Santa Cruz County to Extend Accessory Dwelling Unit (ADU) Fee Waiver Pilot program through June 2023

Recommended Action(s):

1)              Adopt Resolution (Attachment A) to extend the Accessory Dwelling Unit (ADU) fee waiver pilot program to June 30, 2023;

2)              Approve proposed ADU Incentives Program as described in Attachment B; and

3)              Authorize the Director of Planning to enter into a contract with a qualified program administrator for administration of the proposed ADU Incentives Program as described in Attachment B, in fiscal year 2022/2023.

Executive Summary

The County Board of Supervisors (Board) launched two ADU pilot programs in 2018 to incentivize and assist in the development of ADUs and directed staff to report back at the conclusion of the pilot period with an evaluation of the effectiveness and results of the programs. Staff provided that report on December 7, 2021 and consulted with the Housing Advisory Commission (HAC) on January 12, 2022, and March 2, 2022. Staff recommends extending the current fee waiver program for one year and creating a new ADU Incentives Program for a three-year period.

Background

Board of Supervisors Actions

The County initiated two ADU pilot programs in 2017-2018: a pilot ADU fee waiver program for ADUs of 640 square feet or less, and an ADU forgivable loan program. These pilot programs were intended to increase the local affordable housing stock by incentivizing and supporting the development of ADUs. Due to the concurrent enactment of several new state laws streamlining the development of ADUs and decreasing the cost of permits, and historic decreases in mortgage interest rates, the impact of these County programs has been limited and/or difficult to evaluate, as detailed in the staff memo to the Board dated December 7, 2021.

On October 30, 2018, the Board approved Resolution 241-2018 authorizing a three-year pilot program starting January 1, 2019, to waive certain permit processing fees for ADUs of 640 square feet or less in floor area. The purpose of the program was to encourage the development of smaller ADUs, which are considered “affordable by design.”  The fee waiver did not have an income or needs-based test and did not require that ADUs be deed-restricted as affordable units. The loan program was also implemented, offering loans of up to $40,000 that were forgivable after 20 years.

The Board requested a status report on the performance of these programs, which was provided on December 7, 2021 (Item 85, see link attached). At that time the Board directed the Planning Department to review and develop, in consultation with the Housing Advisory Commission (HAC), a recommendation for alternative ADU Incentive Program(s), and report back to the Board no later than April 27, 2022.

Housing Advisory Commission (HAC) Actions

On January 12, 2022, the HAC heard a presentation by nonprofit agency Hello Housing on ADU incentive programs operating in the San Francisco Bay Area. Several other agencies and members of the public involved in ADU programs participated in that meeting. The HAC heard public comment and provided the input to staff to retain the fee waiver program, allow the loan program to sunset, and launch a new technical assistance program. Minutes of the meeting are provided in Attachment D.

At the March 2, 2022, HAC meeting, the HAC considered staff’s proposed new ADU Incentives Program (Attachment C) focused on technical assistance and containing a version of the fee waiver program, now targeted to moderate-income homeowners and those willing to build ADUs that would be deed restricted for affordable rents. The proposal was developed based on input received from commissioners at the January HAC meeting and recognition that the need for design, construction and permitting assistance was a significant hurdle to potential ADU builders that was not being addressed. The HAC considered the proposed program, heard public comment, and voted unanimously (excluding one absent commissioner) to make the following recommendation to the Board (Option 2,as listed in the Staff Memorandum to the HAC):

2. Approve ADU Incentives Program as described in Attachment III, to be funded and launched in Fiscal Year 2022/23 as a three-year pilot program, with the following modification specified by the HAC:

Continue the current ADU fee waiver pilot program, and increase the allowable ADU size for the fee waiver to 750 square feet (consistent with the size threshold for impact fee waivers).

Draft Minutes of the March HAC meeting are provided in Attachment E.

At both of its 2022 meetings, the HAC expressed strong support for the existing fee waiver program and the new proposed technical assistance (TA) program, and agreed that it made sense to sunset the loan program, for the reasons provided to the Board in December. Members of the public also expressed interest in the proposed technical assistance program.

Analysis

Technical Assistance (TA) Program

The proposed program included outreach and education available to the general public, and TA for homeowners wishing to develop an ADU. Homeowners would have to meet eligibility criteria to join the TA program, as described in Attachment B, in order to focus the program on those properties most feasible and reasonable for ADU development, and on affordability criteria to enable the program to target less-resourced homeowners and homeowners willing to create deed-restricted ADUs that would be offered at affordable rents. Affordability criteria would also allow the program to be funded with special Housing Funds, rather than the County General Fund.

