90% of New SF ADUs Are Under Rent Control — Even Though the Law Says They Shouldn't Be
ADU Pilot Team
ADU Pilot Team
California law exempts new construction from local rent control. In San Francisco, that exemption exists on paper. In practice, the city has built a system that routes most new ADU owners into rent control anyway. If you are weighing SF against other California markets for ADU investment, this mechanism should be the first thing you model. For background on how rent control works across California cities, see our ADU rent control guide. For financing considerations that interact with rent control timelines, see our ADU financing guide.
Bottom Line
San Francisco has two ADU approval paths. The State Program preserves your Costa-Hawkins new-construction exemption: no local rent cap applies. The Local Program, which roughly 90% of applicants must use because their lots cannot meet modern Planning Code standards without waivers, requires you to sign a Costa-Hawkins Agreement that permanently subjects your ADU to SF's Rent Ordinance. The current allowable annual increase is 1.6% (March 2026 through February 2027). [1][2]
San Diego has no local rent control. The only constraint is AB 1482's statewide cap of 5% plus CPI, currently allowing increases of up to 8.8%. [3] For the first 15 years after a Certificate of Occupancy is issued, even AB 1482 does not apply. [4]
The practical result: an SF Waiver ADU's operating income stagnates as costs outpace rent growth. A San Diego ADU's income grows with the market. Over 20 years, this gap compounds into roughly $180,000 in foregone rent on a single unit.
What the Law Says
Two layers of California law are supposed to shield new ADUs from local rent control.
Costa-Hawkins Rental Housing Act (1995) permanently prohibits cities from imposing rent control on housing with a Certificate of Occupancy issued after February 1, 1995. There is no sunset date. Under current law, this protection continues indefinitely, independent of any other statute. [5]
AB 1482, the Tenant Protection Act, imposes a statewide rent cap of 5% plus CPI (maximum 10%), but exempts new construction for 15 years from the Certificate of Occupancy date. AB 2747 (2024) extended AB 1482 through January 1, 2035. [4][6]
Under both laws, a new ADU built in 2026 should face zero rent cap for 15 years, then only AB 1482's cap afterward. This is exactly what happens in San Diego.
In San Francisco, the outcome is different for most ADU projects.
SF's Two Approval Paths
SF Planning offers two ADU approval programs, and the one you use determines your rent control exposure for the life of the unit. [2][7]
State Program. Ministerial review, 60-day timeline, no subjective design review. Your ADU is treated as new construction under Costa-Hawkins. SF's Rent Ordinance does not cap your rent increases. Only AB 1482 applies, and that is exempted for 15 years. [2]
To qualify, your project must comply with the current Planning Code without any waivers for open space, rear yard, dwelling unit exposure, or density limits.
Local Program (Waiver ADU). If your lot cannot meet one or more Planning Code requirements, you may request a waiver from SF Planning. The city grants the waiver, but with a condition: you must execute a Costa-Hawkins Agreement that permanently removes your ADU's state-law protection from local rent control. [2][7]
Once signed, the ADU falls under SF's Rent Ordinance. The allowable annual increase for March 2026 through February 2027 is 1.6%, calculated as 60% of the regional CPI. [1] Recent years: 1.7% (2024-2025), 1.4% (2025-2026), 1.6% (2026-2027).
The legal basis for this mechanism is Costa-Hawkins itself. Section 1954.52(b) provides that the new-construction exemption does not apply when the owner enters into an agreement with a public entity in exchange for "direct financial contribution or any other forms of assistance." [5] SF treats a Planning Code waiver as "assistance," which triggers this exception.
Why Most Projects End Up in the Local Program
San Francisco's residential lots are among the smallest in California. A pre-1979 home on a standard 25-by-100-foot lot almost never meets the current Planning Code's open space, exposure, and rear yard standards. Adding a second dwelling unit to an already tight lot makes compliance harder. The SF Rent Board has indicated that approximately 90% of ADU applications are covered by rent control, a figure consistent with the high usage of the Local Program path. [8]
The practical consequence: unless your property happens to have unusually generous setbacks or open space, you will likely need a waiver, and that waiver will cost you your Costa-Hawkins protection.
What 1.6% Looks Like Over 20 Years
SF's rent increase formula produces numbers that consistently trail inflation. The increase is 60% of the Bay Area CPI, which has ranged from 1.0% to 2.0% over the past five years. [1]
Meanwhile, operating costs are growing faster:
| Cost Category | Typical Annual Growth | Source |
|---|---|---|
| Property insurance | 10-25%+ | CA Dept of Insurance [9] |
| Property tax | ~2% (Prop 13 cap) | CA Board of Equalization |
| Maintenance and repairs | 3-6% | NAHB Cost of Housing |
| Water, sewer, trash | 4-8% | SF Public Utilities Commission |
| SF Rent Board fee | $59/unit/year (flat) | SF Rent Board [10] |
When revenue grows at 1.6% and combined operating costs grow at roughly 4%, net operating income (NOI) compresses.
