Are ADUs NJ’s Affordable Housing Solution?
July 16, 2024
Crafted by Gabe Bailer, PP, AICP
There’s been considerable discussion lately about Accessory Dwelling Units (ADUs) and their potential to address the critical need for affordable housing in New Jersey. Let's explore this topic and analyze whether ADUs can indeed be a viable solution for affordable housing in the state.
As I've mentioned previously, I'm a strong advocate for affordable housing, which I often refer to as workforce housing. My own upbringing in affordable housing significantly shaped my views. Growing up in Upper Manhattan, NYC, I lived in a rent-stabilized two-bedroom apartment with beautiful views of the Hudson River and the tranquil Trinity Cemetery. My parents moved to 765 Riverside Drive, a six-story building with 100 units, nearly 50 years ago. They lived in three different apartments within that building, paying $1,300 per month for their last apartment, which would likely cost between $4,000 and $5,000 at market rates today. My father, a geotechnical engineer, passed away last year, and my mother, a teacher, were professionals who chose to raise my sister and me in NYC, made possible by the affordable rent of a stabilized apartment. Sadly, we had to give up the apartment when my mother moved to assisted living, but we hope that another long-standing resident now occupies it.
But let's return to the topic of ADUs. What exactly is an ADU? According to the American Planning Association, an ADU is a smaller, independent residential dwelling unit situated on the same lot as a primary residential structure, typically a single-family home. An ADU must have its own entrance and kitchen, separate from the existing residential structure. These units are known by various names, including accessory apartments, secondary suites, and granny flats. ADUs can take several forms, such as an addition to the existing home, a standalone accessory structure, or a conversion of a garage.
What exactly do ADUs offer? Primarily, ADUs provide new housing opportunities through infill development. Due to their smaller size, the rent or purchase price for ADUs is generally lower, creating more affordable housing options. According to a NorthJersey.com article, New Jersey is short by 210,000 units of affordable housing and ranks as the seventh most expensive state for renting a modest one-bedroom apartment. Thus, ADUs can help alleviate the housing shortage by offering additional, more affordable housing options.
ADUs also provide opportunities for home owners to collect additional rental income, and in cases provide housing for a family member where that needs care, such as an elderly family member. The additional income can help an owner being priced out of a neighborhood, and age in place where they lived for countless years.
There have been numerous articles discussing how ADUs can address the need for affordable housing. However, two critical questions remain largely unanswered:
Is building an ADU financially feasible?
Can an ADU provide affordable housing credits for a municipality’s State’s Mount Laurel Affordable Housing Requirement?
Financially Feasibility
Research indicates that the cost of building an ADU in New Jersey ranges from $100,000 to $400,000. On the high end, an estimate from a NorthJersey.com article suggests that constructing an independent 400-square-foot ADU in Montclair, complete with an accessible bathroom and kitchenette, could cost around $400,000. This equates to $1,000 per square foot, which is not financially feasible compared to building a new house for the same amount. On the low end, an NJ Home article titled “4 Things to Know Before Building an ADU in NJ” lists a cost of $100,000 for a 400-square-foot ADU, resulting in a more feasible $250 per square foot.
The construction costs for an ADU can vary significantly based on factors such as whether the unit is detached or attached, the finishes, and the availability of utilities like electricity, plumbing, and sanitation. Since an ADU is a living unit, it must meet all building codes, provide a kitchen and bathroom, and comply with any other municipal regulations. Considering the reports, which indicate a cost range of $100,000 to $400,000, a reasonable average cost to construct a 400-square-foot ADU in New Jersey would be around $200,000.
A report by Brookings, “Can Income-Restricted ADUs Expand the Affordable Housing Stock in Los Angeles,” offers an in-depth analysis of construction costs and potential rental income for ADUs in Los Angeles. Similar to New Jersey, Los Angeles is facing a housing crisis. In 2022, approximately 65,000 Angelenos (residents of Los Angeles) experienced homelessness, and nearly 60% of renter households, equating to over 1 million households, were cost-burdened.
The idea of ADUs as a solution for providing affordable infill housing, which can foster synergy between ADU tenants and homeowners (such as mutual care and assistance with chores), has been a popular topic. Recognizing the need for more housing options, California enacted legislation permitting ADUs in all single-family residential neighborhoods. While similar legislation was proposed in New Jersey, it was not adopted.
The impact of California's ADU regulations is evident: the number of ADUs in Los Angeles increased from around 2,000 in 2017 to approximately 13,000 in 2022, demonstrating the legislation's success in promoting ADU development.
The report provides construction estimates for a 600-square-foot ADU in Los Angeles, ranging from $180,000 to $400,000, or $300 to $667 per square foot. These figures are comparable to construction cost estimates in New Jersey.
