SB 9 To Lot Split Or Not - LA City

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Hello Everyone,

I own a single family home on a 1 acre lot in NELA. There are two building pads, one has an 1100 sqft house and on the other I recently completed a freestanding 1200sqft ADU. I Looked into a lot split before I decided to build the ADU but it was too expensive.

I spoke to LA City Planning this week and found that I have a few options using SB9.

1. I am allowed to split the lot and build units on the newly created vacant lot, but the existing home and ADU must stay on the same lot(RSO applies now, apparently). This option is more expensive as it will require a large retaining wall. Combined lot values would be $3,300,000 building cost $600,000.

2. Or I can do an addition to the existing house and make it a duplex, I can also convert the garage into a JADU giving me a triplex. This option is much cheaper, the area is flat and unused, plus has a favorable Soils Report. 4 units on a lot bringing in $15,000/month, build cost $400,000

I plan on selling all this when the 3 year occupancy period expires as we will want a bigger home. Traditional logic would be to build a single family home on the new lot and sell it(Option 1), but the other day I saw cap rates on loopnet(no idea if that is a reliable site) for multifamily investing in LA and those numbers were actually more desirable(Option 2).

My question is what is the better option? What cap rate would I be looking at if it sold as a multi-family investment? Would it be comparable to a multi-family? 3 of the 4 units would be new construction and the old unit would have an extensive remodel. Any Advice is appreciated!

[David Maldonado]

Quote from @Dan H.:

For 4 units or less per lot the cap rate is not used to set value.  The value is based on comps.  Cap rates do not apply in your case.  Comps will be difficult to find.  This typically produces low appraisals.

I am a little perplexed on your statement about RSO. I am not an expert on L.A. Rent Control, but Costa Hawkins should apply with regard to any local rent control ordinance. Combine this with the state rent control ordinance and you should be exempt from rent control for 15 years after the completion of the unit that first made the unit a multiplex (your recently completed ADU).

In general, JADUs lower the value of the property.  It definitely does not make the property a triplex.  It can only be rented with owner occupancy.  I suspect this will be a negative value add option (meaning cost to add the JADU is more than the value that it will add).

I suspect splitting the lot will produce the better return, but you have to run the numbers.

Good luck

I think it depends, in terms of JADUs or ADUS value increase/decrease. My SFH has a JADU and an ADU and a house down the street similar to mine, recently sold for $1.15 Mil, in a neighborhood with average comps of $550k-$600k. The comps used for the property were triplexes. I spoke with their appraiser and he said since SB 9 eliminated residential zoning, he was allowed to use mulit family's as comps for properties with ADUs and JADUs.