"Sorry, tenant, but I'm turning your garage into an ADU . . ."

[Jonathan Vince]

I wouldn't say it exactly like that, but that's the gist. So, if you were in my shoes, how would YOU go about orchestrating things? (details below):

*2bd/1ba home in Bakersfield, CA. Detached garage in back. Backyard is big. Tenant's rent currently means the entire property is his to live on and use (i.e. the typical SFR rental agreement). The lease will be up in Jan 2023, at which point tenant can choose to sign a new lease or go month to month for a higher rent fee. Tenant is currently using the garage for storage and laundry (washing machine and dryer are his). They are good tenants

*I learned late (and painfully) that I should have been raising the rent every year. In 2019, when my tenants first moved in, the rent I charged was higher than surrounding areas by about $200. The market zoomed past me, though, and now my tenant is paying roughly $200-$300 less per month than what I could be charging. I did raise the rent by an extra $100/mo at the beginning of this year, upon their lease renewal. All of this to say: It seems that the relatively low rent that I charge can be a bargaining chip in my favor in case tenant protests the "demotion" of his own living situation that an ADU would bring (noisy/disruptive construction, the loss of the use of the garage, and ultimately another tenant sharing the property).

So, considering the above info, how would you go about 1. Telling the tenant your plans, 2. Revising the lease agreement to remove tenant's "right" to the garage and to sole user-ship of the property, 3. "Compensating" him for the reduction in his living quality that an ADU would bring, knowing that he already has a pretty sweet deal on rent (maybe "compensation" could simply be something like saying: "I know this will change how things were. Knowing that market rent, even without garage access, would be $X, and knowing that you are still paying less than (or equal to) that, I won't be raising your rent this year" ... or something to that effect). All input much appreciated!

[Nathan Gesner]

Quote from @Jonathan Vince:

So, considering the above info, how would you go about 1. Telling the tenant your plans, 2. Revising the lease agreement to remove tenant's "right" to the garage and to sole user-ship of the property, 3. "Compensating" him for the reduction in his living quality that an ADU would bring, knowing that he already has a pretty sweet deal on rent (maybe "compensation" could simply be something like saying: "I know this will change how things were. Knowing that market rent, even without garage access, would be $X, and knowing that you are still paying less than (or equal to) that, I won't be raising your rent this year" ... or something to that effect). All input much appreciated!

I believe in being honest. In this case, it's unlikely they will want to stay while you (a) take the garage from them, (b) convert the garage to an ADU, and (c) move someone onto the property with them. There's a very good chance they will leave, but I would offer it to them first. If they don't take it, market it accordingly and start with a new tenant that's willing to accept it from Day 1.