Thoughtful Analysis & Measured Advice
INFORMED OBSERVATIONS ON CURRENT HOUSING CHALLENGES AND OPPORTUNITIES
July, 2024
Edina’s New ADU Ordinance:
An Opportunity to Offset
the High Cost of Home Ownership
This article is available in PDF format:
As you may be aware, Edina’s City Council displayed admirable leadership this past May, approving the ordinance that conditionally permits one accessory dwelling unit (ADU) to be built on any appropriate lot with a single-family home. These smaller units—for example, a finished basement or addition with kitchenette, bath, and separate entrance—provide low-density living situations for extended family, caregivers, or renters in established neighborhoods.
Properly designed and built, ADUs increase housing density in single-family zones, reducing suburban sprawl and helping meet the community’s sustainability goals, while remaining under the aegis of local municipal control. A win-win for owners, renters, and neighbors, they don’t excessively strain infrastructure, parking, and green space or damage neighborhood character and aesthetics. Although actual permitting depends on whether the ADU’s design conforms to various regulations such as ground coverage, setbacks, and other issues, theoretically, a homeowner could add an ADU to any lot that meets these criteria without physical constraints.
ADU General Rules
• ADUs are only allowed on properties with a single-family home in the R-1 zoning district.
• No more than one ADU is allowed per property.
• ADUs may be internal or attached to the principal dwelling or a separate detached structure.
• An ADU may not be used as a short-term rental, such as an Airbnb or VRBO.
• ADUs may not be sold independently from the principal dwelling or create a separate tax parcel.
• An ADU shall not exceed 1,000 square feet of floor area. An exception is allowed for an ADU located within an existing basement that occupies the entire basement.
• Either the ADU or primary dwelling may be rented at one time but not both. A rental license is required to rent either unit.
• Additional parking is not required for an ADU; however, no vehicle may be parked on an Edina street for six or more consecutive hours, unless otherwise signed. On-street parking is also prohibited from 1 to 6 a.m. from November 1 to March 31.
ADU Minimum Setbacks
There are principal governing factors which must be met for any ADU that is not an internal addition to an existing dwelling. In those cases, the following requirements apply.
• Lots in the R-1 district are limited to 50 percent impervious surface lot coverage.
• Lots over 9,000 square feet are limited to 25 percent building coverage.
• Lots less than 9,000 square feet are limited to 30 percent or 2,250 square feet of building coverage, whichever is less.
• See City Code Section 36-438 for what is included in building coverage.
A Golden Opportunity
for Edina Homeowners
If you’re considering adding an accessory dwelling unit (ADU) to your Edina home, MasterWerks’ recommendation is: Seize the day! At the very least, explore your property’s potential for such a project ASAP.
We urge speed because local communities are now in the pioneering stage of figuring out how to develop, utilize, and finance these flexible housing options. Since Edina approved the ordinance so recently, the city’s permitting and regulatory processes are still relatively relaxed—a situation that won’t last long. The current lack of regulatory bureaucracy translates into greater design freedom, cost savings, and potential downstream revenue, incentives we’ll discuss in greater detail.
Generally, we regard this moment as a golden opportunity for homeowners with appropriate properties. However, any decision to move forward with an ADU project must still be evaluated on a case-by-case basis and managed with exemplary care.
The ADU could be configured in various ways: detached or attached to the house or garage or constructed within the interior of the home. Typically, building within or onto the main structure is the least expensive way to go.
Freedom to Build—For Now
There’s no question that it’s essential for cities to establish and enforce building standards to protect the health, safety, and wellbeing of occupants and neighbors. However, as city zoning regulations mount and supervisory departments expand and proliferate, there’s inevitably more paperwork, jumping through hoops, and calendar delays.
