The ADU Hour

Kol Peterson: Hey everybody. Thanks for joining us on the ADU Hour.  I am super excited for today's guest, Katherine Levine- Einstein.

 This topic is  fascinating background about the way that land use decisions are made at the local level across the country and that has some important impacts in terms of understanding what advocates [00:03:00] for infill housing should consider doing strategically in terms of improving regulations for middle housing, ADUs, et cetera.

Thanks so much for coming to join us today, Katherine, I stumbled upon your work through another podcast that I listened to. I want to confess right up front, I haven't read the book, but I wanted to take this opportunity to take some of the things that you've written about and researched and frame it in the context of some of the issues that come up time and time again with ADUs.

Before I launch more into my questions, let me just give you a minute to introduce yourself.

Katherine Levine-Einstein: Sure. So I'm an associate professor of Political Science at Boston University and I study Urban Politics and Housing Politics, and I'm one of the authors of the book "Neighborhood Defenders, Participatory Politics in America's Housing Crisis".

Kol Peterson: Have you considered doing an audio book?

Katherine Levine-Einstein:  It's definitely a great idea. I don't frankly know if the University Press has that kind of bandwidth. But yeah, I'm with you. Audio books are the way to go.

Kol Peterson: Yeah, for me, it's just like how I [00:04:00] consume. So anyway, and this, this series will eventually become an audio podcast for what that's worth for people who are listening.

So there's 19,495  incorporated cities, towns, and villages in the US, 310 cities with a population of  a hundred thousand or more. Neighborhood level politics, that is, city councils, associations. Play an outsized role in how land is developed in the United States. Americans like local democratic processes. So, why is this a problem?

Katherine Levine-Einstein: Yeah. So democratic processes, I mean, you say that word, that sounds really good. Right? Like having land use be democratic? I think most people hear that, they say, "yeah, that's how it should be "people who live in a community should have a say over what goes on. And indeed, that's why we have these regulations in the first place. That when we sort of had a developer dominated system back during the Urban Renewal Days, a lot of bad things happened in neighborhoods.

So there are sort of good reasons to have urban planning practices be really oriented towards neighborhood level [00:05:00] input. But in practice it can be deeply problematic because we may not be empowering a representative democratic subset of the neighborhood, right? What we show in our research is that the people who show up to these neighborhood level meetings are deeply unrepresentative of their communities in a way that actually depresses the supply of housing in the United States and the supply of affordable housing in particular. The people who show up to these meetings are privileged. They're homeowners, they're older, they're whiter, and they're overwhelmingly opposed to the construction of new housing.

Kol Peterson: Let's frame your  research a little bit, so that we'll know what you did. And then tell us a little bit more about the numbers behind those findings of the demographics of people who actually show up to these meetings.

Katherine Levine-Einstein: Yeah, so our book is about these participatory processes. You know, when we told people  we're going to go out and study neighborhood meetings at planning and zoning boards.  Really is that so interesting and important? But, I suspect I don't have to convince the audience here.

 These are incredibly important, these meetings are what dictate whether or not housing gets built in most [00:06:00] communities in the United States.  So we really wanted to understand what happened in this sort of hyper-local politics. And so what we wanted to do is go out and document who shows up to these meetings and what do they say? And Massachusetts turns out, because of unique open meeting laws in the state, to provide an incredible opportunity to do so.

So what we did is we went out and we collected meeting minutes for three years worth of meetings across 97 cities and towns in Massachusetts. And what made the data for Massachusetts really unusual is that in addition to including  a list of public comments that happened at these meetings, we were able to learn the names and addresses of the people who participated in these public forums.

And when you have someone's name and address, you can link them with a lot of other administrative data and learn really interesting and important demographic information. So from those meeting minutes, we were able to learn how demographically and attitudinally representative the people are who show up to these public meetings.

The first k ey finding that we had is that these [00:07:00] folks were privileged. They were about 25 percentage points more likely to be homeowners than the general population in their community. They were over 20 percentage points more likely to be over the age of 50. They were about 10 percentage points, more likely to be white, right?

So these are folks who occupy positions of privilege in their communities. They also overwhelmingly do not like the construction of new housing. So we looked at public meetings that involved the construction of one or more units of housing. So we looked at everything involving meetings  had accessory dwelling units up to like big apartment complexes.

And we found that only 14% of people showed up to these meetings in support of the construction of new housing. So, overwhelmingly the voices that planning and zoning board officials hear and that city councils hear, are people who are opposed to new housing developments.

Kol Peterson: So 14% showed up in support of the projects and all the rests showed up as opposing the projects?

Katherine Levine-Einstein:  Most of them, I think at [00:08:00] 65% showed up opposed, and the rest showed up as neutral. There were a lot of those neutral folks were in fact opposed, but they were sort of asking  clarifying questions about whether the developer had complied with parking studies or something like that.

Kol Peterson: And then you took that data in your study and you contrasted it to legislative support for affordable housing so that kind of gives you a baseline of theoretically , this demographic should have one feeling towards affordable housing, but in practice when it comes to development in their own backyard this is what we see. So can you talk about the differences?

Katherine Levine-Einstein: Absolutely. So another great thing about studying Massachusetts was in 2010, we actually had a ballot referendum about public support for affordable housing, so there's a piece of statewide legislation here in Massachusetts called Chapter 40 B, which allows housing developments that have a certain percentage of affordable housing to bypass local zoning regulations.

And so this was up for a ballot referendum in 2010. And so it gives us a [00:09:00] rough sense in each city and town, the extent to which individuals support the production of affordable housing and  the ability to bypass local zoning to accomplish that goal. So the ballot referendum passed. So this law is still in place in Massachusetts.

And what we found is in every single city and town that we studied, support for housing was higher as measured in this ballot referendum than it was when we actually went and looked on the ground at support from new housing at these planning and zoning board meetings. I think liberal Cambridge, Massachusetts is  the best illustration of this.

So 80% of Cambridge, Massachusetts voters in 2010 came out in support of chapter 40 B. But only 40% of commenters at Cambridge planning and zoning board meetings show up in support of the construction of new housing. So when it comes to developments in their own backyard, the people who show up to these meetings are considerably more opposed to new housing.

Kol Peterson: So what does this tell you about the disparity of those who are empowered to participate in local [00:10:00] zoning processes and the general ideological sentiment towards infill housing in general?

Katherine Levine-Einstein: Yeah. I mean, what it tells me is that the people who show up to these meetings are not representative of their broader communities. And they're not representative in ways that are gonna depress the supply of housing. And it, this is really problematic, right? Because one, it's depressing the supply of housing relative to what the general public wants, right? Like if we sort of look at general public opinions, especially in these high costs, communities like Boston, San Francisco, Seattle, we see high levels of support for new housing, but when it comes to the housing actually being built in specific neighborhoods, when we empower neighborhoods to have a say over whether or not they want housing there, the evidence suggests that those neighborhoods overwhelmingly saying, "No thanks, we don't want housing".

I sorta think the second important point timbers from our data, when we think about this broader housing politics is this is not just a story of people showing up in opposition to big apartment complexes, right? This is a story about people coming out in opposition for a townhouse or [00:11:00] accessory dwelling unit being built in their community.

And so these neighborhood meetings get really contentious, not just when it's a big development, but sometimes when it's like a pretty modest one.

Kol Peterson:  Can you explain the theory of Cost for Political P articipation in the process and let's cover both the expertise element of it, the time required element, then this theory of concentrated costs and diffuse benefits.

Katherine Levine-Einstein: Yeah. Two big reasons that the folks who show up to these meetings are deeply unrepresentative of their broader communities. The first is that it's incredibly costly to participate in these forums. And the second is that the people who are sort of weakly supportive of new housing may not be especially interested in showing up to these developments.

So when we look at canonical political science research, we know that the biggest drivers of whether or not you participate in politics, are whether you have the resources to participate, and whether you're interested to participate. And we believe that both of those factors are really critical to explaining why the people who show up to these planning and zoning board meetings are really unrepresentative of their broader communities, right.

So starting with these [00:12:00] sort of resource-based costs, going to the planning and zoning board meeting is like a big outlay of time, right? So you have to have two to three hours of your life that you're willing to give up, you have to have the childcare. There's  a lot of just like basic costs to showing up to one of these meetings, you also have to develop the expertise.

These meetings often devolve really quickly into the minutia of whether or not a setback is big enough or whether or not a parking study or a traffic study is required. If you're not someone who is intimately familiar with the lingo of variances and special permits, these meetings are not going to feel really accessible to you, right?

So another cost is developing that expertise. So there's really big cost barriers. There's also, again, the second big factor there, these big interest barriers to showing up. So new housing developments have concentrated costs and diffuse benefits. So let's just imagine, you know, a townhouse development, right?

Like not, not sort of a major apartment building, but just sort of a small housing development. The benefits of that housing development, if I'm measuring  across the whole city in it, [00:13:00] City that has a shortage of housing, that the benefits of that they're like pretty diffused. You know, we're not going to really measure a significant decrease in housing costs from the construction of those two new units.

But the cost of that building of two new units is really concentrated. If I live next door to that townhouse development, I'm going to have to listen to construction noise for like a year maybe, or I'm going to have to have my view changed in a way that I don't like, or maybe there's going to be more cars parked in front of my house.

There are all these things that are going to be very motivating to me, as the next door neighbor, to show up in a way that even if I'm the most ardent pro housing supporter in the world, I'm probably not going to show up to a planning or zoning board meeting about a townhouse across town. That's just not a useful outlay of my time given  the diffuse benefits.

Kol Peterson: Yeah. And it, it really begs the question, " Who would actually show up for a meeting for a proposed project near them in general?"  It totally makes sense that [00:14:00] everybody has NIMBY predispositions, even myself.

We don't want change near us. We don't want more parking near us, we don't want more housing near us.  We all kind of feel this way and it's almost a natural thing yet  our democratic process at the local level is set up to empower that predisposition that we have.

Katherine Levine-Einstein: Yeah. So there's really good psychological research out there that shows that we, as humans are just innately sensitive to changes in our neighborhood. Like we respond really strongly to changes in our community. And so it totally makes sense. A development  definitionally is a rapid change to your community, even if it's one of a pretty modest scope. Having a new townhouse go in next door is a really big change to your view.  It's a big and rapid change to the environment into which you bought into.

 Those kinds of rapid changes, we know have a strong impact on people's attitudes and they're motivating, they get you sort of interested in politics and eager to show up to these forums. And as you said, these forums are therefore designed [00:15:00] to capture that exact set of preferences. The people who are intensely motivated to show up and have the resources to do so.

Kol Peterson: For those of us who haven't been through this type of local land use process at the local level, can you help  set up for us what a local meeting dynamic that occurs for a proposed housing development project would look like?

Katherine Levine-Einstein: Yeah, sure. So there's obviously a lot different ways this can go and some of them are a lot more contentious than others. But I can provide sort of a pretty standard example of a  multi-family housing development that happened in Cambridge.

 So this particular developer I think it was in 2015, he showed up and it was this like terrible abandoned warehouse near a mass transit stop in Cambridge. And so he shows up and says, "I would like to convert this abandoned warehouse into four condominium units. Each with one parking space."

 Because he was proposing converting a she'll use into a residential one he needed to get a special permit. And so he found himself before the [00:16:00] Cambridge planning board in order to get a special permit.  So the way that this typically goes, he comes to the meeting, he presents his plan, then the Cambridge planning board asks them like pretty technocratic questions. And at that moment it's turned over, to public comment.

 In most places in the United States, Cambridge is not unique by any means, when you need to get a variance or a special permit. Given the way that land use is set up in the United States, most of the time, if you want to build more than one unit of housing, that's going to be your situation. You have to present your plans in front of a public body. And as part of open meeting laws that members of the public then have the opportunity to comment on that housing development.  They can sort of say anything that's pertinent to the proceedings at hand.

And so at this particular meeting in 2015, after the developer presents his plans, there were a few neighbors who showed up. Every single one of them deeply opposed to the project. Some of them talked about like foundation issues at their houses that had, one person showed up, she was a lawyer, with handouts [00:17:00] indicating that the developer was violating zoning proceedings.Other people were worried about parking issues. And so after hearing from the neighborhood, the planning board, which had initially been like pretty supportive of the project, was considerably more concerned. And they said to the developer, look, you need to go talk to the neighbors and you need to get us a parking study and an engineering study, each of which can cost the developer, you know, $10,000 so these are not cheap.

It also meant that the developer had to come back three months later after  the carrying costs and the other costs associated with holding onto a project and delaying and development by three months. So he comes back three months later and says, okay, I've talked to the neighbors, I've done my studies.

And now instead of developing four units, each with one parking space, I'm going to do three units each with two parking spaces. And so at one level, that's maybe not such a big deal, it's only one year lost and a few extra parking spaces. But when we start to think about that process, getting repeated thousands of times over in [00:18:00] cities, across the country, it's not hard to see how these neighborhood politics are reducing our supply of housing and creating a housing crunch in so many places.

Kol Peterson: You explicitly moved away from using the term "NIMBY", which is a little bit contentious, and instead using a different term "Neighborhood Defenders"  in your book,  is that a term that's intended to be synonymous? Or can you explain what that terms about?

Katherine Levine-Einstein: Yeah. So we talk about the people who show up at these public meetings as being "Neighborhood Defenders" and we very deliberately wanted to move away from this term NIMBY, which refers to people who are "not in my backyard, I don't want new housing here". We think NIMBY connotes, inherently sort of selfish attitudes about, you know, one's own property values, one zone house. And what we observed with me read through thousands of pages of meeting minutes is that's not actually the attitude of most of the people who show up to these meetings.

Most of the people who show up to these public meetings, invokes sort of community concerns. "I'm worried about my neighborhood. I'm worried about my neighborhood character. [00:19:00] I love my community and I want to protect it".  That is sort of the impetus behind people who are worried about parking, who are worried about wildlife, who are worried about wetlands. It's these broader community concerns. And so we think one that this term "Neighborhood Defender" better captures these individuals self conceptualization, but we also think it better captures why these individuals are so persuasive.  The Cambridge planning board could've just ignored the neighbors, right? They had that power. This wasn't a situation where the neighbors get to vote on a development. So the Cambridge planning board could have said. "We hear your concerns, neighbors, but we're just going to go ahead and approve this project because we think this neighborhood of Cambridge desperately needs more housing". And they didn't do that.

And I think part of why these folks are persuasive is because they don't seem selfish. They seem community oriented and like representatives of their community.

Kol Peterson:  Let's go into the history  of nimbyism a little bit.  I had  come across information that there was a connection to the environmental movement, which I think is fascinating and that back in 1970s, the Cuyahoga river [00:20:00] in Ohio was burning and neighborhood conservationist and environmentalist were coming out and trying  to fight the pollution that was associated with that. And I think that had some connection with the origin of the kind of environmental movement slash modern environmental movement slash nimbyism.

 Now nimbyism has taken on a new understanding as of late, but then there's also conflation or connection to urban renewal and environmental regulations that are occurring that make development more challenging. Can you just help tease apart these different topics for us?

Katherine Levine-Einstein: Absolutely. So I actually want to route this a little bit thinking about again this Cambridge housing development.  The reason that that Cambridge housing development had to go before a planning board was because there was a land use regulation in place that said, "anything that converts a commercial use to a residential use has to go before a public meeting."

 If there hadn't been that land use regulation, then this housing development could have happened what is called "By Right". And if a development can [00:21:00] happen by right, it doesn't have to go through this lengthy process.   If we're really interested in understanding, okay, so why do things show up in front of these meetings?

We need to understand the origins of these land use regulations. Why do cities and towns have them? When did these land use regulations that are coming to being?

The answer is it's sort of a confluence of a bunch of different movements and different zoning codes emerged at different times. So some set of land use regulations actually date back as early as the 1920s.

That's when we start to see zoning ordinances really come into vogue. And a lot of the impetus there is really explicitly rooted in segregating communities by race and by class. There's been really good books written on this by  Richard Rothstein and Jessica Trounstine, about the racial origins of zoning and land use regulations.

These ordinances came into being to keep people of color and poor people from moving into communities.  So a lot of places where folks live,  you've probably all heard about conversations about single family zoning, a lot of regulations that [00:22:00] ban multi family housing very much came into being with this sort of race and class-based origins.

 But then there's a sort of separate set of land use regulations that start emerging in the 1970s. So we start to see this big proliferation of land use regulations oriented around environmental uses and around neighborhood meetings that emerged during that time period.  I already talked a little bit about urban renewal. So one thing that went on is during the 1950s and 1960s we essentially had developers bulldozing communities of color and low-income communities.  We were building highways and downtown shopping malls and all of these uses that weren't really serving those communities.  After that happened a lot of urban planners said, my God, we, we actually need to like talk to neighborhoods.

And not just bulldoze them,  we may not know what's best for communities.  From urban renewal emerges, in a lot of cities, this really noble impulse to actually listen to communities that are being affected by development. At the same time, you talk about the Cuyahoga River,  there's lots of different examples of this, there also [00:23:00] this whole series of terrible environmental outcomes happening and we have suburban sprawl, like ruining wetlands. There's  a lot of recognition among environmentalist that the way we were doing development was deeply harmful to a lot of vulnerable, natural resources.

At the same time, we also see a lot of communities start to create wetland regulations or Vernal pool regulations, or Vernal pool, buffer zones. Things that essentially make it really hard to develop anywhere near a Vernal pool or a wetland and require you to get like lots of extra permitting. And again,  that sounds probably good to most people where you're like, yeah, we probably should be protecting some of our wetlands and our Vernal pools and these other very important natural resources.

But when you sort of layer them on to all these other land use regulations, what happens is in practice, each of these additional regulations makes it harder to build a new housing, especially in high opportunity communities that seem to love to add these land use regulations.

Kol Peterson: I have a an [00:24:00] observation which is some of the most  politically liberal cities in this country seem to have some of the strongest NIMBY strands I've observed. Berkeley, California, Eugene,  Boulder, and Cambridge, perhaps, I don't know if Cambridge would really stand out or not, but  is there any correlation there or am I just  projecting that?

Katherine Levine-Einstein: Yeah. So it actually turns out, if you look within those liberal places, it's the most conservative people who are more opposed to housing.  In our data in Massachusetts, it's obviously a pretty liberal place  if you look at like what predicts whether someone's supposed to the construction of new housing, things like being a homeowner, if you own your home, your more opposed the construction of new housing. Also being a Republican predicts being opposed to the construction of new housing.

And there's other folks like Mike Hankinson, who's done more survey work that showed that conservatism is actually more associated with being opposed to new housing. But all that said, you're right to note that some of the most contentious battles that we have over new housing development seem to be happening in places like Berkeley, California Cambridge, [00:25:00] Massachusetts.

 Those are the places that are facing the most acute pressures for new housing.  Those have been places that have experienced incredible economic growth over the last few decades.  They haven't been able to  match that demand for  new housing.  In some ways that's why we're seeing more of the  housing crisis emerged there is because there's been so much economic growth, it's created demand that we're not necessarily seeing in more conservative cities.  But I actually do want to stress that this phenomenon is not just limited to these really expensive cities.

 I'm from Milwaukee, Wisconsin and as a Wisconsin native,  I was interested in  understanding how these processes play out in my hometown, which is not a place that is having the kinds of housing crunches that are experienced in Berkeley, California, Cambridge, Massachusetts. And even in these kinds of places like Milwaukee, we do see  similar kinds of dynamics playing out at neighborhood meetings. And the place where you see it is in the most privileged part of town. So you look at both the privileged suburbs and the [00:26:00] privileged neighborhoods within the city of Milwaukee, you see folks there fighting the construction of new housing.  Even in these less  crazy housing markets, we do see advantaged towns and advantaged neighborhoods still activate to protect their boundaries and stop the development of housing.

Kol Peterson: So for some context  my opinion as a subject matter expert is that Massachusetts has very restrictive ADU regulations, relatively speaking, along with most of the country,  that's just a general observation.

Part of what makes it restrictive in Massachusetts is so many towns require a special permit, which is also known as a conditional land use permit. Can you share with us  any statistics you have about the impacts that a special permit requirement or a conditional land use permit requirement has  on the likelihood that an average homeowner would pursue  a home improvement project?

Katherine Levine-Einstein: Yeah. So I haven't looked at this for eighties specifically. But those are research and that of many economists has essentially shown that every time you add a new [00:27:00] regulation onto the housing development process, you make it more expensive to build and you reduce the supply of housing.  Applying that research to the world of ADUs, I would say, anytime you add a requirement in a special permit is a very onerous requirement, you are going to reduce the likelihood that someone's going to pursue that because it's going to be a lot more expensive. It's going to take longer, you're going to have to presumably hire more experts to get yourself through the public hearing process, you have to pull more permits. All those things cost money and time.

 We know from just more general research and land use regulations, that's going to make it harder to do and reduce the overall supply.

Kol Peterson: What's the difference between a special permit and a variance?

Katherine Levine-Einstein:  So variance from existing zoning is essentially, you're saying " I know that I'm in a commercial zone, but I want to build something residential."

So then you're getting a variance from existing zoning. You're essentially asking for an exception to the existing zoning code. A special permit is different because a special permit essentially says, you have to get this permission to build [00:28:00] multi-family housing anywhere in this city. Right? So in a lot of places that's sort of the context in which I think about this, the most you to build an accessory dwelling unit, or a townhouse, or three family housing, have to pull a special permit.

It doesn't matter where you build it, there's no zone where we let you build this without asking for this extra permission.

Kol Peterson: As a general matter, based on your professional research on this topic, et cetera. Do you believe, or is it your your opinion that neighbors should be given authority in the decision making process that their neighbor has over property improvements?

Katherine Levine-Einstein: No, so I think this neighborhood meeting process is sort of it's undemocratic.  When I've talked about this work before, I've had people at public meetings come upto me and say, "you're being undemocratic for advocating for getting rid of these meetings". And I would say we spent years looking at this evidence and the evidence tells us that what is happening at these meetings is deeply undemocratic.

And it's, it's [00:29:00] undemocratic in a way that it's really hurting urban areas. It's depressing the supply of housing, especially in high opportunity neighborhoods. It's making it harder for low-income people to move into sort of the most privileged parts of our cities. So, no, I don't think that  these processes are working as they should.

 I, like many others, advocate for making more development by right, that allow members of the public to have a say over what land use regulations look like. So we should absolutely be incorporating public input. And I would argue members of the public certainly have a right to vote out officials who pass these policies that they don't like.

But once the land use regulations are set, we should be allowing property owners to be developing to what those land use regulations specify without having to go through an ad hoc and unpredictable neighborhood permit process.

Kol Peterson: What's your take on the most frequent objections that we're hearing in general, in the U S about,  around proposed residentially zoned Don conforming housing development project?

 A lot of jurisdictions, [00:30:00] not just in Massachusetts, but elsewhere. There's a conditional land use process and you have to go through a public process  and, and the frequent objections, among other ones, are, " This is going to change the character of our single family, residential neighborhood". Whether it's a city-wide process or a local project  that can be a complaint that would be issued by a neighborhood defender.

How often does this neighborhood character concept arise as a rationale for obstructing new proposed developments.

Katherine Levine-Einstein: Oh, all the time neighborhood character is a really frequent objection. And a lot of people sort of wonder, like, is this a code word for like race or class-based bias?

And that's, that turns out to be really hard to prove, but it's, it's hard not to see it there at least some of the time that people raise it. Some of the other concerns that we hear a lot about traffic parking, the environment. And I will stress that those traffic and parking concerns, and this sort of blew our minds as we read through the meeting minutes, like it doesn't just happen with big apartment buildings where maybe you could say, okay, there are 200 new apartment units, maybe that's going to change traffic loads, but people will [00:31:00] raise that with like a five unit building. They'll say, it's going to change traffic. And you sort of are like, how can that be? There's only going to be five or 10 new cars tops, but people really  worry a lot about those traffic and parking and environmental concerns.

Kol Peterson: Something else you've alluded to is  this traffic study or parking study. Say I want to build an ADU, I want to convert my garage to an ADU. Can't provide an off-street parking spot, can't replace it. The driveway leading up to the garage doesn't classify as an off street parking spot, according to the zoning code. Is it a reasonable thing to ask me to do a traffic study or a parking study.

Katherine Levine-Einstein: They're really expensive, right. So when we require those things we make it much more expensive to build.

I think my take on that would be that clearly, there are some projects where we want to see parking studies and traffic studies. And I think we should have planners who are experts in those areas work with engineers and other people in city staff to come up with a really clear set of requirements about here are the kinds of projects that absolutely need to [00:32:00] provide us with a parking study and a traffic study.

And here's what we need to see from that parking and traffic study to  view it as conforming with city requirements. Because one of the things that is sort of especially problematic about these neighborhood processes, it's actually not just that neighborhoods can demand, like you need to give me a parking study.

It's if they don't like the results of the first study, they can ask for a new one.

 As part of our book, we interviewed a lot of developers across the country. And a story we heard from multiple ones was that we had to do like two, three, four in one case five traffic studies for the same project, because the neighbors kept raising objections to the one that the developer had provided.

 I totally buy that they're unscrupulous developers who cut corners and provide terrible traffic studies. And I think that is something that local governments can set clear requirements around to avoid. They can say here's what comprises a good traffic study. And if you meet those requirements, you don't have to provide four more, just because the neighbors didn't like the results.

Kol Peterson:  Given this entrenched [00:33:00] dynamic that is more or less  a truism that people don't like change and that   they're going to object at a local level to proposed projects. What are some practical approaches that ADU advocates, infill housing advocates in general should consider in the face of this type of  dynamic?

Katherine Levine-Einstein:  At a sort of more policy level, as much as  possible advocate for policies that allow for ADUs by right. Any time you can get around this sort of ad hoc and neighborhood process, it's going to make it easier for folks to build.  I think at a sort of policy level, avoid the special permits as much as you can, but obviously that's easier said than done.

And sometimes getting these policies passed in communities is incredibly contentious in the special permit is like the compromise that lets you get it done. So thinking more micro, if you're that property owner is trying to get an ADU through a neighborhood process, I think clearly the most important thing is making sure you have supporters in the room.

Ideally make sure if you don't have opponents in the room.  We did read through [00:34:00] meeting minutes where essentially the meeting around an ADU work extremely uncontentious, you know, someone brought like two neighbors with them who are like, yeah, Joe's a nice guy. You should let him build this ADU.

And then no one showed up in opposition. And so the thing went through really easily and it was presumably a reasonably low stress process for the homeowners. So I think making sure that you line up some form of support at these hearings. And if you do hear wind of opposition, really thinking about ways to frame the opposition as being unreasonable or NIMBY in some ways.

