For those of you who’ve been following along, it’s been a real treat sharing this process over the last year and a half. As of today, I’m officially abandoning the live/work project. The climate is wrong, the banks aren’t willing to meet us halfway, and the entire process is…well, just exhausting. I could go on and on about things we’d do differently, frustrations with the industry, or the unrealistic expectation the city has for the ADU program.

But for now, I won’t. Instead, I’ll just say thanks to those who deserve it.

Bad news. After reaching terms with the bank, they’ve gone back on their initial commitment. The first terms were not favorable, but if I held my nose, I could tolerate it.

The new terms are just abysmal. They’ve increased their fees to 2 points, are requiring all sorts of new documentation from the builder, and want to up our rate from 6.5% to 8%. All this and they hold the lien on the house - if anything goes wrong, we lose everything.

After some consideration, I made the decision to stop pursuing business with this bank. This was a tough call because we don’t really have any other options. As much as I wanted to make this project happen, it just didn’t make any sense. Here’s why:

Our project costs roughly $165,000 to build. Our current home is worth just over $250,000. In order to loan on the construction phase, the bank requires that that hold first position on the property. This means that they want to buy out the existing mortgage (to protect themselves in case of default) before loaning on the new building. So while it would SEEM like we need to borrow $165,000, when you add in the existing mortgage, interest reserves, bank fees, title, so on and so forth….you get to a “loan” of $447,000.

Since the appraisal of both properties came in at $485,000, the most the bank will loan is $364,000 (75% of the appraised value of the property). The difference between this amount ($364k) and the TOTAL project cost ($447k) is what we, the owners, have to come up with in CASH (just over $80,000).

I don’t know about you, but it’s a little CRAZY to come up with $80,000 in order to get a loan for a project that’s $165,000.

Still, I was willing to give it a shot. I don’t have that kind of scratch lying around, but I do have some savings. Plus, I have a business with a substantial line of credit and some cash reserves. Last, but not least, I had a dear friend who was willing to loan me $30,000 to make up the rest.

It was a stretch, but I could have done it and met the bank’s insane demands. When they changed the terms, it was still possible…

But the reality is what the bank was asking was just too much, and for a cost that was disproportiante to the risk they were willing to take. Calling the current lending climate “unfriendly” would be an understatement at best. It’s a stark example of how the credit crunch is grinding our economy to a halt.

Banks will loan you a certain amount of money based on the appraised value of your project. To keep it simple, let’s say your project appraises at $100,000. Most banks lend between 70-80% of the full value of the project. With the example above, that would be $70-$80k.

This percentage is often referred to as “Loan to Value” or LTV.

Of course, it’s not *quite* that simple. In addition to the value of the property, you have other costs to be accounted for. Banks will require an “Interest Reserve” - funds to pay the interest on the loan during the construction phase.  If your interest on the loan is around 7%, then you’ll have to add $700×12 months to the project cost. The total number of months depends on the complexity of the project and the bank’s requirements, but in the example above, you’d have to put in $8,400 in interest reserves.

Other fees to be aware of could include title, insurance, and the loan origination fee (usually expressed in points). Let’s say your title and insurance fees run $2000, and the bank charges 2 point ($2000) for the loan. Now you’re up to $12,400.

Ok, so you have the added fees and costs - now you can get an idea of the TOTAL bill.

Let’s say your project is estimated at $90,000. If you add in the $12,400, your TOTAL project costs are $102,400. Assuming the bank will do 80% LTV, that means you have to make up the difference ($22,400).

As you can see, this is why getting a high appraisal is critical. If you don’t have a high enough value, it means you have to bring more money to the closing.

The reason duplexes are relevant is that there are many examples of such properties around the city. Unlike ADUs, duplexes can be found throughout many neighborhoods, and finding recent sales data will be much easier.

If you’re reading this post, send some good wishes our way.

Without going into too much detail, we had a great conversation about the ADU program, it’s shortcomings, and how the city could tweak a few things to improve adoption. We all agree that the city’s code needs some updates, and it’s good to find like-minded folks who see the potential for ADUs in Portland

What I like most about Eric and Beth is that they see the merits of small, efficient design. Their portfolio has some excellent examples of how small, organizational changes can have a profound impact on the efficacy and enjoyment of the home.

In addition to their work, the design duo have some great articles/essays on their site. Here’s one excerpt I found to be particularly compelling:

The fact is that the greenest solution is one that involves the least building possible…

Pretty courageous coming from folks who make their living from building design! Kudos! A while back I wrote an article that discussed the decidedly disturbing trend of “trophy green” - remodeling for the sake of vanity or prestige. It’s great to see building designers who consider the decision to build as a part of the green equation.

