In the US, accessory dwelling units (ADUs) have become a darling in circles searching for affordable housing solutions. Regions across the country, from Portland to Boston to the state of California, have begun to make way for the development of basement apartments, granny flats and backyard cottages. The hope is that these new laws will boost the creation of below-market housing without the massive permitting and construction efforts needed to push through a traditional multifamily development.

But the downfall of many of these policies is that they rely on ordinary homeowners to take the initiative to build ADUs on their land. And without a financing option well-suited for ADU development, this is unlikely to only happen in a way that is equitable or substantial. 

Take the city of Minneapolis, for example. ADUs have been legal to build in most residential areas of Minneapolis since June 2014, when the city council passed an ordinance amendment that made ADUs a permitted use on all single- and double-family lots. This makes sense, considering that expanding affordable housing is one of the three main pillars of the office of the current mayor, Jacob Frey. But despite their institutional support, in the first four years after the amendment, the city only permitted the development of 137 ADUs. While this may seem like a significant number for a burgeoning program, it falls far short of making a dent in the estimated 63,600-unit shortage in affordable rentals that the city is facing. 

This is because—despite their numerous diminutive monikers such as “tiny home” and “granny flat”—ADUs are not small in cost. Construction expenses for ADUs in Minneapolis can range from between $140,000 and $320,000. This puts them well beyond the budget of large swaths of Minneapolis homeowners, essentially leaving them as options only for wealthy or well-capitalized residents. 

At the same time, one of the major benefits of ADUs, in addition to their use as new affordable housing stock, is their ability to generate passive rental income for their owners. Unfortunately, many of the same residents who might benefit most from an additional income stream on their property are the same ones who likely can’t afford the initial construction costs of an ADU. Considering the commitment of the Mayor’s Office toward racial justice and equity, Minneapolis’ ADU policy should ensure that this development option is viable for a more diverse group of Minneapolis residents, especially low-income and minority homeowners. 

The issue at hand, then, is the financing of ADU development. Financial institutions currently have no financing products in place that are appropriate for ADUs. Existing options, such as cash-out refinancing or home equity loans or lines of credit, are tied to the value of the borrower’s home and typically don’t make enough capital available to finance an ADU project. They also don’t recognize potential future rental revenue as income when determining loan eligibility. 

The good news for Minneapolis is that a blueprint for this type of financing already exists. In the absence of an ADU funding model on the national level, several states and municipalities have begun implementing innovative financing solutions tailored to ADU and affordable housing creation. The county of Santa Cruz, California, the city of Portland, and the West Denver Renaissance Collaborative, for example, have all developed low- or no-interest loan programs for ADU development. 

The Santa Cruz program makes loans of up to $40,000 available to help offset construction costs for homeowners who promise to rent their ADU to low-income renters at affordable prices. If they do this for a full 20 years, the loan will be forgiven, giving loan holders a path for avoiding debt that doesn’t result in defaulting. Another pilot program in LA offers forgivable loans of up to $75,000 for ADU construction to homeowners who commit to renting to those transitioning out of homelessness for ten years. While in many cases these loans will not be enough to solely finance an ADU project, when combined with other types of financing they bring ADU development into the realm of possibilities for a much larger group of homeowners. And with their accessible nature, low interest rates, and ability to be forgiven, these loan programs may also ease borrowing anxieties.

Tying financing options directly to stipulations about rental affordability creates a stronger guarantee that ADUs will actually wind up as affordable housing options on the market, fulfilling the primary goal of the policy. This would have the dual effect of driving the creation of additional affordable housing in a city that desperately needs it, while also making ADU development more equitable and accessible to lower-income and minority homeowners. 

Increased ADU development holds the potential to significantly contribute to the affordable housing goals of Minneapolis. With the introduction of the city’s progressive Minneapolis 2040 plan for redevelopment and the 2019 abolishment of single-family zoning, political support for affordable housing solutions such as ADUs has never been higher. Minneapolis should follow in the footsteps of municipalities to make ADUs more equitable with a public funding option, allowing them to reach their full potential for generating affordable housing.

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