Financing an ADU can be challenging, as not everyone has immediate access to $200,000. Since ADUs are secondary to existing homes, traditional home mortgages are not an option. The article outlines four financing options based on a construction cost of $150,000, with a 10-year payment term and annual operating costs including insurance ($150), taxes ($1,500), and utilities ($3,400).
Market rate loan with a 9% interest - Monthly costs $2,361
Upfront grant with $40k subsidy - at 9% interest - Monthly costs $1,844
Low interest loan with 5% interest - $2,011
Grant and low interest loan at 5% interest - $1,587
Does constructing an ADU pay off financially? Will you profit from renting out the ADU unit, or will you incur a loss? To explore this in the context of New Jersey, we'll use a market rate loan with a 9% interest rate over a 10-year term for construction costs of $150,000.
Based on this analysis, the monthly payment, including operating costs (insurance, taxes, utilities), totals $2,361. The critical question is, what rent can you charge for an ADU? Research didn’t provide specific estimates, so I’ll use my own rental experience: my 550-square-foot, one-bedroom unit in Union City rents for $1,425 without utilities, equating to $31 per square foot. Applying this rate, a 400-square-foot detached ADU would rent for approximately $1,050 per month.
While this rent is relatively affordable compared to other rents in New Jersey, the financial feasibility is questionable. With a $2,361 monthly payment and $1,050 in rent, you would incur a monthly loss of $1,311. Thus, under these conditions, constructing an ADU for $150,000 and renting it out does not make financial sense. In fact, even in options 2-4 above, one would still be losing money.
NJ Affordable Housing Regulations and Affordable Housing Credits
For those unfamiliar with New Jersey’s Affordable Housing Requirements, the state has one of the most progressive frameworks in the US. This originates from the Mount Laurel Doctrine, which stems from two landmark New Jersey Supreme Court cases in 1975 and 1983.
In 1975, known as Mount Laurel I, the New Jersey Supreme Court ruled in favor of the Southern Burlington County NAACP, which sued the Township of Mount Laurel for zoning laws that effectively excluded low and moderate-income families. The court mandated that municipalities must provide their "fair share" of affordable housing.
Mount Laurel II, decided in 1983, reinforced this by introducing "builder’s remedy" lawsuits. This allowed developers to sue municipalities that failed to provide adequate affordable housing, resulting in court-ordered construction to meet these obligations.
The outcomes of these court decisions are subject to varying opinions. Some argue that they have successfully facilitated the creation of much-needed affordable housing for New Jersey residents. According to estimates from the Fair Share Housing Center, approximately 50,000 to 60,000 units of affordable housing were created between 1985 and 2015. This translates to roughly 1,833 affordable units per year. Extending this estimate to 2024 suggests that an additional 16,500 units may have been created, bringing the total number of affordable housing units produced since the 1985 Mount Laurel decision to approximately 65,000 to 75,000.
Conversely, some believe these rulings have led to high-density developments in inappropriate areas and provided developers a backdoor method to pursue such projects through builder’s remedy lawsuits. As with most issues, opinions on the impact of these court decisions vary widely.
Municipalities have various methods to comply with their fair share housing obligations. These options include 100% affordable housing developments and group homes for the developmentally disabled. However, the most common approach is through high-density development projects, where at least 15% of the units are designated as affordable. For instance, in a proposed 100-unit development, 85 units would be market-rate, and 15 units would be affordable.
The rationale behind this method is that the cost of building and providing affordable housing units can be prohibitive. Therefore, developers rely on the additional market-rate units to offset the costs associated with the affordable units. This approach has sometimes spurred redevelopment and provided residential developments in suitable areas, such as downtowns near public transportation. Conversely, it has also resulted in high-density development in less appropriate areas.
To protect themselves from builder’s remedy lawsuits, municipalities in New Jersey prepare a Fair Share Housing Element. This element serves as a blueprint for how each municipality plans to meet its affordable housing obligations. The number of affordable housing units a municipality is required to provide is determined by the state, based on factors such as construction growth rates, availability of vacant land, and other variables. This number often sparks controversy, with some municipalities finding the requirements unreasonable while others accept them.
For protection against builder’s remedy lawsuits, a municipality’s Planning Board and Council must adopt the Fair Share Housing Element. Typically, the non-profit Fair Share Housing Center reviews and often opposes these plans, leading to revisions. Once an agreement is reached, a settlement is signed and the Courts approve the Fair Share Housing Element, thereby protecting the municipality from builder’s remedy lawsuits.
The high-density model for providing affordable housing is not always self-sufficient. Many municipalities are fully developed with little to no vacant land available for new projects. Redevelopment of underutilized properties has become more common, but such opportunities are limited. Additionally, new NJ DEP rules further reduce the available areas for construction.
