Housing staff suggest ADU pilot program aimed at 80% MFI households

City housing staff say a publicly-funded program to help homeowners build accessory dwelling units would likely see limited uptake and may fall short of the city’s affordability goals, particularly for households most at risk of displacement.

In a recent memo responding to a 2023 resolution from City Council, Interim Housing Director Mandy DeMayo outlined findings that suggest a large-scale accessory dwelling unit (ADU) financing initiative would be difficult to implement effectively. Instead, staff are recommending a small-scale pilot program aimed at moderate-income homeowners, provided that Council allocates roughly $1.5 million to fund loans, staffing and outreach.

The memo is the latest in a series of staff responses to Council resolutions calling for new financial tools to support ADU construction, particularly for low- and moderate-income homeowners. Earlier Council actions — including resolutions in 2020, 2021, and last year — have pushed staff to explore a variety of approaches to incentivize infill housing. ADUs, often seen as a lower-impact way to increase housing supply, have remained a central focus in those efforts.

Staff analysis was informed by previous modeling by the University of Texas, peer city comparisons and homeowner surveys. It found that low-income households tend to prioritize property tax relief, home repairs and utility savings over the construction of a secondary unit. In many cases, those same households are unlikely to qualify for the necessary financing or be willing to take on pre-development expenses that can range from $20,000 to $30,000 before start of construction.

“Based on previous findings, peer city models and updated financial analysis, staff finds that while moderate-income homeowners may benefit from assistance, an ADU financing program is unlikely to effectively serve low-income households or deliver a significant number of deeply affordable units,” the memo states in part.

While ADUs may help moderate-income homeowners generate rental income or house family members, staff found the level of subsidy required to make units rent-restricted at 60 percent of the area median income often renders the projects financially unviable.

Staff modeled a range of financing scenarios for both 600-square-foot and 850-square-foot units, with varying levels of public subsidy. Even under the most generous scenario including a 30 percent forgivable loan for construction costs, only homeowners with access to capital and higher household incomes would likely realize positive cash flow from the investment, according to data included in the memo.

If Council chooses to pursue a pilot program, staff recommend targeting households earning up to 80 percent of the median family income in high-displacement-risk ZIP codes such as 78744, 78741, 78702 and 78724. The proposed structure would offer deferred, interest-free loans covering 20 to 30 percent of hard construction costs, while requiring homeowners to secure traditional financing for the remaining share. Use of the new unit as a short-term rental would be prohibited, and repayment would be triggered if the property is sold, refinanced or transferred within the loan term.

Although staff have outlined a framework for the program, they emphasized that no funding has been identified in the Housing Department’s proposed fiscal year 2026 budget. A full pilot rollout would require $1 million for loans and an additional $465,810 for staffing and outreach. That includes a dedicated community engagement specialist, expanded use of existing ombudsperson resources within the Development Services Department, and a targeted yearlong marketing campaign in both English and Spanish.

The findings come as Council continues to look for ways to boost missing-middle housing and achieve the goals laid out in the Strategic Housing Blueprint, which calls for the creation or preservation of 60,000 income-restricted units over ten years. While the city has made progress at certain income levels, the production of deeply affordable units remains well below targets, according to the most recent Blueprint scorecard.

DeMayo’s memo also notes that the HOME Interdepartmental Task Force, established last year, is expected to deliver additional recommendations this summer related to development services reform, permitting costs, and potential infrastructure challenges tied to infill development.

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