Like many entrepreneurs, Bryan Copley had an ambitious — and slightly naive — idea. He thought he could make a dent in Seattle’s housing affordability crisis by showing some 56,000 homeowners that they could build cottages in their backyards. Homeowners could profit from renting out the units, people who need homes could find them, and his company, CityBldr, could make a bit of money providing consulting and services for the projects.

CityBldr launched AddaUnit in March. The tool showed Seattle homeowners whether their property could support an accessory dwelling unit (ADU). Hundreds of Seattleites used the tool but few actually went through with a backyard cottage. Getting these projects off the ground was more difficult than Copley anticipated. Homeowners were often intimidated by taking on big construction projects. The permitting process for ADUs can be slow. Plus, some homeowners are waiting to find out whether Seattle will loosen its strict parameters for building a backyard cottage.

Copley was about to shut AddaUnit down when two other Seattle housing innovators stepped in to take it over. Visitors to AddaUnit.com are now directed to The BLOCK Project, which builds self-sustaining units to house homeless people in Seattle homeowners’ backyards, and The Cottage Company, a more traditional ADU builder.

CityBldr’s miscalculation with AddaUnit shows how tricky the backyard cottage equation is to crack. But entrepreneurs are attracted to hard problems, and in West Coast cities with booming tech industries, several startups have cropped up to reimagine the ADU as one solution to the housing crunch. GeekWire spoke with housing startups, builders, and city leaders to find out how tech is trying to take on this complex challenge

The challenge

CityBldr estimates that 56,000 lots in Seattle could support ADUs but only a small fraction of them have actually gone through with a project. Seattle City Councilmember Mike O’Brien believes that’s because the restrictions governing backyard cottages in Seattle are too onerous. Seattle homeowners have built just 1,591 attached in-law apartments and 579 backyard cottages in the past 25 years.

Under Seattle’s current rules, homeowners are required to build an off-street parking spot to obtain an ADU permit. If the main house doesn’t already have an off-street parking spot, the homeowner has to build two. The maximum size permitted for an ADU is 800 square feet, which makes building a unit that can fit a small family tricky. Properties have to be at least 4,000 square feet, or less than one-tenth of an acre, to permit a backyard cottage. Homeowners who build ADUs to rent to tenants are required to live in the main house, which could discourage residents who don’t plan to live in their homes long-term.

O’Brien has introduced legislation that would lift or reduce many of those restrictions. The proposal just finished an environmental impact study and is now open to public comment until June 25. The plan has been met with some opposition from homeowners, including the Queen Anne Community Council. O’Brien told GeekWire there is a good chance homeowners will challenge the impact study in court, which could push the legislative process out until 2019 at the soonest. He estimates that the proposal would make about 70,000 lots eligible for ADUs in Seattle.

“That’s a pretty good market and when you’re in a housing crisis, obviously not everyone’s going to do it, but if 5 percent did it, that’s a lot of buildings,” O’Brien said.

Seattle Mayor Jenny Durkan is also trying to encourage ADU development through city policy. Last week, she announced plans to fast-track permits for pre-approved backyard cottage designs, to be developed by architects that the city hires.

That’s good news to Copley, whose company uses software to help property owners determine the highest and best use of their land.

The biggest constraint to seeing hundreds of thousands of these put up in Seattle is government.

“The biggest constraint to seeing hundreds or thousands of these put up in Seattle is government,” he said. “There’s a lot of bureaucracy that property owners have to go through to be able to get this permit that allows them to put a home in their backyard.”

Housing affordability and homelessness are issues that plague cities across the country. In Seattle, the city government hopes to combat the crisis with funds from a controversial new head tax passed earlier this month. The tax will be levied on the city’s top-grossing businesses, which doesn’t sit well with much of the tech industry because it is seen as a penalty on job creators. But the city and housing advocates say big companies need to help address the problems their growth has helped to create.

The case study

When it comes to backyard cottage zoning, Seattle is “one step away” from its sister city, Portland. That’s according to Patrick Quinton, CEO of a one-year-old Portland startup called Dweller.

Dweller builds ADUs that homeowners can buy outright or acquire through an unconventional leasing agreement. If a homeowner can’t afford one of Dweller’s pre-fabricated backyard cottages, the company will install one on the property for free and then operate it as a 25-year rental unit, splitting the revenue with the homeowner 70-30. The homeowner can purchase the unit from Dweller at any time.

Dweller is validating the model in Portland because the city has very few regulatory barriers for homeowners who want to build ADUs. Anyone with a residential property in Portland can build a backyard cottage without creating parking or other requirements. For the past five years, Portland has also been waiving fees associated with building ADUs to encourage their development.

“Generally speaking, we’re characterized as having the most progressive ADU policy in the country,” Quinton said.

