Homeowners start to erect dwellings as rental space

Retired Family Court Judge Michael Town said he’s looking forward to his daughter and her two children moving into the newly built accessory dwelling unit on his property lot in metro Honolulu, thanks to a city ordinance passed in September 2015.

“It’ll be a house with three generations,” Town said. “I like that.”

A year and a half after Mayor Kirk Caldwell signed the accessory dwelling unit (ADU) ordinance into law, interest has been growing, with more than 1,280 homeowners submitting “pre-check” forms to see whether their lot qualifies for the addition.

Some 145 applications have been approved for permits allowing the units for either family members or renters.

Unlike a former, so-called ohana ordinance allowing only family members to live in second dwellings, the option to rent under the ADU ordinance provides homeowners a financial incentive. In addition, the city is waiving up to $10,000 in fees to homebuilders — including a $6,624 sewage connection charge.

City officials hope allowing qualified homeowners to have ADUs will help create more affordable rentals in Oahu’s housing crunch.

Studies have identified the development of accessory dwelling units as an effective strategy in increasing affordable housing and reducing homelessness.

The smaller accessory dwelling units also seem to support the trend toward small families in a home and are more likely to offer cheaper rents than a typical single-family house, according to the Institute of Urban and Regional Development at the University of California, Berkeley.

“There is at least modest evidence that on-site secondary unit landlords appear to offer rents at a discount to their tenants,” the University of California study said.

As of early March, only 22 accessory dwelling units in Honolulu had passed final inspection since the enabling ordinance was passed a year and a half ago. In about the same period, plans for 17 proposed accessory dwellings were canceled, according to the city’s building permit office.

The 145 permit approvals represent less than 1 percent of 105,000 residential lots that meet the minimum lot sizes for accessory dwellings on Oahu.

Urban-planning expert Tom Dinell said more needs to be done on getting the word out on ADU options.

“It’s really a matter of marketing, of getting the city together with the banks that provide loans … and the contractors,” said Dinell, professor emeritus of the University of Hawaii’s Department of Urban and Regional Planning. “Goodness knows, we have an extreme shortage of rental housing right now.”

Dinell said that by 2030 about a fourth of Honolulu’s population is expected to be 65 years old or older.

He said residential property owners could enhance their income during retirement through developing and renting an accessory dwelling.

Dinell said that for other residential property owners, the accessory dwelling could be a way to keep aging parents close.

Kailua resident Richard Pachon has a unit next to his home for his mother.

Pachon said that while his mother had lived just a few miles from him in a townhouse, having her next door has made daily contact convenient.

“She’s close to us. We can see how she’s doing,” he said.

Accessory dwellings were allowed as early as 1993 for use as rentals on Maui, where the numbers have grown.

Some 4,810 Maui parcels have accessory dwellings — constituting 29 percent of 16,410 parcels qualified to have ADUs, according to the county. An estimated 44 permits were issued for new accessory dwellings on Maui in 2016, according to Maui County.

Maui County does not have a sewage connection fee for accessory dwellings and has a one-time sewage assessment fee of $823 only for Kihei and Central Maui.

While some people might have the cash on hand to build an accessory dwelling unit, other financing options are available, including taking out an equity loan on a home.

A homeowner whose property is appraised at $500,000 with $200,000 worth of equity, for instance, might consider applying for a $100,000 equity loan to build an accessory dwelling.

At Bank of Hawaii the interest on a standard equity loan is 4.25 percent, so the payment on a $100,000 loan would be about $542 a month, according to Jack Smythe, vice president and executive loan officer for Bank of Hawaii.

Average rental rates for a one-bedroom house were $1,577 a month in 2014, according to a study for the city. Observers say rents have increased since 2014.

Rick Cassiday, the consultant who did the housing study, said housing rents have been stable but can vary, depending on location in general and, more specifically, proximity to a beach, good park or good school.

For the homeowner it can be a way to receive additional income.

The cost of building and finishing an accessory dwelling and interest paid yearly as well as the cost of maintenance are tax-deductible as a business.

“It’s a kind of a win-win,” Smythe said.

While homeowners can retain an architect or draftsman to help design an accessory dwelling, it can be relatively expensive and require a longer time for approval. Sometimes a quicker option is selecting from a design that has been preapproved by the city building permits department, saving time and money.

City officials said they’ve begun working with contractors on developing preapproved designs.

One builder, Jeremy Pearl, a partner in Hawaii ADU, said he has five preapproved models reviewed by the city, ranging from one- to three-bedroom units. Prices range from $70,000 to $170,000.

“We do our building off- island in three months; then we install the model in one to two weeks,” Pearl said.

Pearl said he has two models being built off-site, including an accessory dwelling built above the garage.