Yesterday, I wrote about a way to capture the value in thousands of backyards by creating a loan product that could spark a market in building and producing Detached Accessory Dwelling Units (DADUs) or backyard cottages as they are often called. Today, for those who think that $2500 is too expensive and want lower rents, we have another great idea: the Detached Accessory Dwelling Unit Tax Exemption (DADUTÉ) Program. I added an accent at the end.

The City of Seattle has a program that is allowed by state law called the Multifamily Tax Exemption (MFTE) Program. This program allows landlords and tenants of new apartment buildings to share a tax exemption when developers set aside 20 percent of the units in a building for people who earn below 60 percent of Area Median Income (AMI), that’s about $42,000 per year or about $3,500 a month.

As I pointed out yesterday, I’m guessing that rents for a DADU in Seattle would reasonably run about $2500 a month to cover the construction and financing of the cottage. That could be more or less depending on the costs. If the idea of financing these produces enough money, a market will grow, competition will increase, and prices for everything would drop, including the rents. But today, 100 percent of AMI is about $72,000 for a two person household, that’s about $1,800 for rent based on the normative standard of 30 percent of gross monthly income spent for housing.

Through a tax exemption program, property taxes could be significantly reduced; that would mean better financing options (lower interest rates) and savings for the homeowner that would match up or exceed the $700 between the rents that might be required, just like the MFTE program does for rental properties. Yes, this would be subsidy for people with a household income of more than $70,000, but these would be households that could leave rental housing where that household would be paying less. That unit vacated by that household would then be available for another household.

I have no idea what the math would be across the city, but the point is that prices will come down with competition between lenders and builders, and, if the City came along with a DADUTÉ Program set up like MFTE, it’s likely even more people would want to get some benefits from reduced taxes and rent revenue. And people looking for housing would have a whole new rental product available. More overall housing supply would stabilize prices along with the potential rent reductions from the DADUTÉ Program.

When we asked people from Oregon why there are more DADUs there, they said that it was because local government reduced or eliminated system charges for utility connections. This acted as an incentive. So along with a market solution, a subsidy through a tax exemption program could set fire to the DADU market and transform housing production in the city. It’s an idea. We need to do more quantitative analysis but it’s worth doing regardless of the recent tweaks to the code.