Right. I think it's really important.

Kol Peterson: I think we've started to see some you know YIMBY yes. In my backyard movements to kind of coalesce  in support of local projects. Any observations to share about that, that you've heard about.

Katherine Levine-Einstein: Yeah, no. So, I mean, I wish and so many people people have asked me about this a lot in regards to our Massachusetts data, because Cambridge has a very active YIMBY movement now.

And unfortunately our data collection stopped in 2017. And I would say the movement there, it really picked up in 2018, 2019. And so thinking about [00:35:00] sort of where a YIMBY movement can be most effective and looking at Cambridge. In some ways, the place where they've been most effective is actually organizing around pro-housing city council candidates, right?

That at the end of the day, to get good housing legislation passed, you need to have politicians in place who are willing to sort of put into, put into place policies. Like in Cambridge, the affordable housing overlay, we look at Minneapolis, something like abolishing single family zoning, right?

Like that requires the actions of politicians who are pro-housing. And so if I were advising YIMBYs, I would say, go out and organize and get those candidates elected so we can pass the citywide legislation that allows for more housing to be built by right. More recently we've seen

Kol Peterson: states like California and Oregon step in with pretty aggressive or assertive statewide ADU legislation superseding local control over ADUs ordinances.

While this may be seen as a bit heavy handed to some city officials and planning staff in the sense that [00:36:00] historically zoning controls is at the local level. I'm now, personally, becoming convinced that this is the only reasonable pathway forward, to enacting     best practices for ADU zoning regulations.

For the most contentious things like Austria parking, owner occupancy requirements. The only reasonable pathway forward in the sense that I am impatient. I'm not willing to do this through 190,000 jurisdictions in the United States. I want to do it through 50 or, you know, however many handful of states are willing  to take this on where there's actually promise of our potential for ADUs to play a role in addressing housing shortfalls.

So what's your take on statewide legislation that preempts local zoning? And what do you suspect are some variables that would indicate whether this would be a viable approach in your state?

Katherine Levine-Einstein: I'm really into state level preemption in part, because I think it makes the development pressure it's more evenly spread, right.

And more spread to exclusionary places. And so we can think about places like Minneapolis, they went out on their own and they abolished [00:37:00] single family zoning and that's awesome. But their surrounding suburban communities haven't done that. Right. And so that essentially does, is it concentrates a lot of development in the city.

And it means that some of the places that have, you know, the highly ranked school districts get to stay exclusionary. And so I think we don't want to rely solely on a process that involves the most progressive places saying, sure, we'll let more housing get built here, while exclusionary places get to stay exclusionary.

And I say this for two reasons, one it's unjust because it makes it harder to access the really high quality public goods, the top rated schools in many places. Right. And so that's, that's I think a deep problem. I think the second issue though, with having that kind of uneven development pressure is it can lead to gentrification and displacement, right.

That, you know, here in the Boston Metro area, an overwhelmingly amount of our development has been concentrated in the city of Boston because they haven't made it super easy to develop, but relative to the surrounding suburbs they've made it much easier to develop. And so what that means is they get all of the building.

And a lot of [00:38:00] people of color have been pushed out of their neighborhoods. And in contrast are like inner core streetcar suburbs with all that top ranked schools are just not doing their share and they're not going to voluntarily do their share. And so I think that's why we need the state to step in because otherwise a lot of places where that should be shouldering their development burdens just aren't going to do it.

Okay. So where can it happen? Right. Like. Oregon sort of a unicorn, right? Like California, I think has been the counterpoint to show us a place where everyone agrees that housing is a huge issue, but no one can seem to agree on what the  preemption legislative package should look like. Right.

Like we've seen many packages go through. And I think finally, now there's been a little bit more attraction. But that's been a really contentious issue in one that it's been really hard to get support from a bunch of different state legislators. So so I guess, yeah, my answer to how to get it done is we haven't really been able to get it done in a lot of places, right.

That Oregon is the most recent example where there's been real success. But in a [00:39:00] lot of other places like Massachusetts or California that has really pressing housing crises and very liberal state governments it's been really hard to do.

Kol Peterson:  Ironically though. I'd say it's, it was. Weirdly easier to pass a statewide legislative bill for, for what, just for the elements that occurred within the ADU portion of the bill for Oregon, which said no owner occupancy, no off street parking. Easier to pass at the statewide level than to try to do it in a given local jurisdiction.

So I think depending on how the bill is targeted and framed and how explicit or how minor it might seem, it actually might be easier to pass at the state level than  at the local level because of this dynamic that you've articulated so well, which empowers neighbors to have more voice than people who dedicate their profession to studying this issue who are more empowered at the state level. In other words, more [00:40:00] academics, more institutional voices that understand the statewide dynamics between supply and demand.  I wish I knew which states would be most ripe for that type of suggestion at this point.

Katherine Levine-Einstein:  I think the packaging really matters, that's a really important point. I think again about this Minneapolis example where they've gotten tons of attention for ending single family zoning at the same time that they did that they also abolished parking minimums, which like no one was really talking about because they were also distracted with the single family zoning, which is as much bigger, more contentious issue.

And I imagine in a lot of places, if you tried to abolish parking minimums, without  having a broader conversation, it would seem like a huge deal. And so, as you say, I think a lot of it is in the packaging. And whether you can make it seem like a minor little tweak to land use regulations or whether it sounds like the, a big deal that will get rid of all of our beautiful single family neighborhoods. I think that's  an important political point.

Kol Peterson: Awesome. Thanks, Katherine.

 So Kelsey let's I'll have you take it away.

 Kelcy King: That wraps up the interview portion of this [00:41:00] episode of the ADU hour. As a reminder, these episodes are the edited audio version of interviews that we conducted via a webinar series. Good news. You can access the full video series  via Kol's website, BuildinganADU.com. Now for the second half of the show I curate questions from the audience that gives our guests the opportunity to dive deeper into a topic or address new ideas and questions.

First we want to know what the podcast was that you heard, Kol.

Kol Peterson: Oh is maybe Catherine can speak better than me to this .

Katherine Levine-Einstein: It was with the it was The Weeds with Matt Yglesias, and I think it was in January, which feels like a lifetime ago that wasn't so long ago.

Kelcy King:  Thank you. This one's from Neil, are contemporary neighborhood defenders being honest in their community concerns, or could they be euphemisms in order to not say the more insidious intentions out loud?

Katherine Levine-Einstein: Oh, totally. Yeah. And the problem is right. Obviously we can't know that for [00:42:00] sure.  I can't mind read and see sort of what's inside someone's head and certainly not when I'm reading the meeting minutes. But sometimes,  people say that the quiet part, right? So there are times where you read through these meeting minutes and people say things that are, that are more explicit.

So one that really comes to mind for me, was one public meeting where someone talked about their lovely north shore town that's right on the ocean, say we don't want it to become another Chelsea, which is a town that is like six towns over majority Latino. And so it was very clear that the concern was that if you built this housing development, you would have Latino people moving in.

We also heard from someone who worked in the planning department in  another privileged community in the Boston area that sometimes the meeting minutes actually gets scrubbed when someone says something that's incredibly racist. And so I can't speak to that, I haven't seen it personally.

That's all to say, I think those sentiments are very much out there and there's also a really strong incentive on the part of both individuals who are trying to be persuasive and also governments to not [00:43:00] have those be in official documents. So yeah, very much still there.

Kelcy King: Melissa wants to know, with your research, is it better to ask for more units, say 10 versus four, so that after it's all said and done going from 10 to four, rather going from four to three.

Katherine Levine-Einstein: You know, I can't say that for sure.  I would love to partner with a developer where we experiment and try a few different developments to see how this plays out. But in interviews with developers, a lot of them will say that they shoot high in their initial ask, so that then when they're like, oh yeah, we're going from 10 to four that were so reasonable.

We're cooperating. Right. And I think, again, this is another cost of these land use regulations is if you're a property owner or developer, you have to guess, right. You have to sort of say, okay, what's the too high number to shoot for us that I can eventually end up with the optimal number of units for me.

Yeah.

Kelcy King: Great. Thank you. Is it possible for local jurisdictions to take the state to court on state level preemptions?

Katherine Levine-Einstein:  That's a great question. I don't know about whether they can take them to [00:44:00] court. I know they can do lots of appeals and fight it. And I know that individuals have taken the state to court over preemption. More generally, one of the critiques of preemption laws has been that in practice, they don't produce more housing because they lead to more litigation. That has absolutely been the experience with Massachusetts' preemption law, chapter 40 B, which has been around since the 1990's. And  it's unclear what the longterm effects have been on housing supply.

There's been sort of mixed studies on this, but there have absolutely been a lot of lawsuits about it. So I think it is definitely something that folks have to be prepared for when you pass these kinds of laws, that there is litigation around it.

Kelcy King:  Once land regulations are set development should be by right, but how do you deal with design and design compatibility with an existing historic neighborhoods?.

Katherine Levine-Einstein: Historic neighborhoods are really interesting ones. Because it's funny when you read sort of be an economist who studied land use regulations, they hate historic preservation. I think if you were to sort of say, like, what is the thing that they would most love to get rid of?

They sort of look at these historic districts and say that the, when [00:45:00] we have those regulations, we make it harder to build. And yeah, I think those are  that would sort of be the hard party line. I think it's challenging though, because when we look at what we  love about many of our Americans cities, we love  some of the pretty old preserve neighborhoods.

So yeah, I think you've highlighted a really tricky trade-off when we have regulations that preserve our communities,  we make it harder to build and we make it more expensive to build. And in some cases that may be worth doing but not always . Like I think we have to sit or yeah, balance the need for more housing, with the need to preserve some of our some of our treasured neighborhoods.

I think the second place I want to flag that with historic preservation is again, this equity concern in a lot of American cities, the old neighborhoods that are historic preservation areas are also the rich areas. And so they provide this tool for affluent areas to say, oh, you can't develop here look at all these pretty Victorian houses. Why don't you go develop over there? And the other part of the city, which happens to be where poor people and people of color live. And so I think that's one of the tools that has led to incredible [00:46:00] inequities in where development happens.

Kol Peterson:  I want to make comments last question, which is what if as a general operating principle, the higher priced land value areas were required to have the most liberal regulations for housing development.

Katherine Levine-Einstein: I think it would solve a lot of the gentrification displacement concerns. And again, if you look at California, one of the big issues has been that in Los Angeles a lot of local  low-income communities of color  have borne the brunt of development pressures there and it turns out that those are also the areas that have been upzoned more frequently . And so I do think something that, that rectified that inequity would certainly be something I support. I think it would be very politically difficult to pass because the most powerful areas are the ones that are protected by these regulations.

Kol Peterson: But its precisely where we, we need development, right. I mean, those areas,  in general, going to be the areas where the most transit oriented, most desirable places and [00:47:00] where these kinds of projects could pencil out, it would make sense for the community if they were allowed.

Kelcy King:  In addition to building smaller footprint ADU's, how can we also get people to build smaller main homes versus mega mansions?

Katherine Levine-Einstein: This is again, one of the issues that people raised in the town that I live in, when you try to sort of reform zoning and land for more multi-family housing.

One of the issues that gets conflated is people say, well, you know, there's been so many tear downs as small houses to build these mega mansions. And so when we loosened zoning, how do we prevent all the housing from becoming less affordable? You know, I don't know that I have a good answer because I always worry when you add in more regulations, we're just going to make it more expensive to build.

But I definitely share the questioner's concern about about replacing a small single family home with a big single family home, I guess I would say we should replace that small single family home with like a couple of homes or a townhouse, if we can, if the lot's big enough in supports that use.

Kelcy King: Great. Thank you. Are you aware of any research that shows the relationship between increased housing price  and decreased [00:48:00] quality of living?

Katherine Levine-Einstein: Hmm, interesting. So yes, I think there's a lot of research that shows when your housing gets more expensive, life becomes more terrible at a variety of dimensions.

And so when we have higher costs of living, I think  if you want the most direct measure of quality of living health, right, your health, your stress, we know that if you're in a more expensive housing market, and if your housing itself is more expensive, you experience more stress, you experience all these negative physical outcomes .

You're more likely to be faced with a crazy long commute which is terrible for a whole host of reasons.  So I think there's a lot of ways in which being stuck in an expensive housing market makes your life worse.

  Kol Peterson:  

Thanks for being our guest today, Katherine, it's been a lot of fun ! .

And thanks everybody, we'll see you around the bend.

[00:49:00]

Kol : This is [00:02:00] kind of a interesting topic that is,  on its surface kind of a dry topic, but one that I think is really important for some big picture policy reasons. Just to set a little bit of a framework for why this topic is relevant.

There's a direct correlation with where ADUs are likely to take off and an affordable housing crisis. So in areas where there's an affordable  housing crisis, we're likely to see ADUs. In areas where there's an affordable housing crisis, we're also likely to have stricter than normal rental regulations and therefore owner occupied properties, where people are prone to build  ADUs, all of a sudden they may, may maybe in statistically speaking, more likely to be subject to onerous rental regulation standards.

So I wanted to have Kurt Lane on today to kind of go over some of these issues and how some of these rental regulations apply in Portland. So in any [00:03:00] event Kurt,  why don't I have you just give a brief introduction of yourself?

Kurt: Yeah, sure. So my name's Kurt Lane, I've been a   rental property owner here in Portland and in Detroit, Michigan for the better part of a decade.

I started Chroma property management at, towards the end of last year after,  spending a lot of time, self managing properties that I own and really just, I saw a need in the Portland market for really a more modern approach to property management. And also I saw a need or,  property management services for ADU and owner-occupied people because obviously that makes up a significant portion of our market here.

, Portland, I think is arguably the most heavily regulated rental market in the country. So property management then becomes,  pretty crucial here in order to help people navigate all of that regulation because,  penalties for being in  non-compliance can run into , easily into the thousands.

So,  it's a full service property management company, but we do have a suite of services specific to ADU owners.

Kol :  [00:04:00] So let's talk in broad strokes about the trends in terms of landlord tenant laws in West coast cities that are facing an affordable housing crisis. Can you talk about some of the big picture trends that we're seeing in those regards?

Kurt: Yeah, so I think,  really this started in Portland  and really in other major cities over the last decade there was a really significant increase in the total dollar amount of money spent on rents and also on,  the percentage of rent increases. So in Portland, in particular,  2010 to 2015 they saw , over 20% increase in rents and significantly, there was a spike in 2015. Overall Portland saw a lot of economic gains in,  in the last 10 years. So it was a fast, fourth, fastest growing city , looking at income specifically, and  it was only behind Seattle, San Francisco, and I think San Jose . So Portland saw a lot of economic gains, but also saw , people feeling really [00:05:00] squeezed out of the rental market, especially with redevelopment and sort of,  inner Northeast and inner Southeast, which is,  sort of close in to our city here.

That gave rise to the city, declaring a housing emergency in the fall of 2015 and the housing emergency . I'll just read the language really quick because  this language really then dictates the policies we're going to be talking about today. So the Portland city policy as of 2015, is that all Portlanders regardless of income level, family composition, race, ethnicity, or physical ability have reasonable certainty in their housing, whether publicly assisted or on the private market.

And so this concept of reasonable certainty becomes very important. In defining how the city is going to implement a bunch of regulations. So primarily that's taken the form of rent control. So we have citywide rent control here in Portland. The state decided to then follow suit with the first statewide rent control legislation in the country.

So that passed [00:06:00] last year. So at the state level, rents are capped at 7% plus the consumer price index annually. So this year it was 9.9%. Those rates are set every September. Portland also just incidentally has 9.9% increase year to year. So that was very fundamental shifts. Another big change was that there's this idea now of when a relocation assistance.

So all of the things we're going to be talking about today, are  expansions of tenant protections in the market to try and guarantee some reasonable certainty. So rental relocation assistance, what that really means is now there's direct form of cash payments from landlords to tenants in the event of, excuse me, in the event of a no cause eviction or a rent increase over 9.9%.

And then most recently as of March 1st, there's now these ordinances that are called the fair ordinances. One of those deals with screening criteria. So how you can evaluate tenants and the second deals with security deposits. So [00:07:00] what you can charge for security deposit upfront, and then also how the landlord and the tenant have to document the condition of the property throughout tenancy.

And so what you're seeing these that's Portland specifically, but you've seen that replicated in Seattle. Obviously you're seeing that in California and LA and San Francisco and other communities there Seattle, this winter, the city council passed a resolution that you could not evict tenants during winter months.

The mayor refused to sign that, but that's going to come back around. And I think obviously with everything going on now with COVID-19 and major economic disruptions, you're going to see cities,  make attempts essentially to guarantee housing for people. And so that's taking the form now in Oregon of there's a moratorium on evictions through the entire emergency and the state and city sort of,  big dictate when emergency period ends.

Kol : It use are largely developed by amateur homeowner developers. And many of these homeowners are becoming landlords for the first time when they finish your ADU and [00:08:00] rent out the primary house or the ADU. So what are some best practices that you would like to convey to first time landlords?

Kurt: I think,  really important to start thinking about the property, number one is an investment property. And, but number two also, as , you are providing , housing to people and there's a,  there's a great deal of responsibility that comes with that. And so that means that,  you need to have a legally binding lease. You need to have an application process that's equitable.

You need to make sure that your screening criteria is documented. You need to make sure that how you go through the entire application processes is really well-documented. That basically you're you really in compliance with all these things. I mean, that's sort of legally, that's what you want to make sure of.

I would also really advocate people , making sure you have the right insurance in place, so it's going to be a different type of insurance than you have for your home, for example . I'm a big advocate of people setting up LLCs for rental properties. I think there's a lot of protections that provides.

[00:09:00] For a lot of people,  it's the first time doing this. And with ADUs, it is unique because,  typically the owner is,  intimately involved in the development of the construction of it, as well as opposed to somebody who goes and buys a duplex or a fourplex to get started.

So I think you have to separate yourself from the process a little bit and start thinking about what are the steps I would, I would be taking if I had,  a standalone duplex or a standalone single family rental, and just really making sure you have everything in order to,  to be going about it legally and to really,  be taking on having tenants full-time.

Kol : Do does having renters living on the same property, of  owner occupied properties, meaning an owner occupied property with an ADU or duplex or triplex provide any separate legal protections for landlords or for tenants that are not afforded to non-owner occupied investment properties and can you describe what these protections are?

Kurt: Yeah, definitely. So in, in [00:10:00] Oregon, and I think you're seeing this , in other places where ADUs  becoming, an owner occupied, is becoming more and more prominent part of the mix of rental housing is, there's this trend towards creating a separate class of rental property.

So a lot of times,  obviously ADUs  and owner occupied, they're,  they're treated the same as,  an apartment complex with a  hundred units or 500 units. But in other key areas, the city and state are differentiating  those types of properties. So the key things to think about when you're talking about ADU and owner occupied is the idea of the owner actually living on the property.

So that means the owners that they're living in the house, which would be considered the primary dwelling or living in the ADU. It doesn't really matter, which just as long as you're living on both, if you're living on neither, then your property is just a rental property in the same way , again, a hundred unit apartment complex would be. It's treated the same legally. But if you are living onsite, which is obviously really common in the ADU world and [00:11:00] an owner occupied, in Portland and in Oregon, you are granted certain exemptions. So rental relocation assistance, which I talked about earlier that the direct cash payments and the, a bit of a no cause eviction or rental increase button 9.9%, that doesn't apply to ADU owners who live on site. They also are exempted from the screening criteria of the FAIR ordinance that passed. And what the screening criteria really was, was an attempt to standardize how tenants are screened and then also lower the bar economically to make,  a wider pool of housing available to people.

So it used to be that. Tenants would have to show three times , gross income relative to the rent. And now that's been dropped to two times. Credit scores have been dropped. So I think it's 500 now criminal history, they backed off on what you can look at in terms of criminal history.

So before it used to be well now, for example, it's , seven years is as far back as you can look. So that doesn't apply to [00:12:00] ADU owners.

Kol : Wait, none of those, none of those screening laws apply to ADU  owners?

Kurt: No. So in none of the FAIR  ordinance screening criteria, none of that applies to ADU or owner occupied.

So the other thing that's really important for ADU owners, especially if you're dealing with new development is, so there's the statewide rent control law that I discussed earlier that caps rent at 7% plus consumer price index annually. That doesn't apply if the certificate of occupancy was granted anytime within the last 15 years.

So those properties are grandfathered in and exempt from state rent control. So, basically the key things to really know,  in Oregon, in terms of the mix of how this works with ADU , you can have an exemption for state and rent control law if  your ADU is less than 15 years old, rental relocation assistance, since doesn't apply to you. And also this, the screening criteria, the FAIR  ordinance, doesn't apply. The second ordinance there, which is security deposit, [00:13:00] and that applies to everyone. And that's really that that's a fairly like it's a significant ordinance. So people should be really aware of that going into the process. But yeah, those are, those are some of the things that have been done to really differentiate ADUs.

The important thing to know about all of this is that, especially with the rental relocation assistance, you have to file an exemption with the City of Portland. And that has to be granted by the housing bureau. So there is a process for that exemption, but it does exist.

Kol : Yeah. Well, I'd like to talk more about those things in a minute. I will mention that roughly 10% per year rental price increase seems pretty high to me. Like if I'm charging say, a thousand dollars a month, right now it's just really inexpensive,  the least expensive ADU probably would go for a that I can bump it up by 10%, how 1100 bucks. And it like to, that's a pretty big bump. So that doesn't seem [00:14:00] like it's a problem from our landlord's perspective to me. Does it seem like one to you?

Kurt: Well, I think what was happening is that,  we touched on it a little bit earlier, but over the decade, last decade , 2010 to 2019 there was rents in Portland, went up a lot. So it also, and there was also a lot of redevelopment of existing  rental stock. So what was happening is,  a person buys a fourplex and,  does an extensive renovation and then suddenly their market rent went from, and this is a,  pretty accurate example probably about like went from 650 to 850  for a one bedroom.

And suddenly their market rate was 1200, right. So that represents a significant increase in rent. But it was in line with the market. So I think you don't have a problem with this if your rents are already at market rates. But if you have situations, which is also really common, where especially if somebody owned,  owned a property for 15 years and they've had the same tenant and maybe they've raised [00:15:00] rents,  5%, every five years or something like that, which isn't unusual, suddenly you're way behind in terms of what the market rent actually is.

And so if you're in that position, then 10% , doesn't seem like that great of an increase, but I agree. I mean, if you're,  all the, all the landlords, all the owners that I work with everybody is, and the rents are at market rates already. So they're not really going to be worried about,  9.9, 10%.

What happens though, and what people are worried about is that landlords were automatically increase rents to that level every year, just to make sure that they don't fall behind. Because if you miss a year, then , you can't make it back up. And also the other thing to important, important to realize about that is you can't raise rents above the allowable level between tenants.

So there's, there's this idea that the rent level sort of , it is dependent on the property. So if somebody moves out and they've lived there for 10 years and let's say,  do use the ADU  example, let's say they were paying $800, right. And , now you can get 1200, you [00:16:00] can't automatically raise it to 1200.

At the most you can raise. It is the 9.9% is the allowable rate. So even though someone moved out, it's a new tenant, all of that stuff, you still have to only increase at 9.9% in the city of Portland.

 Obviously there's a lot of people here  listening who aren't in Portland. But I think the idea here is that you see a lot of times,  West coast and major cities leading the trends and some of these things. So I think as you start to see , this become an issue in more cities and also,  ADUs  becoming more common in places that aren't like Portland or aren't like Seattle, you'll see a lot of these, a lot of these regulations type,  trickle down. And it really, it is like in Portland, it is an experiment. I mean, it's, it's really an attempt to see, like, does this work, does this,  not, not depress, but does this sort of just suppress the rapid growth we were seeing in rent?

Obviously , you can't now sort of get a good baseline because it's all been [00:17:00] thrown into chaos essentially with,  what's going on,  with COVID-19 and economic destruction from that. But that was really what the city was attempting to do is seem like, is, do, does this work essentially.

Kol : So I'm generally concerned about restrictive rental regulations and their potential to adversely impact housing production in the ADU  space in Oregon, Portland, but even more so in California. And I'm not going to pretend to be a  subject matter expert on the rental regulations  of California, but I have heard they're quite onerous.

So I, I do think that's going to dissuade people's interest in general in becoming a landlord cause they're freaked out about becoming a landlord. So as a general policy matter, I'm interested in seeing some carve out legal exemptions for screening criteria and lease duration, flexibility for owner occupied properties.

So that owners [00:18:00] have a bit more control about who they're living with. And it sounds like Portland's kind of doing this. So I guess I'm curious for your thoughts about this idea as applies to ADUs  and middle housing in general. And so can you talk about that and does do these regulations also applied to middle housing, triplexes, fourplexes owner occupied?

Kurt: They only apply to duplex. So anything over a duplex is considered,  falls into the other category of the other types of your rental properties. So it only applies to owner occupied duplexes and ADUs  where there's,  the primary residence and the ADU on-site and the owner is living there.

So that's, that's really the way that the city and state have been distinguishing these. Yeah, I think in general, yeah, as I discussed there, there is this, do you have,  setting it, bringing a separate sort of class of, of rental property. And I think you're going to see that more and more, especially as people,  advocate for that.

So especially as people who are  ADU owners and are an owner occupied [00:19:00] situations, or are agitating for that. The other thing to keep in mind is that certain fair housing act regulations don't apply to owner occupied or to ADU. So. I'll just say an owner occupied, but I mean, both obviously. And so the fair housing act and I'm not an expert on, on actual the implementation of this, but basically they've tried to make allowances for,  the type of situation you're describing, where people want more control over.

Who's going to live in there because they live on site. So you don't have to follow , protected class guidelines, the way you would, if you were,  if you owned a larger rental complex, or even just a single family rental. So you're given exemptions for that. You're obviously in Portland, given exemptions for rental relocation assistance, you're given exemptions for just screening in general.

So there you do see an attempt to accommodate the fact that people want more control over who's going to be [00:20:00] living  on the same property that they, that they own, that they live at. So that's something that definitely happens. I mean, I think in general, the attempt with the screening criteria that the city of Portland did was to remove all bias  whether conscious or not on the part of the landlord.

So basically just remove all of that. And just say, you have to look at these specific criteria, so you can view regulation as,  onerous and problematic, which it is in some ways, but you can also view it as setting a clear framework for how you can and can't act in the market. And so it's sort of like,  from my perspective, as a, as a property manager,  the screening criteria to me, it just says, tells me like what we can and can't look at,  and that's, and that's all it is.

I mean, you can, you can make arguments about, 'Oh, you're going to get people in properties that aren't able to afford it', all these other types of things. But,  in my mind, it's just the regulation is, what it is and you just have to follow it.

