Be my Neighbor Appendix A

It should be noted that there are often non-financial reasons for creating an ADU or converting a home, such as to house extended family or a caregiver. But if a homeowner is adding an ADU solely for investment purposes, depending on the amount of rent that it can command, it may or may not be a good investment. In addition to capital costs, added property taxes, insurance, and maintenance will be needed.

These costs can vary greatly from municipality to municipality, as can the costs of constructing an ADU. However, two possible examples of these added monthly costs follow - one for a more expensive ADU and one for a less expensive one, both of which are fully financed through a standard 30-year mortgage. If an ADU could bring in enough in rent to cover these costs, as well as allow for a cushion to cover things like vacancy or emergencies, it would be considered a good investment from a standard underwriting perspective. In addition, the homeowner gains value in the added home equity that these investments bring.

Homeowners use a patchwork of financing sources to overcome the capital cost of ADU construction. Evaluating long term benefits and potential financing options is key to successful ADU construction.

Cash Savings

Cash savings is the easiest and quickest way to finance an ADU. Some 401(k) plans offer ways for individuals to take out money from their retirement savings as a low-interest loan to be repaid to themselves without penalty as long as the money is used to build a primary residence.

Home Equity Lines of Credit (HELOC)

Home Equity Lines of Credit (HELOC) is a common tool used to finance ADUs. A HELOC allows a homeowner to borrow money from a lender where the collateral is the borrower’s equity in his or her house before any improvements are added. A typical HELOC is for 25 or 30 years, and the first 10 years is a draw period with interest-only payments. After 10 years, monthly payments require principal and interest payment to pay off the loan. HELOCs are structured to give funds only when needed and charge interest only on the amount withdrawn. This method allows the homeowner to leverage the value of their home, as well as make improvements that will increase property value.

First Mortgage Cash-Out Refinance

A First Mortgage Cash-Out Refinance allows a homeowner to refinance their current mortgage for more than they owe and take out the difference in cash. This may be a good option for those that want to refinance their house or change the terms of their loan. Let’s say a homeowner has $400,000 equity in the home and still owes $200,000 on their mortgage. Interest rates have dropped substantially, so they decide to refinance their mortgage for more than currently owed. Since they need $100,000 to finance the ADU project, the homeowner can refinance their mortgage and take out a new loan of $300,000 - allowing them to cash out $100,000. While it may be unnerving to increase the number of years needed to pay back a loan, renting out the ADU can generate revenue that will enable a quicker payoff.

Construction Loan

A construction loan evaluates future property value following the completion of a project and allows a homeowner to borrow against that amount. After having an architect draw plans, the bank will have an appraiser calculate an ​“As Complete Value” or ACV. Construction loans have many moving parts to coordinate, so it is important to do substantial research. It is also important to know that there are various types of construction loans to accommodate various needs and timeframes. To gain approval, a lender will require construction plans with a detailed timetable, realistic budget, and proof that you are qualified to borrow and have means to repay the loan.

Renovation Loan

Renovation loans are conventional financing methods that base loans on the future value of a property following an improvement. This method may be particularly helpful for a homeowner with limited equity in their current property. A single loan is given for financing the mortgage, repairs, and upgrades, based on the home’s ACV. Renovations costs are limited to 75 percent ACV and may include labor and materials, property inspection fees, architectural or engineering fees, consulting fees, permits and licenses, and other fees associated with energy reports, appraisals, feasibility studies and more.

Municipalities across the nation have recognized the need for more housing. Some have accomplished this goal by effectively banning single-family zoning and allowing for more housing typologies on more land. Others have passed legislation that specifically eliminates barriers to ADU creation. In several cases, these offer policy roadmaps for many municipalities across our region.

Seattle, Washington

In Seattle, new legislation was unanimously passed in July 2019 to make it easier for more property owners to build attached and detached ADUs. The legislation reduces minimum lot size, removes off-street parking and owner-occupancy requirements, allows two ADUs on one lot, increases the maximum household size permitted on a single-family lot, and provides more flexibility for green building strategies. These changes provide extensive new housing and financial opportunities for Seattle residents.

