The ADU Condo:

Affordable Housing or Business Investment?

An “Accessory Dwelling Unit” or “ADU” is the legal term for what some of us might refer to as “mother-in-law quarters”.  It is a small, but completely independent living space that is allowed under many local zoning codes to be built on a single-family lot, in addition to the primary residence (the Main House).   An ADU can be attached to the Main House, or it can be free-standing.  In either case, the ADU and the Main House have separate entrances, kitchens, bathrooms and sleeping quarters.  For the purpose of this article, I will be discussing the code applicable to the City of Bainbridge Island (the City).  The construction and use of an ADU is regulated by the City under Section 18.89 (the ADU Ordinance) of the Bainbridge Island Municipal Code (the Code).

When adopted in 1995, the City intended the ADU Ordinance “to provide a potential source of affordable housing units in single-family neighborhoods and to expedite the review and approval process for accessory dwelling units which conform to zoning and other provisions of the [Code]."1  I interpret this to mean that the City intended ADUs to be used for more than “mother-in-law quarters”, i.e., that the City intended to allow ADUs to be rented to someone unrelated to the owner of the Main House.

But does this really create “affordable housing”?  First, one must understand what “affordable housing” means.2    Basically, housing is only “affordable” if a person of less than the local median income can live there without spending more than 30% of that person’s adjusted gross income on housing expenses (whether rent or mortgage payments, and including the cost of utilities).   Affordable housing is often divided into the separate categories of “rental housing” and “ownership housing”.  On Bainbridge Island, affordable rental housing is in short supply.   And affordable ownership housing scarcely exists.

Until recently, ADUs provided (at most) an additional source of rental housing.3  Presumably the market dictates that the amount of rent payable for the use of an ADU is at least as much as the rent payable for a comparably sized apartment unit.   So, essentially, ADUs are additional “apartments” that are dispersed among the single-family neighborhoods, rather than being concentrated into apartment complexes.

But what do ADUs contribute to affordable ownership housing?   Enter the “ADU Condominium”.  Thanks to the creative thinking of a local real estate attorney,4ADUs can now provide the rare opportunity to own affordable housing on Bainbridge Island.   An ADU Condo is a single lot, containing a Main House and an ADU, that has been “converted” into a two-unit condominium.5 The Main House is one unit, and the ADU is the other.  Each unit can be owned, sold and financed independently from the other.  Like other condominiums, the ADU Condo has a “condominium association” and includes shared areas, called “common elements” and “limited common elements”.  Most single-family lots cannot be subdivided, or can be subdivided only after a long, rigorous and expensive subdivision approval process.  The ADU Condominium provides a relatively easy and inexpensive alternative.

But, before you run off to build, rent or sell your ADU Condo unit, be aware of several significant limitations and risks that you will face:

• The current Code does not contemplate or address ADU Condos – this is uncharted territory and might be forbidden or regulated by the City in the future (ADUs built before the law changes would probably be “grandfathered in”.
   

• Although there is presently no controlling law or precedent, the safe assumption is that an ADU that has been made part of a condominium unit must remain an ADU, i.e., the ADU Unit is subject to all of the restrictions of the ADU Ordinance, including the requirement that the ADU Unit may never contain more than 800 square feet of living area.
   

• The state condominium act imposes its own complex and rigorous requirements, including the preparation and recording of a declaration of condominium (with appropriate survey maps), creation of a condominium association, giving rights of first refusal to existing tenants, and creating of a “public offering statement” that must be given to all prospective purchasers of a unit.6
   

• An existing house and/or ADU that is being converted into an ADU Condo must undergo a structural and code compliance inspection.7
   

• It can sometimes be difficult to obtain appropriate forms of insurance from companies that might not be familiar with the ADU Condo concept.
   

• Some lenders might be unfamiliar and therefore wary of this form of ownership.
   

• Prospective purchasers might be discouraged or intimidated by all of the documents and restrictions the accompany this form of ownership.
   

So, even if you are a pioneering sort, undaunted by all of these risks and limitations, I recommend that you obtain assistance from an experienced real estate attorney, lender, insurance agent, and land surveyor.

Controversy remains about whether ADUs and ADU Condos actually provide any significant amount of affordable housing.  As Bainbridge Island property values rise, even a modest ADU Condo unit may well remain out of reach for people seeking truly affordable housing (as defined by HUD).  For many property owners, building an ADU is simply another way to maximize income from, or equity in, their property.  However, for property owners who desire to create affordable housing opportunities, ADUs and ADU Condos might offer a means to make a difference for people who could not otherwise afford to live on Bainbridge Island.

Please remember that this article contains only the most basic information about its subject matter. I do not intend this article to contain detailed legal advice specific to any particular person or situation. Before entering into any agreement concerning your property, I urge you to consult with a real estate lawyer and with your tax or estate planning advisor.

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1 BIMC 18.89.010

2  The term "affordable" is defined by the US Department of Housing and Urban Development (HUD).  The definition varies, depending upon the context in which it is used.  Also, there are several different levels of "affordability" depending upon the income range of the intended residents.  For a simplified explanation of the concept of affordability, and links to the more detailed laws and regulations, see the HUD web site.

3  Apartments are currently the primary source of affordable housing on Bainbridge Island, and apartments are in short supply.

4  I am not this person.

5  Under the Washington Condominium Act, RCW Chapter 64.34, a condominium is

. . . real property, portions of which are designated for separate ownership and the remainder of which is designated for common ownership solely by the owners of those portions. Real property is not a condominium unless the undivided interests in the common elements are vested in the unit owners, and unless a declaration and a survey map and plans have been recorded pursuant to this chapter.

Condominium units can take many different physical forms, from multi-story, “multi-family” buildings to separate, free-standing “single-family” houses.

6  RCW 64.34.405 et seq.

7  RCW 64.34.415