Since 2017, California has been pushing the development of ADUs as a means of alleviating the shortage of housing that currently exists in the State. Beyond allowing ADUs by right on almost all parcels[1], the State has also committed $100 million to help homeowners build ADUs[2]. While there are currently no details about this program, I would like to take the time to discuss another program which seeks to finance new ADUs, the CalHome program.
The CalHome program is the State’s own version of the federal HOME program. CalHome funds are applied for by local jurisdictions and nonprofits for one of the following activities[3]:
- Loans to First-Time Homebuyers for Mortgage Assistance
- Loans to owner-occupants for Rehabilitation
- Provision of Technical Assistance to Self-Help housing projects
- Provision of Technical Assistance for Shared Housing
- Provision of CalHome program Loans to owner-occupants for new construction, repair, reconstruction, or rehabilitation of ADUs or JADUs
Like HOME funds, this gap financing is only allowed for homeowners and renters who meet the definition of a low-income household (80% of the median area income adjusted by family size). CalHome does have a Disaster Relief program (usually titled CalHome-DR) that does allow households making up to 120% of the area median income to participate in CalHome funded activities[4].
However, given that ADU construction only falls under the regular CalHome grant regulations, this means that only low-income households are currently eligible for ADU loans. However, this income group is unlikely to be able to take advantage of the program. To start with, many of these homeowners have a cost burden. An estimated 61% of households pay more than 30% of their monthly income towards their mortgage and other housing costs (HOA fees, etc.). Therefore, a significant are already unlikely to be able to support a second loan needed for construction.
| Income Category | Owners | Share of Households | Monthly Housing Costs >30% of Income |
| Household Income <= 30% AMI | 509,410 | 28% | 75% |
| Household Income >30% to <=50% AMI | 573,390 | 37% | 63% |
| Household Income >50% to <=80% AMI | 925,245 | 46% | 52% |
| Total <= 80% AMI | 2,008,045 | 37% | 61% |
A second issue is capital. Loans require some initial capital from the borrower. In the most optimistic scenario, a CalHome loan can cover half the cost (up to $100,000) of the cost of an ADU. For this scenario, let us assume that the cost of an ADU is roughly $160,000 (sourced from a survey of ADUs constructed in Portland[5]). The Borrower would be able to finance $80,000 through the CalHome program, but would require either A) $80,000 in savings/investments they could liquidate or B) a private loan. This would require some form of down payment. Given that it many households are unlikely to hold significant savings[6]; it is unlikely that many households would be able to provide the initial capital to start ADU projects.
What I believe the State should consider, in both the CalHome program and the future $100 million grant program, allowing moderate-income households (up to 120% AMI) to participate in the ADU program. First, moderate income households would be more likely to have the funds available to initialize ADU construction and benefit from these programs. Second, this would still fit within the core policy objective of providing affordable housing. Why? Consider the use of an ADU. A survey found that 60% of ADUs were used as either a rental unit (51%) or as multigenerational housing (9%)[7]. In both cases, these provide affordable housing. Multigenerational housing lowers the cost of housing elderly family members for the family or offspring while also allowing for separate living quarters. Anecdotally, building a house on the property after marriage was a rite of passage among my mother’s family in Detroit in the 1950s. Furthermore, the average rent in the survey was $1,298 for what are often either one to two bedroom units, making it affordable to those making around $52,000 ($25/hour). Considering that Alameda County (containing Berkeley and Oakland) a 1-person household making $76,000 is considered low income[8], the result would be a new “low-income” unit. One way to track this would be a require a yearly self-certification (for the period of the loan) that the borrower would complete stating who the occupant was (and if vacant, an attestation that the unit was planned to be used for a family member or rented out), current rent charged, and a copy of a lease (if applicable).
I want to stress that this should not replace investments by the state in promoting extremely low-income housing, particularly in areas of high opportunity. These require much deeper subsidies and should be a major priority. However, I believe the current ADU regulations are too restrictive, making the program unlikely to be a success. Easing the eligibility requirements could result in more housing built, which serves functional purposes, and produces affordable housing.
[1] David Garcia, “ADU Update: Early Lessons and Impacts of California’s State and Local Policy Changes,” Terner Center, 2017, 8.
[2] State of California, “Governor Newsom Signs Legislation to Increase Affordable Housing Supply and Strengthen Accountability, Highlights Comprehensive Strategy to Tackle Housing Crisis,” California Governor, September 28, 2021, https://www.gov.ca.gov/2021/09/28/governor-newsom-signs-legislation-to-increase-affordable-housing-supply-and-strengthen-accountability-highlights-comprehensive-strategy-to-tackle-housing-crisis/.
[3] California Department of Housing and Community Development, “CalHome Program Final Guidelines,” 2019, 51.
[4] California Department of Housing and Community Development.
[5] “Calculating the Costs of Accessory Dwelling Units | Building an ADU,” Building an ADU, accessed November 7, 2021, https://www.buildinganadu.com/cost-of-building-an-adu.
[6] The Federal Reserve Board of Governors in Washington DC., “Report on the Economic Well-Being of U.S. Households (SHED),” Board of Governors of the Federal Reserve System, accessed November 7, 2021, https://www.federalreserve.gov/publications/2020-economic-well-being-of-us-households-in-2019-dealing-with-unexpected-expenses.htm#:~:text=When%20faced%20with%20a%20hypothetical%20expense%20of%20%24400%2C,point%20increase%20from%202018%20%28%20figure%2014%20%29.
[7] Karen Chapple et al., “JUMPSTARTING THE MARKET FOR ACCESSORY DWELLING UNITS:,” UC Berkeley Previously Published Works, n.d., 30.
[8] California Department of Housing and Community Development, “State Income Limits for 2021,” California Code of Regulations, 2020, 13.