accessory dwelling unit (ADU) playbook

Executive Summary

This playbook will provide credit unions in California a roadmap for Accessory Dwelling Unit (ADU) lending. ADUs are an innovative and effective option for adding much-needed housing in California. As trusted financial institutions, credit unions can make a positive impact on California’s housing crisis by increasing access to financing opportunities through creative and strategic lending products.

Creating a specialized product for ADU construction financing is something that some credit unions may want to consider if they have strong lending departments, are willing to take on additional risk, and feel their existing product sets are not sufficient to serve their members. Credit unions that do not wish to expand product offerings may be able to service some members through their existing loan programs, including the traditional Home Equity Line of Credit (HELOC) and mortgage lending.


  • During the last ten years, housing production averaged fewer than 80,000 new homes each year, and ongoing production continues to fall far below the projected need of 180,000 additional homes annually.

  • Overall homeownership rates are at their lowest since the 1940s.

  • California is home to 12 percent of the nation’s population but a disproportionate 22 percent of the nation’s homeless population.

An Accessory Dwelling Unit (ADU) is a new unit of housing that is added to a property which already has an existing home. It is an accessory to a primary residence and has complete independent living facilities for one or more persons. ADUs are also known as “granny flats,” in-law units, backyard cottages, and secondary units.

An ADU can be an addition to an existing structure, a conversion of existing space, or a separate structure.

  • Detached: The unit is separated from the primary structure.

  • Attached: The unit is attached to the primary structure.

  • Converted existing space: Space on the lot of the primary residence that is converted into an independent living unit (master bedroom, attached garage, or storage area).

  • Junior Accessory Dwelling Unit (JADU): A specific type of conversion of existing space that is contained entirely within an existing or proposed single-family residence.
  • Site build: Traditional building process with onsite construction.

  • Prefabricated: An option with some or most of the construction happening off-site (manufactured housing and factory-built housing).
  • ADUs are an affordable type of home to construct in California because they do not require paying for land, major new infrastructure, structured parking, or elevators.

  • ADUs can provide a source of income for homeowners.

  • ADUs are built with cost effective wood-frame construction, which is significantly less costly than homes in new multi-family infill buildings.

  • ADUs allow extended families to be near one another while maintaining privacy.

  • ADUs can provide as much living space as many newly built apartments and condominiums, and they’re well suited for couples, small families, friends, young people, and seniors.

  • ADUs give homeowners the flexibility to share independent living areas with family members and others, allowing seniors to age in place as they require more care.

Lending Considerations

Product Type

  • A HELOC is an open-end Home Equity Line of Credit typically with a variable interest rate. Most credit unions offer HELOCs with a draw period of five or 10 years followed by a longer repayment period. The Renovation/ADU lines of credit that were reviewed are modeled on this product design and are in second-lien position. First-lien products were most commonly patterned after a construction loan or a line of credit. Since construction lending is well defined, a first-lien renovation loan product was not included in this playbook.

Management of Draws/Construction

  • While a traditional HELOC does not have draw management, a renovation/ADU HELOC should, given the added complexity. Processes should be in place to review invoices, monitor lien releases, and review change orders during construction.
  • While there are third-party service providers that can assist credit unions with doing this in-house, this is a large endeavor that will require a significant draw on resources in a servicing department. Unless the credit union is already performing construction financing, it is recommended to look to partners to outsource the draw management. A qualified and independent construction project manager can facilitate this service.

Risk Appetite

  • Each credit union will have to determine the level of risk that is suitable for the institution. There are many factors to consider when providing renovation or construction financing. Most members who have adequate equity to complete any type of renovation or ADU construction can be served with a traditional equity product.
  • A Renovation/ADU line or loan serves the member whose need exceeds or substantially utilizes all available equity.
  • Credit unions must determine if they are able to lend based on the as-completed or after-renovation value (ARV) to adequately serve this market. The lending decision will be based on the completion of the ADU construction or renovation.
  • Many members seeking financing to construct an ADU are doing so for the additional rental income that it may provide. Their present debt ratios may not support the additional debt and future rental income they may need to be considered for qualification purposes. Credit unions should consider future rental income to address this need. It’s customary to use 75 percent of rental income and limit the debt ratio improvement to 5 – 10 percent.

