CITY COUNCIL
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Planning and Development Services
Meeting Date: August 17, 2026
Report #: 2605-6356
TITLE
Adoption of an Ordinance Amending Various Palo Alto Municipal Code Chapters in Titles 16 and 18 to Address Changes in State Law and Direction from City Council Regarding Accessory and Junior Accessory Dwelling Units. CEQA Status: Exempt From the Provisions of the California Environmental Quality Act (CEQA) Pursuant to Public Resources Code Section 21080.17 and CEQA Guidelines Section 15061(b)(3).
RECOMMENDATION
Staff recommends the City Council:
1. Adopt the Draft Ordinance (Attachment A) amending Palo Alto Municipal Code (PAMC) Title 16 (Building) and Title 18 (Zoning) regulations for Accessory Dwelling Units (ADUs) and Junior Accessory Dwelling Units (JADUs).
EXECUTIVE SUMMARY
On June 2025, the City Council adopted the City’s latest ADU ordinance, which addressed comments from the California Department of Housing and Community Development (HCD) identifying conflicts between State law and the City’s previous ADU/JADU ordinance.1,2 At that time, the City Council also directed staff to explore (1) increasing the maximum allowed size of ADUs from 1,000 to 1,200 square feet, and (2) options to allow ADUs to be sold separately from the primary home. Following Council’s adoption of the City’s most recent ADU/JADU ordinance, the State legislature adopted new ADU/JADU provisions to further incentivize dwelling unit production. The proposed ordinance reflects modifications to local regulations to align with new State laws. In addition, staff explored the modifications to the maximum allowable ADU size and for separate conveyance of ADUs in accordance with Council’s direction.
The Planning and Transportation Commission (PTC) reviewed the draft ordinance on May 13, 2026 and recommended that Council adopt the draft ordinance including an increase in the maximum size of ADUs to 1,200 square feet. The PTC recommended staff return to discuss 1 May 12, 2025 Council Meeting (Action Item #10):
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16092 2 Ordinance 5656: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=48336&dbid=0&repo=PaloAlto
separate sale of ADUs once more data was available on the implementation by other cities.
Staff recommends that Council adopt the draft ordinance (clean version in Attachment A and annotated version in Attachment B) consistent with the PTC’s recommendations. While the PTC did not recommend adoption of the separate sale of ADUs at this time, Attachments C includes draft language that could be added to the ordinance to allow for separate sale of ADUs.
BACKGROUND
State ADU/JADU Legislation
In 2025, the State legislature adopted the following laws which became effective at varying points between June 30, 2025, and January 1, 2026, and are summarized in HCD’s addendum to their ADU Handbook.5 The following components require amendments to the City’s ADU regulations, or affect the amendment process:
1.Assembly Bill (AB) 1154 (effective January 1, 2026)
a. Specifies that if a JADU has shared sanitation facilities with the primary structure, owner-occupancy will be required. If the JADU does not have shared sanitation facilities, owner-occupancy will not be required (Gov. Code, § 66333, subd. (b)).
b. Requires that JADUs can no longer be used as short-term rentals and, if rented, must now be rented for longer than 30 days (Gov. Code, § 66333, subd. (g)).
2.Senate Bill (SB) 9 (effective January 1, 2026)
a. Clarifies that if a local agency fails to submit an adopted ADU ordinance to HCD within 60-days of local adoption or fails to respond to HCD’s findings regarding its ordinance within 30-days, that ordinance is null and void and the local agency must only apply State ADU Law when permitting ADUs (Gov. Code, § 66326, subd. (d)).
3.SB 543 (effective January 1, 2026)
a. Requires a permitting agency to determine whether an application for an ADU or JADU is complete and provide written notice of the determination not later than 15 business days after the permitting agency received the application (Gov.
Code, § 66317, subd. (a)(2)(A)).
b. Requires the permitting agency to provide a process for an application to be deemed complete and for applicants to appeal an incompleteness determination or denial, as provided, and requires the permitting agency to provide a final written determination by not later than 60 business days after receipt of the written appeal if a permit application is determined to be incomplete or is denied (Gov. Code, § 66317, subd. (d)(1)).