Before this legislation, Seattle signed into law a Mandatory Housing Affordability policy that changed zoning rules in 27 neighborhoods. The policy allows for denser construction while requiring developers in those areas to contribute to affordable housing by including low-income apartments in their buildings or by paying fees. As a result, more housing options will be allowed on about six percent of Seattle’s single-family zoned blocks. The policy, signed in March 2019, is expected to generate 6,000 new homes over the next decade.

Minneapolis, Minnesota

In December 2018, the Minneapolis City Council voted to eliminate single-family zoning and instead allow residential structures with up to three dwelling units in every neighborhood. The vote is part of the city’s updated comprehensive plan called Minneapolis 2040, focused on creating a denser, affordable, economically viable city. Minneapolis is the first major city in the U.S. to approve such a sweeping citywide change, and while legislation like this may not be politically possible everywhere, its success could offer a model of what is possible. Prior to this, between 50 to 60 percent of Minneapolis was zoned as single-family only.

Much of the legislation’s success lies with local advocacy efforts and community weigh-in. Recognizing and exposing the city’s history of housing discrimination, residents held the city accountable for responsible regulation and truly affordable housing initiatives. Along with elimination of single-family zoning, the Council passed the Mayor’s budget of $40 million for affordable housing programs, up from $15 million previously. The City also passed an interim ​“inclusionary zoning” ordinance that requires apartment-building developers to set aside units for residents with below-average incomes.

Virginia

In December 2019, the Virginia State Legislature introduced one new bill and four other housing measures. The bill would legalize duplex homes - townhouses, cottages, duplexes, and so on - in any place throughout the state currently zoned for single-family homes. The bill does not ban single-family housing outright, and leaves issues such as location, design, setback, and other considerations for local governments to decide.

The other bills introduced would expand the powers of the director of Virginia’s Department of Housing and Community Development and give the state’s Housing Development Authority more tools for research. The state’s new budget proposal also gives a big boost to the Virginia Housing Trust Fund and introduces a new eviction prevention program.

Portland, Oregon

In March 2019, the Planning and Sustainability Commission of Portland, Oregon released a recommended draft of their Residential Infill Project, an action plan to create more housing and meet the city’s projected growth of over 100,000 households by 2035. After thorough examination of existing regulations and ongoing public feedback, the proposal makes a series of recommendations that provide greater flexibility for design and scale while supporting the city’s goals for compact development and more housing choices for all.

While the report includes key recommendations for more ADU construction, it also spends considerable time on creating more flexible law around conversion, such as allowing a greater palette of housing types like duplexes, triplexes, and fourplexes in specific zones. Other recommendations include instituting new caps on building floor area, reducing underutilization of oversized lots, and revising building design and parking requirements that prioritize the importance of greenspace and lower housing costs. If the city implements these changes, more housing units could be built in residential neighborhoods.

Following the release of their Residential Infill report, Oregon passed a bill that effectively bans single-family zoning in large cities. The bill legalizes duplexes in cities of more than 10,000, as well as triplexes, fourplexes, attached townhomes, and cottage clusters in cities of more than 25,000. So, while it does not directly ban single-family zoning, it leaves few towns in the state where single-family zoning is still operable.

California

In 2016, California passed the first in a series of legislative bills to make it easier to build ADUs. New legislation has been put forward every year since, reforming ordinances and permissions for easier ADU construction. At the same time, local governments have launched their own educational programming to assist interested residents. In San Mateo County, for example, locals can use a government-run website to calculate what it might cost to build a secondary unit in each of the county’s 21 cities. San Francisco, as another example, has built out a robust how-to guide and FAQ document that demystifies confusing zoning codes and permits.

By 2018, 5,308 units were approved to build in the state’s 24 largest cities - nearly 15 times as in 2016 and 171 times more than in 2013. In October 2019, California signed several laws aimed at increasing housing density and making it easier to build accessory dwelling units. The slate of bills include Senate Bill 330, which limits downzoning and cities’ ability to impose new building standards that drive up construction costs; Senate Bill 13, which specifically addresses the addressing the issue of high permit fees and other barriers to ADU development; Assembly Bill 881, which removes owner-occupancy requirements; and Assembly Bill 68, which allows for two ADUs on the same property. Removing these barriers creates immense opportunity for ADU construction, and sets the stage for other states to follow suit.