ADU permit or not; financial implications

[Saika Maeda]

Hi all, 
I'm almost in escrow with this single family home in LA with an un-permitted large ADU with a Certificate of occupancy. An architect told me that even though ADUs should not be bigger than 50% of the main house, I should be able to permit this one with SB09 if I pay a fee (about $8k according to my agent). Given there is a decent fee, I'm also considering the option of not getting the ADU permitted and just rent it as is for "roommates". I'm trying to weigh my options, and could use help to decide the best path forward.

With permit, benefits are 1) get depreciation and other tax write off benefits since it's a permitted investment purpose ADU, 2) probably better for resell value, 3) have a separate address and don't have to bother sorting out mails for our legal tenant, etc.

without permit; benefits are 1) no hassle to get the permit, 2) no permit fees, 3) no tax on rental income (as it is more like a “roommate”)

Has anyone gone through a similar situation before? Please let me know what’s the best option, or if I’m missing anything. Please let me know the financial implications. 

Thanks! 
Saika 

[Dan H.]

Quote from @Bruce Woodruff:

Quote from @Dan H.:

How do they define 'safe'....?

 Here is text from sb13 “the violation is not necessary to protect health and safety, as determined by the enforcement agency, subject to specified requirements.” 

So the enforcing agency gets to determine, but HCD is present to intervene if the enforcement agency is being unreasonable.   The enforcing agency certainly cannot take action against an unpermitted unit without citing a specific health and safety issue to address.   This is really what it should be as unsafe units should have to address the safety issues before they can be rented.  Bad electrical is dangerous.   Poor egress is dangerous.   The list is long.   Sb13 did not desire to provide LLs an out from addressing health and safety issues.   So the unit cannot have any known health and safety issues.

For years there have been areas that ignored unpemitted units before sb13.    Now it has CA code that protects them from jurisdictions that could advocate for their removal which would result in less safe units being available.

It is an interesting dilemma especially if after the initial law they pass a subsequent law extending the dates.   It could provide the belief that an unpermitted unit built next month will get protected.  This could encourage unpermitted units which is not the intent of sb13, but an unintended consequence.

[Sebastian Marroquin]

Dan keeps making reference to "safe" unpermitted units and that can be interpreted in many ways. 

I had a client that had an illegal garage rented out for $1k per month and when he attempted to sell the property, the tenant went to the city and the owner had to pay the tenant back 2 years worth of rent. Why? ask them... 

The problem I have seen with many unpermitted units or additions particularly in Altadena CA : is that what looks nice, well done and safe many times is not... 

Sometimes they still have the garage door and drywalled the inside... meaning that they did not do a foundation on the garage door line : they did not use a deputy inspector, they did not use the appropriate hold downs (metals) for structural integrity, they did not use the right calculations for framing (ie rafters for ceilings ) that are often changed in a garage conversion... did not use proper headers for windows and doors... etc etc 

I have been faced with these a lot when representing the buyer and I would : 

1. Go to the city and see what is permitted and what is not (for main home and "ADU")

2. I would make sure that I'm not paying a premium for an "ADU" that should really not be there...

3. I would bring in a drafter or architect to assess it and see if you only need the building plans and pay permits: Building plans about $3k to $4k since everything is done... and city permits about $4k to $7k and make sure that you don't have to do anything major... front foundation could easily be $5k or more plus engineering work and stamp. : so, assess all systems and see for obvious things like : garage door, ceiling height, perimeter foundation and drainage, framing if you can, attic space, electrical, plumbing etc 

4. Bring in a trusted contractor : to assess the current property and how much will it cost to get everything up to code (if any)... 

5. Do an assessment of value now and after you get the ADU permitted

* We have been in situations where $8k for permits could mean an extra $100k in value or $2k per month in rents. 

There are many benefits in getting the permits and the risks of not getting it permitted are high... 

As part of my team: I have a city inspector and will ask them about the unpermitted law Dan is talking about...  

Good luck