These bureaucratic layers exacerbate the pricing structure, causing housing costs to tick up, while building flexibility goes down—in most cases, becoming much more difficult. And although there’s bipartisan agreement that many building regulations could be interpretive rather than set in stone, history tells us the trajectory is always in the direction of incremental regulation with more administrators enforcing more rules. (For example, witness the growing unrest with Edina’s recent draconian tree ordinance, effective since 2023, with its costly escrows and arborist certification requirements, or the ordinance requiring more stringent drainage systems, necessitating civil engineering or hydrology certification, which often leads to a pricey rain garden installation.)
That’s why MasterWerks’ intuition is that ADUs constitute a growth market now, before bureaucratic requirements make them significantly more expensive and complicated to build. As with any other market, success belongs to those who acquire the earliest information about the opportunity and lead the pack in figuring things out. Then they leverage their options and leap. Timing is everything.
Flexible Housing for Resourceful
Owners and Aspiring Renters
Although ADUs are typically billed as “affordable housing options,” the reality in Edina’s upscale neighborhoods is that they present opportunities for successful professionals who may have stretched themselves to buy their homes. They offer strategic ways to offset high mortgage and maintenance expenses, reduce taxes, and recoup investments when eventually sold. Houses and land are simply too expensive in Edina for these homeowners to rent out their ADUs at below-market rates, but they provide suitable renters with more appealing alternatives to traditional apartments in the same price range.
On the renters’ side of the equation, it’s important to remember that “housing affordability” is relative, and it’s not simply a problem for people at the lower end of the income spectrum. Young, upwardly mobile professionals who would have bought starter homes in another era are currently priced out of the more sought-after neighborhoods where they prefer to live, so it’s no wonder they are feeling left behind these days. For this group, renting an ADU in a desirable enclave during their early career years can be a move-up strategy, giving them more flexibility and independence than they’d have in an apartment complex, as well as access to neighborhood amenities, including schools if they have children.
As a result, the ADU becomes a bridge between more established owners and upwardly mobile renters, effectively making them partners instead of pitting them against each other—one of the problems with the housing bills that recently failed to pass in Minnesota.
Rising Home Prices and Interest Rates Cause Major Affordability Challenges
How Many Households Have Over $450,000 Annual Income?
With an accessory dwelling unit, rental income from that ADU could help make Edina home ownership more feasible or competitive.
A Closer Look at the Math
for Each Generation
An ADU can serve a variety of purposes, with different income and tax impacts depending on how they’re utilized. If you rent it as living quarters, in addition to earning substantial rental income, you can take the full scope of tax deductions for interest, depreciation, and maintenance. You can also take advantage of tax deductions if the ADU is used as personal office space. All these offsets can be factored into calculations around home ownership.
For instance, if a family enters the Edina market and is interested in a home priced at $1 million or more, they are looking at roughly $80-90K a year in mortgage payments, including interest, taxes, and insurance, requiring substantial yearly income. A dual-income couple in their 30s—who might have previously been ADU renters themselves— may be able to consider buying a house in that price category if they factor in yearly ADU rental income in the range of $24-48K. (The average rent in Edina is currently $2,375 per month, per Zillow.) Realistically, even at this sale price buyers will not be in the preferred or premier neighborhoods with considerably higher admission costs.
As for older homeowners, the ADU can create an opportunity for their own children. The next generation gets a boost, while the value and salability of the property is enhanced. Alternatively, empty nesters could rent out the main dwelling and live in the ADU themselves, a creative solution for snowbirds who might typically buy a condo after selling their old residence.
It’s worth mentioning that an owner-occupied rental—where the owner lives on the property and is renting out a basement ADU or detached living space—is exempt from certain fair housing regulations, giving owners greater leeway regarding tenancy and other matters. And of course, property management services are available for owners who prefer not to deal directly with their renters.
Navigating Current Financing Hurdles
Because accessory dwelling units are still a relatively new phenomenon—with many different ideas being explored—they are not well-understood by the financial sector. All lenders rely on appraisers using comparable sales to make determinations about loan value, and that data is virtually nonexistent at this point in Edina. (ADUs are much more established on the West Coast with numerous financing options and lower construction costs due to weather and other considerations, so solutions that work there won’t necessarily work here.)