Here’s another quote from Beth that I found very fascinating:

Today people in the U.S. live in about three times as much space per capita as they did in the 1950s. Older homes that housed a family of four are now seen as inadequate for two people. One reason for this is that we now bring into our houses many of the activities that once took place outside the home. In addition to sleeping, eating and socializing, many people now expect to have separate places for a media center, home spa, children’s play space, home office, work-out space, party space, laundry facilities, guest room, plus storage for even more options.

The fact is that bigger homes, even very green ones, use significantly more resources than smaller conventional homes. In other words, living well within a smaller space is one of the greenest things you can do.

If you have a moment, check out Eric and Beth’s site. There is some fantastic food for thought, and the two of them seem like great resources for those considering green design in Portland!

Those of you following this website know that for over a year (17 months, but who’s counting?) I’ve been trying to get our ADU project off the ground. We’ve won some major battles (land use adjustments) suffered some small setbacks (NIMBY neighbors) and learned a lot about urban development.

A few months ago the magazine Portland Spaces put out a brief article on the ADU “trend” (”trend” is an overstatement, but the article did make it seem as if ADUs were the next “big thing”) Anyway, one of the points made by the article was that the permit process is so expensive (at least $7500 for permits) that ADUs fees are nearly as expensive as building a “real” house.

Which segues to my main point - building an ADU in the Portland city limits is simply too difficult, time consuming, and expensive.

17 months ago I had a dream: show that yes, on a modest income, we could build a custom residence (albeit small) within the city core. Our model project would demonstrate how ordinary citizens could increase density without sacrificing quality of life. The project would show the benefits of shared spaces, savvy space planning, and smart architecture. And if that weren’t enough, our new building would show that a small footprint could support a living space and a home-based business. In short, the new building would be the fusion of economic self-sufficiency and small-footprint lifestyle.

Then came the sub-prime mortgage disaster. And the end of easy money. And the evaporation of the construction-to-perm financing programs. In short, the “home equity” era was over.

And with this has come the reality that building this sort of project isn’t really an endeavor to be tackled by those of modest income. You need cash - and lots of it - to get a building off the ground. Even if you’ve got a great track record and good income, the banks don’t want to talk to you unless you bring significant money to the table.

Which gets me back to the city and its zoning issue. I see several problems:

• The time and money involved in building an ADU, especially if it doesn’t fit within the standard guidelines, it prohibitive for all but the most determined individuals. I recently pulled the records for ADU permits and of the 47 permits on file between 2005-2006, a full 20 (nearly half) were canceled. It’s impossible to say why, but my guess is that the economics of the ADU just didn’t work out.
• Appraisers simply don’t know how to deal with ADUs. There are no standards and many appraisers make their best “guess.” Comps are difficult, if not impossible to find. In turn, this means that the ADU is often undervalued and the homeowner is unable to show enough value in the project to obtain a loan.
• Banks don’t know how to deal with ADUs. They speak the language of “multi family” “single family” and “duplexes.” ADUs don’t fit within any of these categories - they’re typically built on single family lots but can easily accommodate additional families or renters. Like duplexes, ADUs can generate income, but unlike duplexes, ADUs aren’t necessarily attached units. I can’t tell you how many banks simply refused to look at the project because it didn’t fit into a nice box.
• Unless you can fund the ADU construction out of pocket or with a home equity loan, the banks will want to hold the lien on the home in order to finance the ADU construction. What this means is that the fees/points/loan costs increase dramatically as the bank will want to combine the existing mortgage with the new construction. In addition to adding to the cost, this creates a situation where you need to “close” on the loan twice - once at the beginning of construction and again when the building is complete.

So, given all these issues, how could the city of Portland change the ADU program to encourage more buildings?

• Develop a program to help train appraisers in correctly valuating ADUs. Create a certification system so that homeowners can hire appraisers trained in evaluating ADUs. Make this list publicly available and share this with lenders.
• Partner with local and regional banks to establish formal lending programs for ADU developers. With this one step, the city could dramatically increase the ease with which ADUs are funded and developed
• Create an advisory system to help homeowners better understand the financial hurdles of construction.
• Educate architects about ADUs. Helps building designers understand the specifics of the program so they can more effectively help their clients navigate the system.
• Reduce Service Development Charges and permit fees to reflect the size of the ADU in relation to the main home. If the ADU is limited to 33% of the home’s size, then fees should be in alignment with this percentage as ADUs impose a much smaller demand on city services than full-sized homes.

These are just a few ideas. In 2003, the city of Portland published a study about the ADU program: The ADU Monitoring Project