Everyone is annoyed with Ol’ Marty Kaplan for appealing legislation that tweaks the City’s existing rules on building backyard cottages. You’d think that the legislation was going to legalize backyard cottages. But here’s the deal: they are already legal, and have been for almost a decade. The code certainly can and should be improved to make it more permissive. Anyone with a backyard should be able to create rental housing on their own property. But even if we got there, and there were very few rules, there’s no way to finance backyard cottages as I pointed out last week. So here’s my million dollar idea to make that happen.

A set of investors could capitalize a fund of $50 million that would support a DADU service and product. I liked the name Cottage Ease.

Cottage Ease would have an app and a web page that would allow a homeowner to put in their address. An AI would give a red, yellow, or green indicator based on the code and the parcel.

If yellow or green, someone from the company would verify that a cottage would work, make sure there aren’t any deal killing site defects, then alert the design build team.

The owner could choose from three stock options for cottages. These would be pre-approved or screened by the City for quicker permitting. A contractor would fold the order into its work load, and the company would supervise construction.

The fund would create a loan with the house and property as collateral — a lien on the title for the life of the loan — and base the loan on, say, $2500 per month rent which would cover a 5% loan over 15 years of debt service.

That would cover about $250,000 complete cost for the cottage plus costs of putting the whole project together and also leasing up the unit. This way, a homeowner would just point and click and within a year have cash flowing from a rental unit in their back yard.

If cottages averaged about $250,000 per unit, the fund would be able to produce about 100 units over a 18 month period for about $25,000,000. My bet would be that once those loans started to produce some value, banks would start getting interested, first as lenders to the fund but eventually as the originators. At the national level, Congress might be persuaded to allow the Federal National Mortgage Association (FNMA) or Fannie Mae, to back these loans. Currently the whole business of mortgages is based largely on the fact that Fannie Mae backs them, making the risk much easier to take.

The value to the homeowner is huge not just because of the rent revenue but also not having to create a second mortgage and deal with a big construction project or dealing with a tenant. I think there is lots of value to capture in people’s backyards, but there just isn’t any way to do it on a large scale. Cottage Ease could show the way by proving a new loan product that could end up being securitized and sold, something banks typically do with mortgages.

And for tenants, this would produce a rental product for people who don’t want to live in a apartment but can’t afford or don’t want to buy a single-family home or a condominium. This, of course, would free up existing rental housing for other people who need it. It is true that cottages would rent for higher than most apartments, but there is likely a big market for them.

How much do I want for this idea? I’ll sell it to you for $10,000,000. But be careful. Once this thing takes off, Mayor Sawant sometime in 2022 will likely push the City Council to ban DADUs again. We can’t have people building new housing and making money from it!

By the time that happens, I’ll be living happily on my island.