Kol : So despite the seemingly seemingly complicated set of rules for [00:21:00] being a landlord, my personal experience over about 20 years doing this is that it's been very easy.

I mean, there's a reason why passive income is called passive income. It's relatively simple way to make income. And only rarely in my, in my personal life have situations arisen where there has been a problem with tenants. Especially when I've been living on the property with tenants, whether it's been in the ADU and I was renting out the primary house or vice versa.

So with all that said you're a property manager and I'm curious what are some reasons that owner occupied ADU owner would want to consider voluntarily giving up 8 to 10% of their monthly income, which is what property managers typically charge to use a property manager, or do you just, would you generally say in a non self-serving way that's not really needed, you don't need a property manager at all? What, what are your thoughts [00:22:00] about that?

Kurt: Well, yeah, there's, there's, I mean, there's a couple of ways to think about it. I mean, I think,  I hired an accountant for a reason and I've  hire general contractors for a reason and it's not to say that I can't do my own taxes. Or that I can't take on a project, which I can't take on a project, but , that's not to say you can't learn how to do that, but a lot of people, it's not really an efficient use of their time and it's not really how they want to be spending their time.

So I think that sort of,  how do I best use my time? How do I best allocate my resources is one reason people go with property managers, another is,  market acumen. So,  knowing what rents are knowing what does, and doesn't make sense to invest in. I was listening to the one yesterday, which was obviously dealing with appraisals and in a lot of that was resonating with me where,  certain choices people make in terms of what they think will be,  will drive, rents up.

If, if you were to consult with the property manager before that, they would say, no, you're not going to see a big,  a corresponding bump in your rent to have that make sense. So I think [00:23:00] market acumen is part of it. Obviously in Portland, in Oregon, it's knowledge of state and local regulation is a huge, huge part of it.

I mean,  if, and this is, this doesn't necessarily just apply to ADU owner occupied, but , the security deposit ordinance, if you run a foul of that and obviously the security deposits are some of the most litigious aspects of a lease. So any time you keep back part of the security deposit, the tenant's going to probably challenge that and sort of what's considered reasonable wear and tear.

There's a lot of gray area there, but if you run a foul of that in Portland the penalty is two times the security deposit, plus attorney fees and actual damages. And also even if the owner , wins the claim, they still can't recover their attorney fees. So in that situation, you can easily imagine,  someone who's got an ADU that's $1,500 security deposit, top of 15, plus your attorney's fees.

That's easily,  five, six, $7,000 penalty there before it's all said and done. So I [00:24:00] think working with somebody who has a really deep understanding of the regulation is a reason. And I mean, I just always come back to like the idea that has literally happened in my cases,  when I did have my own rental property, which was,  the water heater went out at 7:30 on Friday night and it's like, then we're over there doing that.

And I think for a lot of people , maintenance is what people come back to time and again. It's a reason they don't want to do it. They it's something they don't want to think about. I mean, when you thought about passive versus active income, there's certain times when being a landlord feels super active and then there's other times where yeah.

Months or weeks will go by where it does feel very passive. So I think for the people listening to it here is obviously a very motivated,  like entrepreneurial group, who a lot of them will be self-managing. But I think,  most of the people I talked to and the people that I work with you have ADUs, they just don't want to deal with that.

And especially the more regulation there is, they'd rather turn that over to somebody who specializes [00:25:00] in that and do they pay up,  8% is what might my fee is, but who pays that,  on a monthly basis and just kind of takes care of everything for them.

Kol : I'm going to run a little spontaneous experiment here, there a question in the queue from Kevin about People who are maybe inclined to build an ADU, but they're a little bit freaked out about the idea of becoming a landlord because they've been hearing these nightmare types of legal changes that are occurring within their city.

So I would like for landlords who are in this call to put in their thoughts about what advice they would give to newbie potential ADU developer/landlords, to help them feel at peace with the idea, the prospect of building an ADU on their property. I think you would have some suggestions for that too, Kurt,  but I'm going to see what responses come out of that.

And go on to my next question for you. So you have a unique service that [00:26:00] you provide for ADU owners that I haven't seen other property managers do. Could you talk about that business proposition?

Kurt: Yeah. So,  what I really saw the need for was for lease services around ADUs.

So,  a lot of where issues come into play is,  the type of lease that you have with somebody, or the lack of lease, how that's all documented, the application process. We've obviously talked about screening criteria being important. And even though it doesn't some aspects that don't apply to ADU  owners, you still have to follow,  there still are at the state level, legally binding screening criteria.

So really, yeah. What we offer is It's a set of lease services that basically for ADU owners we handle the application process. We run the background and credit checks, so that involves obviously a credit check eviction history rental history, all of the sort of,  background information that you would want to know.

So I work with,  TransUnion who obviously is a big provider of background and credit checks. So we [00:27:00] provide that service and then we do the full lease for you essentially. So that is at this point,  leases  in the City of Portland and run 18 pages or so. And so yeah, the full lease , all of your, sort of carbon smoke detectors, all your molded addendum,  is basically that entire package that makes your legally binding lease with the tenant. And the way it works for us is this is assuming that the ADU owner has already found the tenant. So we don't go out and market the property on that falls into,  full service property management situation.

But if, if you have,  a tenant or you're pretty far along with somebody, we can basically run that entire process for you and make sure you all at the end have all of your documents and your legally binding lease. And so for that we do $300 for that service and that's a, just a one-time flat fee.

And at the end of it, you're then in charge of rent collection and ongoing communication and maintenance and all of that. Yeah.

Kol : I liked that. I liked the concept. I don't know whether that's going to be like of a business line [00:28:00] that's going to generate tons of cashflow for you individually, Kurt. But I do really like that concept of having this kind of standalone piece that you offer for owners who are concerned about dealing with the most,  potentially legally challenging portion of  the process. And also,  doesn't require that they have to give up 8 to 10% of their rental income each month. Which to me is where I balk at the idea of using a property manager at least locally now in my personal case, I own rental property in locally and I manage it all myself and then I own a property not locally. And I do use a property manager. So I experienced with both and it is awesome. Having a property manager makes it so easy. Oh my God. But , I'm giving up a couple hundred bucks a month and most of the time they're not doing much.

Kurt: Well, I don't know about that, but I know for me just to go back to your point of like the, the reason that I set that up in the first place is. [00:29:00] I do think it's a, it's a useful service and it has proven to be for people, but also from my perspective, people who have ADUs  now or owner occupied, those are the people that,  five years from now are going to be buying,  a second. Maybe they buy a fourplex and maybe they buy a couple of single family homes that they want as rentals.

So those are the people that you'll see moving more into having investment properties and rental properties. And so I want to develop a relationship with those people early on, and,  they see value in the service that we provide. Then maybe they'll work on me down the line. So yeah, it's definitely,  the core of my business is full service, property management.

And I do that for people with ADUs. I do that for people,  in multifamily, single family homes, all that. But yeah, I view this as sort of a nice introductory service for people and also for people who. They do want to have the experience of managing on their own. I mean, that's how I got into it as managed my own property.

And,  that's a very invaluable experience to know how everything works and to know what the concerns are, know what,  how a tenant is going to respond to something isn't [00:30:00] always how you think they will. And so having a really good understanding, understanding of what motivates people is super useful.

Kol : One motivation of why people are building  is not just the income potential, but also the flexible housing arrangements that they offer for people. And so  one immediate thing that a lot of people are interested in homeowners, or is like, 'Can I do a short-term rental?' And a lot of jurisdictions that are allowing you to use are saying, 'You can do an ADU now, but you can't do short-term rental anymore'.

And that's all of California and Portland is more or less has a policy in effect now where for new ADUs, you need to pay a lot more if you want to have be able to do a short term rental. So I want to talk about alternative lease structures that homeowners can consider for providing more  flexibility within their ADU to use it for alternative uses such as an occasional family member who wants to come to stay in town.

So can you talk about like fixed term leases and [00:31:00] alternatively structures that are out there?

Kurt: Yeah. So leases typically fall into two categories. There's a fixed term lease, meaning it has a specific start date and end date, and you don't have to give notice for when that lease terminates. So historically that's a year- long lease or there's month-to-month leases and a month-to-month leases, obviously,  rolling 30 days. And there is then a notice period to terminate leases.

So the way that. Again, historically is working as the people,  when you move into a place you're on a fixed- term, lease for a year. And then after a year that rolls over month-to-month. Historically there is an argument to be made to reassign people, to fix term leases.

So,  for another year, but basically what Oregon has done with SB 608, which is the state rent control law is they've been really clear about the advantage that goes into having a month to month lease after the first year of occupancy, because this first year of occupancy becomes very important and the state of Oregon, and [00:32:00] after the first year a tenant, if they're in the same property has a really great set of rights.

And basically it can dictate when they leave. So the only reasons they can be evicted after the first year. And again, this doesn't apply to like non-payment of rent or,  destroying the place we're talking about. No, cause what are called,  no cause evictions essentially. And after the first year, The only grounds for no cause eviction now in Oregon are, if you're going to be basically taking the property off the rental market.

So if you're going to be moving back into it or an immediate family member is going to be moving into it and they can't find similar housing on the property if the property is going to be demolished, that, that type of thing. So I, I will say though,  in the ADU world, there, there is a lot more people do desire a lot more to have,  a three month lease or a six month lease and to have that flexibility.

And so I would say,  if you're going into that situation, then definitely you want to have a fixed term lease. And so yeah, if you think, Hey, I want to have a [00:33:00] person in place for three months. And that's it. Then three months is the way to go. The thing to keep in mind right now, though that's happening is Oregon.

Because of the, because of coronavirus has said they they've stopped basically renewal of external leases. They've said that you can't renew fixed releases. They can just go over to month to month. So what you don't want to do, or what you can't do is start with a three month lease and then try and resign that same person to a three month lease.

They would have to roll over in the month to month. So that's kind of getting into like,  weeds there a little bit, but yeah, I would say,  if it works for you and if it works for the tenant where they're going to be there three months or six months or whatever, definitely go with a shorter fixed

Kol : Aside from coronavirus, which changes everything,  you're suggesting that it is possible to do a fixed term three monthly , for example, in Portland at that point after three months,  I could have another person lined up or I could have another use in mind lined up for the ADU  and the tenant [00:34:00] must leave after three months. Is that correct? Okay, cool.

Kurt: So you still would want to check to make sure that like,  cause there's, there's more extensive termination notices now, which makes it an a, which are 90 days, which makes it kind of this convoluted situation. Like the second, the day they move in, assuming a three month lease, the day they moved in, you give them,  but it's like if you have everything lined up that way yeah, that's, that is the way to go.

And I think,  it's like in that situation, the other thing to keep in mind here is,  this stuff only gets litigated or tested if the tenant feels that they've been wronged in the situation too. So if you both go into it, knowing what the situation is, having a lease that spells everything out, you're, you're going to be usually in good shape.

And I think you'll rarely find these problems.

Kol : Okay. And my final question here is about like other business innovations that could help make the landlording process better for owner occupied properties. And then also tying in like how you [00:35:00] believe COVID is going to impact the rental market for ADUs specifically, but just let's just say housing in general and residential zones or small housing generally in residential zones.

Kurt: Yeah. To start with, with innovations in some of these are tied to COVID and then some of them aren't, but one that is, is definitely a move towards contactless self showings. There's been a movement towards that in property management for a while now. Because one of the things that takes up most of everyone's time is like actually physically being there to do a showing of the property.

So if you can move away from that model and give  potential applicants remote access, then that's something that's really beneficial for everyone. So my company, we we've moved entirely to contact with self showings now. So like how that works in actuality is we verify people's ID ahead of time.

We use lock boxes that are,  remote access one-time code. So people get a code on their phone, open the [00:36:00] lockbox go in. We're looking more and more about in certain types of properties where it might be sort of having it, having some sort of camera system and there as well, but so far, we haven't run into any issues with that.

So I think contact with self showings is one. I think a movement away from security deposits is another thing. So what you're seeing more is a couple of models. One is property managers taking on that risk themselves and saying, we're not going to collect a security deposit. And , the first thousand dollars of damage we'll cover. So that's one model.

Another is the idea of basically paying a form of monthly insurance to a third party that guarantees the security deposit. So companies like Rhino is a really good example of that. What they do is,  the tenant pays a monthly fee, like,  $13, $15 no security deposit is collected, but that money goes away forever.

And then in the event that anything goes wrong or there's a claim against it, then the owner or the property [00:37:00] manager basically files a claim back to Rhino and settles that claim. So I think that that's something you're going to see more and more. I think there's going to be more motivation to collect less money upfront.

Especially as obviously,  mass levels of unemployment people have less access to ready cash. Having all of that money tied up in a security deposit is going to, I think be more and more problematic for people. So that's definitely another way I see it. In terms of ADUs  and COVID-19, I think there's some things because in the short term that are, that are not great.

It's something that I've definitely been noticing on rentals that I have, where there's an ADU attached is in an era of social distancing, people are really concerned about shared backyard spaces or any sort of shared space that say less than,  a sort of city lot size. So I think that that's going to be problematic for people.

Obviously, Airbnb has been decimated by this.  I talk to people every week now who built these like beautifully finished ADUs  for Airbnb that just came online, that [00:38:00] now there's no market for, and want to turn them into long-term rentals.  Those are a couple things that I'm definitely seen as,  sort of Airbnb going away for the short term and people really wanting more space and having concerns about having shared space and shared access.

So those are things that I would keep in mind if you're an owner right .  Again,  in all the things I'm talking about and all this regulation, everything. I still think that,  rental investments in ADUs  and owner occupied is one of the best ways that you can,  basically be investing your money and building up equity and doing all these things and also providing like a really valuable service in your community.

So I think that none of this is to dissuade people. I think it's just,  if you're going to go into make this decision and sometimes be spending,  hundreds of thousands of dollars on developing these properties, you should really know what to expect coming out of it. And I think a lot of this is about like really professionalizing your approach to how you're dealing with tenants and how you're dealing with all the regulation involved.

But it's still, I think, a great thing to be doing and , you're going to see more and more of it. [00:39:00]

Int

Kelcy: Kurt. I'm just going to go down the line here about some good questions.

 What is the definition of living on property for owner occupied properties? This particular person rents the main house to travel for an extended period of time, but plans to move in when the, into the ADU between the extended trips, would that count as owner occupied?

Kurt: I think it depends on how long it is. I'm not sure the answer to that specifically, but yeah, if the idea is also that, like there's not anyone else living in the main property and say, you're gone for,  I'm not going to say specific, but let's say you're gone for two months or something to move back in.

I think that still fits the criteria of occupying the  primary dwelling . So yeah, as long as there's not anyone else that moves into the meantime, that's a,  you're treating us rental , I think you would be okay there, but again, very specific ones like that. I would , I'm, I'm happy to answer a specific question like that afterwards by looking it up, or I would consult with the actual origins on that.

Kelcy: Thank you. What are your thoughts on how new construction rental market is looking in [00:40:00] terms and return on investment over the next year? I have clients who are timid about spending hundreds of thousands of dollars at this time   to do new construction?

Kurt: I think it depends on a ton of factors that we don't really know the answer to yet.

Everybody was really concerned about people paying rents in April and that happened and it was fine, but I'm more concerned about what's August look like what's November look like.  If you look back on other historic events,  they're historic. And so you're able to view them with some remove and some, some distance and a lot more context, but we're in a very fluid situation right now. And it really remains to be seen how all this will play out. If there's,  some sort of solution this fall, then that will be very different than if there's a solution,  a year and a half from now or longer.

So I will say, I mean, interest rates are historically low and , they're not, I mean, they can't go, they can't go much lower. So that's great for anyone who is looking to make an investment. Now, I think,  in general, it's a bad idea to try and time the market. I mean, I think that applies to real estate.

I think it applies to the [00:41:00] stock market. I think that applies to a whole range of investments. I think the individual just doesn't have enough  information to really make decisions like that. So I think,  not following through with plans now that you were planning on doing, I mean, I don't know that I I'd love the idea of,  coming online with an Airbnb this summer.

Like, I, I probably would be delaying those plans, but in terms of,  right now we're still seeing the rental market holding up. And I think the city and state have tried to put certain things into place to make sure that,  there's not sort of,  this massive evictions aren't happening, for example and , for properties that I manage and that type of property, and probably the type of property that a lot of people on this call will have is,  most of those people are still by and large are going to be in decent shape.

In terms of  the earning potential and things like that. So I don't want to speculate too much about it, but I, I wouldn't be changing your plans wildly right now, based on what's happening.

Kelcy: Okay. Do rentals of rooms or spaces within a single family home that is not an ADU,  are those [00:42:00] exempt from the Portland regulations?

Kurt: They would be. So that, that gets treated as a owner occupied.

 Kelcy: Do you specifically offer property management services for purely the tenant search contract lease up for a fixed fee or do you manage the whole tenant after that also?

Kurt:  I do both. Yeah. So, I mean, there's sort of three models, there's the full service property management. And then there's, as I discussed the ADU sort of lease services light which is,  basically you,  who the tenant is and then my company provides the entire service to sort of vet them, do the application and do the lease for them. And then a third service I offer is,  we do the marketing, we do the advertising do photos, kind of everything that we do positioning for the property and then all the way through the lease signing process and then turn it over to you.

And so that's, that's a third model of something I offered. I have actually, I have a property that's going to be coming on next week that falls into that category. And for that, that the fee is, [00:43:00] is one month's rent. And then, okay.

Kelcy: Do you offer your services in Portland only? Or do you do anything outside of Portland?

Kurt: Outside of Portland. Yeah. So the way that licensing works in Oregon is it's, it's a statewide license, so it's essentially a real estate license. So yeah, I work throughout,  kind of the greater, greater Metro area and beyond, I mean, I don't say work down in Bend or Salem or things like that, but yeah, the greater Metro area I'm working.

Kelcy: Great. Thanks. Do you, or are you aware of the City of Portland still offering the landlord tenant 101 class? Is that something that you offer?

Kurt: Yeah, I think they, I think they have been offering that. I mean, One thing that is still really happening is, I mean, even more so than before are things like this.

So,  I'm a member of Multifamily Northwest. I'm a member of NARPA, which is national association of rental property, residential property managers. And those people are doing,  they're doing classes on a, on a daily basis, on a weekly basis. [00:44:00] So the city, I would think they're still doing some of their classes.

 I also do, I teach a class for brokers in realtors that's through various title companies. So if anyone after that is interested on an information on that, just go ahead and email me and I'll connect you with basically how, how that happens. It's typically through, I work with title companies on that.

So they, and if you're able to get a continuing education credit towards your license. So yeah, that's something that I do also typically on a weekly basis.

Kelcy: And for those folks who are planning on doing leasing themselves, can you offer are there any boiler plate legal contracts that they can access?

Kurt: Yeah. You want to be using in Oregon, there's swell important and there's two there's multi-family Northwest. And then there's also Oregon rental housing, I believe is what it's called. I use in most people use Multifamily Northwest. So they have a couple of different services. One is you can buy,  one time printout  fees or I'm sorry, [00:45:00] one time,  for fee one time applications and forms.

The second is a sort of on demand subscription-based model for it. So yeah, those are, those are basically the standard leases and standard notice forms , rent increases, security deposit forms. They had the whole suite of forms and that's actually, I use those forms, most property managers and landlords in the city use those forms because they've just been vetted.

I mean, my, the attorney that I work with he's on the committee that basically writes all those forms. So it's just a really it's a good thing to be using those. I wouldn't just,  Google lease agreement because we live in a very, very unique market and you want to make sure you're using all of the up-to-date leases, but yeah, that's, I would highly recommend the Multifamily Northwest leases.

Kol Peterson: We are jumping into the ADU Hour series with our guest,  Abdul Abdur-Malik.  Thanks for joining us today. It's going to be really good getting into some really technical, nitty gritty stuff that I think we're all learning about. There's no codified information about some of the things that we're covering next, we're going to be learning a lot together, so look forward to it. Alright, Abdur come on out.

Abdur Abdul-Malik: Good morning, Kol. How you doing?

Kol Peterson: Good man. Good to see you.

Abdur Abdul-Malik: Good to see you.

Kol Peterson: Thanks for thanks for being our guest today. I think a lot of people are going to be really interested in what you've been researching. Why don't we just start by having you introduce yourself to our group?

Abdur Abdul-Malik: Sure. So my name is Abdul Abdul-Malik. I'm a certified residential appraiser, that's licensed to appraise in Oregon and Washington. I'm a board member of the local Portland chapter of the American Society of Appraisers. I serve as their secretary. [00:03:00] I recently completed my candidacy for designation, and I'm now a designated member of the Appraisal Institute, NSRA, and I'm also very active in teaching appraisal concepts. I assist a nationally recognized instructor, George Dell, occasionally when he comes to teach appraisers. And recently I've been really delving deep into ADU valuations.

Kol Peterson: Thanks Abdur. So we're going to dive right in, tell us about a term that. I've learned from you "functional obsolescence" and its relative application to ADUs.

Abdur Abdul-Malik: Sure. So to explain that I'm going to use basically what's known as the Bible for real estate appraisers is called the Appraisal of Real Estate. And I'm going to read from the 13th edition, a couple of concepts that are very important to understand when it comes to the valuation of ADUs.

So depreciation is a word that many of us have heard. And the definition for that is "the difference between the contributory value of an [00:04:00] improvement and the costs at the time of the appraisal." So the costs may have been higher initially, but at the time of the appraisal, it may be less .

And there are many different sources of depreciation. And one of them, the one that's particularly relevant for Ady evaluations, is the term "functional obsolescence". And, bear with me here, I'm going to read this definition, but it's very important for the understanding of valuations of ADUs. So it's the functional obsolescence is caused by a flaw in the structure, materials, or design of the approvement when compared with the highest and best use and most cost-effective functional design requirements at the time of the appraisal. A building that was functionally adequate at the time of construction can become inadequate or less appealing as design standards, mechanical systems, and construction materials change over time. Functional obsolescence is attributable to defects within the property in contrast with external obsolescence, which deals with conditions outside the property.

And here's the key portion for ADUs' functional obsolescence, which [00:05:00] may be curable or incurable can be caused by deficiency, which means that some aspect of the property is below standard and respect to market norms. It is also caused by a super adequacy, which means that some aspect of the subject property exceeds market norms. So that last part is the most relevant for the valuations of ADUs. It's not that an ADU is a bad thing to construct. In fact, they're very useful and they serve many different needs in the marketplace, but because the general market expectation is that these structures would not be present in most single family, detached homes, it's considered a super adequacy. Now what's considered a super adequacy today may not be considered one tomorrow. And my suspicion is, is that as ADUs continue to gain a greater market penetration, and they become a much more important part of the housing solution, they may actually in some marketplaces, be considered a norm, and perhaps that functional obsolescence will go away.

[00:06:00] So it's not "once categorized a functional obsolescence, always an obsolescence". It's just that at the current time, the difference between what you'll pay for it and what the value return will be at the time an appraisal is done. Generally, is less than what you put into the home.

Kol Peterson: Now it's not just ADUs that have some degree of functional obsolescence using appraiser speak, but almost any home improvement would have some degree of functional obsolescence. What types of home additions add value for resale from an appraiser's perspective?

Abdur Abdul-Malik: Well a lot of times the easy ones are like a kitchen remodel, a bath remodel. Sometimes if the home is indeed very small for the consideration of the market, sometimes the person may add more physical space, a living area, to their home, and that may bring their home up to market expectation for the typical size of a house in their market. ADUs aren't the only additions that may sometimes have [00:07:00] less of a return in value. A great example here in Portland is a swimming pool. In some markets, a swimming pool will add value, but I have done a number of appraisals where a swimming pool contributed $0 to the return of investment. In fact agents will tell me some times that a home that had a pool when it's sold, the next owner would just backfill it and get rid of it. So definitely EDU's are doing a lot better than swimming pools in the Portland residential market.

Kol Peterson: I saw a new one last week Abdur that was pretty cool. A woman was buying a  high-end house in the West Hills that had a pool in a pool house and she was gonna convert the pool to an ADU.

How's that for functional obsolecence? So how do ADU stack up relative to these other home improvements in terms of cost of construction versus resale value? So let's take kitchens, additions, garages.

Abdur Abdul-Malik: Appraisers like to always hedge their statements by, "It depends". And so it really does depend on a number of different factors how they [00:08:00] stack up. We've all been to some kitchen remodels, maybe a friend shows you their kitchen remodel and you're just blown away. And you could tell that the quality and the craftsmanship is of high value and you would certainly expect in that case for high return then you've maybe been to a kitchen remodel where, you know, to put it politely, maybe it's "lipstick on a pig", right? And it just doesn't really give you the return that it could have otherwise have, if it had been done at a higher quality. So with ADU s, my research is showing that pretty much. Any ADU is going to give you some incremental boost in value. I have yet to do a valuation of an ADU where it was a $0 return, so that's the good news. When it comes to returns, it just depends on what your needs are for an ADU. Some people convert their basements into accessory dwelling units, and that can be a very cost effective way to get that ADU built for an inexpensive price. Others  maybe do a [00:09:00] garage conversion or maybe they'll do a stack on to a garage. And then of course the most expensive option would be a detached ADU perhaps in the backyard. Those can be very expensive to construct. And so the market return will be high on those, but not as high as the cost to construct.

Kol Peterson: We're going to have you give like a 10 minute summary in a minute here, but I want to take frame that by just raising the fact that you've mentioned in the past that this research may not necessarily be applicable in other markets. Before we provide this information for people's contexts, I want you to explain that a little bit for us.

Abdur Abdul-Malik: The general principles of valuation, they certainly apply nationwide, but I always caution people. The numbers that I present are for the Portland market and they may or may not be directly translatable to a different market. An example might be the Bay area in California where median home prices are like $1.5 million. So if I say this [00:10:00] type of ADU gives you a 10% bump. It may or may not correlate directly to that market just because the dynamics are so different. I do say that, but Hopefully especially in Metro markets that maybe their medium prices are very similar to Portland, maybe even the market dynamics are very similar.

Hopefully the numbers actually would provide some meaningful insight into what you could expect in your own local market.

Kol Peterson:  Unlike other days where we've just done a straight up interview for the whole time, I'm going to have Abdur do a 10 minute  version of a really rich study that he's been gracious enough to be working on for a while.

Really just for the benefit of everybody who's interested in this topic. So I'm going to hand it over to you Abdur, take it away.

Abdur Abdul-Malik: This is a, an adaptive presentation that I gave at a conference called the Build Small Live Large, and this is titled "Case Studies, Appraising ADUs".

