How do ADUs contribute to the local economy? (Or, will building an ADU raise my property taxes?)

[This is part 9 of a 13-part series on accessory dwelling unit research and policy. Read the series introduction and table of contents.]

Building an ADU is a significant construction project, as an examination of ADU project costs demonstrates.  A lot of money is sloshing around during construction — easily $45,000+ for an attached unit, or $90,000+ for a detached one.   And when the contractors are done, what was formerly a standard single family residence now has additional finished area, including (in most places) some legally rentable space.

This has two kinds of economic ramifications for the local community.

In the short term, that construction-related money is going out to pay for labor, materials, design, permits, etc.  I’m not an economist, so I may be out of my depth here, but that seems like a good thing, because that cash has left a relatively static pool (of personal savings, or coffers of giant banks) and is now out in the community “doing something.”   The survey of Portland ADU owners showed that professional contractors were used by 85% of homeowner-developers of ADUs, and professional designers were used by 41%.  For the most part, these seem to be relatively small firms, certainly not the kind of giant contractors you see working on big apartment blocks.

In the longer term, the ADU has presumably increased the value of the property.  Certainly the local property tax assessor will be likely to think so.  They will increase the assessed value of the property, and property taxes will rise — permanently.

Homeowners are sometimes surprised by the “bump” in property taxes they experience, but they don’t need to be.   While it’s a bit of a headache, it is possible to do the “tax math” ahead of time and get a reasonable approximation of the increase.  If you have an idea of your ADU’s construction budget, call the assessor’s office and see if they can help you make an estimate.  They won’t be able to give you an exact value until the project is done, so don’t insist on that.  But their formula is set by law, so they should be able to plug numbers in to it and get you in the ballpark.

In Oregon and Portland property tax calculations are messy.  As a consequence of several state measures, the increase in assessed tax associated with an “improvement” to property (such as an addition or ADU) will be influenced by exactly where you live and the year the improvement was made, as well as the perceived market value of the improvement (i.e. the increase in likely selling price of your property, now that it has the improvement).

In my study of Portland ADUs, I figured out those data for about 150 properties, using the homeowner-developer’s reported construction cost as the perceived market value.   That allowed me to apply the assessor’s formula and estimate the yearly property tax contribution related solely to the ADU (even though the property tax bill will be for the property as a whole).

Here’s what I came up with.

The average estimated tax bill was $1134 per year.  Though values ranged up to near $3000 per year, the median estimated value was $1004, meaning that half of ADU owners were paying $1004 or less, and similar amounts will be charged every year for the foreseeable future.  For better or worse, that money is going to whatever property taxes pay for — schools, public safety, and other programs, whether you agree with them or not.

ADUs are like any other kind of “densifying” development — they likely increase both population and the property tax base within a geographic area.   What I’m not sure of is how ADUs compare to other forms of densifying development in their economic contribution to the community.   Are ADUs more or less expensive, in terms of construction cost per unit, than (say) “big multifamily’ projects like apartment blocks?  And do ADUs contribute more or less in yearly property taxes, per unit, than those kind of projects?  I’m very interested in finding out the answers to those questions, so if anyone with a better knowledge of housing economics has data, please leave a comment below.

Whatever the economic differences, ADUs seem to do their densifying in a more subtle, gradual way than other forms of densification.  Only a few will be built in each neighborhood each year (because, remember, the developers are usually regular homeowners), and each one just changes a neighborhood a little.  For better or worse, ADUs can’t instantly change a city — but their effects certainly will be long term.

About Martin John Brown

Martin John Brown is a researcher and consultant on environment and housing. Find out more at http://martinjohnbrown.net.

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