San Jose to Consider Forgivable Loans For Backyard Cottages

With San Jose homeowners potentially shelling out hundreds of thousands of dollars to build granny flats in their backyards, city officials this week will take steps to make it a bit more financially feasible with a forgivable loan program.

Dubbed by some lawmakers as a Yes In My Backyard”—aka YIMBY—initiative, the program would provide property owners a forgivable loan up to $20,000 for planning, permitting and other pre-development costs associated with building accessory dwelling units (ADU), which are commonly referred to granny flats or backyard cottages.

Under the terms of the proposed loan, once a unit gets built, homeowners would restrict the unit’s rent to a low-to-moderate household income level for five years. The loan initiative is being championed by Mayor Sam Liccardo and City Council members Magdalena Carrasco, Sylvia Arenas and Pam Foley, and is part of recent sweeping changes to make it easier and quicker to build these kinds of backyard dwellings.

Come Tuesday, city councilors are slated to approve an agreement with Housing Trust Silicon Valley for $1.25 million to help get the loan program off the ground. The contract would allow for three additional annual appropriations of $1.25 million through 2024.

City officials expect that the money would allow Housing Trust Silicon Valley to provide 200 forgivable loans over a five-year time span. Under the proposal, the loans would mature six years from the closing term, and would be forgivable after an income-eligible tenant occupies the backyard unit for five years. The loan would default, however, if the homeowner doesn’t lease the unit or lists it as a short-term rental on a site like Airbnb.

Accessory dwelling units represent a great untapped potential in the city of San Jose for many homeowners to join us personally in addressing our housing crisis, Liccardo, Carrasco, Arenas and Foley wrote in a shared Sept. 6 memo. The city estimates that more than 120,000 backyards in our communities have the space to accommodate an ADU. While we have said that we want to be welcoming to ADUs in our city, our actions must speak louder than our words.

The first year of the program would be heavily focused on marketing, with Housing Trust Silicon Valley expected to put on six half-day workshops and as many one-hour informational sessions. City officials are expecting the nonprofit Housing Trust to have 30 loans approved by the end of the first year.

To lessen the burden of building granny flats, city officials are also considering slashing a number of fees—namely in-lieu park impact fees and business taxes.

The park fees help the city reduce the impact new residential populations have on existing recreational amenities. They also provide the ability to acquire new land or create new or improved amenities in the city’s public park spaces.

Over the last five years, San Jose has collected over $1.79 million in park fees from homeowners who built backyard cottages. And with 200 units expected to be funded under the proposed ADU loan program, that could result in a loss of anywhere from $340,000 of $1,780,000 in park fee revenue. San Jose currently sits on a $341 million bill for unfunded park maintenance and infrastructure costs.

But some city officials believe the money from the 200 units wouldn’t be much help in trying to put a dent in that $341 million.

As park in-lieu fees must be expended within a close proximity to where they were collected, the broad geographical distribution of the ADUs under the loan program would provide marginal benefit to the overall parks capital improvement program, Housing Director Jacky Morales-Ferrand, Planning Director Rosalynn Hughey and Budget Director Jim Shannon wrote in a memo.

Officials also want to consider temporarily suspending businesses taxes, which are paid by individuals renting residential properties, for people participating in the ADU loan program. The waiver would result in an estimated loss of $200,000 to the city over a five-year period. After that time is up, homeowners continuing to rent out the unit will be once again responsible for paying the tax.

Morales-Ferrand, Hughey and Shannon on Tuesday will ask the City Attorney’s Office to craft a law suspending the fees and to bring that proposal back to the council for consideration. However, Liccardo, Carrasco, Arenas and Foley are asking that park fees only be waived for units that are 600 square feet or less.

The councilors also requested that housing staff report back to council before February 2020 on a few metrics. Specifically:

  • To-date number of loan applications, loans made and total loan amounts.
  • The geographic distribution of ADU loans throughout each council district, the average and median square footage of units receiving the loans and the number of units that are either 500 square feet or less or 750 square feet or more.
  • Information about outreach that has been conducted for the program—including the workshops and informational sessions.
  • An assessment from both city housing officials and Housing Trust Silicon Valley on what they’ve learned and recommendations for program improvements.

The San Jose City Council meets at 1:30pm Tuesday inside the council chambers at City Hall, 200 E. Santa Clara St. in San Jose. Click here to read the agenda. 

Grace Hase is a staff writer for San Jose Inside and Metro Silicon Valley. Email tips to [email protected]. Follow her on Twitter at @grace_hase.

7 Comments

  1. Let me get this straight Sam – you’ve made the permitting process so costly and difficult that no-one wants to go through it for an ADU and now your idea is that you are going to bribe people, at taxpayer expense, to go through your impossible process?

    It costs me $5k to get a review from the city of something my licensed engineer put together for a few hundred bucks – how about eliminating that review if its signed off by a licensed engineer Sam. I have to wait weeks for my stuff to get reviewed even though my architect put it together in a few days – how about dumping that Sam.

    How about offering pre-approved designs for ADU that have no permitting requirements at all.

    Or how about this really radical idea – why don’t you say – look the property owner has a much greater incentive to get the ADU right than anyone in city hall – why don’t we just trust them. I am sick to death of scraping together the money to do mounds of paperwork to have it reviewed by some imperious person in the plush offices on santa clara street – when the reality is I care a lot more about my house being done right than they do and it really shows on the nonsense requirements I get back from them. Why don’t you embrace the idea that these guys are largely pointless and reflect on the fact that you have a large homeless population in the city that is creating a public safety hazard that is way greater than the risk that someone is going to be so stupid as to build their house wrong and create a hazard – to whom? Well themselves of course.

    The historic district has some of the nicest houses in the city and almost all of them were built without a single permit. Why? Because the permitting department didn’t exist at the time. Lets get closer to that state rather than the current impossible regression.

    So why don’t you get the hatchet out and hack away at stupid requirements (like a review of something that’s put together by a licensed engineer) trust the people who are doing these projects and feel a breath of freedom.

  2. I’d rather the city give out $20,000 loans to first time homebuyers such as myself (two incomes, all work done in San Jose, born and lived here most of my life, looking to buy in San Jose) than to a program ultimately designed to serve zero-income methheads. Sure 20k is a drop in the bucket for buying a home in San Jose but every bit would help.

    • > I’d rather the city give out $20,000 loans to first time homebuyers such as myself . . . .

      I’m against give-aways. How about if we just reduced your student loan debt by making your colleges eat $20K for overmarketing or under-delivering.

      • I’m successful without a degree (it can still happen in the valley) and my wife paid off all her student loans (two degrees) of her own accord. We’re in our 30’s. I think if more people our age and younger would put social media down more often and do more with their days, they’d find life will deal them better cards.

    • I don’t believe you’ll have to worry. There are strict codes regarding parking spaces. Also, almost no one is going to build a unit and rent it to rowdy people when they are literally on the same lot.

  3. Lmao. Really fair to those of us who’ve already spent thousands just getting permitted for these units. Unfortunately, this permitting process and the costs of building the actual units are prohibitive. Let’s not even talk about trenching for sewer lines, etc.
    start making this affordable and maybe you’ll have success. Maybe get some contractors on board who are willing to build one of these for under the average $300k!

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