We're just going to talk about how this project got started super quick. As you know, Kol Peterson is the national ADU expert and he made available to me a list of 1500 legal [00:11:00] ADU properties. And that was very useful because  I took those properties and I went into the local MLS system, and I said, Hmm, which of these ADU properties have resold on the open market?

 As you can see here in this slide, I painstakingly went through the entire list of properties, and I highlighted the ones that did sell. And the idea was, let's take a look at the city of Portland. Let's take a look at the properties that have resold and as you can see, quite a few of them have actually resold since the ADU was constructed. And then let's just do appraisals. On the ADU and the appraisal definition from the Appraisal of Real Estate, 13th Edition is "the act or process of developing an opinion of value". So a bunch of mini appraisals are being done and appraisal theory recognizes three approaches to value. You have the income approach, you have the cost approach, and you have the sales comparison approach.

The approach that we're using for this study is a sales comparison approach. The [00:12:00] other two have limitations when it comes to ADUs and the sales comparison approach, honestly, is the gold standard for valuation. It's going to be the the methodology that will give you the most likely return when you go to list and sell. The sales comparison approach it just involves comparing a property to similar sales in the open market.

So if you have apples, you want to compare it to apples. You definitely don't want to compare it to oranges or the valuation will be suspect, but in this case, appraisers have toolkits that go on and on, and we're using many of those tools for the valuation.

 The main thing that we're doing with this valuation is we are staying in Portland for technical reasons. And the city of Portland is actually pretty nice because it has strongly defined neighborhoods. Everyone that's in the city of Portland is as part of a defined neighborhood. So we're, we're taking a property we're seeing which neighborhood is sold in, and then we're comparing [00:13:00] it to properties that are as similar as possible to that ADU property. With one exception, we are not using other properties with ADUs. Now, why would we do that? Because we're trying to isolate the contributory value of the ADU.

If the main structure is a 1500 square foot home with a one-car garage we want to look at all the other 1500 square foot homes with a one-car garage, lacking an ADU, because if we do that, the difference between the two sales prices will tell us what  the market attributed to that ADU. So, as we mentioned, we're sticking with those defined neighborhoods. We are doing our best to bracket every single attribute of the property, except that ADU. So I just want to run through maybe just a few examples. Here's a property that has a detached garage conversion [00:14:00] ADU this particular home sold in, in 2018.

And so in this case, the ADU added 18% to the value. However, because the garage was converted, the homeowner lost the use of that garage, so that did result in some decrement in value. So when you shake out the gain for the ADU, the loss in the utility for the garage, the net gain for this property was 12%.

This one was a new construction property with a basement ADU. It actually sold twice once as a new construction and then 14 months later on the open market as a resale. So in 2016, when it was a brand new construction that ADU contributed 6.1% to the value.  Interestingly enough, when it's sold in 2017 , a year or two months later, the ADU added more. It actually added 16% to the value at that time. My guess, and this is, and this is just a guess, is that the new construction property, typically a buyer is very intentional [00:15:00] about what they want when it comes to new construction.

And if they want something, they generally will seek out to have that constructed at the time that the home is being built. But once a home is resold, kind of like driving a car off a parking lot the dynamics of the market change, and in that case, the ADU actually gave a higher degree of contributory value because it was just a useful feature for people looking to purchase a home in the resale market. So again, another high-quality ADU conversion.

Here is an attached ADU. So it is a separate unit, but it's attached on one side to the home. So in this case, the ADU added 24.6% of the value and for a dollar figure amount that was slightly over $125,000. So as you can see, that's a pretty substantial bump in value, but anyone who's constructed an ADU knows that it probably costs upwards of $200,000 to construct that attached ADU. This is where that term [00:16:00] again comes in depreciation. The difference between the cost of construction and the value at the time of the appraisal, functional obsolescence.

Not that there's a flaw in having an ADU, but the definition encompasses the idea of a super adequacy. So maybe this is still a bit more than what the market would expect, but it's certainly contributed a substantial gain in value almost 25%.

This was a detached garage conversion ADU. And this is where I started to see trends because detached garage conversion ADUs, when you factor in the loss of value for the garage versus the net gain, usually the differentials between five to 10%. So again, I don't know if that would apply in every market throughout the United States, but here in Portland, that's what I'm seeing that if you convert your garage you will probably boost the value up to close to 20%, but then you're going to lose maybe five to 10% because you've got to factor out the loss of the garage utility. [00:17:00]

 Size does play a role in how much an ADU will contribute to the resale value of a property. The smaller ones, the value can be quite small, still there, but smaller. And in the larger ones, of course, a bigger return.

So this is a, another garage conversion. This one added 28.3%. Then again, factoring in the loss of the garage you can see about that 10% loss. So the net gain was 17.2%, and this one was actually a two, two level ADU garage conversion, which was very nicely done.

Now this one, and this will be the final one, we take a look at. This one is essentially two homes. So this home was pretty small to begin with. And instead of maybe enlarging the existing home, the owner decided to just build a separate ADU structure. And as you can see, the main house was 866 square feet, the ADU 690 square feet. [00:18:00] So the parody between the two structures is extremely high.

Because of that, you can see that the value gain on this one was substantial. The ADU added 71.2% to the value, about $160,000. Probably the cost to construct was a little bit more, but in this case, the market rewarded the owner with a pretty substantial bump in value.

Essentially, an appraiser might look at this and say, well, is this an ADU or is this a duplex? And we might talk a little bit about that later. Terminology can matter because depending on the loan that someone is trying to get to finance the purchase of one of these things, the terminology can matter, but it's kind of like calling it  six or  half a dozen.

That is the end there, but hopefully that gives the listeners a little bit of an insight as to the value gains that some of these ADUs are contributing.

Kol Peterson: Thanks Abdur. That was a great expedited summary of your findings. What are some [00:19:00] other methods that could be used to determine a research-based method for determining the contributory value of an ADU?

Abdur Abdul-Malik: Well, as I mentioned before, I really do think that the Sales Comparison Approach is your gold standard. There are many different types of value. In fact, there are dozens of ways to define a value. Market value is the typical way that most people are asked to define it. And that's just basically, what would someone else in the market pay for the structure?

Now, investors might have completely different motivations. People who go out and buy like apartment complexes, or even like quadplexes, triplexes, duplexes, they're looking for rental income. So their valuation of the property would really be tied to the revenue stream. With ADU s I think the Income Approach is a little bit shaky right now because the market has other motivations besides income.

There's the Cost Approach, the cost to construct something, but then again, that term depreciation, functional obsolescence, you got to figure out [00:20:00] well, what's the hit that this is going to take. And so Income, Cost Approach, those are other methodologies, but again, sticking to the one that I think works the best, Sales Comparison Approach, is going out and finding other properties similar and seeing what they're selling for.

Kol Peterson: Let's say there's no sales comps, let's say we're in a market where there has been less than five ADUs built and none of them had been sold. In the absence of sales comps, do you think the income-based valuation method could be used to determine an opinion of value in that case?

Abdur Abdul-Malik: A study was actually done about seven to nine years ago here in the Portland market, looking at the income approach as a way of valuing ADUs. This gets a little technical, but the income approach has, at its core, an implicit valuation of land.

And so attributing the, the land value apart from the ADU gets extremely complicated and difficult. In fact, when you read the paper that these gentlemen wrote who did this study, the equation they came up with was pretty complicated. [00:21:00] I think the issue  is that  many people who build an ADU are looking for revenue stream, but many are not. In fact, as, you know, you put on an ADU Academy and you've also done ADU tours where people can come to Portland and actually see the homes that have had ADUs done and a wide variety of types.

It was very illuminating a trip to do. I got to talk to some of these homeowners and while some did acknowledge they were doing it for income. Some also said that they were doing it to have a family member live close by, to take care of maybe of an ailing parent, or if they were the ailing parent, to have their children be able to live close to them, to assist them in, in assisted living basically on the property.

What happens is the market becomes fuzzy. There isn't as direct a correlation between the revenue stream and the resale value of the property, because it's not just for that purpose.

The government programs are looking into different ways to use that revenue stream . I really do think, five years down the road, [00:22:00] that may be one of the primary ways to value an accessory dwelling unit, because it will become so important for underwriting and the market. Once the market sees that the underwriters are all in on the income stream, it will start to respond. And that might become the primary way for valuing these structures.

Kol Peterson: It's interesting idea that the evaluation methodology might actually shift over time. If other jurisdictions or regions are interested in studying this same question that you've studied how would you recommend that they start the research process?

Abdur Abdul-Malik:  A really good way to start this would to be to clone Kol Peterson and have them operating in your market because he'll be a wonderful source of information. But in the absence of that, I would say the best thing to do would probably be to talk to the, city the municipality. Portland is actually really good because a lot of this data is freely available online, but if it's maybe not so readily available online in your market, go straight to the source. Say, "Can I get a list of legal ADU properties that have been [00:23:00] permitted in this municipality?" And then what appraisers could do is they can check to see if any of these properties have resold. Basically what you're doing is you're doing a benchmark study, so you don't have to necessarily value 200 properties in your local market, but maybe some local appraisers could value 10, 20, 30 properties and get a sense of what the market is rewarding that ADU at what level they're rewarding it at. Then other appraisers could point to that study and say, okay, a peer reviewed study was done,  in this market we have X percentage bump up for this type of ADU X percentage for the other, and in the absence of any other data that would be probably perfectly acceptable to an underwriter as long as a legitimate study was done.

Kol Peterson:  Anecdotally, I've spoken with several people in California who are just dumbfounded  at the idea that an ADU construction costs wouldn't add as much value for resale as a [00:24:00] cost to construct. They insist that it's different and that somehow an ADU there is going to add far more value than it costs to construct. What are your feelings about that?

Abdur Abdul-Malik: That may be perfectly true and their market.  Again I like to emphasize that real estate's local, we've all heard the expression now when it comes to real estate it's location, location, location.

So perhaps in the Bay area or in Southern California where the density is so high constructing an ADU would easily bring back the cost to construct. But that would only be supposition unless someone actually does a detailed examination of those values.

Kol Peterson: Yeah. And I think that's the, that's the linchpin, I think is like, it's easy to assume that, but I think the only way to really know that is to do what you're doing, which is takes an appraiser to put in some rigor.

Abdur Abdul-Malik: Yeah, a little bit of time and effort for sure. It's not an easy thing to do. But I do think that probably some benchmark [00:25:00] studies in most major metropolitan regions will be useful. I'm hoping to produce a paper sometime this year with the findings in Portland.

And if a certain municipality finds that their market tracks pretty closely to Portland, maybe plus, or minus a certain number of percentage points, they might be able to use that study in the absence of anything else. But I would also emphasize that in many markets, there is always some kind of data. It's very rare to come to a market where there's absolutely no data.

As you know, Kol,  you're always on top of the latest legislative developments affecting ADU construction. The state of Oregon had a law pass called HB 2001. And that zoning change basically almost mandates for the entire state that multiunit properties are now admissible and areas that were formerly only single family residential and Oregon is not the only state to do that. Seattle has similar regulations, California passed some landmark ADU [00:26:00] legislation. And so I think that as the climate becomes more favorable, the data is only going to get richer and richer in every market.

Kol Peterson: Yeah, indeed.

 Kelcy King: That wraps up the interview portion of this episode of the ADU hour. As a reminder, these episodes are the edited audio version of interviews that we conducted via a webinar series. Good news. You can access the full video series  via Kol's website, BuildinganADU.com. Now for the second half of the show I curate questions from the audience that gives our guests the opportunity to dive deeper into a topic or address new ideas and questions.

 How does price per square foot change between the ADU and the primary dwelling unit and are there diminishing returns for larger ADUs?

Abdur Abdul-Malik: So the answer to that is that price per square foot for ADUs is usually astronomically higher than the price per square foot for [00:27:00] the main house, just because there's so much smaller. The price per square foot, it always goes up as a unit gets smaller because there are fixed costs to constructing something that even if it was theoretically a zero square foot unit it would still have these fixed costs, like permitting fees, site development, et cetera.

As anything gets bigger, the price per square foot, unless it's like a super rich mansion where everything's gold-plated, the price per square foot is going to always drop as something gets bigger.

Kelcy King: Thank you. Next question. Is there a difference between appraisal method used for financing the building versus used for insurance replacement of the building?

Abdur Abdul-Malik: Yes. In fact many appraisers likes to include statements of limitations and cautionary disclosures.  One of the things they always put in their reports is that this may, this is not really valid for insurance purposes because it's a different type of valuation. The two could be very similar, but they could be also very different depending on how that definition is applied.

Kelcy King: Can you appraise based on potential rental income rather than the [00:28:00] square foot value?

Abdur Abdul-Malik: That gets into the income approach and the income approach is used in residential appraising. We do what's known as a rent survey. It gets a little tricky with ADUs just because we have to, again, tease out what the land value contribution is and that's complex.  To be quite blunt, many appraisers really aren't trained to deal with the complexity that comes with separation of the land value when you got two different revenue streams. Now, one of the ways this could be dealt with is you could kind of look at the home as a duplex.     If you classify it as a duplex, it gets put on a very different type of appraisal form, the expectations of the underwriter also different.  You could simply say, this is a duplex where one unit is not rented because perhaps one unit is owner occupied, which is the case quite often with ADUs. Again, if your lender would allow that, that's a question mark. They may say, well, "this really isn't a duplex". It gets very semantic, but that's one way to kind of sidestep the [00:29:00] issue, I think is to just classify it as a duplex and then proceed as you would as a regular duplex valuation.

Kelcy King: Thank you. Are you aware of any localities or programs that are addressing the barrier of super adequacy through policies like financing above appraised value?

Abdur Abdul-Malik: Actually I have had some very marginal contacts with people connected with Fannie Mae, which is kind of the 800 pound gorilla in the secondary mortgage market. They make the regulations that govern most appraisals. And so one person told me that Fannie Mae is really looking into this. So maybe not so much allowing the home to be valued above the appraised value, but maybe having a stronger program for the inclusion of that income that, that ADU might be able to bring in.

And if that becomes the norm, as I've mentioned before, I really do think that that's going to be reflected in the values for these properties.

Kelcy King: This one's pretty specific to Portland. Do you find that [00:30:00] different neighborhoods value ADUs differently example East side R5 neighborhoods versus R10s?

Abdur Abdul-Malik: That's a very good question. And I haven't yet started to break it out by neighborhoods on a granular scale. That is something I will be looking into, but so far I haven't really seen as big an impact to the contributory value of the ADU based on neighborhood as I have based on the size and the quality of the ADU.

So I think those factors are more important right now for location, because if a person really is looking for property with an ADU, they're probably not going to be fixated on just one neighborhood. They'd probably be willing to explore a different substitute areas to get that value. What we call "value in use". They might be specifically looking for an ADU and so the neighborhood may not be as much of an impact.

Kelcy King: Thank you. Are appraisers from other ADU friendly markets sharing information and techniques?

[00:31:00] Abdur Abdul-Malik: So I'm pretty dialed in with a lot of the appraiser forms. Right now I'm probably one of a handful of appraisers that's actually trying to systematically look at this. Bad news is not too many appraisers are really doing an in depth look. Good news is, is that I think that might be slowly changing, I do share information on the forms and I have been contacted by other colleagues. So perhaps that will blossom. And as I mentioned before, it might be maybe some people in local markets need to prod local appraisers and kind of fire 'em up to look into this issue.

Kelcy King: How does the value differ between a detached ADU and an attached ADU?

Abdur Abdul-Malik: I may not have enough data for statistically valid generalizations, but just from what I've seen so far, I think the detach 80 is will, we'll give you the biggest, like absolute dollar return.

And I think there could be as much as a 10 to 20% difference.  Don't quote me on that or hold me to it forever, but from what I'm seeing tentatively the detached ADU would probably [00:32:00] maybe be 10 to 20% higher.

Kol Peterson: I'm going to interject a couple observations here. You referred to when you convert a garage, you  indicate that you would have to remove the functional economic utility value that the garage provided. While at the same time, you can add on the value of this new housing in it makes total sense.  In fact, that's precisely what a taxation assessor does as well. So if you were to convert a garage, the assessor would say, "Oh, well, that's great. You've added an ADU, but we're also going to subtract the amount of value that the garage was worth because you've gotten rid of the garage".

Similarly, from a homeowner's perspective, if you're converting a garage, presumably you're going to save some money because your structural shell is there. And so you don't have to put the money into building that structural shell. These are all  intuitive alignments of these three different methodologies is looking at what that value would cost.

So yes, [00:33:00] garage conversions going to cost less to build in an ideal world, and it's going to add less value and it's going to increase your property taxation less than detached new construction would. Similarly a basement would have that same kind of economic impact, I suspect.

I think what we might find is over time, all these things really are in alignment with more or less what it costs to construct. So one of the questions that I saw come in  if you're doing new construction with a basement ADU in it. That is the one and only way that a spec developer, at least in the Portland market right now with land values, what they are, it's the most common way that I've seen ADUs  for spec development. It cost the builder, like $30,000 to $50,000 extra to put in that additional unit in that structural shell that they're already building. Whereas you do not see  detached new construction ADUs being built with spec development as much, at least I haven't.

 In the Portland market right now, some spec developers are starting to do that and they might realize  $30,000 to $50,000 bump in the resale [00:34:00] value of that property.

Detached new construction you're not going to get a dollar for dollar valuation on that resale. Does all that mesh with your understanding of things Abdur?

Abdur Abdul-Malik: Right now I've yet to see a dollar for dollar return. I've seen the percentages get pretty up there, you know, all the way up to 70% bump in value. But I do think that, at least for right now, most people in the Portland Metro area who built an ADU should expect that there's going to be some sort  of an economic hit in terms of the return. But, of course, if a person is building an ADU for the long-term and they're not looking to sell immediately. That could change dramatically. Many areas, including Portland have had  housing issues. And I do think ADUs are a very important part of the solution to that.

And it could very well be that down the road, perhaps markets will not only give you the full dollar for dollar return, but maybe you'll get a profit. And that might spur on more building of these ADUs.

Kol Peterson: Another question, giving voice to the threads of conversations that have had with people in California, they seem to [00:35:00] think about these additions as additional square footage. I don't know whether they're basing this in any fact or not, but say, well, if you're adding, you know, 300 square feet of additional square footage and square footage costs $400 a square foot, you're going to get huge value out of that additional 300 square feet.

But that's not  how I've heard that appraisals or resales are looked at. What do you think?

Abdur Abdul-Malik: So that's probably one of the biggest tropes to valuation that appraisers have to deal with. And it's one of the reasons why sometimes people can be disappointed when an appraisal comes in and the value is far off from  what they want, if it was that easy, just take the square footage and multiply it by one number and boom, you've got your value. There would not be an appraisal profession. You would just need a calculator and you'd be done. But the fact that you could spend a certain amount of money and not get that full value back, shows that there's a greater degree of complexity with valuation than that.

 Just as a technical note, there's a standard for calculating living space called [00:36:00] the ANSI standard. And it's the de facto national standard for how square footage is calculated and this guide, if you Google ANSI, you can find it, it's like a 16 page document. One of the things that it specifically says is that if something doesn't flow from the main living area, it cannot be considered gross living area. Gross living area is extremely important because if anyone in the audience has seen an appraisal, there's a line "GLA", that line, that one line is probably 60 to 70% of the value of any home .  If you can't put something in that line, it's not going to have as much of an impact on the final valuation.

Kol Peterson: Thanks.

Kelcy King: Should I carry on?  What effect are you seeing of adding an ADU on the property tax assessments?

Abdur Abdul-Malik: That's a good question. Since I'm really just focusing on the resale value, I haven't actually put those figures together, but it be pretty trivial for me to do because the nice thing is with the RMLS database they actually do supply the tax [00:37:00] figures with the resale.

So that's  a great question. And I'm going to put that as a, to do project. You just gave me some homework.

Kol Peterson: All right. Abdur likes homework. I'll yeah, I'll give my take on that. Property taxation is done at the state level, so it varies from state to state. In Oregon, my rule of thumb, again, assessors would, would be so annoyed if they heard me say this, but here's the way that you can think about it, for every a hundred thousand dollars of contributory value that you add to a property in the eyes of an assessor, that will increase your property taxes by $1,400 per year.

An assessor undervalues the contributory value by roughly 25%. So If you add a $200,000 ADU, 800 square foot average price ADU in Portland market, that's going to add $150,000 in the eyes of the assessor, which translates to $1,400 plus $700 is a $2,100 tax bump per year.

That's my way of thinking about it.  Conversely, if you did a garage [00:38:00] conversion, since you have  shell and  you're not adding on that additional value, then you're only adding on like say $50,000 of finished cost. And so that would bump up your taxes by roughly $700 a year, rule of thumb.

Abdur Abdul-Malik: That's actually not too bad.

Kelcy King: Is there an option on the appraisal report saying what type and size of the ADU? Attached? Detached?

Abdur Abdul-Malik: That's a very good question. So right now the standard appraisal form that most people in the audience have probably seen or interacted with is old.  It's actually considered obsolete even by Fannie Mae, which is the originator of this form.

So it doesn't specifically have a detailed section for ADUs. It does have a little box on the first page where you can say single family or single family with an accessory unit, but then in the grid, if anyone's ever seen the sales grid that appraisers use to make adjustments. The appraiser typically would have to put an ADU in one of those free little lines at the bottom.

So what that tells you is, is that when that form was [00:39:00] designed, they really did not give much thought to accessory dwelling units. It was a non-factor in the development of that form. Fannie Mae is in the process of developing more comprehensive and detailed forms. And I suspect, in fact, they're supposed to be more web based where the form would dynamically change based on the information the appraiser supplies.

So if they were to check that accessory unit box, I imagine it would then start asking questions. How big is the ADU? What's the quality of the ADU? How many bedrooms, how many bathrooms, et cetera. So for right now, it's kind of an afterthought on the existing forms and appraisers kind of have to wedge it into place, but in the future, I expect there will be dedicated fields for ADUs.

Kelcy King: How did you calculate the loss in value for losing the garage on a garage conversion?

Abdur Abdul-Malik: So that's a great question, and that gets into valuation methodology.  As I mentioned earlier, and I know I gave a very rapid fire presentation, I am looking at properties in a neighborhood. So typically I would pull [00:40:00] all the sales within that neighborhood over, perhaps a two year period of time, to get statistically valid amounts of data.

And what you can do, you can do different types of valuation methodologies. One of them is regression, where you can do a regression equation to see what the value of that feature is. Another one, and this is a little technical, is called aggregate difference methodology.  That's when you pool properties by differences that are controlled by you, and maybe you adjust for differences in square footage and then presumably the difference remaining is for that feature that you're looking for. I use that quite often.

 Using either regression or aggregate differences, I say, okay, a garage is worth $20,000 - $30,000 in this neighborhood. So we lost that, but here's what we gained with the ADU, and then I can subtract out the difference.

Kelcy King: Great. And then to kind of piggyback off of that, are there any benefits for having the ADU above an existing garage? So you don't lose that garage space?

Abdur Abdul-Malik: That is useful, but you know, what I've seen is that the ones that are above [00:41:00] the garage are generally the, one of the smaller ADU types. And one property I looked at, I think it only contributed about a 4% bump in value.

So it was actually quite surprising. It was a very small, it was measurable. It was there, but it was pretty small.  There aren't that many that I've seen in my data set. So I maybe don't have statistically valid data to give a definitive answer on that, but just a rule of thumb, it seems like if they're going to be really small, that factor more than anything else weighs in on the value and it might be a more modest return.

Thank you. What is the most common factor used to find the five comps such as East side versus West side, schools, property types?

So again, this is the typical appraiser answer, it depends. The market dictates which attributes are the most important. In most parts of Portland, the single variable that's going to influence value is going to be gross living area.

Then you have  lot size, you have [00:42:00] quality of construction, you have the overall condition of the property. Schools can matter, but generally appraisers are going to do their best to pull comparables that are nearby. So a lot of the locational variables kind of wash out because all the comparables polled share the same school district, or maybe share a similar locational influences.

So, as long as you're not going too far out of the boundaries for a neighborhood, like if you were in Ladd's Addition, I would not pull any comp outside of Ladd's Addition for those who are from the Portland market, Ladd's Addition, is a historic district, you got maybe 50, 60 homes that are on the historic registry.

You don't want to leave the boundaries for Ladd's Addition. Visually, if you Google Ladd's Addition, for those outside of Portland, you can see visually from an aerial view, it's a very distinctive looking neighborhood. So in that case, I'm going to stay in that neighborhood and that's going to wipe out a lot of the locational differences.

And then I'm going to be able to focus in on those key variables of gross living area,  lot size quality. And of course, if it's Ladd's Addition, if it's on a historic registry, I'm going to want [00:43:00] to pull some comps also on a historic registry. So again, apples to apples, as I said earlier, you just want to be as similar as possible when you're pulling comps.

Kelcy King: What banks are currently lending most on ADUs? Meaning which ones have underwriters that understand this process?

Abdur Abdul-Malik:  I don't know if I can give a generic answer to that. ADUs are common enough that no bank or institution should be completely befuddled by the existence of an ADU. So I think the main thing that  most banks and credit unions and other lenders want. Is, if they're going to have a property with an ADU, they want the appraiser to clearly demonstrate, through the use of comparables and through their methodology, what the value that ADU is. I'll be the first to admit, there are some appraisers out there they'll just throw their hands up and they'll just say, plus $10,000 for an ADU and just phone it in and move on.

And that can be very infuriating for people who maybe drop a hundred, $200,000 on an [00:44:00] ADU to just get cursory treatment by the appraiser.  The underwriters, if they're knowledgeable about ADUs, and that's very variable as to which underwriters are conversive with them, they can push back on that and say, "wait a second this is not adequately documented in this appraisal report." but unfortunately, if you get an appraiser who doesn't know what they're doing, coupled with an underwriter, who also is you know, kind of ignorant on the topic, you might just get a bad appraisal and it might be hard to challenge it.

Kol Peterson: I want to follow up on that.

 We've got a couple of questions in the Q and A that I want to mesh together. For some historic context,  appraisals of properties with ADUs has been a big problem in the sense that oftentimes they've been given zero value. Another case , as Sarah mentions , in Denver, there's been appraisals that have fluctuated as much as $80,000 on a property with an ADU.

 What degree of this appraisal process is arbitrary for lack of a better word? What, what degree is attributable [00:45:00] to misinformation on the part of the appraisers about the legality of ADUs?

Abdur Abdul-Malik: Okay, so you really opened up a can of worms by throwing in the term legality.

So one of the things I want to stress is that the study that I'm doing is only legal ADUs, I'm not looking at ones that are illegal. Illegal, that creates problems because, depending on the municipality, something that's illegal could result in an exorbitant fine. And it could make a really big difference in how the valuation will proceed.