5 HCD ADU Handbook: https://www.hcd.ca.gov/sites/default/files/docs/policy-and-research/adu- handbookupdate.pdf
c. Specifies that an ADU or JADU that contains less than 500 square feet of interior livable space does not increase assessable space (Gov. Code, § 66311, subds. (d)). This is important to the calculation and imposition of school fees. d. Revises size limitations to be based on the square footage of “interior living space” of the ADU (Gov. Code, § 66321, subds. (b)(2)(A), (b)(2)(B), and (b)(3)). e. Specifies the number of allowable ADUs described under Government Code section 66323 per lot (Gov. Code, § 66323, subd. (a)) to allow for four accessory dwelling units to be constructed on site.
f. Clarifies that fire sprinklers are not required for a JADU if the primary residence does not have fire sprinklers and that the addition of a JADU cannot trigger the requirement for fire sprinklers (Gov. Code, § 66323, subd. (d)). g. Adds section 66333.5, which specifies that if a local agency fails to submit an adopted JADU ordinance to HCD within the 60-day timeline or fails to respond to HCD’s findings regarding their ordinance within the 30-day timeline, that ordinance is null and void and the local agency must only apply State ADU Law when processing applications for JADUs.
Past Council Direction
At the time Council adopted Ordinance 5656, the City’s most recent ADU/JADU Ordinance, they also directed staff to investigate the feasibility of expanding the maximum allowable size for ADUs. Under State law, the maximum allowable size for a detached ADU is 1,200 square feet where the City’s current maximum is 1,000 square feet for a two-bedroom unit, attached or detached. Council also directed staff to evaluate allowing ADUs to be sold separately from the primary dwelling unit which became an opt-in option for all jurisdictions in California in 2024 under SB 477; qualified nonprofit corporations were permitted to do this under AB 1033 without a jurisdiction opting-in.
Planning and Transportation Commission Recommendation
The Planning and Transportation Commission (PTC) reviewed the draft ordinance on May 13, 2026, and recommended 6-0-1 (Hechtman absent), to adopt the ordinance including the increase to the maximum allowable size for ADUs from 1,000 square feet to 1,200 square feet.7 The PTC felt there was not enough data available at this time to determine how successful separate sale of ADUs would be and, accordingly, did not incorporate it into the recommended ordinance. The PTC recommended staff return to discuss separate sale of ADUs once more data was available. Attachment C includes draft language allowing separate sale of ADUs should Council wish to adopt it. This option is discussed in more detail below.
ANALYSIS
State Law Changes
The changes required under AB 1154 and SB 9 are minimally impactful to the City’s current ADU regulations and processes, as these are either policies currently in place or are not significant 7 Currently, PAMC 18.09.040(e) provides that walls shared between the primary home and attached ADUs are fully counted towards the primary home’s FAR and lot coverage changes. SB 543 is impactful to how Planning staff review permits for ADU/JADUs, which is discussed in more detail below.
Changes to Calculating Square Footage for ADU/JADUs
For projects in low-density residential development, like single family homes and ADU/JADUs, the City’s current zoning code calculates the allowable floor area, lot coverage, and square footage used to determine maximum size and impact fees based on the exterior stud wall of the structure. Generally, the purpose for calculating square footage this way was to manage the overall size and massing of a structure. SB 543 now requires jurisdictions, for ADU/JADUs only, to measure these areas based on interior livable space when determining maximum size and development/school impact fee calculations.
Livable space is defined in Government Code Section 66313(a) as: “a space in a dwelling intended for human habitation, including living, sleeping, eating, cooking, or sanitation.” This definition does not include attached utility or storage areas when their only access is external from the unit. As shown in the examples below, the change from exterior to interior stud walls can have a significant effect on how many ADUs will trigger the 750-square-foot threshold for paying development impact fees (500 square feet for school impact fees):
Image 1: Exterior Stud Wall Measurement (Current) – 294 Square Feet
Source: Collaborative Design Studio, Inc.
Image 2: Interior Livable Area Measurement – 259 Square Feet Source: Collaborative Design Studio, Inc.
Since 2020, the average unit size of ADUs has gradually increased from a range of 400 to 500 square feet of Gross Floor Area to a range of 550 to 600 square feet of Gross Floor Area.
Changing how ADU square footage is counted will likely continue this trend and may result in additional increases in total structure size. HCD has not provided official guidance on how interior or exterior walls should be considered, but staff believe that a reasonable interpretation of the State’s intent is to include the interior partition walls towards the floor area and lot coverage for an ADU/JADU (Image 2), and the draft ordinance reflects this understanding and maintains a simplified calculation. When speaking with local architects, their preference is to exclude the interior walls from the unit’s floor area and lot coverage limits, as an incentive to ADU/JADU development. In the draft ordinance the exterior walls will not count towards the square footage for the unit, nor to the site’s development limits.
