Salt Lake City took the next steps forward with a program aimed at helping residents in all west side neighborhoods build accessory dwelling units on their properties.
Showing that it’s leaning into the small housing units typically added within an existing home, retrofitted garage or backyard, the city announced on Monday that it was looking for lenders who would implement a program that would incentivize ADU construction west of Interstate 15.
The city is hoping to attract lenders who might solve a key issue of helping homeowners pay for costly ADUs at a time when interest rates are cost-prohibitive, blocking a source of homes that can provide benefits for owners and renters alike.
“We’re trying to solve for a market failure,” said Austin Taylor, a project manager for the RDA. “The market supplies two major types of financing for ADU construction…Both of those depend on having enough home equity to fund ADU construction.”
Last year, Salt Lake City updated its ADU ordinance to allow homeowners to build the small dwelling units on their properties without needing to go through a time-consuming process with the city.
The reforms made the city’s ADU rules much more flexible and immediately led to more requests for permits to build ADUs than ever before.
But they didn’t solve for an issue that is largely out of the city’s hands: paying to construct the ADU.
Currently, the most common ways for homeowners to pay for ADUs is by tapping into the equity in their homes, either through a home equity line of credit (HELOC) or a cash-out refinance.
That type of financing worked during the COVID housing market, when interest rates fell to record lows. But it has become a barrier after the Federal Reserve raised borrowing costs to two-decade highs in an effort to tame inflation.
Taking out a HELOC now means borrowing at interest rates near 9 percent. A cash-out refi means trading record-low interest rates for a rate that would be much higher.
A Building Salt Lake review from October found that homeowners are increasingly interested in building ADUs following the city’s reforms, but that financing is the main barrier to getting the job done.
If they were able to find pay for the construction, many homeowners told Building Salt Lake they planned to add an ADU so that a family member could live on site. Many also said they planned to keep rent below market rates.
WHAT’S HAPPENING
On Monday, Salt Lake City released what is known as a notice of funding availability (NOFA), which alerts possible applicants of the opportunity.
The NOFA isn’t geared toward homeowners who might be interested in building an ADU at this point. Instead, the NOFA would offer funding to a financial institution that would create a program geared toward spurring the creation of more ADUs.
That could come in the form of an interest rate buydown or some other lending innovation that gives homeowners an option for funding the construction of an ADU.
The city is focused on this as a housing option because ADUs are typically rented at rates that are less than what’s charged in newly constructed homes or apartments.
The concept is in line with the city’s stated goals of generating more sources of affordable housing, including increasing density in primarily single-family neighborhoods.
ADUs in general help existing homeowners offset their existing housing costs while also offering housing to people earning moderate incomes, and they increase investment in neighborhoods.
Salt Lake City has focused on the west side because incomes and home values are generally lower, providing even fewer chances for homeowners to tap into a source of funding.
The new program, which would be carried out by whatever lending institution the city chooses through this new process, would be geared toward generating rentals for households earning no more than 80 percent of the area median income.
The city has already set aside $1.15 million for the program. It has access to another $1.75 million through the 9-Line community redevelopment area.
The city’s process seeks to stretch the money further than if it simply awarded the money to homeowners, given that ADUs can easily cost over $200,000 depending on the design.
Now through Sept. 27, the city will accept applications by organizations interested in carrying out the program.
The pilot program, which would likely be approved early next year, would take place over the coming two years.
“If proven successful, the RDA may choose to extend the timeline an possibly expand the program citywide,” the RDA wrote.
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