Sample Product Guidelines

  • Term: One-to-two-year draw period followed by a 15-to-20-year repayment period. Repayment periods should consider the payment and affordability. Most projects are completed within 6 – 8 months of permitting. Homeowners may want to enter into the repayment period and seek more favorable terms as soon as construction is completed.
  • Credit score: Minimum of 720. Much like a cash-out refinance, a member should have a demonstrated excellent history of managing finances. Borrowing all available equity should be reserved for those with excellent credit histories as well.
  • LTV/CLTV maximums: Most credit unions lend to 80 percent loan-to-value/combined loan-to-value ratio (LTV/CLTV). Using the as-is value is limited to 125 percent CLTV. Federal preemption is available for state-chartered credit unions to exceed 80 percent CLTV under the Garn-St. Germain Act of 1982.
  • Line amounts: $400,000 to 90 percent CLTV ARV, and $500,000 to 80 percent CLTV ARV. Average ADU construction projects are between $300,000 and $400,000. The approved line amount should include a contingency for cost overruns and change orders.
  • Rate: Variable-rate based on the Prime Rate during the draw period. Fixed-rate options could be considered for the repayment period to make the product more attractive for members that will not or should not consider refinancing the new loan with a first mortgage.
  • Closing cost: The member pays all closing costs, including project management fees. This would be customary with construction lending. Shorter-weighted average life is assumed for this product.
  • Draw, management, and lien-release fees: The member is responsible for all fees. Credit unions may want to consider a monthly non-completion fee to provide financial incentive to complete construction.

Project Management

  • An ADU construction project introduces new risks to the collateral, especially if project completion is assumed in the credit union’s underwriting (use of proposed rental income in qualifying and/or ARV for relied-upon property value).

  • It is recommended that credit unions require the use of a construction project manager to assist with the project management and ensure projects are completed on time and on budget. Credit unions may want to consider requiring members to work with a set of pre-approved project managers. If credit unions are not going to have a set list of pre-approved project managers, they should set criteria and requirements for reviewing project managers that members select.

  • A construction project manager will help ensure the member is working with qualified contractors throughout the process and help avoid unexpected delays, budget overruns, and bad actors. Each credit union will need to determine the criteria it sets for vetting, approving, and monitoring potential and active project managers.

  • The project manager will assist the credit union in monitoring the following steps of the ADU project.

    • Project management/preparation prior to application:
      • Determining feasibility and estimating of cost.
      • Consulting on design and third-party selection.
      • Assisting through the permitting process with local governing agency/authority.

    • Project management after approval:
      • Secure/review bids and contracts prior to engagement.
      • Consult on options and finish selections.
      • Keep project timeline and budget.
      • Review of payment requests/invoices, lien releases, and change orders.
      • Submit draw requests and lien-release waivers to lender for review and payment.
      • Evaluate governing agency/authority feedback with builders/contractors and share findings with owner.
      • Review project completion with owner to ensure satisfaction.
      • Communicate with third parties/builders/contractors any questions or concerns by owner regarding project completion.
      • Review final permit sign-off with owner and confirm owner’s receipt of certificate of occupancy.
      • Review final payment request by third-party professionals/builders/contractors with owner.
      • Submit final draw request and unconditional lien-release waiver(s) to lender, along with final permit sign-off.

Recent California ADU Legislation

View the California Department of Housing and Community Development’s Accessory Dwelling Unit Handbook.

Assembly Bill 345 (Chapter 343, Statutes of 2021) builds upon recent changes to State ADU Law, particularly Government Code sections 65852.2 and 65852.26, to require the allowance of the separate conveyance of ADUs (does not apply to JADUs) from the primary dwelling in certain circumstances, provided they meet certain conditions, including those listed below, found in Government Code section 65852.26, subdivisions (a)(1-5):

  • The ADU or primary dwelling was built or developed by a qualified nonprofit. (Gov. Code, § 65852.26, subd. (a).)
  • There is an enforceable restriction on the use of the property between the low-income buyer and nonprofit that satisfies the requirements of Section 402.1 of the Revenue and Taxation Code. (Gov. Code, § 65852.26, subd. (a)(2).)
  • The entire property is subject to the affordability restrictions to assure that the ADU and primary dwelling are preserved for owner-occupied, low-income housing for 45 years and are sold or resold only to a qualified buyer. (Gov. Code, § 65852.26, subd. (a)(3)(D).)
  • The property is held in a recorded tenancy in common agreement that meets certain requirements. (Gov. Code, § 65852.26, subd. (a)(3).)

Assembly Bill 3182
(Chapter 198, Statutes of 2020) builds upon recent changes to State ADU Law, specifically Government Code section 65852.2 and Civil Code Sections 4740 and 4741, to further address barriers to the development and use of ADUs and JADUs. This legislation, among other changes, addresses the following:

  • States that an application for the creation of an ADU or JADU shall be deemed approved (not just subject to ministerial approval) if the local agency has not acted on the completed application within 60 days. (Gov. Code, § 65852.2, subd. (a)(3).)
  • Requires ministerial approval of an application for a building permit within a residential or mixed-use zone to create one ADU and one JADU per lot (not one or the other), within the proposed or existing single-family dwelling, if certain conditions are met. (Gov. Code, § 65852.2, subd. (e)(1)(A).)
  • Provides for the rental or leasing of a separate interest ADU or JADU in a common interest development, notwithstanding governing documents that otherwise appear to prohibit renting or leasing of a unit, and without regard to the date of the governing documents. (Civ. Code, § 4740, subd. (a), and Civ. Code, § 4741, subd. (a).)
  • Provides that not less than 25 percent of the separate interest units within a common interest development be allowed as rental or leasable units. (Civ. Code, § 4740, subd. (b).)

