diff --git a/packages/compat/tests/stage2.test.ts b/packages/compat/tests/stage2.test.ts
index c6dccff88..e63bc379f 100644
--- a/packages/compat/tests/stage2.test.ts
+++ b/packages/compat/tests/stage2.test.ts
@@ -719,7 +719,7 @@ describe('stage2 build', function () {
     test('lazy engine css is imported', function () {
       expectFile('assets/_engine_/lazy-engine.js')
         .matches(`  if (macroCondition(!getGlobalConfig().fastboot?.isRunning)) {
-i(\"../../../lazy-engine/lazy-engine.css\");
+i(\"../../node_modules/lazy-engine/lazy-engine.css\");
   }`);
     });
 
@@ -760,7 +760,7 @@ i(\"../../../lazy-engine/lazy-engine.css\");
     test('lazy engine css is not imported', function () {
       expectFile('assets/_engine_/lazy-engine.js')
         .doesNotMatch(`  if (macroCondition(!getGlobalConfig().fastboot?.isRunning)) {
-i(\"../../../lazy-engine/lazy-engine.css\");
+i(\"../../node_modules/lazy-engine/lazy-engine.css\");
   }`);
     });
   });
diff --git a/packages/core/src/app.ts b/packages/core/src/app.ts
index 57d727dc8..f14df5031 100644
--- a/packages/core/src/app.ts
+++ b/packages/core/src/app.ts
@@ -1081,7 +1081,7 @@ export class AppBuilder<TreeNames> {
       if (engineMeta && engineMeta['implicit-styles']) {
         for (let style of engineMeta['implicit-styles']) {
           styles.push({
-            path: explicitRelative(relativePath, join(engine.package.name, style)),
+            path: explicitRelative(dirname(relativePath), join(engine.appRelativePath, style)),
           });
         }
       }
diff --git a/test-packages/engines-host-app/app/router.js b/test-packages/engines-host-app/app/router.js
index c31f5ea58..3d495a9ed 100644
--- a/test-packages/engines-host-app/app/router.js
+++ b/test-packages/engines-host-app/app/router.js
@@ -10,6 +10,7 @@ Router.map(function() {
   this.route('use-eager-engine');
   this.mount('lazy-engine', { path: '/use-lazy-engine', as: 'use-lazy-engine' });
   this.route('style-check');
+  this.mount('lazy-in-repo-engine', { path: '/use-lazy-in-repo-engine', as: 'use-lazy-in-repo-engine' });
 });
 
