Build Small, Live Large summit explores ways to finance accessory dwelling units, make them more affordable

TRIBUNE PHOTO: STEVE LAW - A tiny home was on display on the Park Blocks during the recent Build Small, Live Large summit on accessory dwelling units hosted by Portland State University. Accessory dwelling units are all the rage in Portland, with about 600 construction permits issued last year and again this year. Brochures promoting homes for sale frequently tout the potential to add an ADU on the lot or convert the garage into one.

But at this month's national ADU summit at Portland State University — called Build Small, Live Large — one speaker after another said the lack of financing is holding back development, especially for moderate- and lower-income homeowners.

"We think most homeowners are actually left out" of the market, said Patrick Quinton, co-founder of an ADU startup and former executive director of the Portland Development Commission.

Building a new ADU here is "too expensive," Quinton said — typically $150,000 to $200,000 — and "we really don't have dedicated financing products."

Several speakers also pointed out that ADUs often are developed by do-it-yourselfer homeowners, a daunting task.

"It's a long and complicated process if you haven't done it before," said Tim Miller, CEO of Enhabit, a Portland-based nonprofit that works on energy retrofits and other projects. "Nowhere else in the building sector do we ask people to

be hobbyist developers or

amateur developers," Miller said.

Many advocates say Portland could double, triple or quadruple the number of ADUs being developed, and use them more effectively to tackle the city's affordable housing crisis.

The bulk of people building ADUs in Portland are in the most affluent neighborhoods where prices have shot up in value, so they can tap home equity lines of credit to pay much or all of the building costs. But that limits the opportunities to affluent neighborhoods and established homeowners, leaving many people and neighborhoods on the sidelines of the ADU building boom.

Umpqua jumping in

Banks haven't exactly jumped into this fast-growing niche. Some say it's because ADUs are located on the primary home lot, making it harder for a bank to use the ADU as security if the loan isn't paid.

But people who think ADU loans are only available for those with substantial home equity lines of credit "don't know the programs that are available," said Hillary Seiler, an Umpqua Bank loan officer who moderated a summit panel on ADU financing. Seiler has facilitated 16 ADU construction loans in the past two years.

TRIBUNE PHOTO: STEVE LAW - Attendees at a national summit on accessory dwelling units at Portland State University browse displays of innovative ADU designs. For qualifying homeowners, Seiler explained in an interview, Umpqua offers a construction loan to build the ADU and replace the main mortgage on the house. By holding the mortgage on the main property where the ADU is getting built, the bank has security that its loan will get repaid.

What's innovative about Umpqua's program is that it allows appraisers to take into account the future value of the house once the ADU is built, based upon approved and detailed drawings. Umpqua doesn't base its loan on future rental income for the ADU, but what the entire property would fetch if sold, including the main house and the ADU.

It's a fairly rigorous process, Seiler says, typical of what banks do for building loans. But it can enable clients of more modest means to tap future equity and qualify for a ADU construction loan.

Nonprofits getting involved

Enhabit is teaming with another Northwest nonprofit, Craft 3, to figure out ways to put ADUs within reach of lower- and moderate-income homeowners.

Craft 3, a nonprofit community development lender, is exploring the idea of providing loans based on the future rental income from ADUs, targeting lower- and moderate-income homeowners, said Adam Zimmerman, CEO of the Seattle-based company, which has multiple offices in Oregon.

"It sounds easy; it's not," Zimmerman said.

But Craft 3 doesn't have the same limitations as highly regulated banks, and it taps money from foundations and other nontraditional sources.

Zimmerman tossed out an example of homeowners in Rockwood, a low-income neighborhood in Gresham, using their ADU for short-term rentals, i.e., via Airbnb. If they could triple their rent and thus get financing to build their unit, "I don't want to stand in their way," Zimmerman said.

TRIBUNE PHOTO: STEVE LAW - Accessory dwelling unit advocates from around the country convened in Portland this month for what was billed as the first national summit on ADUs. Robert Liberty, executive director of the PSU Institute for Sustainable Solutions, told summit attendees that they shouldn't pooh-pooh using ADUs for short-term rentals, because that enables more to be built and builds wealth for the homeowners. And after a few years, the units could be shifted to long-term rentals that are more affordable, Liberty said.

Enhabit, which teams with Craft 3 to finance home energy-efficiency projects with loans paid via monthly utility bills, envisions itself providing a "one-stop shopping" service for people wanting to build ADUs, Miller said.

"Somebody needs to hold the homeowners' hand through the process," as it's very complicated, he said. Enhabit could play that role, with Craft 3 providing the loan, he suggested. Enhabit could help with property management and other services that often are barriers to people hoping to build ADUs.

"Program support along with financing could have a huge impact on the volume of ADUs," he said.

Other models

Dweller, the Portland startup company formed by Quinton and Brian Lynott, is working on an entirely different but equally innovative model. It hopes to design, build and own ADUs on residents' lots, sharing the rental income with the homeowners. After 25 years, Quinton said, the homeowner gets the keys to the ADU, or could buy it earlier from Dweller at a predetermined price.

Dweller is working to lower the cost and hassle of construction by using prefabricated units with standard designs. That way, on-site construction can take as little as a month, Quinton said. Dweller is working with Portland's Living Room Realty to handle property management.

Summit attendees from Santa Cruz, California, and Austin, Texas, talked about how their communities are granting development fee waivers for building ADUs, on condition the units are offered as affordable housing. The nonprofit Habitat for Humanity in Santa Cruz is now building ADUs on all the new homes it builds there for low-income people.

Portland developer Eli Spevak has experimented with "condo-izing" ADUs, so someone can buy the detached unit without having to purchase the land beneath it.

In Los Angeles, a project is under way to leverage federal Section 8 rental subsidies to put people in affordable ADUs.

Housing affordability is a growing problem in many rural and urban Oregon communities, said Carl Seip, vice president for communications at Craft 3.

"We think that accessory dwelling units could be one piece of that puzzle."

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