LA City

SB 9 also known as the (HOME ACT) went into effect Statewide in California on Jan. 1 2022. The City of Los Angeles along with many other California Cities and Counties are publishing their own guidelines daily.  As expected, and as seen previously when the state ADU laws first went into effect, some local governments will embrace the new law, while others will resist.

The City of Los Angeles has been very proactive in their efforts to promote the creation of new housing. Their quick release of SB9 guidelines and application forms is a sign of their continued pro-housing initiatives.

Many other local governments including San Diego and Ventura County have also already published and that the list is growing daily.

Just as the discovery of gold at Sutter’s Mill on January 24, 1848 put the gold into our Golden State, the enactment of SB 9 on Jan. 1, 2022 is bringing the gold back!

In essence, SB 9 allows most homeowners to build four housing units on a plot zoned for a single house. In some instances, homeowners may also split their lot and build two housing units on each lot. In all cases, four units is the maximum amount allowed on a single lot.

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Every local municipal government will have their own versions and options for development under SB 9.

The City of Los Angeles has just released their SB 9 Guidelines. Below is a link to the published memorandum available on the LADBS (Los Angeles Building & Safety Department) website.

https://planning.lacity.org/odocument/bef6b998-de32-4090-9557-5f98711c6c15/SB9_Memo_2-7-22MG_-_signed.pdf

DISCLAIMER: This is a brand-new law. NOBODY has successfully obtained a building permit under SB 9 YET. Any statements made here may or may not be valid now or in the future.

Ok, that said, here are some of the challenges and possible development opportunities these City of Los Angeles SB9 guidelines seem to suggest.

OPPORTUNITIES

  • Most single-family properties can now have up to four living units. These units can be attached or detached depending on various factors.
  • Most properties can be subdivided into two separate legal lots. Each subdivided lot can have up to two living units.

RESTRICTIONS:

Several conditions must be met under SB 9 before a homeowner can build any type of additional unit under this law.  Additional units cannot be built if:

  • Current homes are in environmentally sensitive areas or historic districts.
  • There are deed restrictions or rent control
  • Parcels are smaller than 1,200 square feet.
  • A tenant has occupied the current home for the last three years.
  • A city deems the added units as threats to health or safety.
  • If the owner of the property chooses to subdivide the property into two separate lots, then the owner MOST live in one of the units for a minimum of three years.

If you read between the lines, you will understand that it MAY be possible for investor owners to create fourplexes with no owner occupancy requirement. This would represent a bold and aggressive application of this new state law. Remember, the goal of the law is to incentivize construction of massive amounts of new housing. Without the additional contribution of private investor monies, these new housing initiatives have a significantly lower chance of producing the total number of units desperately needed.

What is the single most profound opportunity created by SB 9? The answer may surprise you. First let’s look at some data. Why is California housing so expensive? It’s not the cost of construction, that is similar anywhere in the country. It’s the cost of the dirt! Land costs in California are among the highest in the country. As an example, if you could find a flat, vacant, legally-buildable lot anywhere in the city of LA, it would cost a minimum of a half a million dollars! Just for the dirt.

A big part of the value of anything in a capitalistic society is simple supply and demand. Within the City of LA, almost all the land has been developed already. So, the supply of new buildable lots is very low, hence high values.

THIS is the magic. The State of California just created a huge potential number of NEW buildable lots out of thin air! Now, a homeowner can subdivide their property into two, separate, legal-buildable lots and sell that newly created lot for what? I already told you the answer, it’s likely half a million dollars or more! Of course, it’s not that simple. There are many other monetary considerations in play but the upside is potentially huge.

The Current State of Housing in Los Angeles and California

For the past 50 years, California has experienced an extended and growing housing shortage. In fact, according to a study released in 2018, California ranked 49th of all states in housing units per resident. In raw numbers, that translates to a shortage of close to 4 million housing units statewide.

The housing situation is even more dire in Los Angeles, where several factors contribute to a chronic housing crisis that demands immediate attention.  Fortunately, housing reforms and legislative efforts, including the passage of SB 9, are starting to ease some of those problems, clearing barriers so that the housing industry can make some badly needed inroads to address a basic quality of life need.

Here’s what you need to know about the state’s housing crisis and what recent legislation is doing to address those associated issues. Since there are a lot of reasons why SB 9 was passed into law, it’s best to begin with an overview of the problem and why SB 9’s passage was so significant.

For starters, industry experts estimate California needs to double its current rate of housing production to keep up with anticipated population growth.  The housing industry also needs to quadruple the current rate of housing production over the next seven years to create price and rent declines. These shortages are most acute in California’s coastal urban areas, such as the west side of Los Angeles County.