Like many West Coast cities, Portland is dealing with soaring rents and an influx of newcomers. The city has been liberalizing its ADU restrictions as one way to add housing; a strategy that appears to be effective. Backyard cottages are cropping up faster in Portland than anywhere else in the U.S.

Dweller is only operating in Portland right now, with one ADU on the ground and four more in development. The startup is eyeing Seattle as a next market but waiting to see whether the city loosens up its ADU regulations.

Over the past few years, California has also been dramatically reducing barriers to building backyard cottages and granny flats. California passed legislation legalizing the units in all of its cities, fast-tracked certain ADU designs, and is reducing parking requirements. The result has been dramatic. Los Angeles saw ADU permit applications jump from 80 in 2016 to 1,970 in 2017. Oakland’s went from 99 to 247, and San Francisco’s spiked from 394 to 593.

The innovators

Dweller is one of several Pacific Northwest startups trying to innovate in the tricky space of urban housing. Its model could be seen as a cousin to Loftium, a Seattle company that launched last fall.

Loftium helps homebuyers gain an edge in Seattle’s intensely competitive housing market by covering some or all of their down payments on the condition that they rent out a portion of their home on Airbnb and share some of the profits with the company. For example, a customer looking to buy in a popular neighborhood could receive $20,000 toward a down payment, agree to rent a bedroom for somewhere between 12 and 36 months, and give Loftium 70 percent of the monthly revenue generated from Airbnb, retaining the other 30 percent.

“By building a backyard cottage or adding a mother-in-law unit to their basement, homeowners create more housing, add rental income now while living in their home, and add value if they eventually want to sell their home,” Loftium CEO Yifan Zhang said. “With Loftium, they’re also creating a way for future homebuyers to get a larger down payment. It’s a true win-win.”

Though that is a win-win for homebuyers, Loftium’s model relies on short-term rentals, like Airbnb, rather than long-term rentals for residents. O’Brien is concerned that even if Seattle lowers the barriers to building backyard cottages, too many homeowners will choose to operate lucrative short-term rentals instead of creating permanent housing for Seattle renters.

“There’s a lot of folks that do these for Airbnb or other short-term rentals and that’s a complicating factor for sure,” O’Brien said. “The energy and excitement behind this, from my perspective, is to add long-term housing options for people but we know that depending on the season, the location, and the individual, some of the folks will be using these for short-term rentals.”

In December, Seattle passed new regulations that prevent property owners from operating more than two short-term rentals in an effort to ensure an adequate supply of long-term rental stock for the city’s permanent residents. O’Brien said that’s as far as the city will go in regulating Airbnb operators but he suggested that there might be some incentives for residents who commit to building backyard cottages to rent long-term.

In addition to Loftium and Dweller, there are a number of startups building pre-fabricated backyard cottages to make it cheaper for homeowners to install them, like Cover in Los Angeles and Seattle-based Blokable.

According to Blokable co-founders Aaron Holm and Nelson del Rio, there are three core issues that need to be solved before backyard cottages can become a scalable housing solution — and the startups mentioned above happen to be working on each of them.

First, viable sites for backyard cottages need to be systematically identified, as CityBldr does. Second, homeowners need better financing options for ADUs, which Dweller and Loftium aim to offer. City governments can also help with this by reducing permitting costs. Third, backyard cottages need to be built quickly, efficiently, and affordably. That’s an area that pre-fab builders like Blokable, Cover, and others are working on.

“Seattle is primarily zoned for single-family housing and the local economy has created 220,000 new jobs in the last decade,” Holm said. “Housing is a regional issue and we’ll need to build thousands of thousands of housing units. Single-family, multi-family, luxury, affordable, new concepts, backyard cottages, all of it, in Seattle and in the surrounding areas. We should build faster, higher quality, more cost-effective, with new technology and capabilities.”

The big picture

Housing innovators and lawmakers are careful to note that increasing a city’s supply of backyard cottages isn’t a panacea for its housing crisis. Instead, ADUs should be of many tools in the urban development toolkit.

As Holm noted, Vancouver, B.C. is dealing with an acute housing affordability crisis despite progressive ADU policies.

“It’s one part of the puzzle and it’s worth doing, but we have to build thousands and thousands of housing units and building more backyard cottages alone won’t be enough,” he said.

But in Seattle and other cities, adding ADUs would allow lower-income residents a way into some of the most desirable neighborhoods, many of which are zoned exclusively for single-family homes.

“A lot of times, those are the neighborhoods that have access to the best schools and parks and things like that,” O’Brien said. “So some of the most desirable neighborhoods are pretty much off-limits to a huge chunk of the population. But with backyard cottages, you can start introducing new housing types in these neighborhoods … and we firmly believe that everyone will benefit from that.”