A recently released policy brief by the Mercatus Center examines the increasing role of state governments in legalizing Accessory Dwelling Units (ADUs) as a solution to the national housing affordability crisis.
ADUs—secondary units like backyard cottages or basement apartments—are a common way policymakers are preempting local zoning restrictions to facilitate the construction of lower-cost housing. States with “strong ADU laws“ successfully eliminate barriers to their construction.
While Maryland passed a statewide ADU mandate requiring local governments to adopt ADU ordinances by October 2026, the provisions in that bill still land Maryland in the “weak” ADU law category – mainly because it still allows local governments to enact s0-called “poison-pill regulations.” These rules stand in the way of widespread ADU construction, even in locations where ADUs have been legalized.
Based on the expertise developed by Kol Peterson (an ADU builder, consultant, and advocate), the three primary policy barriers are:
1. Owner-Occupancy Requirements
Owner-occupancy requirements stipulate that the property owner must live in either the primary dwelling unit or the ADU. This rule significantly thwarts investments in ADUs for several reasons:
- If the homeowners move, they lose the option of leasing both the ADU and their primary residence to separate tenants, thereby shrinking the pool of potential future buyers for the property.
- New lending rules from the Federal Housing Administration (FHA) only permit mortgage borrowers to qualify based on rental income generated by an ADU if that unit can be rented without restriction.
- The repeal of owner-occupancy requirements has previously coincided with substantial increases in ADU construction in cities like Los Angeles and Seattle.
- Successful ADU ordinances typically allow the principal residence and the ADU to be rented separately, without this requirement.
2. Off-Street Parking Requirements
Mandating off-street parking for ADUs can make them infeasible to build at many existing houses.
- On sites where a backyard cottage is desired, requiring space for both the ADU (within setback limits) and an additional parking spot may not be possible.
- If a garage is the most natural place for an ADU conversion, the necessity of replacing the primary dwelling unit’s parking and adding parking for the ADU can prove prohibitive.
- State laws, such as those adopted in California starting in 2016, have addressed this by limiting parking requirements for ADUs.
- Successful ordinances analyzed generally do not require single-family houses with ADUs to provide extra parking for the accessory unit.
3. Conditional or Discretionary Reviews
- Requiring discretionary reviews for ADU permits prevents many homeowners from building these units.
- Applying for a conditional use permit often requires homeowners to navigate a time-consuming and intimidating public hearing process.
- Homeowners must pay a nonrefundable fee and commission potentially expensive site-plan drawings.
- Many homeowners are understandably reluctant to spend thousands of dollars when they only have the chance of receiving a permit.
- California responded to this barrier by adopting a law in 2003 that mandated localities permit ADUs through a by-right process instead of discretionary processes.
Other Important Policy Barriers
Beyond these core “poison pills,” other policy aspects that significantly affect the feasibility and construction rates of ADUs include:
- Dimensional Standards (Size and Setbacks): The physical limits imposed on ADUs are critical to their feasibility. Zoning reforms that have allowed for larger ADUs have been essential to increasing construction rates in various cities. For instance, California law requires localities to allow ADUs of at least 800 square feet, provided they can be built within specific envelope requirements, such as 4-foot side and rear setbacks and a height of 16 feet.
- Cost and Infrastructure Fees: Policies affecting the cost and convenience of providing infrastructure and utilities can make ADUs infeasible for many homeowners.
- Impact fees can be a major problem. In Portland, Oregon, an impact fee waiver implemented in 2010 led to a major increase in permits for ADUs.
- State laws, such as those adopted in California, have sharply limited the impact fees localities may charge for ADUs.
- Requirements by utility companies for separate metering for the ADU can entail significant costs.
- Permitting Speed and Local Resistance: Even when core state barriers are removed, some local governments continue to stall ADU construction, often through slow permitting processes.
Read the full Mercatus ADU policy brief here: A Taxonomy of State Accessory Dwelling Unit Laws 2025 | Mercatus Center