In a nutshell, SB9 allows you to have higher investment returns coming from building 4 units as part of one project, on just one property, as opposed to building 1 unit (ADU) that has limited returns options. However, to fully take advantage of SB9, you’ll need a higher budget, and it requires some previous experience in real estate development. If financing is limited and this is your first construction project, you can either split the lot into 2 lots and sell one of them, or you can start by building an ADU and, later develop it per SB-9.

What is SB-9 and what can you build?

SB-9 (Senate Bill 9) is a California State law, which went into effect on January 1st , 2022. SB-9 eliminated single family zoning by allowing homeowners to have up to 4 units. A homeowner who apply for permits under SB-9 is allowed a variety of development options that span from:

1. Converting the existing single-family home into a duplex plus an ADU for each unit (in some jurisdictions), to

2. Splitting the existing parcel into two lots and building a duplex on each new lot.

What is an ADU and what can you build?

An ADU (Accessory Dwelling Unit), also known as a granny flat, is a living unit or a smaller single-family home, built on the same property as an accessory structure to the primary home. ADUs can be:

• Detached (a separate building from the main house)
• Attached (connected to the main house)
• Converted (a converted garage or other existing structure)

Main differences and similarities between SB-9 vs ADU

Do they apply on multi-family zoned properties?

SB-9: No. SB-9 applies only to properties zoned for single-family homes.

ADU: Yes. These can be built in all residential zones, including single-family, multi-family and mixed-use zoned properties. CEQA or environmental restrictions are limited compared to SB-9.

Are any restrictions on properties considered historic or have any other environmental restrictions?

SB-9: No. There are additional limitations such as: no development in historic districts or high-risk areas like fire zones, flood zones, earthquake-prone areas, and hazardous waste sites. It also doesn't allow construction in sensitive environmental areas, like prime farmland, conservation areas, or habitats for endangered species.

ADU: Yes, as long as it doesn’t alter the design of the existing building

Is any owner occupancy requirement pre- and/post development?

SB-9: No, if you go with duplex + ADU option. Yes, the homeowner must occupy one of the units for an additional 3 years if you go with lot split option.

ADU: No. It can be rented out regardless of whether the main house is occupied by the homeowner.

Is it possible to sell the dwelling unit separately?

SB-9: Yes, you can split the lot into two parcels and sell them separately, with or without units built.

ADU: No, ADUs cannot be sold separately from the main home, at least for now. However, a state law called AB 1033 allows local agencies in California to set rules for selling ADUs and primary homes as condominiums, while still following the existing ADU development regulations.

Is it any affordability requirement or rental restrictions?

SB-9: Yes. The new units cannot be rented for less than 30 consecutive days. There are no affordability requirements. However, you cannot demolish an RSO (Rent Stabilization Ordinance or units build before 1978). A property owner who has completed an Ellis Act withdrawal at their site may pursue an SB9 Urban Lot Split, only if the units withdrawn from the RSO (via an Ellis Act withdrawal) are not demolished or altered more than 30%.

ADU: Yes. An ADU cannot be rented for less than 30 consecutive days. There are no affordability requirements.

Are they allowing for a fast-permitting process or ministerial review?

SB-9: Yes. The entire process takes 3.5-4 months long for the duplex construction. If you decide to go with the lot split option, the permit takes an additional 4-6 months. 

ADU: Yes. The entire process takes 3.5-4 months long. Once you submit the permit drawing set for plan check, the city must decide if it is complete within 60 calendar days of submitting the application. If the local government fails to give you an answer within 60 days, your permit drawing set is approved by default. In case the city planner asks for corrections, your designer needs to address them and resubmit the application. The city will approve in 30 days.

Does SB-9 or ADU laws limit the size of the building?

SB-9: No, there isn’t a maximum building size. The maximum size is determined by the size of the lot, the 4 ft setbacks and the local zoning restrictions. The units' sizes are not limited, but the lot should be at least 2,400 sq ft (for lot splits, the new lots must be 40% and 60% of the original lot size).

ADU: Yes, the maximum size for an ADU is 1,200 sqft. Most of the jurisdictions have imposed further restrictions limiting the size of an ADU at 1,000 sqft.

Can HOAs restrict the development?

SB-9: Yes, if your property is part of a development with HOA and you want to go with the lot split option. However, you may still go with the duplex plus ADU option.

ADU: No, HOAs cannot stop the development of an ADU according to state law.

Costs and Financing for SB-9 vs ADU Project

Both ADU and SB-9 projects require careful financial planning. ADUs are typically less expensive to build than a duplex. SB-9 projects, especially lot splits, involve extra costs for land division and may require new infrastructure (e.g., utilities), making them more expensive. Here's a breakdown of the costs for a 1,000 sq ft comparison of SB-9 and ADU projects.

How much it costs and what is the profit to build a 1,000 sqft (3BD + 2BA unit) ADU

Architectural and Structural Fees: $25,000

Permits and Approvals: $15,000

Sitework: $30,000

Construction: $381,000 (in Los Angeles)

Financing (10 years at 7% interest rate) : $149,847

TOTAL: $600,847

Market Value: $990,000(in Los Angeles)

Option to sell: No, unless you sell the entire property.

