Are Add-On Dwellings the Key for Denser, More Affordable Urban Housing?

Real Estate Report: Add-on dwellings gain ground in backyards and above garages

As planners and developers look to catalyze density in metro Denver and other Colorado locales, the low-hanging fruit might well be in plain view: backyards.

There’s a lot of buzz around accessory dwelling units (ADUs), also known as carriage houses or granny flats, being an overlooked key for denser, more affordable urban housing.

In Vancouver, there’s a booming market for ADUs, featuring $1 million properties along well-manicured alleys. California recently relaxed restrictions statewide to help more homeowners build more ADUs in their backyards.

David Schultz, owner of L&D Construction in Denver, has focused on ADU projects for the last 2 ½ years. L&D built its first ADU in late 2017. “We built six last year,” Schultz says. “We’re on pace to build 10 to 12 this year.”

This above-garage ADU in Northeast Denver's Clayton neighborhood (also pictured above) cost the homeowners roughly $300,000 to build. They are renting out the 700-square foot space, which includes two bedrooms, one bath and a three-stall garage. 

He actually started with one in his own backyard near Sloans Lake, then organized a series of happy hour events to explain the ins and outs of ADU development. About 30 people showed up to the first one, then 50, then 80.

“ADUs are a really great form of ‘gentle density’ that doesn’t change the look and feel of a neighborhood as much as other development,” Schultz says. “The palatability of ADUs is rising.”

Denver lifted a longstanding ban on new ADUs in 2010 as part of Blueprint Denver’s zoning reforms. Durango recognized the ADU as a legitimate form of housing in 2014, and other Colorado municipalities, including Englewood, Colorado Springs and Boulder, have since followed suit and loosened ADU regulations.

“It was a blind spot in our land-use regulations,” says Mark Williams, a planner with the city of Durango. “We retroactively approved 250 ADUs.” Durango has issued 25 permits for new ADUs in the five years since and roughly doubled the number of parcels that potentially could have an ADU to about 3,000.

Williams points out that ADUs require no additional infrastructure, unlike other forms of residential development in Durango. “In that sense, it’s a bargain for the city.”

John Voboril, senior planner with the city of Englewood, says reform in early 2019 legitimized 180 existing ADUs, as more than 100 people had attended meetings related to the reform. He expects the city to issue the first permits for new ADUs by summer.

“This is a way to increase housing supply and bring people to Englewood,” Voboril says. “Englewood’s king of the landlocked and doesn’t have much empty space.”

As the average household in Denver has declined by more than 50 percent over the past 50 years, Schultz says, “We would be bringing density back to historic levels” with ADUs in every backyard.

“Denver is such a gridded-up city,” he adds. “It’s really the perfect city for ADU development. Everybody has an alley.”

Only about 15 percent of Denver by land area is zoned for ADUs, although that should change with the next zoning update. Complicating things further: In single-unit zones, the owner must occupy one of the structures.

After about 60 permits between 2010 and 2015, Denver Community and Planning Development issued 34 permits for new ADUs in 2016, followed by 46 in 2017, and 58 in 2018. The trend is positive but not even close to Portland where 615, 588 and 650 ADU permits were approved those same three years.

“There’s still a long road of rezoning,” Schultz says. “We’ll definitely see pushback from the Park Hill neighborhood and places like that.”

Schultz says advocates see single-unit zoning as a “poison pill” for ADU development, and certain requirements in the code have unintended consequences. “We see people having to build a bigger garage than they really want just to have a livable space upstairs,” he says, noting that some neighborhoods allow a two-story ADU. “That’s really a game changer.”

Financing a new ADU is tricky as well. “We have a lot of brokers coming out of the woodwork saying, ‘We can definitely do this, we can definitely get this done,’ and then they can’t,” Schultz says. 

Most homeowners utilize home equity. A construction loan as part of a refinancing is a common approach, “but it’s tougher,” he adds. “Even in places like Portland that have thousands of these, you talk to people and they say financing is the reason there aren’t more.”

L&D’s ADUs are typically 450 to 700 square feet of residential space above a two-car garage and typically cost $230,000 to $275,000 to build.

Schultz sees room for more reform. “Portland mitigated their development fees for a couple years to promote ADUs,” Schultz says. “The biggest thing is, it’s just expensive to build in Denver. We have a massive labor shortage.”

Renee Martinez-Stone, director of the West Denver Renaissance Collaborative (WDRC), works as an advocate for urban regeneration in nine historically poor neighborhoods in West Denver.

As about 6,000 parcels in those neighborhoods are zoned for ADUs, Martinez-Stone sees the form as a great fit. It also aligns with a high number of multi-generational households and relatively large lots.

Rising property tax bills “are destabilizing homeowners,” she adds. “They want to be part of the economic success Denver is experiencing.”

These dynamics led the WDRC to develop an ADU pilot program in 2018. “We have designed an approach to ADUs that makes them more affordable,” Martinez-Stone says. The program has six pre-approved ADU plans ranging from studios to three bedrooms above a garage and a streamlined approval process with the city that expedites permits. WDRC partnered with Habitat for Humanity of Metro Denver as a builder and found a Fannie Mae loan program that was a good fit.

It all adds up to an average price of about $130,000, well below the typical ADU budget in Denver. Some homeowners in the program will also be eligible for a subsidy of $10,000 to $25,000.

Outreach was launched in early 2019, and five applicants applied in the first few weeks. The goal is 10 ADUs in 2019, with the first groundbreaking slated for June.

After that, Martinez-Stone hopes to build 30 ADUs in 2020, followed by 60 each year through 2023, for a total of 200.

“These homeowners who want to stay in their neighborhood who are experiencing instability are stabilized,” she says. “We need more tools in the toolbox. This is a new tool.” 

Categories: Real Estate