What would you choose? SB9 vs. ADU vs. Home Addition?

Question

Hello BiggerPockets Community!I have a property that I purchased in LA county that has a ~12,500 sq/ft of flat land (12,500 Sq ft lot) with one existing primary residence (1200 Sq/Ft)I hired a architect to design an ADU (3bed/2ba, 1200 Sq/ft) and Addition (3 bed/2 ba, 1200 sq/ft) to the main home. My plan was to add a kitchen/kitchenette to the addition after the city signs off on everything and rent it out as it's own unit But now that I think about it, if something happens in the addition (i.e, a fire) I could be held liable since that area was never permitted to be its own rental unit or have a kitchen. Secondly, what can that mean to any insurance claims. Third, the addition is will be constructed to the existing master bedroom that is currently occupied by tenants. The contractor will have to take down an exterior wall when they begin framing making the master bedroom inhabitable. If we put up a temporary wall during construction, the city inspector will question why there is a wall there; unless I can make the claim that it's currently being used by a tenant? Would they be ok with that?So here are my questions for the wise and experienced BiggerPockets community:1. Should I scrap plans for the addition and just focus on the ADU? This way everything is permitted and legit and I don't have to worry about the master bedroom being unavailable. 2. Should I split the lot (SB9) to get the most of out of the land? 4 legitimate units as opposed to 2.3. If I build an ADU, can I split the lot later in the future or will I no longer be able to after the build of the ADU? (I don't have the capital to build 3 units at once)4. Should I talk to the city to see if I can maintain a wall in the master bedroom during construction since it's being used by the tenant and take it down at the end when it's ready to be attached to the addition?I've spent about $25K so far on designs, plan checks, permits etc. I don't have a permit to start construction yet but am not contemplating whether my original plan is the way to go.I know this is a long post but I wanted to provide as much relevant information as I could and I truly appreciate everyone's time in helping me with this critical decision!! Cheers!

Brad S. · Answer

Here's what I found about SB9 and tenants in the past 3 years. "Benefits homeowners NOT institutional investors. Recent amendments require a local agency to impose an owner occupancy requirement as a condition of a homeowner receiving a ministerial lot split. This bill also prohibits the development of small subdivisions and prohibits ministerial lot splits on adjacent parcels by the same individual to prevent investor speculation. In fact, allowing for more neighborhood scale housing in California’s communities actually curbs the market power of institutional investors. SB 9 prevents profiteers from evicting or displacing tenants by excluding properties where a tenant has resided in the past three years." from SB 9: The California HOME Act | Focus and here is info about RSO and properties built prior to 1978 "Q12. May SB 9 be used for properties with units covered by the City’s RentStabilization Ordinance (RSO)?The City’s RSO covers properties with two units or more where at least one of the units was built prior to October 1, 1978. This includes properties with a single-family residence built prior to this date and a second dwelling unit (e.g., main dwelling, ADU, or JADU). Please consult LAHD’s webpage and associated FAQ on this topic. Demolishing or withdrawing a unit covered by the RSO requires an Ellis Act withdrawal. RSO units are considered withdrawn from the housing market if they are demolished or if the two units are split into two one-unit parcels due to a subdivision. Properties with only one unit on a parcel are not subject to the RSO. A property owner may not seek a permit for a SB 9 Two Unit Development during the 15-year period after RSO units have been demolished or withdrawn from the rental housing market (Ellis Act). Therefore, an Ellis Act withdrawal will disqualify a site from being eligible for a SB 9 Two Unit Development for a 15-year period from the date of withdrawal.A property owner who has completed an Ellis Act withdrawal at their site may pursue an SB 9 Urban Lot Split only if the units withdrawn from the RSO (via an Ellis Act withdrawal) are not demolished or altered. They have a small matrix showing scenarios and SB9 eligibility. Check it out here -SB9FAQ2.7l.pdf (lacity.org)

Brandon Ly · Answer

No apologies at all! Account Closed. It’s because of your feedback that led me to do more research in this specific area that I can now ask LA county to clarify. In the end, we’ll all benefit from personal experiences and how LA county interprets SB9 regulations so we can all better prepare and plan for our projects in the foreseeable future. I appreciate the dialogue and feedback and should you ever want to know the outcome my meeting with the county, please feel free to reach out. Until then, cheers 🍻 and thank you 🙏.

Brandon Ly · Answer

Thanks Account Closed The only reference I can find in the legislation that excludes SB9 from being used due to tenant occupancy in the last 3 years is specifically associated to the alteration or demolition (anti-displacement measures) of the unit on the property. I'm interpreting "alteration" to mean any change to the existing unit but perhaps that's viewed differently by the jurisdiction that "alteration" means any change (such as new construction) on the lot? Other than that, I couldn't find anything in the legislation that prevents SB9 from being used on rental properties. I've got a virtual consultation scheduled with LA county to bring up these points and if anyone is interested, I can provide an update on the outcome of that meeting. Thanks!https://leginfo.legislature.ca... https://www.hcd.ca.gov/docs/pl... https://www.myhomestead.com/bl...

Account Closed · Answer

You can split the lot if the house was built pre-1978. My complicated situation aside I just wanted to answer questions 2 and 3 from your original post, you can split after building an ADU. But whether or not you should is a financial question that really depends on where your lot is. I built my ADU in 2020 before SB9 passed, which put my original house under rent control because it was built pre-1978(2 units on the same lot triggers rent control if one was built pre-1978). I would not have gone that route had I known SB9 would exist. My end goal is to have 2 separate lots, for me the only way to split my original house and ADU off onto separate lots was to add a JADU to my original house.I only mention it because you said you have tenants, you would not be able to use SB9 until 3 years have passed since you had tenants. You could choose to not renew their lease and start construction now with a detached ADU and a JADU attached to the original house, then in 3 years go for the lot split.I went this route because the resulting 2 lots will sell for much more than 1 lot with 4 units. The obvious downside for you is that route requires a lot of capital up front and no returns for 3 years.

Brandon Ly · Answer

Thanks Account Closed !I haven't found any information about not being able to split the lot if the house is built before 1978 (which mine is) but I'll bring that up to the county when I meet with them in a couple weeks.Is there a reason why you chose to split the lot as opposed to adding an SB9 unit and then adding an ADU to it? The result of 4 total units is the same as the lot split but it seems like it would be longer to go through the process of splitting the lot as opposed to just adding a primary SB9 unit which you can then add an ADU to. Maybe I'm missing something.

Account Closed · Answer

Well that's good news. I just checked the forms the city had me sign for my plans, it just says "certain restrictions" apply if I had had a tenant in the last 3 years. Sorry if I led you astray, thank you for finding that info!

Account Closed · Answer

I would look into SB9's tenant clause, I believe if you have had a tenant on the property in the last 3 years you cannot use SB9. Not sure of the intricacies of that.I finished a detached ADU in 2020. You can use SB9 to split the land after, I am in that process now. Basically I have a supplemental permit that says SB9 2-unit development, the old house is unit 1 and the ADU is now unit 2. Keep in mind once the ADU is complete your old unit will most likely become RSO which will mean any alterations are much more complex and limited.The downside of this route is that if you build the ADU now and your old house is built before 1978 you cannot split the lot because the old house cannot be on its own lot once it falls under RSO. My work around was to convert a free standing garage I had into an ADU which will stay on the lot with the old house thus keeping it RSO.Sorry if that was not succinct, its just REALLY complicated. But I'm making it work, the trouble is worth it in NELA, but probably not in some locations.

Ben Nya · Answer