20-Year NOI Projection: $3,000/Month SF Waiver ADU
Assumptions: 5% vacancy, operating expenses at 35% of Year 1 gross rent, OpEx growth 4% per year.
| Year | Monthly Rent | OpEx % of Gross | Annual NOI | vs Year 1 |
|---|---|---|---|---|
| 1 | $3,000 | 35% | $21,600 | — |
| 5 | $3,250 | 39% | $21,200 | -1.9% |
| 10 | $3,515 | 45% | $20,300 | -6.0% |
| 15 | $3,800 | 51% | $18,800 | -13.0% |
| 20 | $4,115 | 59% | $16,700 | -22.7% |
By Year 20, operating expenses consume nearly 60% of gross rent, up from 35%. NOI has declined by almost a quarter in nominal terms. Adjusted for 3% annual inflation, Year 20's $16,700 has the purchasing power of roughly $9,200 in today's dollars.
Diamond, McQuade, and Qian (2019) documented this dynamic in San Francisco specifically. Their research found that the 1994 expansion of SF rent control reduced rental housing supply by 15%, as landlords converted units to condos, demolished buildings, or sold properties to exit the rental market. [11]
Petition Relief Is Limited
SF landlords under the Rent Ordinance can petition for increases beyond the annual cap through two mechanisms. [12]
Operating and Maintenance Expense Petition: when costs outpace rent, landlords can petition for an additional increase of up to 7% (for buildings of six or more units, per five-year period). Eligible costs include property tax, insurance, repairs, and water. [12]
Capital Improvement Petition: for substantial improvements (new roof, seismic retrofit), 100% of certified costs can be passed through over 10-20 years for buildings with 1-5 units, capped at $30 or 5% of rent per month, whichever is greater. [12]
These mechanisms exist, but they are administrative proceedings that take months, require documentation, and do not fundamentally change the long-term NOI trajectory. They provide temporary relief for cost spikes, not a structural fix.
The San Diego Baseline
San Diego has no local rent control ordinance. [3] The only rent cap is AB 1482, and new ADUs are exempt from it for 15 years.
San Diego does have a Tenant Protection Ordinance (effective June 2023) that extends just cause eviction protections to day one of tenancy and requires two months' rent in relocation assistance for no-fault evictions (three months for seniors and disabled tenants). [13] The TPO does not impose any additional rent cap.
The city also waives all Development Impact Fees for the first two ADUs on any property, regardless of size, which goes beyond the state requirement of fee exemption only for ADUs under 750 square feet. [14]
| San Francisco (Waiver ADU) | San Diego | |
|---|---|---|
| Local rent cap | 1.6% [1] | None |
| AB 1482 cap (after 15-year exemption) | 5% + 1.3% CPI = 6.3% [4] | 5% + 3.8% CPI = 8.8% [3] |
| 15-year exemption | Overridden by Waiver Agreement | Active for new ADUs |
| Rent Board fee | $59/unit/year [10] | None |
| Just cause eviction | All covered units [8] | From day 1 (TPO) [13] |
| Impact fee exemption | City-specific | First 2 ADUs: all DIF waived [14] |
Three Scenarios, Three Outcomes
To isolate the rent control effect, the following table compares $3,000/month starting rent across three regulatory frameworks. Market-rate growth is assumed at 3.5% annually, consistent with long-run averages for established Bay Area and San Diego neighborhoods.
| Year | SF Waiver ADU (1.6%/yr) | SF State Program (market → AB 1482 at Yr 16) | SD ADU (market → AB 1482 at Yr 16) |
|---|---|---|---|
| 1 | $3,000 | $3,000 | $3,000 |
| 5 | $3,247 | $3,563 | $3,563 |
| 10 | $3,514 | $4,232 | $4,232 |
| 15 | $3,803 | $5,028 | $5,028 |
| 20 | $4,115 | $5,974 | $5,974 |
The SF State Program ADU and the SD ADU track identically. Both are uncapped for 15 years, then constrained by AB 1482 (6.3% in SF, 8.8% in SD). Since 3.5% growth falls below both caps, the practical difference is minimal in normal market conditions. In a hot market where rents spike above 6.3%, the SD investor has more headroom.
The Waiver ADU is structurally different. By Year 20, monthly rent is $1,859 less than the other two: $22,308 per year in foregone revenue.
