Live/Work

(and how they can fix it)

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 74 permits on file between 2005-2006, 18 were canceled. It’s impossible to say why, but my guess is that the economics of the ADU just didn’t work out. UPDATE: I’ve obtained a list of permits from 2007-09 as well.
• 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

This entry was posted Tuesday, June 3rd, 2008 at 11:07 pm and is filed under Financial, Zoning. Both comments and pings are currently closed.