 export default Router;
diff --git a/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/engine.js b/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/engine.js
new file mode 100644
index 000000000..979fa1e50
--- /dev/null
+++ b/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/engine.js
@@ -0,0 +1,15 @@
+import Engine from 'ember-engines/engine';
+import loadInitializers from 'ember-load-initializers';
+import Resolver from './resolver';
+import config from './config/environment';
+
+const { modulePrefix } = config;
+
+const Eng = Engine.extend({
+  modulePrefix,
+  Resolver
+});
+
+loadInitializers(Eng, modulePrefix);
+
+export default Eng;
diff --git a/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/helpers/duplicated-helper.js b/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/helpers/duplicated-helper.js
new file mode 100644
index 000000000..d90769dca
--- /dev/null
+++ b/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/helpers/duplicated-helper.js
@@ -0,0 +1,7 @@
+import { helper } from '@ember/component/helper';
+
+export function duplicatedHelper() {
+  return 'from-lazy-in-repo-engine';
+}
+
+export default helper(duplicatedHelper);
diff --git a/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/resolver.js b/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/resolver.js
new file mode 100644
index 000000000..2fb563d6c
--- /dev/null
+++ b/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/resolver.js
@@ -0,0 +1,3 @@
+import Resolver from 'ember-resolver';
+
+export default Resolver;
diff --git a/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/routes.js b/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/routes.js
new file mode 100644
index 000000000..fbe9f1b40
--- /dev/null
+++ b/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/routes.js
@@ -0,0 +1,3 @@
+import buildRoutes from 'ember-engines/routes';
+
+export default buildRoutes(function () {});
diff --git a/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/styles/addon.css b/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/styles/addon.css
new file mode 100644
index 000000000..8088dad77
--- /dev/null
+++ b/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/styles/addon.css
@@ -0,0 +1,6 @@
+.shared-style-target {
+  border-bottom-width: 2px;
+  border-bottom-style: solid;
+  border-bottom-color: blue;
+  content: 'lazy-in-repo-engine/addon/styles/addon.css';
+}
diff --git a/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/templates/application.hbs b/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/templates/application.hbs
new file mode 100644
index 000000000..796f7ccee
--- /dev/null
+++ b/test-packages/engines-host-app/lib/lazy-in-repo-engine/addon/templates/application.hbs
@@ -0,0 +1,6 @@
+<div data-test-lazy-in-repo-engine-main>
+  <h1>Lazy In-Repo Engine</h1>
+  <div data-test-duplicated-helper>
+    {{duplicated-helper needAnArgumentHere="to force ember to consider this a helper"}}
+  </div>
+</div>
\ No newline at end of file
diff --git a/test-packages/engines-host-app/lib/lazy-in-repo-engine/config/environment.js b/test-packages/engines-host-app/lib/lazy-in-repo-engine/config/environment.js
new file mode 100644
index 000000000..550798a49
--- /dev/null
+++ b/test-packages/engines-host-app/lib/lazy-in-repo-engine/config/environment.js
@@ -0,0 +1,11 @@
+/* eslint-env node */
+'use strict';
+
+module.exports = function(environment) {
+  let ENV = {
+    modulePrefix: 'lazy-in-repo-engine',
+    environment
+  };
+
+  return ENV;
+};
diff --git a/test-packages/engines-host-app/lib/lazy-in-repo-engine/index.js b/test-packages/engines-host-app/lib/lazy-in-repo-engine/index.js
new file mode 100644
index 000000000..c03b813fa
--- /dev/null
+++ b/test-packages/engines-host-app/lib/lazy-in-repo-engine/index.js
@@ -0,0 +1,12 @@
+/* eslint-env node */
+'use strict';
+
+const EngineAddon = require('ember-engines/lib/engine-addon');
+
+module.exports = EngineAddon.extend({
+  name: 'lazy-in-repo-engine',
+
+  lazyLoading: Object.freeze({
+    enabled: true,
+  }),
+});
diff --git a/test-packages/engines-host-app/lib/lazy-in-repo-engine/package.json b/test-packages/engines-host-app/lib/lazy-in-repo-engine/package.json
new file mode 100644
index 000000000..fadffeddb
--- /dev/null
+++ b/test-packages/engines-host-app/lib/lazy-in-repo-engine/package.json
@@ -0,0 +1,17 @@
+{
+  "name": "lazy-in-repo-engine",
+  "keywords": [
+    "ember-addon",
+    "ember-engine"
+  ],
+  "dependencies": {
+    "ember-cli-htmlbars": "*",
+    "ember-cli-babel": "*"
+  },
+  "devDependencies": {
+    "ember-engines": "*"
+  },
+  "volta": {
+    "extends": "../../package.json"
+  }
+}
diff --git a/test-packages/engines-host-app/package.json b/test-packages/engines-host-app/package.json
index c55b505f1..7767f7bab 100644
--- a/test-packages/engines-host-app/package.json
+++ b/test-packages/engines-host-app/package.json
@@ -63,5 +63,10 @@
   },
   "volta": {
     "extends": "../../package.json"
+  },
+  "ember-addon": {
+    "paths": [
+      "lib/lazy-in-repo-engine"
+    ]
   }
 }
diff --git a/test-packages/engines-host-app/tests/acceptance/basics-test.js b/test-packages/engines-host-app/tests/acceptance/basics-test.js
index b3e4c6d6c..bc3c2927a 100644
--- a/test-packages/engines-host-app/tests/acceptance/basics-test.js
+++ b/test-packages/engines-host-app/tests/acceptance/basics-test.js
@@ -105,6 +105,58 @@ module('Acceptance | basics', function (hooks) {
   // See TODO comment in above test
   skip('lazy engines own app tree is lazy', function () {});
 
+  // this test must be the first test that loads the lazy-in-repo-engine as after it has loaded
+  // it will not "unload" and we are checkign that these modules are entering require.entries
+  // for the first time.
+  test('lazy-in-repo-engine', async function (assert) {
+    await visit('/');
+    const entriesBefore = Object.entries(window.require.entries).length;
+    let rules = arrayOfCSSRules(document.styleSheets, '.shared-style-target', 'content');
+
+    assert.notOk(rules.includes('lazy-in-repo-engine/addon/styles/addon.css'));
+
+    await visit('/style-check');
+    assert.dom('.shared-style-target').exists();
+
+    assert.equal(
+      getComputedStyle(document.querySelector('.shared-style-target'))['border-left-width'],
+      '2px',
+      'eager-engine styles are present'
+    );
+
+    assert.equal(
+      getComputedStyle(document.querySelector('.shared-style-target'))['border-bottom-width'],
+      '0px',
+      'lazy-in-repo-engine addon styles are not present'
+    );
+
+    await visit('/use-lazy-in-repo-engine');
+    const entriesAfter = Object.entries(window.require.entries).length;
+    assert.ok(!!window.require.entries['lazy-in-repo-engine/helpers/duplicated-helper']);
+    assert.ok(entriesAfter > entriesBefore);
+    assert.equal(currentURL(), '/use-lazy-in-repo-engine');
+    assert.dom('[data-test-lazy-in-repo-engine-main] > h1').containsText('Lazy In-Repo Engine');
+    assert.dom('[data-test-duplicated-helper]').containsText('from-lazy-in-repo-engine');
+
+    rules = arrayOfCSSRules(document.styleSheets, '.shared-style-target', 'content');
+
+    assert.ok(rules.includes('lazy-in-repo-engine/addon/styles/addon.css'));
+
+    await visit('/style-check');
+
+    assert.equal(
+      getComputedStyle(document.querySelector('.shared-style-target'))['border-left-width'],
+      '2px',
+      'eager-engine styles are still present'
+    );
+
+    assert.equal(
+      getComputedStyle(document.querySelector('.shared-style-target'))['border-bottom-width'],
+      '2px',
+      'lazy-in-repo-engine addon styles are present'
+    );
+  });
+
   test('eager-engine', async function (assert) {
     await visit('/use-eager-engine');
     assert.equal(currentURL(), '/use-eager-engine');