic groups. Atlanta’s 1922 race-based zoning ordinance (see below), among other ordinances developed around the same time, included minimum lot sizes for residential zoning categories specifically for this purpose. The logic is simple: larger lots are more expensive, and if subdivision is not required, those without access to capital find themselves unable to afford housing.
Reducing minimum lot sizes is a moral imperative for the City of Atlanta and a step towards correcting the generational damage created by the city’s past exclusionary and racist zoning practices. An attempt was made in 2016 and 2017 during the Quick Fix Round 2 zoning ordinance updates, but fierce backlash from Atlanta residents derailed the attempt. A minimum lot size of 2,000 SF is a good target. Focusing on updates to the R-4, R-4A, R-4B, and R-5 categories as a first step might result in less resistance. Even better: tackle lot subdivision first and separately, get that passed, and then take on reduction of minimum lot size.
Examples of Success: Durham and Portland
Atlanta’s elected officials don’t have to stick their necks out without any backup to get this done: it’s already been done in two other major US cities. Last September, Durham passed an amendment to its Unified Development Ordinance entitled Expanding Housing Choices. Nearly all the recommendations listed in this post were included in the amendment, which passed Durham’s city council 6-1. (KUA worked with local leaders in Durham in the months leading up to the council vote to help spread awareness and build support for the amendment’s passage).
Completed in August of this year, Portland, Oregon’s updated zoning code has been called “the most pro-housing reform to low-density zones in US history.” The updates were explicitly designed as a step towards reversing racist and exclusionary zoning policies. The updated code, which passed Portland city council 3-1, includes some familiar changes: allow residential lot subdivision, allow flag lots, reduce minimum lot size to 1,600 SF for certain residential lots, and more.
While many of these policy changes are politically controversial, Durham and Portland have proven that strong leadership and sustained public advocacy can get it done. There is an extremely high number of Atlanta homeowners who want to build an ADU – we hear from them every week – but the disconnect between the zoning code and financing structures prevents most people from getting started. A few straightforward adjustments could bring Atlanta’s zoning code into line with standard financing options, opening the floodgates for ADU construction in Atlanta and resulting in a significant boost to the city’s housing stock.
Summary of Recommended Zoning Updates to Make ADUs Easier:
1) Allow ADUs by right in all zoning categories
2) Loosen restrictions on guest houses
a. Define “temporary habitation” by ‘guests’ as up to 12 months
b. Implement stove permit program
3) Expand/loosen ADU restrictions
a. Allow both attached and detached ADUs on a single property, 1200 SF max
b. Do not count unconditioned space (garages, porches, etc) toward max SF
c. Allow 25’ height
d. Exempt ADUs from increasing nonconformity of existing two-family
e. Allow reduced setbacks in R-4
4) Allow subdivision of residential lots
a. Allow narrow pole flag lots
b. Allow subdivision of corner lots
5) Reduce minimum lot sizes and frontage requirements
a. Allow 2,000 SF lots