If it's illegal, a lot of lenders have a policy, you can't value it according to an illegal purpose, they may say the appraiser is to value it based on the legal purpose and what's known as a "cost to cure", meaning how much would it take to get this back to legal compliance?

But in some markets like any of you who are out there in Hawaii, you very well know that in Hawaii, getting a permit is almost a joke for certain additions and alterations for a property. And the municipality is very laid back about it.  In that case, yeah, technically it's not allowed in the market, but the [00:46:00] market doesn't care about the illegality because no one enforces the code, so you can just proceed pulling any old comps you want. So again,  it's local, it's all local, depends on your jurisdiction.

Kelcy King:  Can you address  the condoization model?   

Abdur Abdul-Malik: That's an extremely good question. So I'm not studying condoization right now. And from what I can tell, just on pulling data from the market, it's extremely rare, at this point, for a property that's been condoized to then be resold on the open market where the units are sold independent.

So I have seen listings in my research where the realtor is saying that it's in the process of condoization, but I haven't seen too many sales. That's a project for future time, I think right now, if you have condoized your ADU, expect an extraordinarily difficult appraisal process. I'm just going to be very blunt about that because the data for that is pretty scarce. And you might say, well, why can't you just pull other condos ? We're trying to compare apples to apples. And if we have a [00:47:00] detached ADU that's a condo, which has its own little site around it, so to speak, and then you have apartment style condos, they're not quite apples to apples. And so then that's where as a brought out this fluctuation of $50,000- 480,000, it's all over the map because the data is all over the map. It's just not clear. .

Kol Peterson: I'll just comment that there has been roughly 25 condoized ADUs in the last year. It's definitely becoming a a little bit of a, a trend amongst spec developers,  for whom ADU development doesn't make sense otherwise. And we've seen that in, in Seattle, we've seen that in Austin, Texas, California doesn't allow it.

So that's something that we can  look for more comps of in the future, I believe. 

Abdur Abdul-Malik: As I said before, I think the data across the board, it's just going to get richer and richer.

Kol: Here we are! Ezra, what's up, buddy? All right.

Ezra: Cool. How are you?

Kol: Good man. Thanks for coming on [00:02:00] today to be our guest on the ADU hour. So Ezra, we've been just jumping right into stuff pretty quickly, but let me just like, first of all, let me have you introduce yourself a little bit. I just, you know, briefly said you're with the Portland Home Builders Association. Tell us, give us a, like a, a one minute intro of who you are and how you came to be in the position that you're in.

Ezra: Yeah, sure. And thanks for having me today. Really appreciate it. And so nice to see folks joining from all over the country and it looks like internationally too.

Very cool. So I am a land use attorney by training. I practiced in Southern California, primarily in the Los Angeles region. My wife and I fell in love with beautiful Portland Oregon, as so many folks have, and we recently moved up here about a year and a half ago. And since that time I've been leading the efforts advocacy, lobbying, and education here at the home builders association of metropolitan Portland.

We're a local HBA. There are chapters across the country and we engage with policymakers and decision-makers at the local and regional level [00:03:00] to help craft policies that are pro-housing, as we call them- kind of focused on allowing more housing, different types of housing, lower priced housing, housing that's accessible to all folks and you and I actually met because in my previous life, I was a big fan of yours down in Southern California.

I actually have my copy of Backdoor Revolution right here. Highly recommend that everyone get one or get two. They make wonderful Christmas gifts and, and great gifts even in springtime. You'll notice that I have my sign here tab, so I will be looking for a signature next time I get to see you in person. But your book was actually an inspiration for a number of us who were working on ADU policies in the City of Los Angeles and in California, more broadly back in 20 15, 16 and 17, I, I saw you speak before I believe a Senate committee in California working [00:04:00] with one of our senators down there who was very interested in allowing for more ADUs. And we actually took a lot of your ideas and copied and pasted them into conversations that were being had in Los Angeles at the time.

It was a pretty pitched battle in LA, as I'm sure practitioners who are joining us today from that area can attest to, and it actually came to a head at a point in time when the state kind of shrug their shoulders, said enough is enough and took away a local control for jurisdictions like Los Angeles that had really been recalcitrant in implementing a series of regulations that legalized ADUs. I think as many folks recognize that it's been a fantastic smashing success down there and throughout Southern California in all of California generally. And a big part of that is thanks to you and the work you've done advocating for and  educating folks about accessory dwelling units.

Kol: Well, thanks for the I was more of a flattery than itself introduction, but I really appreciate it Ezra, [00:05:00] and yeah, I mean, that was kind of the goal of the book was to kind of lay out some statistically based evidence to back up some of the policy ideas that has been bantered around for a while and were just hard to kind of get enacted into local ordinances and then California in 2017, put forward this pretty aggressive legislation and then doubled down in 2018 or maybe I'm getting those wrong years wrong.

But and that kind of set the pathway in terms of showing that state legislative approaches are perhaps not only a good idea, but maybe even a best practice as far as getting these types of updates done. The way I think about it now is, I mean, and I'm having firsthand experience with this in Oregon.

Now I'm on rulemaking for HB 2001, but HB 2001, which we've talked about in a previous show. And we'll talk about more today and the California legislation. I would say [00:06:00] that it's not a unfair statement to say it was actually less work to pass the statewide ordinances than to pass the same kinds of ordinances at the local level. What do you think about that?

Ezra: Yeah, I think you're hitting the nail right on the head there, Kol. You know, it's interesting to see States like Oregon and California borrow practices from States in the South and Midwest where this has been standard practice for quite some time. The devolution of complete authority to local jurisdictions to manage land use is not something that's practiced nationwide. It's something that's unique to a lot of high priced urban markets where there's been an expectation of extensive community engagement and feedback for  even the smallest projects, going back to the 1960s and seventies as a way to push back against some of the darker times of urban renewal.

But in other parts of the country statewide regulations around housing are [00:07:00] pretty common practices. I often speak with my counterparts in Texas or Indiana who work on pieces of legislation that are total no-brainers but would be extremely difficult to get implemented at the local level. And, and they deal with it all at the state level.

Just an example, Texas recently prohibited jurisdictions from putting in place material restrictions on houses that would kind of otherwise limit what sort of material builders could use in homes. Obviously they have building code standards there and they ensure material that they use is safe.

But what we've seen a number of jurisdictions do up and down the West coast has kind of arbitrarily set standards and what can be used on houses. As a way to drive up the cost of housing kind of control the type of housing that can get built. And the cumulative effect of these regulations year over year are higher housing costs.

So I think dealing with things at the statewide level makes a ton of sense. Although it's great to have community participation for many [00:08:00] things, when it comes to small scale housing, oftentimes we need to take a deep breath, step back, and really let policymakers shape a series of regulations that are going to open the door for housing. Because quite frankly, Kol, we've been failing doing that at the local level.

There was a great report that came out in 2018 from Smart Growth America and ecoNorthwest here in Portland that highlighted the fact that since the great recession we've under built in Oregon, 155,000 units of housing as a ratio of household formation. I know for folks in California, that sounds like a drop in the bucket, but that's really impactful here in Oregon.

And the same report showed that there's about a 6% increase in overall housing costs associated just with that scarcity. And so when we talk about tools to help craft housing that is more accessible to more Oregonians and more, more people, generally, we need to take [00:09:00] into account the fact that we have not been building enough housing and a big reason for the fact we haven't been building that housing is because local governments put impediments in place to inhibit folks from building.

Kol: So  let's go back to HBA for a second to tell us a little bit about the organizational structure of HBA. You are in a local chapter. How are you connected to a national organization? Is there a national organization in DC and how do all those chapters play out nationally?

Ezra: Yeah, sure. So the home builders association of metropolitan Portland, we're a member-driven organization. Our membership is primarily builders, developers, remodelers who build small scale single family and multifamily housing. Our folks generally don't work with steel. That's kind of the rule of thumb. So anything over four stories, our folks aren't building anything under that, they probably are. As well as all the trade professionals and suppliers , the legal folks, the engineers, everybody that's kind of in that universe of smaller scale [00:10:00] residential developments.

Like you mentioned, we are a a chapter organization. So we work in partnership with the Oregon home builders association. They work down in Salem and we coordinate our efforts to advance kind of policy at the local regional and state level. And we're also members of the national association of home builders, which has a big honkin building in DC.

You know, they're working on things like home buyer, tax credits ensuring that Fannie Mae and Freddie Mac are, are, are up and running effectively. But we, we don't, you know, we, we don't work with them on policy at the local level just because each jurisdiction is different. And we need to be crafting policies that are right for Portland and more broadly, right for Oregon.

Kol: So  tell us about  the national structure of HBA in terms of the DC representation, national association of home builders. What's that? What do they do and how are you guys tied into them?

Ezra: Yeah. So all of the local chapters are kind of members [00:11:00] of the broader organization, the national association of home builders, and they they do education, advocacy and lobbying at the at the federal level. So they work closely with HUD and secretary Carson. They work with congressional leaders.

They've been actively engaged in conversations around the COVID-19 relief efforts and ensuring there's a appropriate number of dollars being dedicated to the triple P program to help our small businesses and ensure that they can remain viable during these difficult economic times. So they're doing grant work out of DC and, and we try to do good work here locally.

Kol: So I wanted to dive into HBA's role with regard to middle housing legislation. So are we just really lucky to have you and your colleagues here in Portland who are doing middle housing type of advocacy and education in local jurisdictions around the Portland Metro area, [00:12:00] or is that a national policy that, that the national association of home builders is doing you know, countrywide?

Ezra: Yeah. So, as I mentioned before we set we set policy, our organizational policy at the local level. It's just too difficult to coordinate with the hundreds of chapters that exist around the country. And quite frankly, I don't know what's right for Indiana. I don't know what's right for North Carolina and I certainly don't know what the right fit is for, for, for Boston.

But what we do know is that here locally, middle housing is a critical piece of the overall housing picture. And we have members that build it. They build it with great success. And we have seen middle housing kind of proliferate throughout. The Portland Metro region and have really positive impacts region wide.

We're starting to see great product getting built in communities like Tigard and Milwaukee, where they've really been at the forefront of progressive conversations around middle housing. We've seen the incredible [00:13:00] steps that the city of Portland has taken to advance conversations with the residential infill project, although they haven't passed it yet, there's been a ton of great conversation.

And we've been part of many of those many of those conversations for the past five years. So, you know, here locally, we really recognize that middle housing and by middle housing, you know,  we think expansively. So it's everything from accessory dwelling units, townhomes, multiple units on a lot up to, up to four in whatever kind of form that they take.

But we found that when you liberalize the types of housing that can get built, not only do you kind of expand the marketplace of folks that can participate in building new housing, which is a real positive because you let homeowners kind of actively engage in that market and bring good housing  to the marketplace for folks to to rent or to buy. But you also produce myriad types of housing. And I think that's the piece that's been the most exciting quite frankly Kol, because for so long, like, like the viewers know, and [00:14:00] like, you know you know, planners have relied on kind of monochromatic maps to say the light yellow goes here and the red goes here and the blue goes there and never shall they ever meets.

And this is how we show, advance our society. And for anybody that's traveled in Latin America or Europe or or, or many parts of the globe, they'll say that that's not how housing has to be. And I think over the years. And, and middle housing has really been a big piece of this. It's helped us chip away at those kind of outdated Euclidean models of zoning, and really allowed us to think more creatively about the types of housing that folks need.

I live in a multi-generational household, like many Portlanders do. We were thankful enough to have my mother come live with us right before the pandemic. And, you know, had we lived in a community let's say with restrictive covenants that had kind of prohibited that type of intergenerational, it would have been really hard on our family [00:15:00] and middle housing plays a role in giving people the type of flexibility that they need to get the type of housing that's most appropriate for

Kol: So you came to Portland by way of LA, as you mentioned,  and LA has become a huge hotbed of ADU activity, I would say it's yeah, it's fair to say it's objectively the best well, the biggest market in the country for ADUs right now, 5,000 or so permits issued last year alone in 2019. So it's, it's been pretty phenomenal. Can you help explain why LA has since seen such a groundswell of ADU permits being issued and, and and say like we already, like, we've already kind of covered that there is some legislative changes at the state level, but why LA, why aren't we seeing tens of thousands being built in say San Jose instead of LA?

Ezra:  Yeah, I know that's, that's a great question Kol. So Los Angeles, like any practitioners from there we'll know, or anybody that's lived down there and we'll know the entire Southern California region, but LA specifically is just starved for housing.

You know, it, it was a open secret [00:16:00] before the city took the appropriate steps to liberalize accessory dwelling units that there were likely tens of thousands of unpermitted units existing in the city. A couple of estimates that I've seen put that number upwards of 50,000 throughout the entire city.

And many of these were built to appropriate code standards. They just didn't have the appropriate paperwork and land use authorization to allow them to be quote- unquote legal. Many of them, unfortunately, weren't built to appropriate code, but that was due in large part to the fact that government had made it so onerous to build an accessory dwelling unit that any rational person would just shrug their shoulders and ignore the system altogether. Before LA took the steps that it did, again, driven in large part by the great great work of the California legislature, folks were asked to go through a year- long entitlement process that was entirely discretional. The costs generally were 40 to a hundred thousand dollars in permits, [00:17:00] legal fees, and land use planner fees.

And all it took was one disgruntled neighbor to show up and yell at a hearing officer about lack of parking or neighborhood character or disruption to the community or any sort of those kind of standard tropes that we hear from folks. And, and their application would be denied. Before I was a land use attorney, I had the pleasure of working for Councilman Mike Bond and in the city of Los Angeles.

For those of you that are familiar with LA, each council member represents a geographic area, and they're essentially the mayor of their geographic area for the purpose of discretionary land use entitlements. And I talked to literally dozens of, of heartbroken and frustrated homeowners who are attempting to go through the process of building an ADU for a loved one or for for some additional rental income.

And it had just been dragged through the most arduous process, not only from the city side of things through the regulatory environment, but then from [00:18:00] just terrible interactions with their neighbors that, that, that hurt the community that kind of caused more ill will between neighbors and at the end of the day, kind of resulted in in no benefit to anyone.

So when LA took the steps to kind of do away with that regulatory framework, they really opened the floodgates. And there was such a voracious appetite that the citizens of Los Angeles have for housing that we've seen these incredible numbers, like you mentioned 5,000, that's fantastic.

I hope next year it's 10,000. Let's build 15,000, let's build a hundred thousand ADUs.  If we take those sorts of real steps than California, and hopefully Oregon too, we'll be able to address the incredible housing shortfall that we have.

Kol: So since you've come to the HBA, Portland HBA, you've taken a really active role in representing the Portland home builders, associations, interests, and local legislative issues. In the jurisdiction [00:19:00] surrounding Portland, there's roughly 28 jurisdictions in the Portland Metro area. And I, I'm not sure how many. Jurisdictions you represent, but, but you've been, you've taken an active role in, in participating in these meetings, as cities are going through code updates. Can you tell us a little bit about that?

Ezra: Yeah, absolutely. And, and, and listen, Kol. I couldn't be doing it without you. Anytime a jurisdiction looks at amending their middle housing regulations or ADU regulations. I come a calling. You've probably gotten emails from me at 11 o'clock at night, asking you to dig into something and see if there are any poison pills in there or if there are any concerns that you have.

Like I mentioned before, our members build accessory dwelling units throughout the greater Portland region. And therefore it's, it's my responsibility to ensure that our advocacy team is beating down the doors of elected leaders and citizens serving on planning commissions to to, to push them, to advance progressive ADU regulations.

You know, at the end of the day, it is so [00:20:00] difficult for many potential ADU developers to actively engage in advocacy. These are homeowners, as you know, that have busy lives. That may be thinking in the back of their mind about potentially building one, they have a single, or maybe even multiple conversations with the city about what the process will be.

But oftentimes when they find that it's going to be expensive time-consuming and difficult, they shrug their shoulders and go on their ways. And so those folks are, are really tough to kind of rally and, and get to these public meetings even to write letters to advocate because they might not know that they're an ADU developer yet because they've only thought about it.

So the role that we play along with you and with many other great community activists in the Portland Metro region is making sure that we go to these meetings, that we submit testimony into the record, that we demonstrate the value and the benefit of accessory dwelling units. So that jurisdictions will adopt regulations that are more favorable to building ADUs in whatever [00:21:00] form they might be.

Kol: So things are a little bit more advanced here with regard to the baseline context of the ADU conversation because of HB 2001. But for those who are not in Oregon or California, who are on this call, I want to just kind of pick your brain a little bit about the role that you specifically in the HBA with wearing your HBA hat has played . So what are some common themes that you've observed amongst planning, staff and elected officials who are grappling with how to loosen ADU regulations. And what, what advice would you offer to other HBA chapters or for members who are in other jurisdictions who want to talk to their HBA reps like you?

Ezra: Yeah, absolutely. And I would just say the biggest thing that we should be doing and that we should think about is is how we're going to be bold. I think it's, I think it's that simple Kol we're so used to operating in a paradigm where it's kind of the, the, the NIMBY, not in my backyard, folks coming out who expect to [00:22:00] play an oversized role in conversations around new housing.

And I think a number of planners out there have been through these battles time and time again, to the point where they're really war weary, where they feel like any time they take you know, a positive, progressive step forward and maybe ADUs, they're going to get beaten back. Their, their elected leaders are going to get nasty letters. And then they're going to have a really tough time defending their positions. And our message to you is, is be bold. Take that step. Just like Portland and just like Oregon. I know that many of the regions that folks on this video come from are dealing with intractable housing crises.

And we're not going to solve those crises. You know, using businesses as usual techniques, we need to be able to take steps forward that take away poison pills and make it easy and effective to build accessory dwelling units. When we do that, we will show our communities that ADUs aren't something to be feared, but are [00:23:00] rather something that fit beautifully and seamlessly into existing community frameworks and have a lot of positive knock on effects.

If we build enough ADUs, we'll see rents reduce, you know, a great report that came out here in Oregon and Kol, I'm sure you can remind me of the specifics, but I think it found that upwards of 12% of ADUs are actually rented for free to family members. That's incredible. There's no other type of affordable housing. And I, and I, I mean that affordable housing zero, it doesn't get any more affordable than zero.  That the marketplace can build without significant government subsidy. And the ADU is something that by and large will help people support family members who might need access to housing at reduced costs.

Kol: Yeah. Yeah, you're totally right. The three studies that I've looked at on this issue related to ADUs and affordable housing are that in all three cases, [00:24:00] roughly 18 to 20% of ADUs are rented out vastly less than market rates. And those are probably, you know, people like me who owned an ADU and rented out to a friend or whatever.

And then roughly eight to 10%, five to 10%, or probably I think 8% is the aggregate figure rent at, at $0 per month to probably, you know, granny, grandpa, whatever, that kind of situation or brother who, you know, doesn't have a job or whatever it is. So whether or not it's a required, it seems as though ADUs are actually outperforming regulated, affordable housing,

Ezra: Wow.

Kol: And so so what, what role do you think builders specifically can play in terms of advocacy for liberalizing ADU regulations and missing middle housing regulations in general?

Ezra: Yeah. That's a great question. And Kol, you know, it's my job to be out there talking to folks since my job there to be out there advocating, but, but I'll tell you this it is so much more impactful for an elected leader to hear from somebody that is actually [00:25:00] engaged in the business that they do.

It's great to have lobbyists again, as I mentioned before, it's really tough for a lot of small developers and builders to spend time to interact with elected leaders and policymakers. But when you can take the time to write a letter or provide public testimony it goes miles further. And so I would say to folks, you know, think about advocacy and think about lobbying as something that you would do to support your own business.

You'd certainly take the time to hire an accountant to make sure your books are right. You'd certainly take the time most likely to to work with a professional on doing some advertising. Taking the time and the, and the resources associated with that to do a little bit of advocacy will go miles.

So highly recommend for people to share their own stories. You know, here in Oregon like many parts of the country, we have a part-time legislature. These are folks that have jobs like you and I, that aren't elected. And, and sit in some sort of [00:26:00] ivory tower, just thinking about policy day in and day out.

These are folks that live in the community and when they can hear their neighbors and their neighbors, friends share their stories about how they're building accessory, dwelling units, and, and housing more generally, they're going to be much more receptive to advancing policies that help you and then help all Oregonians and everybody by ensuring there's enough housing.

Kol:  What are some differences that you've observed between legislative and local regulatory environmental in the regulatory environment in LA Angeles versus Portland markets for residential construction? I hope that this isn't just a question that serves people who live in Portland or people who live in LA.

But I think understanding from your vantage, how these two different jurisdictions operate legislatively and regulatory regulatory wise will help give some meaningful context for people who are doing it advocacy and understanding the culture of different building environments.

Ezra: Yeah, absolutely and I'm gonna, I'm going to take a step out if that's okay. And kind of [00:27:00] compare Oregon and California generally. And this is to all of you, Californians Oregon took a tremendous step with its ADU regulations here in Oregon. There's no prohibition for putting condo maps on a lot. That includes an ADU.

In California, that's explicitly prohibited. It's been in the law since day one. It's been carried over as this barrier strict of language that really has no solid basis in rationale. And so here in Oregon, we don't have that and the result has been something organic and really darn cool. And something that I'm, that I'm really thrilled about.

And that's essentially the condoization of either attached or detached ADUs. So small scale housing that then can get put on the marketplace and sold at a point at a price point that is highly attainable to folks. So here in the city of Portland, I'll just give you an anecdotal example. We have a program, the government will subsidize you selling a [00:28:00] home to a family that makes less than the area, medium income as long as you sell it at a prescribed price point. And currently that price point is $405,000. They basically found that for a two income household of folks making less than the area, medium income, they can spend 30% of their income and afford a $405,000 mortgage. For the ADUs  that are being condoised and sold -detached products, so they look exactly the same as a single family home. They just tend to be a little bit smaller, those ADUs are selling for a little over $310,000. So a hundred thousand dollars less than the prescribed price point for affordable housing is what you can buy. One of these ADUs for here in Portland, that's mindblowing, and that's something that should be available all over the country.

California is missing out on a fantastic opportunity to allow [00:29:00] people to purchase ADUs as essentially starter homes and start building the equity and get the access to capital and tap into the tax code and all those benefits that are available for home ownership could be available to folks that purchase ADUs.

And so I highly encourage you to speak with your legislators about fixing that last poison pill in the ADU regulations that exist in California. Come join us. Let's do things the Oregon way and let's make ADUs available for sale.

Kol: So on the, on the flip side, what are some things that Oregon could learn from California? What are some lessons we should borrow ?

Ezra: Geez, Kol, that one's tough. I, I don't wanna, I don't want to hate on my mind old state, but you know, honestly, California is just decades behind where we are hear in Oregon. The housing crisis there that's gripping California is so bad that they've seen a year after year lower and middle income [00:30:00] residents flee the state, I think California, you know, is likely to lose a congressional seat this year for the first time in forever. Because in large part, they've done such a terrible job. With allowing for the construction of new housing and the primary reason for this, there are a lot of factors. And I think the LA times story that came out several weeks ago, highlighting the, I think it was $1.1 million affordable units that were built down in Southern California.

There, there, there are myriad reasons why building a so tough in California in any practitioner down there can attest to it.  But the primary difference between California and Oregon is. Here, we're actually rational about our environmental regulations. We don't have secrets. What we've done in Oregon is essentially bake in  the appropriate environmental regulations into our zoning codes by and large.

So it's easy. A practitioner can kind of pick up a zoning map. They can understand where they can and can't build. They can [00:31:00] understand what mitigation measures need to be taken in order to help preserve and enhance the environments. And they can go and get their approvals and start building without having this, this sword of CEQA hanging over their heads.

In California, you might go through that process. You might have dotted all of your T's and excuse me, dotted all of your I's and crossed all of your T's and then open yourself up to years and years of litigation based on some spurious argument that has zero rationale and is totally unrelated to your project in any way.

I mentioned, I previously practiced in Los Angeles. There are a number of firms down there primarily based in San Bernardino County. That would file blanket appeals on any projects built in Los Angeles, solely as a mechanism to blackmail folks into giving them cash handouts. It's it's called a greenmail practice in Venice, California, wonderful community just South of, of Santa Monica, there were several residents, [00:32:00] well-known there, who would appeal every single project that went through solely as a mechanism to extort tens of thousands of dollars from the project applicants. Okay, that there's, there is no rational basis for doing any of that. CEQA does not have a demonstrable impact on enhancing the environment.

I would welcome anybody to come here. Check out, see what Oregon is doing. See how well we preserve and enhance the environment there and put that up against  CEQA or any other sorts of regulations like that, that leave open-ended litigation as a part of the land use process and cost, you know, hundreds of thousands of dollars for even smaller scale projects.

I'll give you one example, Kol, just to highlight how egregious this is my bread and butter. When I was a practicing attorney was medium-sized apartment buildings. Medium-sized for Los Angeles. I'm thinking a hundred to 200 units. Nothing. No, high-rises nothing insane like that. The attorney's fees on those [00:33:00] projects were unconscionable.

And, and not because we charge high fees, we were extremely low priced compared to any of the competition. But because of this, this, this ever existing threat of litigation, applicants were forced to pay hundreds of thousands of dollars to produce environmental reports that set essentially nothing. At the end of the day, our clients were building apartments buildings in places like Hollywood and downtown Los Angeles, where they were literally next to other apartment buildings.

And yet for some absurd rationale, they were forced to spend close to half a million dollars. Having their attorneys review a document that said, 'We're building an apartment building next to other apartment buildings'. So I I'm, I'm gonna T I'm going to go out. I'm going to have a hot take your call. I'm going to say we shouldn't borrow things from California, California should be borrowing from Oregon, should be borrowing from States that are, that are taking a more rational approach to how to build housing.

And if they do that, there'll be able to house some of the [00:34:00] millions of Californians that are having a very difficult time, even finding a home.

Kol: Thanks. Thanks for that, that screed.. That was excellent. I do have one really specific last question before we transition to Q and a, which is on a couple of days ago,  Eli Spievak was on, and I was asking him about what insights he had regarding condoization defect  legislation. And I don't know what you're able to share about that, if anything, but w where did, where does that legislative matter stand right now within Oregon?

Ezra: Yeah, that's a great question,  Kol. You know, unfortunately the condo defect rules we have in place here are not industry standard. They're not best practices.

They produce serious litigation threats, and they're the reasons that here in Oregon, condos are generally the last product to enter the marketplace during a boom and the first to exit during a bust. We unsuccessfully, tried to pass a piece of legislation in 2018 that would have brought Oregon and [00:35:00] line with some of our surrounding States. Would have kind of made the liability much more rational, would have allowed builders to cure defects that would have existed. And, and quite frankly, we were beaten by the trial attorneys. They are formidable down in the legislature. Thankfully we have some real housing champions, including speaker Kotek who brought forward HB 2001 in 2003 that I know you've talked about.

