ADU/DADU, valuation and financing (Seattle: sale, lease, mortgage broker)

[Hatterasker]

How do I properly value my stake in an ADU development project on my property?

Background: I have property on which I intend to put two more units. The lot is 5950 sq. ft. The lot is situated as the standard 50'-60' by about 100'. It is oriented lengthwise east-west with the street to the west and an alley on the east. The house is less than 1000 sq. ft. and situated about 8'-10' off the alley with carport off-alley. That means an enormous yard on the west facing street-side front.

I intend to put two more units on the land. Seattle allows one main house with an AADU and then a separate DADU. The current house is small enough to qualify as the DADU. The front yard is huge with plenty space for a new "main" house with an AADU.

An old and valued friend constructs ADUs and houses. The level of trust is strong so I want to make sure we do this properly. We are working out an agreement for him to finance the build and have his company do the build. My share is based on the value of the land that will be contributed. I intend to offer up 49% of the land so that I retain 3000 sq. ft. along with the original house. Spoils will be proportionally based on his construction/build costs and the value of my land.

Questions:

How do I determine my share?

When is my land value determined? At the beginning of the project? At project completion? At sale of property?

Should I also collect a bit from allowing the project to happen on my property? He is, after all, getting double profit, on construction with his company and at sale.

There are a lot of other things, but this is the focused issue that I am trying to determine at the moment.

Thank you for your consideration.

M

[jabogitlu]

I note that you say you're offering up land, but to be clear, as far as I understand the local code, this isn't a subdivision, it's just additional dwelling units (a primary dwelling and an attached accessory unit) being built on the same lot. Just want to make sure you know what you're signing up for. You will be legally tied to your friend and can't sell your DADU without him agreeing to also sell his interests in the property.

As for date of value, I would assume you're both going to want a prospective (future) value, and base all your decisions on that value (i.e., upon completion of the project). Any risk in the change of value of the property is inherent in your friend's profit factor that he is underwriting to.

First thing I'd do is find a residential-certified or general-certified appraiser. There are residential appraisers who have specialized knowledge of how to value ADUs who could probably give you some really good advice (valuation and consulting). They'll also be able to assist you with various valuation scenarios to divide up the value of your DADU vs. your friend's new primary and attached dwelling units. If you know any residential mortgage brokers or Realtors, you could ask them if they have appraiser recommendations. Or, you may have some luck by starting with the Appraisal Institute Seattle chapter for a list of residential appraisers with this knowledge. https://ai-seattle.org/form.php?form_id=13

Depending on what all you're asking the appraiser, I'd assume a typical residential appraisal fee of around $500 to $900, plus additional fees for prospective values of the various scenarios (AADU, DADU, etc.) for probably a total fee of under $1,500 to $1,800, just to give you some idea.

You could also consider a land use attorney, I am sure there are residential attorneys out there who've done their fare share of ADU development agreements and have some "lessons learned" they could pass on.

Edited to add: Yes, for a development scenario like this, as a landowner or for some risk similar to a leasehold position, I would usually figure about a 10% to 15% entrepreneurial incentive factor. That's because, as you probably deduced from your line of questioning, the value of your land is the value no matter what. So you need to figure out a profit factor to get you to actually undertake this project.