This disparity between supply and demand is due to vibrant job creation and a severe lack of new housing construction to meet that demand. High land prices, rising construction costs, density restrictions, environmental laws, and NIMBYism have also contributed to the severe shortage.

Estimates put the state’s backlog at about 2.3 million housing units back in 2017.  Today, according to state housing officials, just to keep pace with its growing population, California needs to build an average of 180,000 new homes every year.

At a time when local governments are also cash-strapped and trying to provide as many services as possible, there has been a concerted push toward commercial and retail development which generates more local taxes than residential developments.

With the average cost of a home in California at 2.5 times the national average (currently hovering at about $800,000), only one-third of Californians can afford a median-priced home instead of about 50% nationally.  By extension, this has created more homelessness and an estimated loss of up to $400 billion annually due to less construction activity and money spent on housing that can’t go to other segments of the economy.

To find more affordable housing, large segments of the population have created a mass migration of urban sprawl resulting in some of the nation’s longest commutes and worst traffic. Anyone who has ever driven in Los Angeles knows this situation all too well.

Los Angeles County’s housing numbers are particularly troubling.  According to a 2021 report published by the California Housing Partnership, L.A. County currently faces a shortfall of 500,000 affordable rental homes.

In response, there have been several policy proposals put forth recently.  Some address short-term housing needs, but long-term solutions are needed to solve institutional-sized imbalances in Los Angeles County and throughout the state.

For example, to meet the crisis, Los Angeles City Planning and the Housing and the Community Investment Department recently released plans to add about 57,000 new housing units and set a goal of nearly 500,000 total units over the next eight years. Titled “The Plan to House L.A.,” the draft calls for more than 200,000 of those units to be reserved for lower-income residents.

In Los Angeles, rezoning would allow “for over 200,000 new housing units within three years of the plan’s adoption. The rezoning program will increase density and allowances for housing, particularly in neighborhoods with access to good jobs, schools, and amenities.”

Los Angeles has also enacted an Affordable Housing Linkage Fee that requires developers to pay a fee ranging from $3 to $5 per square foot for commercial development and $8 to $15 for residential projects, with the money going toward affordable housing production.

These local actions have been bolstered by a major piece of legislation recently signed into law by Governor Newsom.  The passage of SB 9 could have a dramatic impact on housing throughout the state in years to come.

How ADUs Can Be Part of the Solution

With the passage of SB 9, one of the significant zoning restrictions of building multiple units on existing single-family lots has been removed in many situations.

The original ADU laws went into effect on Jan. 1, 2017. These laws were groundbreaking in their scope. This continues to be an attractive option for homeowners, and SB 9 may enhance those benefits.  Many of the guidelines in SB 9 were taken directly from existing and successful ADU legislation.

Inspired by the success of the original ADU laws the State passed a second set of new ADU laws that went into effect on Jan. 1, 2020. These new laws expanded the ADU options now allowing single-family homeowners to add TWO ADU units to their properties. Shockingly, a little-noticed addition to these newly expanded laws has created the most significant opportunity to date.  Multifamily property owners can now add two or many more ADUs to their properties as well!

In a time of great challenges to the multifamily industry in California, these ADU laws offer an opportunity to greatly increase the value of their assets and improve cash flow.

What makes ADUs such a viable option?  Here are some benefits to consider:

  • They’re less expensive to build than new single-family detached housing. There are no land costs because the homeowner already owns the land.  Junior ADUs, in particular, are much cheaper to build out.  Some people choose prefabricated ADUs, which also can save thousands in construction costs.
  • ADUs can create passive income rental opportunities with convenient onsite management.
  • Start to finish completion times are shorter.
  • ADUs are ideal as granny quarters or for recent college grads until they can get out on their own.
  • They are a real bottom-line asset that will increase your property value.
  • As a person’s housing needs change over time, ADUs use can be adapted for different household types, income levels, employment situations, and stages of life.
  • ADUs can be built in neighborhoods close to key job and transportation centers, lessening traffic, commuting, and other quality of life concerns.
  • Because they are smaller, ADUs are more aesthetically pleasing in a neighborhood than large, overbuilt units. A smaller unit also means greater energy efficiency.
  • As more and more people work from home, ADUs are becoming a viable option as offices or private refuges for people more inclined to stay close to home.
  • Multifamily owners have an opportunity to add two or many more units to their properties to greatly increase value and cash flow.

Seth Phillips, also known as Mr. ADU is the founder and head of ADU Gold. He has been a licensed broker/agent for over 30 years and also brings over 13 years of real estate development expertise to his projects. Seth and his team have renovated over 1,200 homes and he is also the founder of The ADU Development Meet Up group with over 730 members. Contact Info: ADU Gold (213)784-4447 [email protected] https://www.adugold.com/.