And so she has been kind of very open, a very open door with us. We have been having a series of round table discussions with stakeholders, including the trial attorneys. I don't have any details at this time. We're hopeful that we'll be able to bring forward a reform package in the 2020 legislative session that will have broad based support across the political spectrum.

Because just, just as we're starting to see an uptick in middle housing, we want to make sure that, that middle housing is available in both rental and for sale form and condo defect, litigation reform is an integral piece in helping us [00:36:00] achieve that.

Kol: Thanks, Ezra.

Transition

Kelcy: Okay. So the first one I'm going to go with is Shanna Doherty's question. And this one's kind of up at the top here. How has LA and other cities dealing with infrastructure impacts as a result of new density from ADUs? Is this a true issue or more of a political issue? For example, I was told that the sewer and water capacity can not meet higher density density manifested from duplexes, triplexes, ADUs  on a single family lot.

Ezra: Yeah, I mean, I'm going, gonna, I'm going to just stop here. This is by and large red herring. You know, to, to, to pretend as if the addition of housing is somehow going to overwhelm Los Angeles or any jurisdiction for that manner is just absolutely false.

And we know it's demonstrably false for two reasons. One, when you do large scale projects or even medium-sized projects in California, you have to engage in environmental analysis. And part of that analysis is determining kind of what the existing [00:37:00] capacities are. Even for smaller scale projects, you need to get a will serve letters from the appropriate service provider to ensure that they have the capacity.

And importantly, new homes are responsible for paying the fees to those providers, to ensure that they're able to upgrade their capacity in a way that will accommodate housing growth over time. So not only do we do the analysis on a case by case basis and when we have updated community plans, do it at a a neighborhood or regional basis.

But new housing pays its way. And the same goes for here in Oregon. People pay development, impact fees. We call them system development charges, but they're, they're the same thing as development impact fees. And those fees go to enhance infrastructure in a way that can accommodate your growth. I would also note that we're seeing things shift dramatically when it comes to transportation modes.

So not only do we see more and more folks working from home, and this was occurring long before  COVID-19 kind of came [00:38:00] onto the scene. But we're seeing working from home, being a huge part of the transportation ride share. But we're also seeing more and more folks use alternative forms of transportation whether that's ride sharing whether that is electric scooters here in Portland bike infrastructure is getting built out in a way that makes it much more seamless to get around via bicycle.

These forums are changing all the time and they allow for us to have different expectations of what's what our infrastructure is going to provide for. I'll also note that in Los Angeles, in particular it folks oftentimes like to pretend that the impacts come from the housing. The impacts come from the people who live in the house, right?

So traffic is bad in LA because there are lots of people living there and driving their cars. The parks are full because there's lots of people playing in them. Not because housing was built and importantly, in Los Angeles, in many jurisdictions along the West [00:39:00] coast, people come regardless of whether or not the housing was available.

Kol in the 1990s, I had the pleasure of visiting Russia after the end of the cold war and in Russia they prohibit low-income residents or they did at the time from coming from the villages and living in Moscow. They didn't want a bunch of four people coming into the city and they would check people at train stations.

And if they didn't like what they saw on your ID they tell you to get back on the train. We don't do that here in America. And I'm really thankful for that. And what that means is the fact that folks are going to come to cities, whether or not the housing is available for them. And they'll find a way, and whether that's couch surfing or sleeping in their cars or doubling up in ways that are not optimal from a habitation standpoint, the people will be here.

The best thing that we can do is build the housing to accommodate those folks. And if we do that, we'll actually be able to collect the dollars necessary to build out and enhance the infrastructure that will make it better for everyone [00:40:00] doing the opposite is absolutely the wrong approach.

Kelcy: Thank you. This one I thought was interesting, cause I haven't heard of this before.

Maybe you or Kol  can answer this. A city  that created a guide for bringing existing outlaw or unpermitted ADUs into compliance. Is that, are you either of you familiar with anything like that?

Kol: I am. I'll speak to that. So this is a really kind of a long topic and a really interesting topic. And I can't go into all, all of my thoughts on it right now, but what I will say is there, there has been some limited degree of success in, I think Marin County in California for an amnesty program.

But I think more importantly if we look at the, the, the number of legalizations of properties in of ADUs in California . If we look at the number of properties in Los Angeles that have [00:41:00] become legal permitted ADUs  in the last couple of years, What we see is that approach of just simply having pretty good ADU regulations at large has really been what's fostered a lot of legalizations, it's not an amnesty program per se.

So so I think the lesson that, that I would like to kind of put out there is not that it's, I don't personally, I'm not of the belief that an amnesty program is necessarily, it's not a bad idea, but I think it involves a lot of staff time to come up with the mechanisms to do that. And I think the lesson should be that rather than focusing on amnesty of preexisting unpermitted structures, that would have a hell of a time meeting, structural code,  planning and zoning code and habitable current habitable building code.

It's better to just. Make it easier overall to build permitted ADUs  and that will enable more people to, you know, legalize, you know, legalize our [00:42:00] ADU if it can do so. It's not, again, that it's a bad idea to do amnesty, but it involves a lot of staff effort. And and I think the reward that you get is ultimately a fairly nominal number of units becoming legal.

And when they become legal, all it means from my vantage as an ADU advocate is you've made them put some more money into bringing up this structure to meet current building code in some way, shape or form, which just takes a really affordable albeit unpermitted unit and putting it into a slightly more expensive permitted unit.

So it actually hasn't increased the housing stock at all. In fact, you've eliminated some really affordable housing stock now. A city, can't say that a city can't say, well, you should just continue to live in an unpermitted ADU. But I just question whether it's a fundamentally flawed approach to be focusing on amnesty when, when there's so much [00:43:00] opportunity for new ads to be brought to the fold by simply reducing the threshold of of making permitted ADUs  at large.

Kelcy: Thank you.

Kol: Yeah. Yeah. I'd say two more, Kelsey. Okay, great.

Kelcy: There's a couple that are dealing that are curious about the construction defect laws. So Ezra  have you been involved in lobbying for the construction defect laws? And are you familiar with those and can you address construction defects?

Ezra: Yeah. And I think that we touched on this a little bit before. But, but thanks for the question again. Yes again construction defects specifically related to, to condoization, but more broadly is something that the HBA is working on at the state level. We hope to have. As I mentioned before, a new bill brought forward in 2020 that is going to be able to pass muster.

The big [00:44:00] opponents here are the trial attorneys. So if you're a trial attorney, I'm wagging my finger at you stop standing in the way of construction, defect reform. But we hope to work collaboratively with them and get something advanced in, in the 2020 legislative session.

Kelcy: Great. Excuse me.

Thank you. So this one, I'm kind of piecing together a little bit. It's from Dan Curry, and he's interested to hear if you your take on the current environment of COVID-19 having any power to make a case at the state level, in many States that don't already have kind of the state level of legislation that favor ADUs  and missing middle housing.

Can you speak to that?

Ezra: Sure. I mean, I think we're, we're all kind of thinking of channeling Rahm Emanuel here about not letting a good crisis go to waste. But I think it's, I think it's more fundamental than that. The value of a good set of ADU regulations exists far beyond the crisis that we're in right now.

So many [00:45:00] metropolitan areas in our country are unaffordable to the people that live there. And the processes that we have in place to allow for the building of new homes continues to fail, to meet the needs of our residents. Full-stop. ADUs should be legal across the country. The process should be by right.

They should be allowed to be of a size that can accommodate a growing family. They should be allowed in all areas. They should be allowed next to all types of housing and all of the old paradigm that we use to determine where housing should and shouldn't go. And what types of housing should be in those places.

Really, we need to start thinking about throwing that out the window completely. We need housing in this country. We desperately need housing in this country. And the only way that we're going to achieve that is if we start to rethink the kind of rules and processes that we have in place. To allow for new housing to get built full stop.

So yes, I think now is a perfect time to advance progressive [00:46:00] ADU legislation. I think once we're out of COVID 19 is a perfect time to advance progressive ADU legislation. I think when it's cold outside, it's a perfect time when it's warm outside, whether it's winter, whether it's summer, I don't care where you are in this country, we should all be working to advance progressive ADU legislation that allows for more housing to get built and more areas that will be accessible to more people. 

Kol Peterson: [00:02:02] it's the man of the hour. I'm just going to quickly introduce Robert Liberty  a colleague and friend and we've been working and strategizing on ADU stuff together for a long time.  More closely in the last few years.  Robert was the head of the Portland State University's Institute for Sustainable Solutions and he focused that Institute's efforts on ADU related activities, which we'll be talking about momentarily.

More recently Robert built an ADU in his house, so we're going to be talking about that, too. And also some of his previous experiences  related to land use legislation or land use law in Oregon, which is a really fascinating topic in its own right.  We'll be talking a little bit about the connection between the urban growth boundary policies.

 He's also a former elected official with Metro. So welcome Robert any opening remarks before we launch into some questions?

Robert Liberty: [00:02:54] No, launch!.

Kol Peterson: [00:02:56] All right. So we're going to start off by talking about the history of the urban [00:03:00] growth boundary a little bit, which I just alluded to. It's referred to colloquially locally as the UGB. So we'll, that's what we'll call it.

A lot of people on the call might know what the UGB is, but in essence, every city in Oregon regardless of size has a urban growth boundary. And we're going to show off what that looks like in practice, but the regulation of housing is also part of the Oregon land use program. Can you tell us something about that, Robert?

Robert Liberty: [00:03:24] Yeah, I think people don't know about the program other than we have urban growth boundaries, limit growth, somehow think that was going to limit the amount of housing production, but from the very beginning, one of the problems that was tackled by these laws starting 40 years ago was the zoning that limited housing choice to single family homes on large lots and often big homes.

So right from the beginning, there was an understanding that if you're going to be more compact in your growth patterns you should also increase housing choices. And the supply of land was much less of a factor in the cost of housing than the regulations of [00:04:00] housing. So the same time urban growth boundaries were drawn starting at the state level, we went through every city and every urban part of every County and said look, "you've got a rezone land for apartments, for smaller lots, for duplexes, for townhomes, and that was accomplished largely in the 1980s. And it's made a huge difference.

Kol Peterson: [00:04:17] So given that no other state in the nation has an urban growth boundary, does this concept even matter in this conversation about infill housing? Or is it kind of pointless to even talk about it because no other state has anything like it.

Robert Liberty: [00:04:32] Well, actually, it's not true that no other state has anything like it. The state of Washington has urban growth areas and scattered across the country in places as varied as South Dakota and Kentucky,  in Colorado, you find urban growth boundaries, even though a little town and township in Michigan called Frankenmuth. And Lexington, Kentucky, and they won't call it this, but Sioux Falls, South Dakota has virtually the same thing. Ventura County Northern California. So there's, I don't [00:05:00] know, maybe 15 million people living in communities with urban growth boundaries. What I've found is all of them end up having the same elements and one of them is to change the regulation and zoning to allow more housing to be produced.

Kol Peterson: [00:05:15] So it has some political relevance, at least in those areas.

Robert Liberty: [00:05:20] Well, it has political relevance and I think there's real concern now and understanding about what housing regulations done to limited people's housing choices.

And I think  that can be a starting point for talking about, "well, how do we grow generally?" And how does this connect to climate change? And maybe we can talk about that later. So it's a different political world than it was in the 1980s. We all know that, it's a different world than it was 20 years ago, but there may be an opportunity for change accelerated by the pandemic actually.

Kol Peterson: [00:05:48] Yeah, actually, I'm going to do a quick thing here and share two slides that show and what an urban growth boundary looks like just as a really quick illustration of [00:06:00] what the urban growth boundary does. Robert can you just briefly talk about these two slides here.

Robert Liberty: [00:06:04] Yeah. These are what are called figure grounds which are actually the black is the structure.

And they were done by the New York times. They weren't done by anyone here in Oregon and this shows Portland metropolitan region. And the urban growth boundary is really obvious in this. It's not drawn in. It just shows how development has been made contiguous and more efficient.

If you go to the next slide, this is the same kind of map from Charlotte, North Carolina, which is virtually identical metropolitan population, and a very similar growth rate. So you can see there's a huge difference. And this makes a big difference to the economy, to society, and to greenhouse gases and yes, it does connect accessory dwelling units. And we'll talk about that.

Kol Peterson: [00:06:49] Great. Thanks.  So one of the things that I've observed as a resident of Portland for roughly a decade is that my perception [00:07:00] is that there's kind of a cultural, I want to actually have you check me on this, but my perception is there's this cultural acceptance towards infill housing and density as a result in part of the influence of the UGB, which was established in '73, and that's kind of inculcated itself into the culture and the ethos of Portlanders at least.

Is that accurate?  Do you think, do you think that's accurate in terms of understanding the mentality of acceptance towards infill housing?

Robert Liberty: [00:07:28] I think it is part of it because the arguments have been made for 40 years.  We've had seven ballot measures at the state level dealing with the planning program, for and against, and by and large, the public has reinforced it.

And I want to clarify something because people get confused to hear about urban growth boundary for Portland. It's not an urban boundary for Portland is for the entire metropolitan region for 24 cities. And every city in Oregon has one. Antelope has a population of 50, it has an urban growth boundary. So this is widely understood as a basic strategy [00:08:00] of saving lands we need for farm and forest production and natural resources and being more efficient with taxpayer dollars as well. So yes, it has become, you know, I've back in the day when I took taxis home from the airport, I'm not making this up, taxi driver brought up urban growth boundary. So yes, it is part of the thinking, but I think the other part of that thinking is.

There's some benefits about growing efficiently and using the structures and land we have that have nothing to do with saving farm and forest land, that are good in themselves. If our landscape looked like the moon, there would still be good reasons to do what we've done and to make it easier for people to have housing choices and reduce regulations.

So, yes, I think there is a culture, but this is what I utterly reject, because I often do presentations and I show a picture of Oz and the characters from Oz and the background is Portland under these green towers. [00:09:00] So this is just wrong. We were so much like every other state in 1973. I mean, we were basically,  Columbus, Ohio with fruit trees and bracket fungus or sagebrush, depending what part of the state.

And we became different by working on it. And it was very contentious, Kol, as you know, it's still very contentious in Portland. It wasn't easy and it's actually the fight over these things that helps people understand them. So other places say, "Oh, we couldn't do that it'd be too controversial." The answer is, "Yes, you can do it, yes it will be controversial and overcoming the controversy is part of the education process." So for those interested in ADU design so far, this. It was a bomb. So we get into the ADUs more, but you and I are both interested in the big policy setting for ADUs.

Kol Peterson: [00:09:50] That's largely what I wanted to talk about with you is these policy aspects. You bring a lot to the table with these policy discussions. You have a rarefied set of skills and experience, [00:10:00] so we're going to focus on that. For several years you orchestrated a Sustainability Institute housed within PSU and focusing the institutes efforts on ADU production.

Can you tell us about the initial goals of that program and whether it was successful?

Robert Liberty: [00:10:13] Yeah. The Institute for Sustainable Solutions work on a variety of topics, but this was one and we picked it because it had a high profile. Thanks, in large part, to the work of you and colleagues of yours, like Eli Spevak and making this a big issue, even though ADUs had been authorized in Portland for 30 years, actually, and regionally for 30 years, not much production.

So the idea was, can we look at all the barriers to production other than regulation and what can we do about cost financing, permit processing, site suitability designs and so on. So we commissioned some work and one set of projects were five standard designs for ADUs to serve different markets from smaller to larger.

In fact, the center for Public Interest Design at Portland [00:11:00] State had a studio on that. And one of the designs is likely to be built now. That was one project, another was a survey of hundreds of ADU owners and tenants, and all the prior surveys that we were aware of interviewed only the owners and not the tenants.

Another was some research into site suitability in the city of Portland, and then we convened people in finance to talk about how to  increase access to financing for people that didn't have a lot of equity and savings. We talked about a wide variety of topics.

How successful? Well, this is part of a conversation you and I have been here having for while, which is people want this to go to scale, but so far, except in a few places, scale has been pretty modest. And why is that? And can you do this at scale and what is the role of government? But I would say that we don't know yet. It's a little too soon to tell what the results might be. Some of the work is clearly helpful. Some of it has not been helpful.

[00:12:00] Kol Peterson: [00:12:00] Yeah. I have a general mentality of urgency around ADU production. I'm tired of dilly dallying, and I want to see success. I want to highlight programs that have worked as opposed to spending political capital and money and effort on things that might work, but haven't proven to work. And so that's kind of the underlying skepticism I have around some of these really good sounding programs that I see a lot of municipalities and institutions trying to promote.

And I'll give an example of this, standardized plans. Obviously that sounds like an easy win. It sounds like a good idea. A lot of jurisdictions are putting effort into design contests, have standardized plans, but we've seen a standardized set of plans in Santa Cruz in 2003 and  those were not used even once, ever. And now we see that same thing happening in Seattle and San Diego, and a lot of other jurisdictions are trying to [00:13:00] standardize plans. And that doesn't have any impact, or at least hasn't, now it could potentially, but I don't want to have, I don't want to see governments spinning their wheels on things that haven't proven to be successful.

I'd rather have them focus on things that we know can actually help.

Robert Liberty: [00:13:16] Well, I think that this particular topic is an interesting one because when we started our work, you were very polite in our big collaborative meetings. By the way, I do recommend those, bringing all these different people together to talk about it  generated a lot of activity and interest. But you were very skeptical, and so was Eli. I remember going up to Vancouver and talking to Jake, who you had on your program, I think on Wednesday and on his wall, he had a series of very beautiful renderings of different designs, and I think he mentioned them briefly.  I said, how many of those have you built? And he said, "none".

So,  that's very important but one of the things that I have questions about is, is it because we're talking a very early [00:14:00] pioneering market in the limited place.

So the house I'm in  is a 1945 house. It's 1100 square feet, including the attic. And it was one of about 40 built in our neighborhood all at once. So those were standardized designs and those were middle-class homes. So it may be that the people who build ADU is now tend to be more affluent, have disposable income care, more about design, and maybe people who earn $60,000 dollars a year and have a big backyard say, "Well, fine, Model B with the brown countertops is fine."

So I don't know, yet, but this is part of the bigger question, too.  The idea of standardized designs was to reduce the time required to do it, and maybe the cost.  I think the cost issue is a big one and the design part is not necessarily a big part of the cost.

You know, it might be 10%.  So I would say, if we want to have large scale production, then we ought to be looking at settings where this might work and markets where [00:15:00] that might work and you have to have the financing and the outreach, and then standardized designs. 

The percentage of Americans who live in single-family homes designed by architects must be a fraction of a percent. Most of them are some variation of standardized design.

So as I recall, and I'm going to send this question back to you. One of the issues though, that's for detached units is  the backyards have too many variations in them. And that's one reason, but how do you feel about why standardized designs don't work?

Kol Peterson: [00:15:31] I'm asked this question a lot by every pre-fab company in the world that wants to start doing standardized designs. And I always like to caveat my response with it could work. In fact, there's three companies in the whole United States where it is working, but there's a hundred companies for whom it's not working and they go out of business.

So I don't want to say it can't work, but I will say that the only companies that for whom it has worked are coming in at really inexpensive price points, that seems to be the common theme [00:16:00] amongst them, and they are standardized plans. So it can theoretically work based on those few examples, but for most companies  it doesn't seem to be working.

And there's a whole bunch of reasons why not the least of which is, "Hey, I'm spending at least a $100,000, if not $200,000 on this unit. I want to have some say over some architectural aspects of how it's gonna look and how it's gonna lay out on my property and what the orientation of the doors and windows and electrical and utility connections from the primary house will be in my particular property."

So I think that's a reasonable thing for any homeowner to anticipate being able to have some control over.

PrefabADU.Com is the most successful in terms of market rate adoption they've built several hundred ADUs in the U S, most of which are prefab, predesigned, standardized plans.

Robert Liberty: [00:16:43] And obviously in an expensive market. So even compared to the regular homes here are quite affordable.

The other thing I would say is that the idea that you can have a design that fits  all the backyards for detached units, that isn't the point. The point is that [00:17:00] maybe out of a hundred thousand sites or 200,000 sites, maybe there's 5% that would fit one of the designs. That's what I think is the opportunity. A flat site without a bunch of trees , maybe an alley, or on a corner, or something. If we could map those and say, "Look, your site actually has a low cost potential." 

I made a reference to an internal standardized unit, that was something that the Center for Public Interest Design did. You can see some of these components already exist, the kitchen and bathroom and the wall, and have that so that you can slide in and connect up, and that might save a chunk of money. So that's a standalone possibility it could be used in new houses too.

Kol Peterson: [00:17:39] I want to talk a little bit about the Institute for Sustainable Solutions survey that was done, and just share some of the highlights from that survey.

Robert Liberty: [00:17:44] So this was a survey done in 2017, 18, I think, and it was a good database, there were hundreds of people interviewed. We paid $10 for every response, and we got a good response. The numbers don't look very [00:18:00] impressive here, but  high quality.

 The main point of this  is that things really took off in 2013. These are all Portland city only.

 I think the waiver, the $15,000 benefit of not paying system development charges had a lot to do with it, but this also was ,concurrent with Portland, becoming a tourist destination we had never been before, around food.

And a lot of the ADUs are built to the neighborhoods where food tourism is pretty prominent and it also coincides with a massive run-up in home costs and rental costs. So the returns on building an ADU, or renting out part of your existing house as a short-term rental, changed dramatically right as we came out of the recession, as well as regulatory reforms and the SDC waiver.

 So I think, Kol, maybe you can comment on what you see nationally, but I think this distribution had changed a little bit from the prior case. But you can see it's detached new structure is 40%, [00:19:00] but garage and basement renovations together are 43%.

And my impression is that's continuing 'cause I can see a lot of them being built. There is a big difference, potentially, I should say there's a big difference in cost, especially in the basement renovation. What's not in there, by the way, and you've comment on this, is attic renovations.

Kol Peterson: [00:19:23] Yeah, attic renovations represent I think 2% of all permitted ADUs in Portland, so it's really marginal. Another weird thing, Robert, this is kind of a fascinating side point here, but if you look at the actual data of real life permits that have been issued in Portland, there's not a lot of internal carved out ADUs aside from basement conversions, just in general, whether it's at a conversions or other portions of the primary level. The reason that's important is because California has a state law now that's like junior ADUs and it's for internal carve-outs of existing structures, which is another one of these things that sounds obvious. Of course, that's a great idea, we have all these oversized [00:20:00] homes, but the data doesn't actually bear out that a lot of people are doing that aside from taking a basement and converting that, which maybe has some architectural rationale that other internal carved out ADUs do not.

Robert Liberty: [00:20:12] I think it's interesting question. One of the things I have observed, if you look at the map or accessory dwelling and it's been built in the region, not just important, but in the region, they're overwhelmingly clustered at inner neighborhoods in Portland.

Those are areas where your market return is really high, but there are also areas that have older homes and small lots. And this is why I think the opportunity in mid-century suburbs is so great because these are places which have mature trees, small often awkward home designs from 50 or a hundred years ago to adapt.

So that's one of my questions is, would we see something different if we were looking at a blossoming of ADUs in a mid century ranch home suburbs?

Kol Peterson: [00:20:55] Well, I think the the form of ADUs does follow regulations, and I'll [00:21:00] speak to that in a second, but to your point, I think over time, we might see that there's different forms of ADUs  that happen as a result of the year that the housing stock was developed in a given area. For example, snout house suburb subdivisions that were built in the fifties to seventies  in cul-de-sacs. If, and when in California, ADUs take off in those areas, we're going to see a lot of snout house conversions.

Whereas right now that's not a really prominent form of ADU, but it's, it's obvious.  It's really easy low-hanging fruit for a lot of areas within California, I would say.

Robert Liberty: [00:21:35] Projects that we didn't get done, that I'm still interested in getting done, is to look at mid century homes and which ones would be most easily, cheaply, but effectively converted to include an ADU.

So my parents moved in 1962 from inner neighborhood of Portland to what was then an outer suburb, it's not anymore, and they bought a ranch style home, with their three kids. And [00:22:00] it's got a complete daylight basement with what was a wet bar, a bathroom and separate entrance.

I look at that, I think, you know, pretty nice apartment, pretty large, basically a rec room, so it's big, and that would be a very easy conversion, I think.  That home design, even though that actually was designed by an architect, it looks like a lot of other homes. And so that's kind of thing that's interesting. Plus a lot is big. So, I think there are a lot of potentials.  Pioneers tend to be in the inner neighborhoods for a variety of reasons. Now we look at neighborhoods about 50 years ago for opprortunities.

Kol Peterson: [00:22:38] Let's go through a couple more of these findings from the survey.

Robert Liberty: [00:22:41] Some of this was a big change, short-term housing less than one month, 26%. This had gone up dramatically from the survey that was done several years before. And I think that's a reflection of what I mentioned before, which is a big spike in rent and tourism coming to Portland.

You can also see that [00:23:00] 16%, interestingly, it's the owner's primary residence and the ADU is currently occupied, meaning the owner is living on the property. Now that's one of the things that Portland has done is it doesn't require the owner to live in the primary residence.

And on one of your tours, we visited one of those properties.  The fears that people had are completely unjustified because you can rent your house out anyway. So it's hard for me to understand the fear is about what we don't want to have the ADU as a renter, unless the owner of the home lives in the primary residence, you can already rent out the home..

Kol Peterson: [00:23:34] Robert, since you've teed up this short-term housing thing, we don't want to dwell on this. This is a big topic. I have some really strong talking points about this, but what's your talking point about the conflation of, or the concept of short-term rental opportunities, options within ADUs?

Robert Liberty: [00:23:53] Well, it's   a mixed bag and I have some new information as a result of work in the Columbia [00:24:00] Gorge, is that  in small markets, you can have a lot of the housing stock converted short term if you're in a resort area, that's not us, in a city is very different. And as you and others have said, a lot of the short-term rentals are in their primary residence.

So confusing an ADU with a short-term rental, it's kind of a mistake. Short-term rentals could be anything. I think the other thing is that the short-term rentals, the rapid return, is often the trigger that allows people to go ahead and build an ADU. And the survey results show that people often plan to get out of the short term rental business 'cause it's pretty taxing and go to a long-term rental after they'd paid down their debt. Also, there's an equity component during the testimony before the city council on whether to continue the waiver of system development charges, the city said, okay, we'll do it, but you have to agree not to use the accessory dwelling unit as a short-term rental, one of the people testified said, "That was going to be my retirement the only way you [00:25:00] can stay in my home." So. I wouldn't say that unlimited short-term rentals is good, particularly if you're in a resort area that you're actually changing your housing market way, that's bad for people, but I think it's a lot more nuanced and complicated and conflating ADUs with short-term rentals it's a mistake just factually. That that income stream may be essential trigger.