Assembly Bill 68 (Chapter 655, Statutes of 2019), Assembly Bill 881 (Chapter 659, Statutes of 2019), and Senate Bill 13 (Chapter 653, Statutes of 2019) build upon recent changes to ADU and JADU Law, specifically Government Code sections 65852.2 and 65852.22, and further address barriers to the development of ADUs and JADUs. This legislation, among other changes, addresses the following:

  • Prohibits local agencies from including in development standards for ADUs requirements on minimum lot size. (Gov. Code, § 65852.2, subd. (a)(1)(B)(i).)
  • Clarifies that areas designated by local agencies for ADUs may be based on the adequacy of water and sewer services, as well as on impacts on traffic flow and public safety. (Gov. Code, § 65852.2, subd. (a)(1)(A).)
  • Eliminates all owner-occupancy requirements by local agencies for ADUs approved between Jan. 1, 2020, and Jan. 1, 2025. (Gov. Code, § 65852.2, subd. (a)(6).)
  • Prohibits a local agency from establishing a maximum size of an ADU of less than 850 square feet, or 1,000 square feet if the ADU contains more than one bedroom and requires approval of a permit to build an ADU of up to 800 square feet. (Gov. Code, § 65852.2, subds. (c)(2)(B) and (C).)
  • Clarifies that when ADUs are created through the conversion of a garage, carport or covered parking structure, replacement of off-street parking spaces cannot be required by the local agency. (Gov. Code, § 65852.2, subd. (a)(1)(D)(xi).)
  • Reduces the maximum ADU and JADU application review time from 120 days to 60 days. (Gov. Code, § 65852.2, subd. (a)(3) and (b).)
  • Clarifies that “public transit” includes various means of transportation that charge set fees, run on fixed routes, and are available to the public. (Gov. Code, § 65852.2, subd. (j)(9).)
  • Establishes impact fee exemptions and limitations based on the size of the ADU. ADUs up to 750 square feet are exempt from impact fees, and ADUs that are 750 square feet or larger may be charged impact fees but only such fees that are proportional in size (by square foot) to those for the primary dwelling unit. (Gov. Code, § 65852.2, subd. (f)(3).)
  • Defines an “accessory structure” to mean a structure that is accessory and incidental to a dwelling on the same lot. (Gov. Code, § 65852.2, subd. (j)(2).)
  • Authorizes HCD to notify the local agency if HCD finds that the local ADU ordinance is not in compliance with state law. (Gov. Code, § 65852.2, subd. (h)(2).)
  • Clarifies that a local agency may identify an ADU or JADU as an adequate site to satisfy its Regional Housing Needs Allocation (RHNA). (Gov. Code, §§ 65583.1, subd. (a), and 65852.2, subd. (m).)
  • Permits JADUs even where a local agency has not adopted an ordinance expressly authorizing them. (Gov. Code, § 65852.2, subds. (b) and (e).)
  • Allows a permitted JADU to be constructed within the walls of the proposed or existing single-family residence and eliminates the required inclusion of an existing bedroom and an interior entry into the single-family residence. (Gov. Code, § 65852.22, subd. (a)(4-5).)
  • Requires, upon application and approval, a local agency to delay enforcement against a qualifying substandard ADU for five years to allow the owner to correct the violation, so long as the violation is not a health and safety issue, as determined by the enforcement agency. (Gov. Code, § 65852.2, subd. (n); Health & Safety Code, § 17980.12).)

Assembly Bill 587 (Chapter 657, Statutes of 2019) creates a narrow exemption to the prohibition for ADUs to be sold or otherwise conveyed separately from the primary dwelling by allowing deed-restricted sales to occur if the local agency adopts an ordinance. To qualify, the primary dwelling and the ADU are to be built by a qualified nonprofit corporation that has a mission to provide units to low-income households. (Gov. Code, § 65852.26)

Assembly Bill 670 (Chapter 178, Statutes of 2019) provides that covenants, conditions, and restrictions that either effectively prohibit or unreasonably restrict the construction or use of an ADU or JADU on a lot zoned for single-family residential use are void and unenforceable. (Civ. Code, § 4751).

Assembly Bill 671 (Chapter 658, Statutes of 2019) requires local agencies’ housing elements to include a plan that incentivizes and promotes the creation of ADUs that can offer affordable rents for very low-, low-, or moderate-income households and requires HCD to develop a list of state grants and financial incentives in connection with the planning, construction, and operation of affordable ADUs. (Gov. Code, § 65583; Health & Safety Code, § 50504.5).

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