CONSTRUCT + FINANCE

CONSTRUCT + FINANCE: NATIONAL CASE STUDIES

OBY Cooperative - Bay Area, California

Los Angeles (LA) is the epicenter of ADU production, accounting for 11,500 of the 26,600 California ADUs permitted from 2017-2019. The distribution of ADUs are random across space, but fairly predictable across time. Access to jobs, near employment centers and transit options, is the most important predictor of ADU production. Enterprise Community Partners estimates that if production continues at 2019 levels, one in ten LA houses will have a modern ADU by 2026. In Los Angeles, LA Mas operates an incentive program that offers homeowners optional financing, design, permitting, construction, and leasing support to build and rent a new ADU. Partnerships and non-profit funding make it possible to offer affordable design services through a design handbook of limited floor plans and choices. This minimal customization approach allows homeowners to save money on design and makes it cheaper for contractors and construction as well.

Other incentives that make this model successful include: • Design Support • Reduced Permitting Fees • Low-Interest Loans • Construction Administration • Landlord Registration and Training

In the Bay Area, OBY Coop also works with a land lease model that utilizes both community investors and a deferredpayment construction loan to finance ADUs for Section 8 residents. The construction cost is minimized through utilizing a preapproved builder cooperative with prefab design options.

SUPPORTIVE POLICY: CALIFORNIA

A series of laws enacted over the past five years have systematically eliminated most explicit and implicit legal barriers to ADU construction across the entire state. While Los Angeles is the epicenter of ADU production, many other cities with similar characteristics like the Bay Area have also seen explosive production of ADUs. Supportive policy includes not only zoning codes and other regulations, but also city outreach and education.

Another Bay Area ADU program, Bright in Your Backyard, is very popular since it does not have any income qualifications. The financing for this program is either a low interest construction loan or an interest only loan with the opportunity to offer three year rent caps and free project management. This program also utilizes the same approach for design - offering prefab/ modular options or low cost design services that minimize customization.

Affordable Small Homes - Portland, Oregon

Dweller, in Portland, develops and owns prefab ADUs through an innovative deferred ownership program which allows a property owner to use their existing land to build an ADU through a hands-off approach with no up-front cost for construction and still have the benefit of receiving rental income. They specialize in building modular ADUs which helps to reduce design and construction cost.

A lease agreement between the developer and homeowner is in place that puts the developer as the responsible party for maintenance and construction. The ADU is built off-site using modular construction and installed on-site to reduce costs and construction time.

The Affordable Small Homes program, also in Portland, is managed and operated by a non-profit developer to target low-tomiddle income homeowners. This program provides privately financed loans through partnerships with mission-driven partners.

SUPPORTIVE POLICY: OREGON

Although Portland has had an ADU program in place for several years, ADU development was not effectively promoted until 1998, when the city amended its laws to relax the regulations governing ADUs. The amendments eliminated the minimum square footage and owner-occupancy requirements. ADUs are now allowed in all residential zones with relaxed development standards.

Portland’s regulations permit the construction of ADUs on lots with a single-family home, as long as they are supplementary to the primary residence and no more than 800 square feet. They can be created by conversion of an existing structure or by construction of a new building.

An early assistance process is available to help with project development for ADUs created through the conversion of an existing structure. ADUs that meet all the standards are permitted by right and do not require a land use review. No additional parking is required for accessory units. Portland’s ADU program guide outlines ways to bring existing nonconforming units into compliance. Portland also waives systems development charges for new construction.

The collective impact of these policies was impressive - ADUs were permitted 500% more once the city removed the minimum lot size requirement, parking restrictions, encouraged multiple types of ADUs, revised the design standards, and waived any associated impact fees.”

WDRC ADU+ Pilot - Denver, Colorado

The WDRC ADU Pilot program focuses on equitable access to development in historically low and moderate-income neighborhoods experiencing involuntary displacement fueled by investor speculation, new public infrastructure investments, and rising housing costs. The program is helping longtime residents invest in their properties, build intergenerational wealth, and create economic flexibility.

This is incredibly important for low and moderate-income families in an area that was historically redlined and has a majority of Latinx residents with limited resources to leverage home equity. The pilot program hopes to demonstrate that affordable ADUs, with a streamlined and cost-effective design approach, can compete with common tools such as the Low Income Housing Tax Credit, opening up opportunities for a greater diversity of federal and state funding to support affordable ADUs. By working with partners with a broader reach, such as national nonprofits, or the state housing finance agency, the WDRC ADU Pilot is able to advocate for new lending and funding options for ADUs.

Including an ADU as part of a new construction brings the costs down through the economies of scale of a larger project. 83%

OF PARTICIPANTS IN THE ADU+ PILOT PROGRAM IDENTIFY AS HOUSEHOLDS OF COLOR SEEKING TO HOUSE FAMILY MEMBERS

Partners

Homeowner Qualification

Ownership + Capital

Additional Details

Number of ADUs Built Bay Area, CA (Bright in Your Backyard) Bay Area, CA (OBY Cooperative) Portland, OR (Affordable Small Homes) Denver, CO (WDRC ADU+ Pilot)

Aligned non-profits and foundations

Must rent at 100% AMI for 3 years upon completion Aligned non-profits and foundations

Variety of missiondriven architects, community development partners, and other mission-driven agencies Rent to Section 8 Will serve any AMI, but by design attracting 120% AMI, aiming for 80% AMI First Bank, Enterprise, Habitat for Humanity

Focus on targeting lower income homeowners

Homeowner Land lease financed through private foundations and trusts Homeowner financed through local banks and credit unions Homeowner financed through First Bank with a $30,000 forgivable loan, there is also a $30,000 construction waiver

Free design and project management assistance is provided with the financing options

17 Assistance with property management and maintenance. Builder cooperative utilizing prefabricated components to lower development costs

7 Including an ADU as part of a new construction or renovation project brings the costs down through the economies of scale of a larger project.

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Several cities were examined to see how they compared to Denver in terms of their market, supportive policy, and resident understanding of ADUs. The success in all of the cases below can be attributed to city-provided incentives, city-wide restriction removals, and more available and diverse financing. The cities rely on non-profit programs to help make ADUs more available and affordable to develop, as illustrated here. Therefore, the combination of these programs with more supportive policy is what has led to success in these cities.

RECOMMENDATIONS: CONSTRUCT + FINANCE

ADUs built at market rate are usually built by tapping into personal funds or sufficient existing home equity to finance construction unless a mortgage can be used if an ADU is being constructed at the same time that the primary home is being purchased. To tap into personal funds this would require good credit scores or sufficient cash. All of these options are a challenge for low-to-middle income residents, so specific lending products that are accessible and tailored need to be created. These recommendations go hand in hand with the design and policy recommendations in order to holistically address the accessibility of ADU development. Recommendations include:

Incentivizing ADU development with a property tax abatement or deferral

Updating the Building Code to make it easier for homeowners to convert an existing structure to comply with new construction regulations

Creating a builder cooperative of pre-approved, experienced manufacturers, builders, and contractors

Increasing the available lending options by creating a subsidy model, or privately financed loans, with grant funding from mission-driven partners to diversify the options available

Minimizing extraneous development costs, such as foundation engineering costs, by using a standard pre-approved foundation

Working with the State of Colorado’s manufactured housing group to streamline inspections and approvals

Expanding the use of modular home building/manufactured housing

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