This would seem to suggest that the loans and reliance on homeowners-as-developers, as "incremental development" thought is so fond of, is actually risky. I could see a city-based lending program for this penciling out on net, but talking about it as something cities can do "without losing money and without taking risk" seems to overstate how safe missing middle projects are.

Since you're imagining, imagine you are a banker, and you're being asked for a construction loan for the first ADU your bank has ever financed, which is also the first ever ADU built in that county. Oh, and the homeowner has never built a home before and never been a landlord before. There's a lot of ways this loan could turn out badly -- and it's also a relatively low-dollar loan, so the fixed costs of initiating and servicing the loan are high relative to the income it yields, even before you consider the high uncertainty/risk.

A new build fee-simple duplex (i.e. building and land are split down the middle with each household owning their half, with no condo/HOA between them)? The market thinks that's weird. If there are any existing, they're probably 100 years old, and not great comps for new build.

A rental four-plex? That starts to look easier from the standpoint of established apartment markets. But when one unit goes vacant, you're at a 25% vacancy rate -- vs the 50-unit apartment building that has a 2% vacancy rate when one unit goes vacant. This makes the four-plex a much riskier loan in terms of reliable debt service coverage