TA would include the following services:

•              Feasibility assessment of the property, review of local codes

•              Coordination and guidance with all aspects of ADU planning and construction: design, cost estimating, contracting, insurance, budgeting, and financing

•              Support with permit applications and permitting process

•              Construction management

•              Landlord training and tenant matchmaking

As presented to the HAC in March, the proposed program included a version of the fee waiver program, in this case combining the waiver with the TA program and extending the waiver only to income-qualified property owners and those willing to deed-restrict their ADUs. Following the March 2, 2022 HAC meeting, staff revised the proposed ADU Incentives Program to remove the needs-based fee waiver component, based on the HAC recommendation to extend the existing fee waiver program instead, as explained below. Please see Attachment B for further details on the final proposed TA Program.

Fee Waiver Program

At the March HAC meeting, staff recommended allowing the existing ADU fee waiver program to sunset on its current end date of June 30, 2022, for several reasons, and that a modified program that includes a means test for eligibility be substituted. A modified program would be targeted to the homeowners for whom the waiver would make the most difference in the financial decision of whether to construct an ADU and could be funded by affordable housing funds rather than the County General Fund.  The existing program cannot be funded with housing funds because it is available to all property owners for ADUs smaller than 640 SF, regardless of income and assets, and because the resulting ADU is not required to be deed-restricted to guarantee it will rent at an affordable level. Please see Attachment C for further details on staff’s March recommendations to the HAC.

During the March HAC meeting, commissioners expressed strong support for the existing fee waiver program in its current form, without any income-screening or affordability restrictions on the new ADUs. That strong support was articulated in the HAC’s recommendation to the Board, excerpted above.

Following the HAC meeting, staff further explored the HAC’s recommendation in light of the performance of the waiver in incentivizing small ADUs relative to the cost of the program. Staff understands the HAC support for the current fee waiver program. Nonetheless, most ADUs built today, particularly new detached units, will cost $400,000 and up, depending on size. Conversion ADUs and JADUs can cost less, however those can still cost several hundred thousand dollars, depending on how much retrofitting of the existing structure is required to meet current codes.

The Planning fees waived through the fee waiver program represent a very small percentage of the total cost to develop an ADU (1% to 5%), so it is unclear, based on limited data available, whether these fee waivers are making a key difference in the property owner’s financial decision about whether to construct, and at what size. Further, the pilot period of the existing program coincided with passage of new state laws that significantly streamlined the process for ADU development and expanded the situations in which new ADUs could be developed. The number of ADU applications increased during this period, but it is difficult to attribute this increase to the fee waiver program alone, given so many other changes to the process.

For this reason, staff is now recommending a modest revision to the HAC’s recommendation, which is to extend the fee waiver pilot program in its current form for one more year, after which the effectiveness of the waiver and the cost of the program can be re-evaluated. Staff also recommends that the ADU size threshold that qualifies for a waiver remain at 640 square feet, rather be increased to 750 square feet. Staff initially recommended the increase to 750 square feet so that the County fee waiver program would use the same size limit as is used in state law for various fee exemptions and other incentives, to minimize confusion. However, upon further analysis, it is recommended that the threshold not be changed, so that permitting trends in ADUs within this size range can be tracked consistently across the 4-year period of the program. Maintaining the 640 SF threshold would better reflect any impacts of the fee waiver program, which is the only incentive that uses that 640 SF size limit.

Financial Impact

The recommendation to extend the current fee waiver program for one year will cost the General Fund an estimated $76,000 in waived fees for Planning Department permitting services. This amount may be higher or lower, depending on how many ADU permit applications in the applicable size range are received during the year.

Staff estimates that the recommended new ADU Incentives Program (Attachment B) will cost approximately $711,000 for a three-year period. The program goals include assistance in completing development of 18 to 20 ADUs through partnership with participating homeowners. Funding for this program is available in the Affordable Housing Impact Fee (AHIF) and Subdivision In-lieu Fee funds, as shown in Attachment B. Staff requested a total of $711,000 in appropriations for this program, including costs for administration of the contract, in the Planning Department’s FY 2022-23 Requested Budget.

Strategic Plan Element(s)

2. Attainable Housing: A. Affordable Housing and C. Local Inventory

The recommended actions implement Strategic Plan elements 2A and 2C by providing incentives and assistance for the development of ADUs by and/or for lower- and moderate-income households, and/or small ADUs that are affordable by design.