SV@Home Policy Manager Mathew Reed is pleased with San Jose’s new ADU financing pilot program. “To the city’s credit, they have worked continuously over the last couple of years to make this is easier, more accessible, more visible and (they are) streamlining it,” Reed said. “This loan program is another piece that is intended to strip away some of the barriers.” ADUs are one piece of the puzzle along with others, and that piece seems to be working well, and has real potential to have an ongoing and lasting impact.” Even though ADU programs require a homeowner’s time, space and money, it’s not necessarily transferring responsibility to build housing from the city to private residents. “It’s a market response to new opportunities created by changes in the law,” Reed said. “Ultimately, the city is learning from homeowners and responding to the challenges they face.”

BY: ┃San Jose Spotlight
PUBLISHED: May 14, 2021

San Jose is lagging behind its 2017 promise to build 25,000 units of new housing—10,000 of them affordable—by 2022.

Now, officials are looking for solutions to the shortfall and hoping to jumpstart construction of accessory dwelling units (ADUs).

To meet its goal of 25,000 new units in five years, the city needed to build about 5,000 units a year. Instead, it’s averaged a little more than 2,400 new housing permits each year since 2017.

The city would need to more than double its annual rate of permit approval and housing construction to reach its goal next year.

Many San Jose leaders believe backyard homes can help solve this shortfall. A new pilot program aims to make the building process easier.

It’s just a matter of getting those units built, leaders say. But the costs are still the burden of homeowners despite relaxed permitting restrictions over the past few years.

To try and ameliorate that obstacle, San Jose this week announced the launch of a program to provide short-term, 0% interest loans for permitting and building ADUs within the city. The program is a collaboration between the city, builder Prefab ADU and private investment firm 29th Street Capital.

The loan would cover 100% of the permit and construction costs. The backyard homes average $150,000 for a retrofit to $250,000 for a custom job.

The program is in a pilot phase, so only 20-30 qualifying applicants will receive the loan. From there, the city and its partners will monitor and tweak the program as it goes. The hope, city officials say, is to scale up the program as quickly as possible.

After the initial startup loan, 29th Street Capital will help homeowners with finding longer-term financing to finish the project.

“It’s no secret, like many suburban cities throughout the western U.S., we’re largely single-family homes,” said Mayor Sam Liccardo. “And because that is the nature of the majority of our parcels,  being able to densify and get more residents living on these single-family parcels is critical to addressing our affordable housing crisis and our challenges getting affordable housing built.”

In coordination with the pilot program, PrefabADU announced a goal to build 200 affordable backyard homes over the next year. The company is one of seven pre-approved builders with floor plans that don’t have to go through the city’s master plan approval process.

An accessory dwelling unit rendering from Prefab ADU, a company specializing in backyard homes.

Officials have struggled to figure out how to encourage ADU development. In 2019, the San Jose City Council considered a $5 million loan program to cover the costs of permitting and fees, but abandoned the plan after housing officials cited concerns that it might not be enough to incentivize homeowners.

One of the goals of making it easier to build an ADU, city officials say, is to help increase the affordable housing stock.

The current market

An informal analysis by San Jose’s planning department in October 2019 showed a total of 23 ADUs for rent in the South Bay on Craigslist. The rent for these units was, on average, a bit more than $1,800 per month.

follow-up analysis by San José Spotlight reviewed more than 50 listings available on Craigslist in Santa Clara County in March. Data shows the average rent for an ADU across Santa Clara County is about $1,900; the average size is about 460 square feet. The average rent in San Jose, where there were 20 listings, was slightly lower at about $1,700 per unit.

The average rent for a two bedroom apartment in San Jose is just over $2,300, a city report shows. The city says renters must earn $50 per hour ($103,560 annually) to afford that.

“(ADUs are) one piece of the puzzle along with others… and that piece seems to be working well,” Mathew Reed, a policy manager at Silicon Valley@Home, told San José Spotlight, “and has real potential to have an ongoing and lasting impact.”

Last year, the city received more than 600 permit applications for ADU construction, which allows property owners to build detached, smaller homes on their property. ADUs account for one-third of all new housing construction in San Jose, Liccardo said.

“This is a proven solution, a critical solution,” Liccardo said.

The city is on track to receive about 1,000 applications to build ADUs by the end of the year.

Even though ADU programs require a homeowner’s time, space and money, it’s not necessarily transferring responsibility to build housing from the city to private residents, Reed said.

“It’s a market response to new opportunities created by changes in the law,” Reed said.

Ultimately, the city is learning from homeowners and responding to the challenges they face, he added.

“To the city’s credit, they have worked continuously over the last couple of years to make this is easier, more accessible, more visible and (they are) streamlining it,” Reed said. “This (loan program) is another piece that is intended to strip away some of the barriers.”

To learn more about the program, contact the city’s planning department.

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