What can municipalities do to meet their state-mandated affordable housing obligations when there is no more land to redevelop? Accessory Dwelling Units (ADUs) present a viable option for appropriate infill development, helping municipalities fulfill their fair share housing requirements. ADUs can provide additional housing units without the need for large-scale redevelopment, making them a practical solution in land-constrained areas.
Hold on a second. According to NJAC 5:93, the substantive rules of the New Jersey Council on Affordable Housing, accessory dwelling units (ADUs) are recognized as a realistic method for municipalities to meet their fair share housing obligations. Specifically, NJAC 5:93-5.8 identifies ADUs as Accessory Apartments, noting their potential in this context:
Up to 10 accessory apartments may be used to address a municipal housing obligation.
A municipality using an accessory apartment program shall:
1. Demonstrate that the housing stock lends itself to accessory apartments. The
Council will favor a large (measured in square feet), older housing stock;
2. Provide at least $10,000 per unit to subsidize the creation of the accessory
apartment;
3. Demonstrate that rents of accessory apartments will average 57.5 percent of
median income, including utilities. The rent shall be based on the number of
bedrooms in accordance with N.J.A.C. 5:93-7.4;
4. Demonstrate that accessory apartments will be affirmatively marketed, in
accordance with N.J.A.C. 5:93-11; and
5. Designate an agency to administer the program.
(b) Accessory apartments shall be exempt from Council bedroom mix requirements (N.J.A.C.
5:93-7.3).
(c) Accessory apartments which have been constructed prior to the municipal adoption of a
municipal accessory apartment ordinance or are otherwise illegal may be eligible to
address a fair share obligation if a municipality addresses the criteria listed in (a) above
and (e) below except that no municipal subsidy shall be required. In addition, the
occupant’s income must be below 80 percent of median income and the rent must be a
Council permitted rent.
(d) Accessory apartments that are age restricted shall be included with the 25 percent that
may be age restricted pursuant to N.J.A.C. 5:93-5.14.
(e) Controls on affordability on accessory apartments shall remain in effect for at least 10
years. To be eligible for a rental bonus pursuant to N.J.A.C. 5:93-5.15, controls on
affordability shall remain in effect for at least 30 years.
(f) The Council shall assess the municipality’s accessory apartment program at the end of a
two year period from date of substantive certification and shall require any necessary
Changes but not limited to the zoning of an additional site.
If the ADU model is viable for providing affordable housing, why haven’t more municipalities adopted it? There are a few reasons. Although the concept of ADUs is not new, it has gained popularity recently for appropriate infill development and providing affordable housing due to their smaller footprint and square footage. This idea has garnered more exposure across the US, including in New Jersey.
Several New Jersey municipalities, such as Princeton, Maplewood, South Orange, and Montclair, have adopted ADU ordinances. This has led to the creation of ADUs within these municipalities, with Princeton leading the way with 38 ADUs developed as of April 2024, according to an NJ.com article.
The question remains whether any of these ADUs have been credited toward these municipalities' fair share housing requirements. As of now, I don’t have an answer, but I hope to gain more clarity on this issue in the future.
Another reason municipalities have not widely adopted the ADU option is its economic feasibility. As mentioned earlier, constructing an ADU in New Jersey can be costly, ranging from $200,000 to $400,000 per unit. If developers are required to rent these units at rates affordable to very low, low, or moderate-income individuals, the financial viability diminishes further, especially considering the 10-year deed restriction.
However, while this may not be financially feasible for developers, it could be a viable option for families who want to build an ADU for a relative, such as an elderly parent or a young adult. For these families, the decision may be based more on family needs than on financial considerations. The family member would still need to pay rent to meet eligibility requirements.
Additionally, ADUs must be affirmatively marketed to ensure fair access. However, the property owner retains the final say in who rents the unit. As long as the ADU is affirmatively marketed, it can potentially count towards the municipality's affordable housing obligations. This provides an opportunity for municipalities to meet their affordable housing requirements through ADUs.
Unfortunately, even though ADUs are recognized as a viable option for providing affordable housing, New Jersey's new affordable housing regulations limit the maximum number of ADUs a municipality can receive credit for to 10, and did not change with the 2024 affordable housing amendments. This cap is insufficient to significantly impact the overall affordable housing needs in many communities.
To enhance the successful implementation of ADUs, more incentives need to be provided to developers and nonprofit organizations. These incentives could include tax credits, funding from federal, state, and local grants, the use of affordable housing trust fund monies by municipalities, or the offering of tax-exempt bonds by municipalities to finance ADU projects.
In conclusion, the issue is complex. ADUs are a potential solution for providing much-needed affordable housing. However, the financial feasibility of building an ADU and generating sufficient rental income to cover costs is challenging. ADUs are not particularly attractive to developers due to thin profit margins, especially when adhering to affordable housing regulations. Government or municipal assistance is crucial to offset these costs and make ADUs a viable option for affordable housing in New Jersey. I hope such support becomes available to make this a reality.