Introducing Appeals to ADU/JADU Permits
State law now requires the City establish an appeal process for ADU/JADU permits when they have been determined incomplete or have been denied by the City. The applicant pursuing this appeal must provide the City with their reasons for appeal in writing and the City has 60 days from then to return a final written determination on the permit’s incompleteness or denial. This appeal must go to the governing body of the City.
The City currently has an appeal process established in PAMC Chapter 18.78 and certain Planning application types (such as a Major Architectural Review) go straight to the City Council
Consent Calendar when the Director’s decision is appealed, typically within 45 days of receiving the appeal. The draft ordinance recommends that any ADU appeals received be placed on the City Council’s Consent Calendar within 45 days of receiving the request, consistent with this existing process. Pulling the item for discussion would still require the City to make a final determination within the 60-day timeframe. It is worth noting that staff works collaboratively with applicants to get the information needed to approve applications and that the City has not denied a permit for an ADU/JADU since State laws changed in 2017.
Allowable Number of ADU/JADUs
Since 2017, the State legislature has adopted significant measures to allow for more ADUs to be built on residential properties as a way to support infill housing opportunities. This is most impactful in low-density residential areas of the City where, historically, only one unit was permitted on site. The 2025 legislative changes continue that trend by increasing the allowable number of accessory units to be built on site from three to four:
• One Attached/Conversion ADU, one Detached ADU, and one JADU to be built using Section 66323 standards (PAMC Section 18.09.030, Table 1); • Plus one ADU built using Section 66314 standards (PAMC Section 18.09.040 Table 2). 9 Table 1 provides development standards for ADUs that are exempt from generally applicable local regulations. Table 2 is for ADUs subject to local standards. In recent years, the City has sought to encourage ADU construction by allowing both an attached and a detached ADU to be constructed under the Table 2 standards, at least for single family homes. Because State legislation now allows construction of all three Table 1 ADUs in addition to any ADUs allowed under Table 2, the draft ordinance has revised Table 2 to allow only one additional ADU – either attached or detached under those regulations.
Codifying Local Practice for Table 1 Detached ADUs
The draft ordinance also includes a change to Table 1 to clarify staff’s interpretation and implementation of its provisions with respect to detached ADUs. Because Table 1 does not include the local bonus/exemption of 800 square feet offered in Table 2, any ADUs proposed under Table 1 are counted against the standard available FAR and lot coverage on a site. At the same time, FAR and lot coverage cannot be used to constrain or deny proposed Table 1 ADUs of up to 800 square feet. For example, if a site has 2,500 square feet of total development potential and an existing single-family home of 2,000 square feet, an 800 square foot Table 1 ADU would “use up” any remaining development potential, limiting future expansion of the primary home. Even though the ADU exceeds the available FAR in this scenario by 300 square feet, the City would still be required to permit it under State law. A homeowner could avoid these impacts on future development potential by instead proceeding under Table 2 (including local tree protection/privacy measures), which offers the local bonus/exemption. Staff presented this approach to Council during the 2020 ADU Ordinance update as a way to incentivize applicants to build using local standards. This would allow the City to support 9 See bottom of page 18/55 in the HCD ADU Handbook.
second-unit development while also providing some measures (such as privacy measures) to limit impacts on neighbors. Since then, the City has predominantly seen applicants following the local standards for second unit development instead of using State law allowances.
Previous Council Direction
Allowing Separate Sale for ADUs
In 2024, the State legislature adopted AB 103311 which required jurisdictions to allow certain ADUs developed by qualified nonprofit corporations to be sold separately from the primary unit and allowed jurisdictions to extend this option to all other ADUs. Since then, roughly 10 jurisdictions in California have passed ordinances allowing for separate sale of ADUs, and more appear to be poised to adopt ordinances in the coming year. While San Jose was the earliest jurisdiction to extend separate sale to all ADUs in 2024, their staff noted only two applications had been approved and two more were currently under review since 2024. Other jurisdictions (such as San Jose, Santa Cruz, and more recently Berkeley and City of San Diego) have either recently adopted ordinances or have experienced a similar low volume of projects despite early adoption of an ordinance. While members of the public have reached out to City staff since 2024 on this topic, it is unclear whether the City would see a significant volume of applications for separate ownership, if allowed. In comparison, since the adoption of SB 9 (2021) procedures in 2021, the City has received 38 applications for urban lot splits and/or two-unit development.