Generally, lending institutions tend to shy away from factoring in future rental income when you apply for a residential loan. And given the newness and lack of data, there are problems with getting appraisals and establishing a viable secondary market for homes with ADUs, meaning the companies that buy mortgages.
However, if you’re a homeowner with sufficient equity and good credit, most likely you can self-finance an ADU project without running into many roadblocks from a lender, by tapping into various sources such as home equity lines of credit (HELOCs) and second mortgages. (As of this writing, Freddie Mac is proposing a borrower-friendly program that would allow homeowners to tap into their home equity while retaining their first mortgage with its low interest rate. MasterWerks is watching this promising situation closely and will provide updates.) Other organizations like the Family Housing Fund can provide you with additional information on state and federal loan programs as well as local grants.
The cost of building an ADU is not prohibitive, particularly when you’re looking at finishing an existing interior space like a basement or a bonus room. And depending on size and amenities, you can potentially rent it from $1200-$4500 a month, given the current average of $2375 for rentals in Edina and adjacent neighborhoods.
Your Guide through the ADU Maze
At MasterWerks we recognize just how much of a game-changer ADUs are likely to be in the Edina housing market—while cautioning the unwary that this game contains plenty of pitfalls!
Design matters. There are no one-size-fits-all solutions, and failure to consider aesthetics as well as functionality could result in negative impact to your overall property value. In some cases, building an ADU simply won’t work. In addition to having a lot that’s correctly sized, the unit must be seamlessly integrated into your property with similar finish standards—especially on the exterior when attached or detached—amplifying the beauty of the whole.
Only when strategically researched, designed, and built, will an ADU enhance your property value and, if used as a rental, substantially increase monthly income and offset other expenses. Inherently, it can be a true asset and hedge in inflationary times, while serving as a bridge to home ownership for the next generation.
What follows is a series of examples—already built by MasterWerks or currently in development—that demonstrate effective, potential ADU applications with floor plan illustrations.
Regarding the pre-built, convertible ADUs, each was designed to meet the owner’s specific needs and purposes, while maintaining compliance with Edina’s rules at the time of construction. (Prior to the passage of Edina’s new ordinance, the city planning department was adamantly opposed to any alternative dwelling unit in a neighborhood zoned for single-family homes.) With forethought, however, we incorporated the potential for gas, water, and sewer connections as well as electrical capabilities, so the spaces could be adapted to other uses, if-and-when the codes changed. As a result, although these units were not initially developed as living quarters, each readily lends itself to ADU-conversion at a greatly reduced cost, because the core infrastructure already exists.
The three examples that are still in the planning and development stages will be constructed as interior or detached ADUs, purpose-built to provide independent living quarters. Whenever feasible, working with an existing structure will be more cost-effective than building either a full-scale addition or detached structure.
Elegantly Effective: ADU Ideas in Context
INTERIOR LOWER LEVEL
INTERIOR / ABOVE GARAGE
INTERIOR / ABOVE GARAGE with upper level addition
ATTACHED
ATTACHED
DETACHED
DETACHED
The preceding solutions are just a few examples of what can be done with an accessory dwelling unit; there are many other options. However, each ADU must be carefully tailored in terms of design and utility to maximize economic value for the owner.
Seize the Moment
If It Makes Sense for You
Every now and then, life hands us a gift, and the passage of Edina’s ADU ordinance is one of those times. During this challenging period of high housing costs and interest rates, homeowners can generate revenue, reduce taxes, and enhance property value, while giving upwardly mobile renters a chance to access a lifestyle that was previously out of reach. Handled correctly, owners can enhance their properties’ desirability and potential return, if or when they choose to sell.
The greatest success, however, depends on making the decision now, before myriad regulations and inflation further drive up the price structure. It’s also imperative to have informed guidance and expertise—including MasterWerks’ absolute willingness to give a thumb’s down, if we think your property and circumstances aren’t right for the project.
If you’d like to discuss the feasibility of incorporating an ADU into
your property, we invite you to contact us today.