20-year cumulative gross rent:
| Scenario | Total Gross Rent | Gap vs Waiver |
|---|---|---|
| SF Waiver ADU | ~$839,000 | — |
| SF State Program / SD ADU | ~$1,018,000 | +$179,000 |
The $179,000 gap is the direct cost of the Costa-Hawkins Agreement over 20 years, before accounting for NOI compression. Factor in rising operating expenses, and the effective gap in cumulative cash flow is closer to $220,000-$250,000.
The Main House Exposure
When an ADU is added to a single-family property in SF, the lot is reclassified as multi-unit. If the main house was built before June 13, 1979, it loses its Costa-Hawkins single-family exemption and falls under the SF Rent Ordinance. This applies regardless of which ADU approval path you use. [8]
In San Diego, no local rent control exists, so adding an ADU does not change the regulatory status of the main house.
For a detailed analysis of this mechanism across six California cities, see our ADU rent control guide.
Vacancy Decontrol: The Key Variable
Under Costa-Hawkins, when the last original occupant voluntarily vacates a rent-controlled unit, the landlord can reset the rent to market rate. [5] This is called vacancy decontrol, and it is the single most important variable in a rent-controlled ADU's financial model.
ADUs tend to attract shorter-tenure tenants: young professionals, graduate students, and transitional households. If the average tenant stays 3-4 years, the landlord gets periodic market-rate resets that partially offset the 1.6% annual cap.
A tenant who stays 15 years locks you into cumulative erosion with no reset opportunity. Your assumed turnover rate may matter more to the NPV than the cap itself.
Proposition 33 (2024) attempted to repeal Costa-Hawkins, which would have eliminated vacancy decontrol entirely. It failed with 62% voting against. [15] Propositions 10 (2018) and 21 (2020) also sought repeal and also failed. Future attempts are expected, and the political infrastructure for expansion exists. SF's Board of Supervisors had pre-drafted legislation to bring an estimated 100,000 additional units under the Rent Ordinance if Proposition 33 had passed. [16]
Decision Framework
If you are considering an ADU in San Francisco: determine whether your lot can qualify for the State Program without Planning Code waivers. If it can, your ADU has the same regulatory profile as a San Diego ADU for the first 15 years. This is worth significant design effort. Consult with a planner or architect familiar with SF's ADU programs before committing to a project design.
If you must use the Local Program, price the 1.6% cap into your financial model from day one. Set the initial rent at or above what you need to sustain the unit for the next 5-7 years, because your adjustment mechanism is limited. Model tenant turnover realistically: vacancy decontrol is your primary growth lever.
If you are comparing SF and SD for ADU investment: SD offers structurally better conditions for rental cash flow growth: no local rent cap, a higher effective AB 1482 ceiling (8.8% vs 6.3%), lower construction costs ($350-450K vs $400-500K), and no main-house rent control exposure. SF offers higher absolute rents ($3,000-3,500 vs $2,000-2,500 for a 1BR ADU), which partially compensates. The choice depends on whether you prioritize higher initial yield (SF) or better long-term growth trajectory (SD).
For all California ADU investors: record your Certificate of Occupancy date. That date starts the 15-year AB 1482 clock. Model two phases: the exempt period and the capped period. The 2032-2035 wave of exemption expirations, when tens of thousands of ADUs built during the 2017-2020 boom lose their new-construction protection, will test investors who assumed unrestricted rent growth was permanent.
References
[1] San Francisco Rent Board, "Annual Rent Increase 3/1/26 - 2/28/27 Announced." Link
[2] SF Planning, "Check Rules for Adding ADU — Local Program." Link
[3] SoCal RHA, "AB 1482 — Rent Caps and Just Cause." Link
[4] AB 1482 Bill Text, California Civil Code §1947.12. Link
[5] Costa-Hawkins Rental Housing Act, California Civil Code §1954.50-1954.535. Link
[6] AB 2747 Bill Text, California Legislature. Link
[7] SF Planning, "Accessory Dwelling Units — Local Program (Waiver ADUs)." Link
[8] San Francisco Rent Board, "Partial Exemption of Certain Single-Family Homes and Condominiums Under Costa-Hawkins." Link
[9] California Department of Insurance, Market Reports. Link
[10] San Francisco Rent Board, "The Rent Board Fee." Link
[11] Diamond, R., McQuade, T., & Qian, F. (2019). "The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco." American Economic Review, 109(9), 3365-3394.
[12] San Francisco Rent Board, "Landlord Petitions and Passthroughs." Link
[13] City of San Diego Tenant Protection Ordinance FAQ — SoCal RHA. Link
[14] City of San Diego, Development Services — Information Bulletin 400. Link
[15] CalMatters, "Prop 33 Election Results: Rent Control." Link
[16] SF Standard, "New Law Would Expand Rent Control — But There's a Big Catch." Link
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