The town council unanimously passed a resolution on Oct. 6 wherein the town will provide 30-year, interest-free loans to property owners to build a new, secondary-dwelling unit if the owner promises to rent to a low-income tenant at below market value.

"Interest-free loans for construction of a second unit—that's not a bad deal," said Kent Westerberg, a real estate attorney in Saratoga.

Using a standard formula for calculating construction costs, the town will issue a loan covering all expenses if the property owner promises to rent to people who fall into the county's "very low income" bracket by charging them no more than 50 percent of the fair-market rental rate.

A property owner who charges 80 percent of the market rate to "low income" tenants will receive a loan from the town to cover 80 percent of construction costs.

"It's always a collaborative effort, with council asking staff to continue to think outside the box. It causes us to come up with ideas that are different and innovative," said Community Development Director Bud Lortz, whose department proposed the incentive program.

So far, $500,000 is available as loans to property owners, with the money distributed on a first-come, first-served basis. The town has an additional $3.4 million from its redevelopment agency and Below Market Price funds that could be appropriated to this program should the council decide to do so, Lortz said.

Under the terms of the program, housing units built within the town's redevelopment project area must remain affordable for 55 years, whereas those built outside the area must stay affordable for 30 years.

An effort to create more affordable housing arose when the town was forced to change its approval process for applicants seeking to rent out secondary units in order to reflect changes in state legislation. The town took this opportunity to come up with a new affordable-housing program.

According to Lortz, the town was asked to produce 59 "very low income" housing units and 13 "low income" units between 2002 and 2006 by the Association of Bay Area Governments, which oversees governments in the San Francisco Bay Area. Since the inception of affordable-housing programs, the town has provided 250 housing units for low-income tenants, he said.

Previously, the town had considered passing an ordinance forcing all property owners who put secondary units up on the market for the first time to charge below-market rent. This was met with staunch opposition, with the town receiving more than 100 letters from homeowners, Realtors and representatives of special-interest groups questioning the legality of mandatory rent control.

When the town came back with this second proposal that would allow property owners to volunteer to participate in an affordable-housing program, the feelings were much different.

"Personally, I'd like to congratulate the staff for something different," Natalie Cardeñas, government affairs director for Silicon Valley Association of Realtors, told the council last month. The town can now ensure that the units actually go to someone who needs affordable housing, she said.

The original proposal called for property owners to rent at below market, but allowed them to rent to whomever they wished. The approved plan won't force anyone to charge below market, but if owners want the interest-free loan, they have to deed-restrict the units at below market rate and make sure they rent to a low-income tenant.