Options to get your investment back: pay off in 10 years by renting it or when you sell the entire property

Project Timeframe: 1 year

How much it costs and what is the profit to build a 1,000 sqft (3BD + 2BA unit) house with a lot split project per SB-9

The design process for a SB-9 lot split project will incur additional costs including surveys of the land, a landscaping plan, and possibly a soil report. The site may also need paving and landscaping to ensure separate access to the second building. Additionally, connecting utilities and providing street access for the new home under SB-9 will require work on the property’s access area, rather than just behind the curb.

SB-9 projects are subject to all standard impact fees, while ADUs usually have most of these fees waived. The fees for SB-9 can include costs for plan reviews, sewer and water connections, fire services, and more.

Architectural and Structural Fees: $35,000

Permits and Approvals: $50,000

Sitework: $45,000

Right of way (for flag lot split only): $50,000

Construction: $381,000 (in Los Angeles)

Financing (2 years at 7% interest rate): $28,400

TOTAL: $589,400

Market Value: $990,000(in Los Angeles)

Option to sell: Yes

Options to get your investment back: sell right away to pay off the expenses and to cash in the profit

Project Timeframe: 1.5 years

See how much it will cost you to improve your property per SB-9

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FAQ about ADU vs SB-9

How many units can I build on my property per SB-9?

The maximum number of units is 4. Whether you decide to have 2 duplexes or just a single-family home to which you’ll add an ADU later is up to you. State law imposes local governments not to restrict you to having less than 4 units. Some jurisdictions go even beyond the State Law to allow for more units on each lot. Check our article that itemizes the regulations for each jurisdiction to find out how many units you may have.  

Can I only split the lot per SB-9 without building anything on it to sell it right away?

Yes! A lot of homeowners decided to split their lot to sell it right away. Some homeowners decide to purchase a large property in a great location and then split the lot right after so they can pay part of mortgage or to finance expanding the main house. The buyer of your lot would have to develop it per SB-9 and you’d still have to live for 3 years in the original house.

I don’t have the money to pay upfront for the lot split. Are there any finance options?

Yes. There are companies that can finance the permit, and the design fees the entire period until the lot is split and ready to sell it. Some companies would partner with homeowners to do the split and develop the new lot for them. The question is how you estimate the value of the new lot.

How can I estimate the market value of the new lot to see if it’s worth the cost of splitting the lot? 

The value of the (new) lot is estimated based on what you can build on the lot and the resale value of the lot after it is improved. Best is to order a CityStructure zoning analysis and a feasibility study for your property. Take these analyses to your local realtor for a CMA. This helps you get top price when negotiating with a buyer because it shows the maximum building area, the budget to develop and the new market value of the new lot once it is fully developed.

Does SB-9 require independent utility meters?

Yes, the units under SB-9 should have separate connections and meters, and may require improvements to the right of way. ADU however, because you cannot sell them separately from the primary unit, typically allow utility connections to be made behind the property line.

If I build an ADU, can I split the lot per SB-9 later in the future?

Yes. Most homeowners don't have the capital to build 3 units at once and the fees for a lot split. This is a great way of phasing your project. Your project phasing could start by building an ADU, then split the lot, build a single-family or duplex on the same lot as the ADU, then add a new unit to the original single-family home. If you know you want to take full advantage of SB-9, you need to plan ahead of time, so you know where to place the ADU on your property. 

May SB 9 be used for properties with units covered by the City’s Rent Stabilization Ordinance (RSO)?

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 cannot 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 SB9 Lot Split only if the units withdrawn from the RSO (via an Ellis Act withdrawal) are not demolished or altered more than 30%.

Are the permit fees for ADU waived?

Not completely. The fees are reduced and most of the impact fees are waived for ADUs under 750 sq. ft.

Challenges to Consider

Challenges with ADUs

Limited Space: Zoning rules often restrict the size and placement of ADUs on a property.

Financing Difficulties: Getting financing for an ADU can be harder, as lenders may have more strict requirements.

Rental Concerns: Renting out an ADU may lead to legal challenges related to landlord-tenant regulations, such as the requirement that ADUs can only be rented for a minimum of 30 days.

Challenges with SB-9

SB-9 projects come with risks because it's a new law, and not many homeowners have attempted to apply for it yet. This might involve trial and error, long approval periods, higher costs, and possible legal issues. Homeowners should move carefully as the process can be complicated and time-consuming.

Lot Size: SB-9 requires an even split of the property, which can make it difficult to develop irregularly shaped lots.

Tenant Restrictions: Development is not allowed on properties that currently have tenants or have had tenants within the past 3 years.

City Regulations: Some cities may have stricter rules, which can make the process even more challenging.

Lot Split and Timing: Starting an SB-9 lot split before finalizing your development plans can lead to problems with regulations, finances, design, and legal requirements. Without a solid plan, you may face limitations on lot size, unexpected costs, infrastructure challenges, and issues with rules on property use and rental.

Making the final decision: ADU or SB-9?

When deciding between adding an ADU or pursuing an SB9 project, consider the following:

• If you're looking for lower costs and simpler processes, an ADU may be the right choice.
• If you're interested in maximizing land use and adding multiple units, SB-9 could provide a more profitable option, though it requires more planning and investment.

Both options have their advantages, and the right choice depends on your goals, available space, and financial situation.

We think that SB-9 has opened a lot more possibilities for a homeowner. You can even finance your ADU by selling the new lot after splitting your property. As I mentioned above, there are companies that can finance your lot split so you can start an SB-9 project with $0 down. Contact us, the CityStructure team to review together your options.

Find out which project gives you the maximum return: SB-9 or ADU?

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