Affordable Housing for Santa Cruz
Imagine helping Santa Cruz residents find affordable housing. Imagine our teachers and police being able to live within the city. Imagine downsizing without leaving your property or bringing your aging parents to live near you. Imagine what could be possible if Santa Cruz could build hundreds or even thousands of accessory dwelling units (ADUs) in our back yards. The State of California has just formalized laws governing ADUs, requiring every city to liberalize its ADU regulations and counties and cities across the state are developing programs to encourage rapid construction of ADUs.
The Sustainable Systems Research Foundation is developing a one-stop program to provide Santa Cruz homeowners with the opportunity to put a 2-bedroom, 800 square foot ADU with virtually no effort and at a very reasonable cost. These units will be manufactured structures, available in a few pre-approved configurations. SSRF will handle everything from initial design to permitting, finding financing (a variety of options will be available), supervising construction and even managing property. The entire process will be so easy that putting an ADU in your backyard will be a no-brainer. The homeowner will receive a monthly payment and will contribute to the health and well-being of the community, too.
What is the problem?
Housing prices in Santa Cruz are among the highest in the United States, with median rents for a one-bedroom apartment exceeding $2,000 This sum is beyond the reach of many tenants, including professionals on whom community well-being depends— teachers, police, firefighters, construction and service employees, janitors–but who cannot afford to live in the city where they work and serve. The high cost of housing has also “trapped” homeowners who cannot afford to downsize because of the property tax burden that would come with a new house, and it contributes to people sleeping in their cars because there are not enough rentals available at an affordable price.
Although there are numerous causes of this housing crisis, a primary one is the high cost of land, which can be more valuable than the structure build on it. Proposition 13, passed in 1979, makes it difficult and costly for long-time homeowners to downsize by moving, thereby limiting the supply of housing, on the one hand, while motivating conversion of multifamily housing into expensive condominiums, on the other. In the 1960s, for example, a 2,000 square foot home cost about $25,000, including land. As a result of Proposition 13, the assessed value of that house is about $80,000, of which 25% is land cost and 75%, structure. A similar house nearby, is assessed at $800,000, of which 75% is land value and 25%, structure. Due to land prices, a newly-built house of 1,400 square feet might cost $300,000 to build and $1 million to purchase. The $700,000 difference is the land. Clearly, any solution to the affordable housing problem must address the cost of land.
Is there a solution? Most efforts to increase the supply of rental housing relies on multi-floor infill development, but apartment buildings are expensive, time-consuming and often delayed due to regulations and local opposition. Accessory dwelling units (ADUs) offer a low-cost alternative. An ADU is an “additional, self- contained housing unit that is secondary to the main residence,” ranging in size from 200 to 1,200 square feet. ADUs come in a number of flavors–free-standing, additions to existing houses and “over- the-garage” units (see illustrations below) and offer a number of advantages over other types of “infill” development :
- There is no land cost, since the property is made available by the homeowner;
- The construction impact is localized and time-limited;
- Utilities are readily available from the primary structure on the property;
- Neighborhood opposition to low-profile ADUs is likely to be limited, especially as more are built, and
- Depending on construction costs, monthly rents could be considerably lower than HUD’s “fair market rent” in Santa Cruz of almost $2,800 for a two bedroom apartment.
What does an ADU cost? Most construction companies quote a figure of $150,000 to $300,000 for a “stick-built” stand-alone unit ($250-500 per square foot), depending on size, design and other features. We believe that an attractive manufactured structure could be installed for $100,000 or less, making the ADU option considerably more attractive.
There are already more than 500 legal and illegal ADUs in Santa Cruz, built over the last 100 years, but there is a considerable potential for many more. SSRF has conducted a GIS survey of residential parcels in the City, and identified more than 5,000 lots with adequate space for a free-standing unit of 600-800 square feet. .
What about all those permits?
Anyone who has built or remodeled a house knows that all sorts of permits are required. The same is true of ADUs. Specific building and safety requirements are based on recognized national standards and may be supplemented by additional requirements imposed by the local jurisdiction (city or county). All new residential structure must undergo architectural review, to ensure that a design is feasible and will not fall down in the event of a natural disaster. All units must have utility (gas, electricity, water, sewer) hookups, and permits and inspections are required. These can be expensive and take a frustrating amount of time for approval.
Zoning laws have also been a major obstacle to construction of affordable housing and ADUs. Zoning defines permissible construction, both residential and commercial, in particular areas of a city. Often, some are zoned only for single family houses, and apartment buildings and ADUs are not allowed. The new California laws try to change this, but the state cannot require jurisdictions to change their zoning, however, any jurisdiction that does not must follow state standards. In other words, zoning can no longer be invoked to prevent ADU construction.
In recognition that ADUs can make significant contributions to affordable housing, both the state and localities have begun to streamline and simplify the ADU safety review, permitting and approval process.
Standardized plans could reduce the time required for initial review, although all units would have to undergo inspection. If such designs received blanket approval, the permitting and review process could go more quickly. A few organizations offer full-service “ADU Management and Delivery,” which reduces the burden on and the risk to the homeowner.
Paying for an ADU
For an ADU to be affordable to tenants, it must also be affordable to the homeowner, which is a function of financing, taxes and maintenance. Financing a new ADU is not a trivial proposition, even if the numbers are favorable.
The most common method is through a “HELOC” a home equity line of credit or second mortgage on a property. Not everyone can afford to do this. To encourage homeowners, some jurisdictions have offered loans that are be forgiven if the ADU is rented to a low-income tenant for a specified period of time. A number of “innovative” financing methods are being proposed (see table below), and some have been put into practice. Others are more theoretical and are yet to be tried. All assume that the homeowner holds sufficient equity in their home to secure a loan. But there could be arrangements in which the funder pays all costs, holding a lien on the property, with the homeowner simply providing the land and taking title to the ADU after 10 years.
There are other ways to ease the burdens of building an ADU. Normally, the homeowner is both developer and contractor, and must shepherd a project through the permitting process, often with considerable delays along the line, arrange financing and find an architect and contractor. All of this can be daunting. A few companies and organizations A few companies and organizations now offer full-service “ADU Management and Delivery,” which reduces the burden on and the risk to the homeowner. The managing entity can be non-profit or for-profit. It identifies interested homeowners, presents them with several pre-approved designs from which to choose, arranges financing, handles permitting, hires contractor-builders, delivers the key at completion and even functions as a property manager. The organization might even own the ADU for 10 years, paying ground rent for 10 years and then transferring title to the homeowner. If the financing and building model is sufficiently attractive and offers a high rate of return, financing could come from a variety of sources, including venture capitalists and high net worth individuals.
SSRF is exploring, designing and developing a large- scale ADU program for Santa Cruz as described above. You can read more about ADUs here. For more information, please contact SSRF.
You can also find additional information at resources here.
 This paper was developed with the assistance of Justin Farris, Tom Nilsson, William Bravo, Cori Strell and Liane Bauer.
 Proposition 13 was an amendment to the California Constitution, passed in 1978, caps property tax assessments to 1% of market value, limits annual increases in property taxes to 2%, and prohibits reassessment except for new construction or when a property changes hands (“What is Proposition 13,” California Tax Data, at: https://www.californiataxdata.com/pdf/Prop13.pdf (accessed June 30, 2019).