Kol Peterson: [00:25:24] Yeah. Well, this is really big topic and we could have a whole show on this at some point.

Robert Liberty: [00:25:29] The people were not receiving any rent are often using it themselves, living in the primary residence, or it's a relative or a friend.

And actually it's significant that the percentage of people, who it's a friend, it's not a relative, it's not a child, it's a friend who needs it. Also, below market value, I think people said, "well, how would they know?" But the answer is in fact, people are pretty careful. They do check, there's lots of information online about what other people are getting for their rents. In fact, when there was a cost increase in our ADU, I said, well, I'm [00:26:00] not too concerned, but what kind of rent can I get from this relative to what this extra cost. I was so horrified, it was so high. So I certainly knew what the market rents were. And people were choosing to do this.  They're choosing not to charge market rents. They're not trying to maximize their income, so they're more flexible. So I think this is pretty important.

Kol Peterson: [00:26:24] I'm going to go rapid fire through four or five more questions, Robert. So you developed an ADU. Tell us about the development process and what you've learned about providing an affordable ADU rental from a homeowner's point of view?

Robert Liberty: [00:26:40] I started the process by saying I wanted to  learn about the difficulties.  By the time it was done, I realized that I was wrong. And it was because I found someone, architect and developer, Nicholas Papa efthimiou  an expert. I'm a land use attorney, but after a while, he really knew the ropes.

So really my job [00:27:00] was to give some advice. We talked about the design and this is a 391 square foot converted  tuck under garage. It has retaining walls into a private patio, it's South facing, which is very important Portland, and we had a budget of originally $60,000, turned out to be 75,000. So I learned, it actually wasn't that hard for me. I had to make some decisions. My sweat equity was pretty modest, mostly the exterior landscaping work. And I did learn about the challenges of different interpretations of the same code by different reviewers and building codes. Some of the stuff  did drive me a little nuts, but fortunately Nicholas really was write checks, give us some advice. So that's what can happen elsewhere.

Kol Peterson: [00:27:48] Now that you've had some experience with this, what roles do you see ADUs playing in terms of affordability and equity?

Robert Liberty: [00:27:56] Well, what we know from the survey is that there's an overlap between the rents [00:28:00] charge for ADUs and people earning between 60 and 80% of median household income. So market provided, small housing can be affordable people at 60 to 80%, but, one of the questions is that people in those units maybe earning  120%.  That's a question about, can we, I find that people really need these rents. So I think it could be pretty significant. The other thing we could have done, or can do, in Portland is we have a $15,000 value in the waiver system development charges, the city. And I know you're not a fan of this, but the city could say, we're going to turn that into a rent reduction.

And it doesn't have to be dramatic, but we'd like you to shave off $200 a month. So I'm charging significantly below market. But because I had savings I used, my return is, this is gross, 1% a month. There's nothing, especially now, there's nothing I can get in the market, as someone who doesn't have a lot of money, like that. So, [00:29:00] I think this combination of great opportunity and need and kind of minor Incentives could do a lot. It's not going to solve the problem. There's no silver bullet, but this is a piece of silver buckshot that I think can help with that housing market.

Kol Peterson: [00:29:13] Robert, this is an important point, can you just explain that in lay terms, when you say your return is 1% a month, explain what that means, dollar value?

Robert Liberty: [00:29:22] So the rent I'm charging is $760 a month. The cost of the ADU was about $75,000-$76,000. And the $76,000 is not construction costs, it's everything. Permits everything including I think I threw in and finally the money has been a building and planter boxes and the fence and stuff. So that means I'm getting 1% back on my money.

Now, if I had borrowed that money, I wouldn't get that kind of return. But if I'd put that money into some sort of investments, I'd be getting a negative return right now.  So, [00:30:00] there were a couple of things that made that possible. One is I had help. Second thing is I had a home with a tuck on her garage and I didn't have to provide parking, if I'd had to provide parking, that would make a big difference.

So this combination of regulations, existing structure, and not getting too obsessed about fancy touches, made it , I mean, there's nothing like that I could get.

Kol Peterson: [00:30:23] Yeah. Let's dive into a different topic here.  Let's talk about the greenhouse gas emission reduction potential of ADUs and middle housing for cities and states that have greenhouse gas emission reduction laws or policies in place. Can you talk about that a little bit?

Robert Liberty: [00:30:39] Yeah. So since we're changing topics so dramatically, I'm going to change my tie. Greenhouse gas production, about quarter, but typically, certainly in this state, 27% is from transportation, another big share is from the structures themselves. And by having ADUs as a strategy around infill and redevelopment, you [00:31:00] reduce driving. People are closer to things, especially if they're built in neighborhoods like the ones we live in, where there are stores nearby and walk to, and the conveniences of  excellent transit, bike proximity. ADUs as strategy around infill and redevelopment makes a big difference in the amount of travel.

So that's one part. The other part is small houses just generally don't take as much energy to heat, dramatically different.  I know this from personal experience, we had an energy audit and there was a threshold of savings they had to meet and then you'd get a benefit.

Well, we couldn't really meet it and our walls are not insulated. So why is that possible? It's because the house is a appropriate size, 800 square foot main floor. We shut the doors to the attic, it's just really efficient. And so those two things, the small unit and the infill together actually have a big impact.

And California has made compact growth, a major part of its effort [00:32:00] to address climate change. And I worked on that project for a couple of years as well.

Kol Peterson: [00:32:05] We're going to close out with one question here about your experience as an elected official in Metro many moons ago. What are some strategies that you'd recommend for advocates and elected officials that are confronting common concerns around the impact of off street parking or owner-occupancy or any of the other arguments that are put out there against infill housing and residential zones?

Robert Liberty: [00:32:29] Well I think the most important thing is organized education coming from the residents themselves. We've had, I want to repeat this with very important, all the stuff we've done in Oregon, around planning and changing how we grow and develop around housing has been contentious. It always has been, but there's always been a lot of grassroots advocacy coming from individuals and organizations.

I'm amazed at the level of distributed sophistication we have [00:33:00] here from these challenges. It's something universities can contribute to. But the most important thing is, and I serve on the Columbia Gorge commission now, is to have people coming in and say, I want this in my neighborhood.

And to do that it's best if there's an organization or YIMBY, "Yes In My Back Yard" organization, but it can come from designers, it can come from faculty members, can come from people in faith communities who say, "You know, if those people were good enough to take out our garbage or teach our kids, they are good enough to live here."

So this is, again, an experience that's many places have had, but I think that's what has to happen. And then the elected officials get more comfortable. The other thing you can do is, speaking bluntly is, make someone lose an election from being on the wrong side of an issue and that will get everyone's attention immediately.

Kol Peterson: [00:33:52] Good closing piece of wisdom, throw your electeds under the bus!

 Kelcy King: [00:33:59] That wraps [00:34:00] up the interview portion of this episode of the ADU hour. As a reminder, these episodes are the edited audio version of interviews that we conducted via a webinar series. Good news. You can access the full video series  via Kol's website, BuildinganADU.com. Now for the second half of the show I curate questions from the audience that gives our guests the opportunity to dive deeper into a topic or address new ideas and questions.

 So Jeff Barber is asking , and I'm  curious about this too, about comparing the urban growth boundaries from out West to the Compact Context Areas in the Midwest. Is that something that you can address?

Robert Liberty: [00:34:44] I'm not sure I know what that is but I can guess a little bit, one thing I'd say is Urban Growth Boundary is a tool that will help supply over a big area because of separates city and country.

And if you don't limit what happens outside the boundary, it's worthless. So in [00:35:00] Oregon, about 96% of the private land is zoned for farm or forest use. And you're not necessarily entitled even build a house. So  you can't just densify and allow sprawl across the countryside, you have to have a system that covers a state or a whole region. And it is also not true that encouraging density and cities are allowing that some cities will save the countryside. It doesn't work that way, you have to have something that applies across the whole landscape.  Thank you.

Kelcy King: [00:35:30] What could specifically, this questions asks  California, but I think anywhere, learn from Oregon in regards to land use and zoning instead of purchasing open space.

Robert Liberty: [00:35:42] Several years ago, I did a study of what all 50 States were doing to curtail sprawl. And I looked at a bunch of regions. It's an 800 page report.

I'll send a signed copy to someone if they promise to read it all. But  when I was done, I had a kind of, instead of "eureka moment", a "well duh" moment. So [00:36:00] one thing is you have to change your land, use regulations in a fundamental way. You have to have oversight, you have to have enforcement.

We have actually citizen forcement in Oregon, and you have to stick with it. So, it's not just a little bit of tinkering, you'd have to really think about your entire landscape. In California actually has huge amount of planning legislation. A lot of it's not enforced and a lot of it is advisory and that just doesn't work if you mean it, you have to require it.

So it's politically difficult, but I think it will be essential, both for equity and sustainability.

Kol Peterson: [00:36:35] Robert, there's a couple of questions I had for you that I didn't get to ask and I'm curious if you could get into it a little bit. So what, just in general, what roles do you think ads and missing middle housing play in terms of meeting a state's housing production goals?  Oregon and California,  I'm sure other states have goals that they're trying to meet. Can you give us some insight into how middle housing can help those goals?

Robert Liberty: [00:36:58] Well, I

think it could help [00:37:00] significantly, but just the ADU productions we had before the pandemic. I remember talking about this and whether it was regarded as a niche with a regional government, and one of the planners there said we were looking at, I think three or 4% of the housing production going on during that high growth period was taking the form of ADUs.

That is not a niche. Three or 4%. Right. So I think we don't know what it could play.  If there was a requirement that new housing that was built, something discussed in Portland and the region, had to include an ADU, then we could really talk about a significant increase in production.

So, I think the potential, even if it's one or 2%, it's significant because ADUs are unlike apartments and they're unlike single family homes, they really are in different locations or different scales, they're in opportunity areas often. So I think they can play a very important role.

I think the trick is can we get that to go from hundreds to thousands? And how do you do that? So the answer [00:38:00] is yes, it can. But we'll have to see. Oh, one other thing I should add is that when, as part of the planning effort here in the region, we wanted to encourage growth along corridors and in centers and not sprawl.

We've had an explosion of mid rise apartments along transit quarters, simply by eliminating parking requirements because it's $15,000 to $40,000 per unit extra. And all of a sudden things now work. So that has been dramatic in last five years.  I think there is big potential.

Kol Peterson: [00:38:34] I always give a lot of credence to people who put their money where their mouth is. And by that, I mean people who build an ADU for themself because  I think there's so much to be gained in terms of understanding the market by going through the process yourself.

So can you just talk a little bit about now that you've been through the ADU development process yourself,  how has that changed your understanding of the ADU market and policy interventions [00:39:00] that are out there?

Robert Liberty: [00:39:01] Well, it's sort of a emphasis in some points I made earlier. One is there are situations like mine where the cost of the ADU can be low and the return is high.

That's a combination of the home, and the site, and the regulation, and available capital.  A lot of Americans have no savings, so this doesn't work for them, but they may have value in their property.

Finding the place where there's really a high return, I think I was kind of shocked at how important this has been for my financial future. Other people know that, there's nothing particularly unique about our situation. I think sharing that can make a big difference.  On the other side, I looked at the possibility of building a detached unit talking about that with Nicholas again. And I looked at that return. I was going to have to borrow some of the money and it wasn't great. It was pretty weak.

So what that shows is you have to find the right situation, the regulations, the right setting for the remodel and so on. And then I think it has big [00:40:00] potential, big potential.

Kelcy King: [00:40:01] There was one more that  I think can be adapted to any city or any municipality experiencing growth.

Danny asked,  "I've been asked  by my local real estate investor group. What types of development does Portland need most? What do you think the best answer to this question is?

Robert Liberty: [00:40:15] Housing development or development generally?

Kelcy King: [00:40:17] I would say housing.

Robert Liberty: [00:40:20] Lower costs, and I think that is going to be a mixture of apartments, but I also think we need innovations to test markets and the work that Kol and others did actually did that and demonstrated there was a market that's actually a role for government is to test markets.

So I think there are some things around design. So for example can we get the science where people have a small backyard and some privacy, but it's part of a multifamily development. Is that a big market? What can we do with  adaptive reuse of existing structures, both homes and not. So I would say we need more housing, more variety of housing we don't need more trophy housing. You [00:41:00] know, we don't need to worry about the upper end of the market except in so far as it's using up the land and the taxpayer required financing required for other people.

Kol Peterson: [00:41:09] Thanks, Robert.  I noticed how you slipped adaptive reuse  that was pretty slick.

All right. So thanks so much for joining us today, Robert. And we are gonna wrap up today's show  thanks again so much for being our guest today.

Robert Liberty: [00:41:23] My pleasure and thank you for doing this, Kol, it's very important.

Kol Peterson: [00:01:38] It is Earth Day! That is exciting because for a lot of us the whole ADU movement is really around environmental issues or is precipitated by environmental issues.  It is for me. I didn't even realize it was earth day till,  Kelcy reminded me.

Kelcy King: [00:01:56] Happy earth day, everyone. Thanks for  supporting this [00:02:00] content and  supporting Kol and all of our guests.

Kol Peterson: [00:02:02] So let's bring out Jake.

Jake Fry: [00:02:03] I just want to, before we start to say, this is such a great idea. And I'm really honored to be asked to join in this discussion. I think it's really tremendous all the work you've done over the years.

Kol Peterson: [00:02:13] Thanks man.

Jake Fry: [00:02:14] Kudos to you.

Kol Peterson: [00:02:15] Yeah, this is great. And I am honored to be able to pull this kind of thing together with people  your caliber,  to be able to share the wealth of information that you have.

I've been just diving right into heavy material because that's what we're doing. Why don't I start by just having you do a one minute intro of you and your company and your relationship to ADUS?

Jake Fry: [00:02:40] Sure. I will say, , And, and the immediate front , I think I'm most known for the running of my company, which I started in 2005, in Vancouver, Canada,

 I think on some level, it's a different country and we have different dynamics that are happening here. It's a fairly small city. It's only about a million people, when you look at the greater [00:03:00] city. We really had a number of pressures on our urban environment and I was always enamored with the ADU form. And it was something that I was just drawn to. My background had been as a carpenter.

 Going back to that early two thousands, did this seem that something had to happen in our town that was going to be different. Land prices through speculation were just going through the roof. Housing, even at that point was an issue, it's even more so now. And there was issues of affordability and this urban growth and what the city was going to look like and how it was going to change.

And for me, although there's never a magic bullet to these urban matters, the ADU makes so much sense. And I just basically stuck a flag in the ground and said, we're going to make this happen. And I worked really hard,  advocating for the built form. There had been some precedent from historical, little coach houses,  that existed in the city and some precedent through heritage retention that, that wasn't completely without example, but we were able to really push it.

And by 2009 through [00:04:00] some pretty concerted effort around marketing and getting people on board, we actually got a citywide ordinance passed and opened up 70,000 building sites to ADUs. And since that time, , I think we've maintained sort of a leadership role. , certainly we're very, very active in advocacy as the built form is involved in the city.

Personally our company's put in a little over 300 ADUs , and citywide we've certainly capped over 5,000 across the city and it continues to be a very strong  built form within this sort of spectrum of housing in Vancouver.

Kol Peterson: [00:04:35] Wow. There's so many different things I want to ask you about now that I didn't even think about writing initially. So I'm just going to go in that direction for a moment. You just said that, the city of Vancouver has roughly 5,000 ADUs. Now, I think we should just do a little bit of myth dispelling about some of the numbers that are coming out of Vancouver.

A lot of the documentation media coverage about the ADU scene in Vancouver says vast number [00:05:00] of homes have ADUs. So let's talk about the vernacular that's used in Vancouver and talk about the legal permitted secondary suites and the unpermitted secondary suites and just kind of help tease those different issues apart for us.

Jake Fry: [00:05:13] A  hundred percent. And so, I think that's a great point you bring up, I mean, for us, a couple of things, what we immediately considered to be ADU is a standalone building in the rear of the property. And I know from our work that we're starting to do in California, the ADU also includes what we call a secondary suite.

So going back to the eighties, certainly in the nineties,  land value starts going up in everybody. And his brother puts in an illegal suite in their basement. It's a very common built form. It took about 12 years for that to become a legalized citywide and so some of our numbers around ADUs include that. If you were to look at the city and to tease out those numbers, we have a city core , which is very urban and lots of towers and condominiums.

And that's an ongoing concern, but about 85  [00:06:00] percent our land mass is a traditional single-family home development where we have, you know, kind of a grid pattern. Although we're hemmed in by mountains and ocean, we have a bit of a grid pattern. Those that grid has lots of laneways.

Up and down those streets and varying sizes, we have single family homes. And so if you were to land here in 2000, I would say a large percentage of those homes, quite, quite big. We have a scenario where we have a basement suite. Some sort of rental unit within the home, that became legalized towards the late nineties, early two thousands.

Subsequent to that, moving up to 2009, is when we have this rear unit that could then be legalized. In both cases, they were few and far between, where you have an ownership model with that built form, it's all rental where it would be commonplace in a block. If you were to go to a typical street right now, I would say  it wouldn't be uncommon to see half the homes having a basement suite , and maybe one or two of [00:07:00] those homes having a rear ADU.

And if we were to tease that out a bit more, I would say we roughly have about 1% housing stock that gets torn down per annum, and rebuilt. And I would say over 75% of those new builds, which is somebody who's come in and whether it's for development or speculation, or just because they're building their dream home. They're putting a new house in the property. But 75% of those people will install a secondary suite in the basement and an ADU in the backyard because it's square footage that otherwise wouldn't be there.  There's no cost to it beyond construction.  And about 25% of the ADUs that go in, maybe even a little less, tend to be someone just going, "Oh, I need to house my kids or, my Mom and I are going to consolidate our properties and she's going to live in the backyard or I'm going to live in the backyard."

So that's, that's kind of  the preview. What small works does. We only do the infield part of that, that market .

Kol Peterson: [00:07:55] So when we talk about the secondary suites, [00:08:00] do you have solid numbers or a guess as to  actual permitted numbers, there are versus unpermitted secondary suites that exist?

Jake Fry: [00:08:10] Well, there was an amnesty program. So if there's unpermitted, laneway, unpermitted secondary suites, I think they call them California they call them junior ADUs, they're going to be pretty modest.  No, I don't have those numbers, but that amnesty program has been extinct for a long time. As an aside, if you build a single family home, you have to put provisions for a secondary suite in the basement, even if you're going to use it for family use,  because rental is so rare here that they don't want to be in a position where they don't have that opportunity with future owners to have an ADU.

Kol Peterson: [00:08:43] Dive into that a little bit more for us, Jake. So you're saying it's a building code requirement or planning zoning requirement that you must create a secondary suite ready lower level?

Jake Fry: [00:08:53] A hundred percent.  If you're doing a single family home, you have to have some accommodation that in the [00:09:00] future, that rear unit or some part of the home could accommodate a standalone living unit. Even if it's not going to be at the original point of usage. .

Kol Peterson: [00:09:11] And that's, that's a pretty, aggressive standard. I really like it. Do you know of any other places that are doing that?

Jake Fry: [00:09:20] No. You know, and I have to say Kol, , and not to toot Vancouver's horn, but, , I think there's, there's a couple of things that are really different.

And again, maybe I could use a comparison to California because we've been looking at the Bay area a lot, cause it's very similar. What we have here is  a different tax structure than you do in the States. Canada has a longstanding relationship, because it's part of the Commonwealth, with Hong Kong.

 I won't attribute it strictly to that, but there has been , in the last 25 years, quite a bit of, investment in property in Vancouver. And in the last 15 years, it's very speculative and because we have a different tax [00:10:00] structure than you do in the States, it's a really good place to legally shelter money with property.  They don't look at their global wealth. They just look at what wealth they have in Canada. And there's any number of drivers that makes it a very attractive place to invest money in real estate. And it's a very large community, a diverse community in Vancouver. So it was also an established community of Chinese origin. And so there was any number of driving factors that really in the end basically just took the land value in this, blew it out of proportion for what local economy would support.

So by example , about 4% of the earners can actually afford a single family home. The top 4% of the earners can afford a single family home in Vancouver. So, you know, we have trouble attracting doctors because even at , a good rate of a surgeon, it's still pretty expensive to buy a house here.  There's lots of home ownership that's people having homes through family and so forth.

 But if you were to actually land in [00:11:00] Vancouver and trying to buy a home,  not conceivable, to be able to do that with a normal income and certainly blue collar or middle-class income, it's almost impossible.

In comparison to California. Where there are local high earning people, right? So there are people in the tech industry and yes, that's kind of a real negative effect around land prices. And that kind of wage disparity that happens , is quite acute in that part of the world that has its own challenge. But. Going back to your key point. What's the driver behind this rental is so important for local people to live here.  We haven't been able to crack the nut on affordability or their home homeownership attainability, which is something that I think, we've been really working on , along with others.

10 years ago, we have such an emergency. We have to enforce an ability to at least create rental stock. And that's really what was behind both the basement suite ADU or the junior ADU and the ADU develop.

Kol Peterson: [00:11:56] So Vancouver is prices are roughly akin [00:12:00] to the Bay area, I believe. So could you talk about the average price point for a single family house in Vancouver. And then talk about  how you see  laneway homes fit into  economic sustainability for homeowners who are looking at buying a property or who are thinking about building one?

Jake Fry: [00:12:17] Yeah. So, this in two little pieces.

So first off, what is the average property value? If you were looking at the average stand-alone home. It's going to range from the East to the West side.   The further West, you get closer to the ocean, the higher the prices, but I'd say as an average, we're creeping up to $2 million for a single family home.  And just to put that in context, our mean income is $80,000 per family , so there's a big disparity . Of course there are, there's always those  properties that sort of skew the price at a $10 million property, $12 million property. And we do have quite a few of those.  But I would say even if you were to scrub those outliers outside of the equation, you still dealing with homes that are well over $1.8 million on [00:13:00] average.

Kol Peterson: [00:13:00] Right, that, just for everybody's reference, I think that's almost the exact same price point as the Bay area, right?

Jake Fry: [00:13:09] Yeah.

And that's probably the only large jurisdictional area within the United States where that's a comparable price point for sales on the homes.

Yeah. And one of the questions is ,this popped up in the string and we weren't taking it, but someone's saying, "well, what's that how's that compared to a American dollar?" And yeah the Canadian dollar is much lower right now, but I mean, our earned dollars are the same, right? So a carpenter with a truck who's really skilled, he might have an annual income of $110k, or his family might have an annual income, $110,000, but it's for pretty skilled employee who's rarefied here.

Right. So, just to put it in context, I would think a Bay area carpenter of a similar quality would make the same in American money. So in some respects, I think it's a level playing field, right?  We're, we're really judging this against income.

Kol Peterson: [00:13:58] The second part was how do you [00:14:00] think of secondary suites and laneway homes fitting into economic sustainability and, and sorry. And also just the homeowner mentality around the role that ADUs play.

Jake Fry: [00:14:11] Yeah, sure. I'm going to break it into two parts because I think it's important.  I'm going to focus on what we tend to do, which is that  we're a green builder. We believe in embedded energy, the importance of keeping that principal residence because that's probably the greenest thing anyone can do as opposed to ripping down a house and building  new for new sakes. So in our context, how that fits into affordability's, it's twofold probably about  80% of our customers tend to have some sort of familial relationship with the current property owner. So really typical scenario is  a young couple. maybe they're just married, but they've been living together. Maybe they lived in a condo, maybe they were renting. Maybe they owned a condo and they're going to start a family. And one of the parents of the couple is like, well, build in the backyard it's all yours, you pay for it. [00:15:00] And all of a sudden you're living really nice setting, close to schools and close to babysitters, being the grandparents and so forth. That's really typical for us. It's incredibly affordable.

A two bedroom condo downtown is getting close to $2,000 a month.  If we were to build one of our nicer homes, we're probably  just under $400,000. The cost of service that mortgage right now is probably around $1,800, something like that.  And so all of a sudden  we've moved from a rental scenario to a scenario where you're actually building up some equity. Now, on paper these lane homes are ADUs are for rental, but when you're dealing with a family member and they're putting equity in the property, whether it's a handshake or a formal legal document, people make arrangements so that equity's protected. And we've also found that, anecdotally, those people who've built an ADU and sold it generally make [00:16:00] about 20% off their investment on the property.

 So it's kind of a win-win. So if the family, and we've had this before, a family buys a home, they do it together. They lived there for a while. They sell, they both make money off the investment and they can go on into a different strata of home ownership. 

If we look at  the lion share, the ADUs that are going in, someone will build up a property, even a speculator, will build a house and put an ADU in the back. As well, it's a basement suite. What happens here is a lot of people use the credit unions. The credit unions will take the income   that the rent will generate off those ADUs and consider that part of your recognized income.

And again, typically what we're finding in those rental ones is that your investment, if you were to rent that ADU, you're probably renting it $3,000. The one I just described , so you might very well be making 40% on your investment. So again becomes quite a lucrative investment. Although they're usually building for family just to compliment that [00:17:00] once in a while.

We'll have somebody who's moving from a little bungalow a slightly bigger house. And they'll talk to us about building laneway house because that will help them afford the mortgage to the more expensive properties. So that's another aspect of that.

Kol Peterson: [00:17:12] You tossed out a number, I realized it's not based in science, but you said, people get 20% return on their investment when they sell the property. Did you mean that if you had a $100 thousand dollar laneway home, the property would sell for $20,000 more?

Jake Fry: [00:17:26] No, $120,000 more. So if we had a property worth $2 million.

Kol Peterson: [00:17:31] Yep.

Jake Fry: [00:17:32] Didn't do much, but you put a laneway house in and that was worth  $300,000. You would probably, sell that property for 1 million, $360,000 in the market. Right that investment it's $300 for come back as a three is,  when you went to sell it, anecdotally, what we're finding is that property you probably made about $60,000 on that $300,000 investment.

Kol Peterson: [00:17:58] 60? [00:18:00] Six zero.

Jake Fry: [00:18:00] So on a $300,000 investment. 

What we've been finding is  people who build them and then go to sell them. They probably make $20,000 off the investment, the property's worth more to the buyers.

Kol Peterson: [00:18:11] Yeah. So it's fair to say that there's no way that the ADU is going to add a dollar for dollar value. It would not be a good short-term speculative addition to the property.

Jake Fry: [00:18:24] I mean, it caps out because it's, at one point it's only worth so much.  Its value is only what it generates in income, if you're looking at it in that kind of very, ROI type of lens.

