CodeNext opens options for garage apartments, but finances a hurdle

Thirteen years after moving into her three-bedroom home, Valerie Kanak Poynor moved into a new house — one in her own backyard.

“At that time I was single, so it made no sense for me to own a three-bedroom house,” Poynor said. “But I couldn’t really afford to move.”

She did some research on garage apartments and backyard cottages and decided to build one. It took about a year to design and complete, but by January 2010 she’d settled into her cozier confines, just half a yard away.

She started renting out the main house for extra income, living in the apartment for seven years until she got married and moved to Round Rock. Now, Poynor rents out both units.

“It’s ended up being my retirement fund,” she said.

For Poynor, the long-term math made the idea of backyard apartment an especially enticing idea, but she also could handle the up-front costs. While she could’ve refinanced her primary home, she secured a private loan to cover the $120,000 bill.

But for many Austin homeowners, including those who might benefit most from the long-run rental income these “accessory dwelling units” can provide, the financing questions prove too prohibitive, raising some doubt about how big a role these units can play in the city’s battle against its rising cost of living.

‘Neither fish nor fowl’

Billed as one way to increase affordability, reduce traffic congestion and build an alternative income stream for low-income homeowners, accessory dwelling units — commonly known as ADUs in zoning parlance — are an oft-cited piece of the city’s initiative to build 135,000 new housing units in the next 10 years, including 60,000 affordable units.

The current draft of CodeNext, the city’s overhaul of zoning and other land-use regulations, would allow accessory units on 20,000 additional acres of property around the city.

But even with that expansion, these backyard cottages and garage apartments will remain a small, albeit growing, part of the affordability fight. Last year, the city issued 241 ADU permits, although that was up sharply from 23 in 2012.

“ADUs are a funny thing,” said Jake Wegmann, a professor at the University of Texas School of Architecture. “They’re neither fish nor fowl.”

On one hand, he said, they’re larger and costlier than typical home renovations. On the other, they’re smaller projects than a real estate developer would tackle in large quantities. Typically, a homeowner takes on the project, and that makes financing harder to secure.

Wegmann said the design, construction, fees, utility hookups and other costs can run “about $150,000 all-in,” depending on size.

That’s cheap for new housing in Central Austin, but expensive for most homeowners – especially because residential finance policies often don’t allow appraisals to factor in the expected rental income, Wegmann and his co-authors noted in a report about ADUs in Portland, Seattle and Vancouver.

They cited a separate study that found homes with accessory units were undervalued by almost 10 percent. So rather than construction loans, most property owners fund ADUs with savings or a home equity line of credit.

“It’s easier to get a loan for a new patio or new bathroom, on the idea that they’ll increase the value of the home,” Wegmann said.

The permitting process doesn’t make it any easier, said Eli Mosley, head of Mosley Design Build, an Austin contracting company. It often takes as much as $10,000 and six months to prepare for and get an initial permit, he said.

In fact, under the current budget proposal, the city’s permit and inspection fees for ADUs would rise even higher — adding as much as $950 or more, depending on the size of the unit.

In a Sept. 7 meeting, City Council Member Delia Garza balked at the increase, saying higher fees would make building the units even less affordable for many homeowners. City staff noted that the fees merely cover the cost of the review process, and those are high because of the many regulations in place.

Mosley, who has worked in Austin for nearly a dozen years and has built Poynor’s and a handful of other ADUs, agreed that current land-development regulations are overly complicated.

“It’s a comical stack of papers that you have to turn in for these small projects,” he said. “If one tiny thing isn’t correct or completed … they won’t accept it. It’s really a trick just to turn in the application.”

Despite the hassle, Mosley added a garage apartment of his own about eight years ago. The process is aggravating. It might take 10 years of rental income to repay a loan, maybe more. “But long term,” he said, “it’s a great investment.”

Whether it’s a great idea for neighborhood development is more controversial question, one that has generated considerable debate in and around City Hall.

The density debate

Proponents such as Wegmann and members of AURA, a local nonprofit that favors denser development, call it one of the cheapest ways to add affordable housing in Central Austin. A 2015 study by AURA calculated that a two-bedroom backyard cottage, once rented, would generate about $290 in monthly income after loan payments and taxes.

If adopted by the City Council, the report’s policy recommendations would offer “natural market-rate affordability for household making 80 percent of the median family income” in Austin and open the way for “at least 500” new ADUs each year, the organization said in the 2015 release.

While the City Council did loosen restrictions later that same year – and the CodeNext draft goes a step further, streamlining the process and expanding the number of lots on which ADUs can be built – they stopped short of many AURA proposals.

Critics contend they still went too far. During the City Council’s 2015 deliberations and again now with many of the hot-button issues involved in the CodeNext process, the city is making decisions on ADU policy without adequate public input, said Mary Ingle, president of the Austin Neighborhoods Council.

Ingle disputes the argument that rental income covers the cost of building these accessory units, especially after increased property tax values are factored in. And she and her fellow members would prefer individual neighborhoods have a greater say in the types of development there.

Officially, though, the neighborhoods council doesn’t have a policy stance on ADUs, she said. After all, they’ve been around Austin for decades, especially near the University of Texas campus, where they provide a key source of student housing.

But they wonder whether the trade-off between small gains in density and affordability are worth the potential problems they might cause.

“They’re for one or two people,” Ingle said. “Does that really help with density, adding one or two people to a lot?”

The new CodeNext draft due out this week is expected to eliminate the ability of neighborhoods to opt-in or opt-out of allowing ADUs on smaller residential lots. The City Council already started moving away from that scheme in 2015.

“CodeNext is kind of going in that direction,” said Greg Dutton, a planner with the city’s planning and zoning department. “We’re trying to get away from the opt-in, opt-out because it’s very difficult to administer and keep track of.”

In the second CodeNext draft, residents wanting to add a cottage on the smaller, SF-2 lots would need only a minor-use permit – a much simpler process that involves staff review rather than a full administrative hearing, Dutton said.

Ingle and other members at the neighborhood council say they worry about what that might mean for neighbors and communities. Smaller lots mean houses and ADUs packed tighter together, she said, and the city hasn’t solicited enough feedback on those concerns.

“Do they really want a two-story building peeking over into their yard?” she said. “No one ever asked them. Nobody asked us if we wanted the change.”

In the end, it might not matter. CodeNext is not expected to change many of the other sticking points for homeowners who want to add a backyard apartment. For example, the new code would retain some of the existing off-street parking and impervious cover requirements that make it more difficult to add ADUs.

Nor does the city currently address any of the financial challenges for lower-income homeowners – the ones some City Council members have said ADUs would most benefit.

Wegmann and others would like to see public-private financing option that could make accessory units more manageable for longtime, lower-income residents who could use the rental income stream to stay in their homes.

ADUs are “one of many things we need to be doing to address the affordability crisis, but it’s by no means a magical answer,” he said. “The idea that struggling homeowners are going to do this to build a nest egg for themselves – that’s not going to happen.”

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