How Villa Helps Multifamily Property Owners Drive Yield from Unused Land
Sean Roberts, CEO of Villa
California’s ADU laws provide compelling and accretive value creation opportunities for owner/operators of multifamily properties. In recent years, California’s laws have been modified to allow multifamily owners to turn unused land into additional housing through ADUs – a way to house more families by quickly adding units while driving more income from a property.
Specifically, each multifamily parcel (with a few qualifiers) is allowed to add two detached ADUs. Moreover, at least one conversion ADU is allowed along with new ADUs comprising up to 25% of existing unit count. For example, an eight-unit building can have two conversion ADUs on top of the two detached ADUs allowed by-right.1 That means that a building originally able to house eight families or roommates can grow to a twelve-unit lot. This creates a pathway for material value creation on properties that are already owned and have the physical space to add more units.
For owners of these multifamily properties – which are typically low-rise and “garden style” apartment complexes – this presents a compelling opportunity to convert already-owned land into additional yield-generating units on the property. At Villa, we have seen that many of our institutional clients take advantage of these newer regulations with strong results. These investors have generated compelling yield-on-cost outcomes – typically getting to around a ~10-12% gross rental yield-on-cost – and these units frequently rent at a ~20-30% premium to the existing adjacent apartment units, as they are new construction detached units with no shared walls. Given the nature of Villa’s prefab-focused approach, on-site construction is performed quickly with minimal disruption to existing tenants and typically receives a certificate of occupancy within months of breaking ground.
1California Department of Housing and Community Development, “Accessory Dwelling Unit Handbook” (Updated July 2022).
Villa was the first company to scale using HUD-code prefab homes to build detached ADUs in California, and we’re now the most scaled builder of prefab detached ADUs in California. While we started as a consumer-oriented business with a focus on helping homeowners directly, we have now been working for two years with some of the largest apartment owners/operators and institutional investors in the country. Through this work, we were a trailblazer in building detached prefab ADUs alongside apartment buildings in California. We were also a trailblazer in doing a detached carport conversion project with ADUs in California. And we have many more trailblazing collaborations with multifamily clients in our pipeline. These are just a few examples of the many innovative applications of prefab homes that we have pioneered here at Villa— we’re just getting started.
Being able to drive this level of innovation in the prefab space requires a few important competencies, all of which we have developed here at Villa over the last few years:
(1) Understanding laws, regulations, and permitting. At Villa, our team actively studies and tracks all the relevant laws and regulations that pertain to the type of housing that our clients want to build. We are experts in ADU laws and have built ADUs alongside multifamily properties in many different jurisdictions throughout California. From our experience with permitting hundreds of ADUs in many different AHJs across California, we have managed complex issues specific to adding ADUs to multifamily parcels, such as: carport conversions, fire separation distances and sprinklers, building setback requirements, easements, electrical panel upgrades, utility trenching in public spaces, and mailbox/address administration. These are complex issues to navigate and collaborating with an experienced ADU builder, like Villa, can help get to the best outcomes. We have an in-house permitting department that has a deep data-set on what it takes to get homes permitted across the 200+ AHJs throughout California in which we have permitted new homes.
(2) A client-centric approach to home design. At Villa, we develop our proprietary home designs with client-driven design preferences and specs in mind. Our in-house Product & Design team can more rapidly iterate the home design, architecture and engineering to respond to market needs than most factories can handle directly (as factories lack the degree of direct customer engagement that we have at Villa). We collaborate with institutional clients to develop the right home product for the application they have in mind, adding or removing certain features depending on client preferences and market needs.
(3) Powering everything with technology and data-driven insights. Villa applies technology to everything we do. This includes client-facing tools like our Design Studio (where clients can configure and price out their unit) and our Lot Placement tool (where clients can assess preliminary site positioning of homes). This also includes technology we use in our internal operations to consistently deliver homes on-time and on-budget. Moreover, our factory-routing algorithm allows us to optimally match factory production capacity to clients’ orders so we can get our clients the best possible execution on the cost, speed, and quality of the homes they’re building with Villa, particularly for larger orders of 20+ homes which we uniquely can build out of multiple factories.
(4) Consistently strong execution, powered by cost and speed advantages. Our institutional clients care tremendously about good execution – as they should. We focus on delivering our homes cost-efficiently (to support the best yield-on-cost outcome for our clients possible), quickly (to minimize time on site and reduce disruption to existing tenants), and always meeting our high quality standards. Our body of work includes repeat projects for multiple large institutional clients, including major publicly-traded REITs and private equity groups, who have come back to Villa multiple times to add ADUs to their portfolios.
Looking ahead
Being creative about finding novel applications to add infill homes using prefab construction is a core part of what we do at Villa. Our mission is to be the easiest, fastest, and most cost-efficient way to build homes. This applies not just to our individual consumer clients, but also increasingly to the growing number of institutional owner/operator and investor clients for whom we build homes.
Looking across California, there are some ~4.6 million apartment units (including both 2-4 family properties (~1.1M) and 5+ unit multifamily properties (~3.5M). Many of these units are located within properties that have physical configurations which make them ideal candidates for value-add projects leveraging prefab ADUs. There is a large opportunity for the owners of these properties and to create additional housing stock and add value to their portfolios.
We’re excited to continue to work with our owner/operator and investor clients to add housing into these infill locations and, in neighborhoods where it is very much needed, while delivering strong returns and value-creation to our clients. For more information on building ADUs to create value for multifamily properties with Villa, visit our Multifamily page.
The information provided here is not intended to and does not constitute legal advice. The information, content, and materials are provided for general informational purposes only. No reader, user, or browser of this site should act or refrain from acting on the basis of information on this site without first seeking legal advice from counsel in the relevant jurisdiction and should contact their attorney to obtain legal advice. Performance, estimates and/or projections provided in this article intended for illustrative purposes only and are not indicative of future results. Prospective customers, builders, investors, and readers should conduct their own independent investigation. Villa expressly disclaims all claims and liability that may be based upon or related to the information provided herein.