It is worth noting that jurisdictions throughout the state, including Palo Alto, have experienced increased interest from developers seeking to deed restrict ADU and JADUs as Below-Market- Rate (BMR) units to meet the affordable housing requirements of local inclusionary ordinances or State Density Bonus Law. These proposals are generally disfavored by staff because the City would prefer to have larger, primary units provided as BMR units. In addition, BMR ADUs present difficult questions of enforcement and administration. It is also unclear, from the developer’s perspective, how marketable a primary unit will be if it comes with an obligation to rent an attached or detached ADU at BMR rates. A decision to allow for separate sale of ADUs would eliminate some of these logistical concerns, making it more likely for ADUs to be designated as a required BMR unit in future development.
Staff prepared draft language (Attachment C) based on the process established for SB 9 development, but tailored to ADUs specifically, and incorporated the requirements under Gov.
Code Section 66342. This process is a streamlined subdivision process which consolidates the requirements of the Preliminary Parcel Map and Parcel Map applications and ultimately provides the Director of Planning and Development Services with the authority to approve or deny the application. Unlike SB 9, this is not a State-mandated, non-discretionary process, so some additional objective requirements could be added and were discussed as options with the PTC.
11 AB 1033 language was incorporated into GC Section 66340-66342:
https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=GOV&division=1.&title=7.&part=&chap ter=13.&article=4.
At the May 13, 2026, meeting, the PTC discussed this option and expressed concern about the effectiveness of this policy based on the following topics:
• Lack of data from early adopter jurisdictions regarding the frequency and volume of applications;
• Potential for developers to abuse these provisions to develop multi-family housing without following City process/procedures; and
• Interest/concern for requiring all for-sale ADUs to be sold at 80% Area Median Income (AMI) requirements.
By a vote of 5-1-1 (Commissioner Templeton voting no, Commissioner Hechtman absent) the PTC recommended that the discussion of allowing separate sale of ADUs return at a later date when more regional data is available. Nevertheless, should the Council wish to adopt this policy, staff has included draft language in Attachment C since consideration of this change was part of the Council’s request in 2025.
FISCAL/RESOURCE IMPACT
The impact to the staff’s resources from adopting this ordinance is expected to be minimal.
Most staff resources expended would be limited to staff trainings on the materials, implementation and communication of this ordinance to the public, and staff time spent updating checklists, handouts, or webpage information. If the Council adopts the allowance for separate-sale of ADUs, then staff time and resources would be covered by the project fees for each respective application.
There was a slight increase in median unit size between 2024 (609 square feet) and 2025 (679 square feet) which resulted in a slight increase in impact fees (2024 - $576,866; 2025 - $595,913). With State law changing the way square footage is calculated for ADUs, actual unit sizes will likely continue to increase but assessable square footage for collecting fees may result in a plateau or decrease for fees. Should a decrease in impact fees occur, this will impact funding for City services that support any new residents that could move into newly constructed ADUs.
STAKEHOLDER ENGAGEMENT
The PAMC requires notice of this public hearing be published in a local paper at least 10 days in advance. Notice of a public hearing for this project was published in the Daily Post on August 7, 2026, which is 10 days in advance of the meeting.
ENVIRONMENTAL REVIEW
The adoption of the draft ordinance is exempt from the provisions of the California Environmental Quality Act (CEQA) pursuant to Public Resources Code Section 21080.17 and CEQA Guidelines sections 15061(b)(3), because it constitutes amendments to the City’s zoning code to conform with preemptive State law, including Article 2 (commencing with Section 66314) and Article 3 (commencing with Section 66333) of Chapter 13 of Division 1 of Title 7 of, the Government Code. As such, it can be seen with certainty that the proposed action will not have the potential for causing a significant effect on the environment.
ALTERNATIVE ACTIONS
In addition to the recommended action, the Council may:
1. Adopt the draft ordinance with modifications;
2. Not approve the draft ordinance and leave the code unchanged; or
3. Continue the hearing to a date (un)certain with specific direction.
ATTACHMENTS
Attachment A: Draft Ordinance (Clean Version)
Attachment B: Draft Ordinance (Annotated Version)
Attachment C: Draft Text to Allow Separate ADU Ownership APPROVED BY:
Jonathan Lait, Planning and Development Services Director