Kol Peterson: [00:18:37] This is a really interesting topic, Jake, because there's so little clarity around this contributory value question because there's lack of sales comps. I think Vancouver, like Portland is in a position to actually be able to analyze the question a little bit more. In California there's definitely people who are  thinking that an ADU is going to add more than it costs to [00:19:00] build. And I'm, I've been like, no, it just doesn't. But I mean maybe, maybe it's a local market thing and maybe it will add more? But it doesn't seem like that's the case here. I would say in Portland as a general matter, it might add 50% of what it costs to actually construct, maybe.

Jake Fry: [00:19:17] I mean, yeah. We're also in a scenario, and California will be the same, where there's not a lot of contemplation about stratification or subdivision, I think you'd call it. And it's those rare projects that have an ADU in the back that can sell, they tend to be in our environment, I'd say almost a hundred percent.

They just can be something around, you know, a property's been bought and there's a deal made with the city around heritage preservation. And that's  benefit that's been given to the  person undertaking a project. If you're a builder, you were at our level, but you're sort of a builder investor, let's say, you're making a fee  on your construction and you're  maybe making 15 or 20% off the overall investment.

So, you know, it's not a $1 [00:20:00] in $2 venture by any stretch.

Kol Peterson: [00:20:03] All right.  I haven't even started on my questions yet.  I knew I knew this would go in different directions. All right.   I wanted to ask you about the duplex code provision. So we've been talking about missing middle housing with, Eli yesterday in Portland and Oregon.

And tell us a little bit about what's going on with Vancouver with the duplex code, when that went into effect and  help explain the difference between a duplex and a house with a secondary suite.

Jake Fry: [00:20:29] Oh, it's pretty simple I think. One way to look at it is that our current provisions for duplex in Vancouver produces four living units on the whole property.

So what happens is you usually have a principal residence. In the basement area, you'll have a dwelling unit and then someone will elect to have a laneway house. With the new duplex incentive, which we can talk about how viable it is as an equation, but not withstanding their idea was that you'd have a [00:21:00] structure that would have be a side by side or back to front duplex. And in the basement of each one, you'd have a modest one bedroom or studio. We call them walk-off rental units. So you'd have sort of student rental, you know, typically, in that first scenario where you have a house with a basement suite, you might have a two bedroom like a small family dwelling, what the duplex contemplates is much more of a single person for young couple rental.

 So it's really not a duplex. It's really a fourplex that's being built on that single family property.

 Ostensibly, but just to clarify, those basement rental units are studio to one bedroom at most, but they're quite modest. I will say, in my experience,  although that's been pursued, and there is some value to it , it doesn't create enough value in the increased practices that there was a big uptick in the duplex movement.

Yeah, there's, there's other things that could be done. And there's other things that have been done in the past that have been more successful [00:22:00] and part of it has to do with the challenges our land cost is so high and the construction costs it has an impact. Some of these initiatives tend to drive more expensive housing, right?

So you're taking something that's currently in the market as a built form for maybe a thousand dollars a square foot. You're creating something that, although it's a little smaller, the price point might be up to $1,400 . And so you're somewhat working against affordability, granted, all of a sudden you have a 1200 square foot living unit in prior to you didn't have something that modest, but that $1200 is so dear, that  it falls out of the affordability spectrum. Right?

So it doesn't really get to the missing middle because you're not getting enough value out of the land, right? Cause you're not going to affect land costs too much. You not really gonna affect construction and have something that's nice.

What we're contemplating, what we've been pushing, is to sort of broach a bit more density to give us one more living unit. But what we're going to do is [00:23:00] drive all that extra land value and we're going to subsidize one unit. So it will be sold below market and it will have a covenant on it.

So it has to stay below market. So, you as a homeowner could go, "Well, if I do this, I'll make a little bit more money, than if I just sold my property to the land developer.  I'll get a living unit for myself.   I'll put a bunch of cash in my pocket,  and the benefit to the city is that they get this affordable unit in perpetuity." and that's some of the ideas that we've been working on for the next phase of where we hope our ADU program goes.

Kol Peterson: [00:23:33] I'd like to hear more about that, but I'm going to keep going through the list of questions that I had.  So one of the trends that we're now witnessing here in Portland, in Oregon at large, in Seattle and now in California, is allowing for two ADUs.

Vancouver has a lot more experience, I was hoping you could share some insights with practitioners who are considering this type of change and what are some practical considerations?

Jake Fry: [00:23:57] Two things. One, we had a [00:24:00] big parking relaxation because parking is always a big issue in these discussions and we knocked our parking down to one car on the property.

And I have to say,  there'll be a couple of people who will disagree with me and there are certain pockets of the city where this comment is not accurate, but it didn't have a big impact. Right. And that parking relaxation is the only reason we were able to get those three units, this moving to one, one exterior stall, nothing inside the ADU, because it's just going to get co-opted into living space.

Doing that made the program work. And went a long, long, long way to really secure rental tenure for people.  I would say as a practitioner, if I could wave a magic wand and go, "this is the best way to do it". Getting that residential unit out of the basement and having that secondary  ADU be more of a front back or side to side configuration is a much more humane way and creates [00:25:00] a lot more value for both the who's ever investing it and expecting to get a return from it. And also for somebody who wants to rent that as a living space.  Which is the dream of the ADU.

So you have these smaller living spaces that meet your immediate needs, and don't have nature of any excessiveness, but your have contact with the ground, we live in such a temparate place. It really adds to our livability of our domestic existence, right?

Kol Peterson: [00:25:27] When there is a whole site redevelopment project, developers are compelled to build a secondary suite in the basement. Are they typically finishing that out? Or are they creating  a secondary suite ready structure?

Jake Fry: [00:25:41] You know, I would have to say it's a little case by case and I can't really definitively answer that, but I can tell you , anecdotally being in the streets a lot, looking at our job sites, going around the city, I'd say over three quarters of those  new projects generally have those units up and running.

 The rear ADU that's is free square footage. [00:26:00] So I don't know a builder, who won't take advantage of that.  You know, some of the really higher end places, they don't want something in the backyard. They may feel it's declasse, but,  those are pretty rare individuals.

 And the basement suite, again, because it's home owner's discretion, but most people do it. And the rental here is still below 1% vacancy. We're dying on it. You know? And obviously the last two months is becomes very acute because now a lot of those people who are in those units are the service workers who are trying to live locally. So that's presents another challenge.

Kol Peterson: [00:26:30] What additional changes would you like to see occur within the residential code in terms of middle housing in Vancouver? Given that the context here is Vancouver is already vastly in front of the curve.  So what other changes would you like to see?

Jake Fry: [00:26:48] I think there's threefold,   in the context of our discussion I'd like to see the ADU's take on the realm of the starter home and the retirement home because it really preserves the neighborhoods.  The other thing is, I'd like to see is [00:27:00] just starting to deal with things like getting three or four or sorry, four or five townhomes on corner lots. I think that's really important. We haven't gone there yet. I think it's something that's there and it's something we've seen in the past happen.  We've had a lot development where we were taking our typical 33 foot wide lot and doing skinny homes, and that's something that might be interesting to revisit.

 I think what I'd like to do though, is I'd really like us to make the conversations more sophisticated and less complicated. Right. Really looking at end outcomes more than prescriptive scenarios.

We should be dealing with general massing on the size of our ADUs and not getting into well that dormer is two inches, "like this." We've done a whole bunch of work to lower embedded energy costs while still maintaining a building code. But someone's got to look at, "Oh, wait a minute, if we can do a foundation system like this and it meets code, but it's not our common practice here or it doesn't have energy requirements, but [00:28:00] it has a net benefit ." I think those are the conversations we really need to have up and down through Cascadia.

 We're often held to a standard that's not necessarily appropriate to our environment. They're more national standards. And I think we need to have something that focuses on outcomes and mitigates  unintended consequences rather than getting too mired in a rule book that seems to be at odds with itself sometimes.

Kol Peterson: [00:28:23] What other cities in Canada are worth looking at in terms of making strides towards opening up their zoning code to allow for more housing types in residential zones.. 

Jake Fry: [00:28:34] The, I think every major cities had some stab at this in candor.

We've just been really successful for a number of reasons.  So there's lessons learned from us.  There is a publication just out of Ryerson university in Toronto, which contemplates the value of the type of modest density  that we work in. It really does a very good  look at what the impact of that full scale of tower through medium rise and the type [00:29:00] of housing form that I think we're focusing our efforts on. I mean, we really outweigh the other ones. A whole bunch  spread out through a city in an urban area. And what that brings is depth, much more beneficial than a, say a tower that might have more affordable units in it per hectare. But the impact of that is this disproportionate to the value of the whole city when you look at something that's much more widespread.

Kol Peterson: [00:29:24] You mentioned that Small Works has built roughly 300 laneway homes. Could you describe,  Small Works in terms of the process that you guys use for design build? Are you guys using mostly standardized models. And I just want to ask you to give a little bit of context about the standard lot sizes and alley loaded lots that you have in Vancouver.

Jake Fry: [00:29:49] I'll work that backwards. So generally Vancouver is  an odd shape city, but  a lot of the development was done when the railroads were coming in at the turn of the century. So it's  very much a grid pattern. And we have an [00:30:00] extensive I think you call them alleys we call them lanes.

So most lots are serviced  out the rear yard and the cars come into the property a rear access system.  Hence the name laneway that we coined. And those lots pretty much are 50 feet or, or 33 feet or some derivative of that. Primarily because there was two survey companies and one had a 50 foot chain and one had a 33 foot chain and that's how the city got divided up. 

 So we're full service. We have a sales team, we have a design team.  We used to have our own factory cause we build partially off site. We're now have a joint venture with another company.  And then we have a construction team and a service team.

So we're the full compliment. We work on fixed prices.  And so far we just find that that's the best way to work with the customer. They need to know from day one, generally, what's, it's going to cost them.

 We had started with the idea of having six or seven fixed plans and people could personalize them. What we found was that the city  wants to comment on every plan.  Things changed. It was hard to [00:31:00] create a surety.

And then meanwhile, generally,  the clients, because we were building for sort of homeowners,  and they were living in the property, this was the retirement home. This was their starter home. So, you know, we started to get that kind of Dwell magazine creep of higher and higher finishes.  You know, when I started it, I really intended to be beautiful, but modest  cute little cottages, but they really became much more custom homes.

So our process is custom. Every home is different, so I've got 300 homes. Every one is significantly different. And, I mean, we can only go so different, our building envelope is quite regulated.  We can build to about 24 feet in height. We have so much depth off the backyard.  But , for us, every project is a little different.

 Generally, we have three architects working or designers, I should say they're they're architect trained, but do not stamping our drawings in the office.  And then we have a staff at nine in the office and then comparable staff  in the fields. And then we work with sub-trades with annual contracts.

So. I'll talk to Keith and I go, "Keith, you know, what are we [00:32:00] going to talk about for plumbing for these houses per year. And I have 25 homes that have contracts for, so let's work at a price," and then we're able to bring that cost to surety and reflect that into our pricing to our customers.

Kol Peterson: [00:32:10] So Kelcy let's  have you come on,  and,  if you could,  show some of the images of some of the laneway homes, that would be great.

Jake Fry: [00:32:18] So these are really typical. You can see this quite a variety of styles.

 And if anyone wants to go take a [email protected] .  You can see there's quite a range  of traditional modern, kind of a Cape Cod influenced. Our homes range roughly, I'd say around anywhere from 500 to 950 square feet.

 That one right there called Petit Versailles because our clients showed up, a very charming woman, and she had a picture of Versailles. She goes, "get me as close as you can". So if you go inside. Here we have a herring tooth,  Walnut floor fireplaces, lots of custom millwork, big vaulted spaces. I mean, this is very much client driven about what they wanted. [00:33:00] Re high-end millwork. MIllwork is king in our home speaks is that's where you really get your viability of creating that storage that you need to make these as livable as possible. So, maybe I could show you one in contrast, which is one of my favorite ones, called the quintessential laneway home. I really liked this one. It's very modest. It's about 580 square feet. Really has a nice feel to it, it's very livable. Was built for a current homeowner and  really met her needs.

It's a small two bedroom . She later sold this and went on to house a family of four in this little house, but I think it really speaks to how much you can get out of a small space. 

  Kelcy King: [00:33:40] That wraps up the interview portion of this episode of the ADU hour. As a reminder, these episodes are the edited audio version of interviews that we conducted via a webinar series. Good news. You can access the full video series  via Kol's website, BuildinganADU.com. Now for the second half of the show [00:34:00] I curate questions from the audience that gives our guests the opportunity to dive deeper into a topic or address new ideas and questions.  

I see a lot of questions coming in that deal with the condoization strategy. So when you're saying that  they use can really serve the first-time home buyer and retirees, people are selling the ADU's individually? Is it detached or they remain with the primary dwelling?

Jake Fry: [00:34:27] Yeah. So these are not currently on the market as something you can buy, you can only rent. But what we find at our firm is because we're getting people who tend to be related to the homeowner. They're treating it as if it's their first home or the retirement home. Right. And so what happens is that in a way it's, it's having a defacto kind of co-ownership model that's naturally progressing, but, in the context of the city and in the context of how there should be functioning there, the rental units. Right. But,  I think [00:35:00] it's a positive unintended consequences. This is filled the niche in the market that allows people to do this under certain circumstances.

Kelcy King: [00:35:07] Can you dig into the co-ownership model a little bit more? Are you seeing that a lot?

Jake Fry: [00:35:13] Yeah, increasingly because again, we discussed how challenging it is to own. We're starting to see this naturally we're getting people coming together and going, "Okay. We've had this friendship for a long period of time, or maybe we're cousins. I can't afford a home. You can't afford a home. Let's go buy one together. And we'll just have a private agreement between us." And we do see that increasingly.  There's been a big drive for co-ownership in, in multi-family. And so there's a couple of groups doing that in a much larger scale, but we're seeing a heck of a lot about it on this much more smaller scale.

Kol Peterson: [00:35:49] So one of the questions from the attendees was how are people financing these things, is there a renovation loan product where banks are learning [00:36:00] against the future value?

Jake Fry: [00:36:02] Yeah,  you'll have somebody who's lived in a property over 20 years, they bought it for $200,000 or less, even though they're sitting at something it's 1.8, they own it outright. And to get a line of credit just because of that untapped capital tied up in the land. But,  again,  the banks really look at that income or it's certainly the credit unions look at the income that generated. So they consider it to be quite a safe investment.

 A local credit union, we have a relationship for the longest time they would ask for floor plans and they go, oh, this is a Small Works floor plan, this is a two bedroom, this'll get this, and they would base the evaluation of the viabilities off the income that they talk to have some generate rent.

Kol Peterson: [00:36:43] Yeah. And you say that lightly, but I think that's a really important point that a lot of banks in the U S are not able to make that leap right now.

Jake Fry: [00:36:51] And we did it by fostering a relationship with a credit union and we helped them develop a product. But we were like, "Hey, look, you can do this, and this will lead to this." And they were amenable [00:37:00] to that.

Kelcy King: [00:37:00] Can you talk a little bit about your experience with the prefab components?  How far do you take that and what kind of savings do you see?

Jake Fry: [00:37:09] It's a great question and I'm glad we get to talk about that.  We went the full gamut. We never really went fully modular. Primarily we do our framing offsite.  So right now, by the time we get to slab on grade, it takes us about five to six days to walk away from the building with the building erected, doors and windows on, and the roof on, and that'll be for a 900 square foot building.

In our facility we work with a truss factory, as I said, it's a joint venture with them. So we do all our wall panels, floor panels, roof cassettes in that environment.  We have in the past, and it was really good,   process built kind of a cube that  facilitated a kitchen, that would basically get bolted onto it, and it was a fully functioning bathroom and mechanical room. And we said, that's the sweet spot. You know, once you start to get into any modules that are bigger than that, it just becomes more of a hassle to deal [00:38:00] with.  We are working right now in a modular foundation system, which I hope to bring to the market the next four months and I think that's going to be big game changer for us. So that's, that's probably going to be the biggest innovation.

Kelcy King: [00:38:11] Thank you. I think we're going to do one more. In the U S in Portland and here in Bellingham, we have a size limit. So  66% of the main dwelling or 800 square feet, whichever is more. Is that something that you see?

Jake Fry: [00:38:25] Yeah, the Vancouver equation is basically 16% of the lot. And then there's an area within the lot that you have to comply with size-wise a couple of feet off the alley.  You  need a minimum of 16 feet between the two residences.  But we work on more of a percentage basis, but really where that takes you is in the standard lot of 33 feet, you have something just under 600 square feet. And then by the time you get to 40 or wider, you're out your maximum square footage, which is 950 square.

Kelcy King: [00:38:53] I just want a little clarification. It's based on the lot, not the main dwelling.

Jake Fry: [00:38:58] Yeah. It's a standalone [00:39:00] equation for the ADU. So your, your principal residence could be overbuilt or underbuilt.  One of the things I will say that was really progressive of the local council at the time, was they said they wouldn't worry about any upgrades to the main house they would just like, "that's not there, that's not the house you're looking for." They would just focus on what was happening with the ADU and let any noncompliance things, unless it was egregious, be in situ and stay there.

Kol Peterson: [00:39:23] Awesome.  Jake, thank you so much for participating today.

Full text of interview

Kol: [00:01:48] I'm just gonna quickly introduce who Eli is. But not a really formal introduction. I'll let him do that. But Eli and I have been co-conspirators in a number of different initiatives and [00:02:00] activities and educational programs over the last decade. And so he and I worked together in a symbiotic way on a number of different things and not the least of which is we run AccessoryDwellings.org together, which is a volunteer run website.

And Eli and I kind of started that and have been running it since for a long time. So there's a lot of things we could talk about. But first I'll just, have you just maybe briefly introduce yourself Eli to the group.

Eli: [00:02:27] All right. Well, thank you, Kol and thanks for hosting this series. It's a great idea. I am currently sequestered in the common house for our community keeping as far away from my two little kids as I can, who are trying to homeschool. I started doing affordable housing development in Portland, about 25 years ago, originally in the nonprofit sector with Habitat for Humanity and some community-based groups and came to love the small homes that we were building and the market wasn't building small homes at all.

And so for environmental reasons, and for affordability reasons, I got interested in accessory dwellings, which Portland allowed for a long time. But [00:03:00] weren't getting very many of them built. So I will jump forward to today where I am a developer and a general contractor. I built ADUs I worked with AARP to help launch them other parts of the country city and the state level, and done tours, the website. And I just, I geek out on them. I'd done condominiums where you solve them separately. I've tried to fuss around with them any way I can and just trying to get the new, more broadly available then they are today.

Kol: [00:03:24] Great. Thanks, Eli. All right. So we're just going to jump right into the heavy stuff.

Cause that's what I like to do here. So Eli, please,  udpate us on what's happening now in Portland and in Oregon at large, with changes to residential zoning standards.

Eli: [00:03:38] Well, that's a short question. So I started one of the things I had, I also, where as I serve on the planning and sustainability commission of Portland that I chair and I led a group for a while before shifting roles to try and expand housing options in the neighborhoods of Portland.

So Portland is going back over seven years now, we've been trying to update our residential zones so that instead of seeing these huge single family homes, 2,500 square [00:04:00] foot, or larger get built on single family, lots, there'll be other options of what we get built. And the residential infill project is an outcome of that.

And also, pressure from neighbors to build smaller than because they're tired of the large homes getting built. This has been a very politically challenging process. And that means it's taken a long time. But the, the nugget of it is that Portland is now going to not let you build as large a structure on a lot, but there's going to be more flexibility about what happens inside that structure. And that would mean go up to two, three or four units on a lot, even six units. If there's some affordability component to them, it's gone through the planning commission. We monkeyed around with it quite a bit to staff's chagrin.

And now it's at city council. And it was about to be voted on literally. It was on the agenda for city council when city council shut down for COVID-19. So, for a project has gone on this long. It's still not done yet. They're hoping that it gets done by the end of this fiscal year or the end of June.

But in while this has been going through the State of Oregon passed a law, which requires every city in the state over a certain size to allow [00:05:00] duplexes on every lot and a single-family zone. And for largest cities, two three or four units or a cottage cluster allowed on any lot, somewhere in areas of the city.

And that's a groundbreaking state law. I mean, frankly, Oregon is kind of a leader in state land use planning to have a pretty large role of the state in what can be built in, in comprehensive planning and what can be done in parts of the city. But this really, in some ways makes you think again, what single family zoning really means.

It really says that if you're going to have large neighborhoods where historically you could just go to one house on a lot. That's just not going to be true anymore. You can still regulate the scale of the structures to make sure things are compatible, of the right sort of size and height and setbacks.

Those all can be regulated locally. But you're not going to be able to let single family zoning become an exclusive way of keeping smaller households or lower income households out of a neighborhood. And I think that's a great leadership role the state's done. And because of that, actually residential infill project, called RIP, a terrible name for it, in Portland now [00:06:00] has a "RIP 2". Because it's the RIP that thing going through the political process thus far only adjusted the zoning in the closest neighbors of the city that are zoned for relatively high density, residential. You have other parts of the city that was zoned for one house for 10,000 square foot, lot or one house for 20,000 square foot, lot, which under new state law, we're going to have to be updated also to allow additional housing choices.

And that process is just getting queued up starting this summer.

Kol: [00:06:24] All right. So, in summary, for those who want the summary version, Portland is going to be allowing for up to four units on every residential lot. Meanwhile, Oregon at large is also going to be doing the same, at least in all large cities and Metro areas cities.

So that's awesome. That's great. I love it.  But the big question for me is Eli. Like this is incredibly progressive. It's never happened anywhere as far as I know in United States and or maybe it has kind of historically [00:07:00] happened in cities, but in recent years, recent decades, it has not. But the question to me is, is there actually a market for this type of housing, so sure. We're going to allow it. That's great. But is anybody going to build these things? Who's going to buy this stuff? What needs to happen legally or with financial products for there to actually be a market for middle housing?

Eli: [00:07:24] Well, it's a good question. I think that it will get used. I don't think it's going to be a quick change in what gets built in neighborhoods.

We can go back to Portland and other cities before there was zoning. All kinds of residential areas of cities were up for grabs. You could build an apartment building, you'd go up single family house, a fourplex, any of those were options. And mostly people built single family homes. And I expect that even under these rules, mostly people build single family homes, but back in the day before zoning people also built duplexes, triplexes, fourplexes, courtyard plexes, and they mix them in and I think you'll see the same thing today. So, it means that in our [00:08:00] neighborhoods what are the housing types we're going to see? I'm guessing that you'll see people doing cute little cottage clusters.

People like, especially on the West coast, they like single family detached structures. They don't like sharing walls, at least not yet. I grew up in Washington, DC, so I'm used to it in so many other expatriates, but historic Oregonians, like their own four walls. So, you'll see that you'll see townhomes get built.

If you've got one close in lot in Portland, you'll probably see, instead of being one house, maybe you'll see three or four narrow townhomes sold, likely as condominiums. And that'll require a little bit of a climbing of a learning curve for the home builders. But they're already doing it, frankly.

And I think that that will, that will continue. And I think the affordable housing non-profits many of them own scattered sites, single family homes, all over the city. And they've been looking to do something a little bit more with their property, and this will give them an extra bonus density to be able to build smaller, affordable homes in some close, in really fancy neighborhoods.

Kol: [00:08:54] Although I don't think you mentioned this as what you thought a realistic or a common typology would [00:09:00] be, but let's talk about triplexes and fourplexes.

Eli: [00:09:02] I think the way that Portland's rolling out the residential infill project, it really does a great job for corner triplexes or fourplexes, especially because you have lots of street frontage. You can have a 50 by a 100-foot lot. You can have four townhomes all facing a hundred-foot side of it with narrow backyards. It's a great housing type. And we already see some corner duplexes both this way, but under current rules, but this will expand the options. And I think it's, I think it's incredible. that Portland has come this long without having much townhouse development. It's not just good for smaller homes, but attached to homes of energy savings. And frankly, if you're trying to buy a house in Portland you're stuck. You want to buy a new house let's say, you're already priced out of anywhere within biking, distance of downtown by and large.

So, people are going further and further afield. This will allow some of those folks to be able to land closer into the neighborhoods that they really want to be in. And they're sharing a lot with a couple other people, but people will definitely make that compromise. So, I think that there is a market for some attached townhomes for sale in Portland. And also, people will take their existing [00:10:00] houses, maybe then, you know, an 80-year-old house. And they will not only do a detached ADU in the back, but they'll do a basement in ADU as well. And they'll get a little, a supplemental rental income and provide some rental options in the close in neighborhoods too.

Kol: [00:10:14] I think actually one of the sleeper elements of the code that I do see happening in a big way is going to be the provision that it will allow for two ADUs within a single detached accessory structure. I think from a homeowner's point of view that's going to be a really kind of profitable good housing typology to add that doesn't require that they tear down the primary house. And it'll probably add, you know, 50% to 75%, more than a single detached accessory dwelling cost, but you'd be able to effectively double the rent.

Eli: [00:10:47] Yeah, no, I think that having a shared structured wall decreases the skin to volume of a house which decreases the operating costs.

And I think that rentals--- If you're trying to rent out a triplex absentee, [00:11:00] it's kind of hard to manage because you have to deal with all the shared areas and yards, but for owner-occupied rentals, we rent out two units. It works really nicely because the person that lives on site and take care of the grounds without hiring a company to do it, it works pretty well.

Kol: [00:11:14] So you alluded to one way in which this type of housing could be purchased, which is condoized units. And I'm wondering if you could talk a little bit about that more. So, condoization is something that you have experience with for ADUs in the past. And I want you to kind of, if you could articulate what some of the drawbacks of condoization are and what can be done about it in terms of legislation.

Eli: [00:11:40] Yeah. Well, maybe I should describe for a second how condos work for this. Condoization is really common in like a 40 unit building where you have, instead of having one person own the whole building and rent out the units, you divided it up into little volumes of air. So each person owns their own volume of air and they can get separate financing [00:12:00] for that volume of air through a mortgage secured by that condo unit.

That same model works in the single-family setting where you have a single-family house, and then maybe you build a detached ADU and maybe on the lot next to it. You have another house with a detached ADU and you can submit it to the condominium regime-- that's a jargon way of saying, but basically you divided it up.

So, the person who wants the house, owns that volume for the house. So, someone owns that ADU owns that volume. Someone owns the other ADU that volume and the other house, and then the common areas that the ground in between them was all on collectively or is divided into private yard areas. So that's what condominium means.

It makes no difference. The actual built structure is identical, whether it's owned as a house with an ADP behind it rented out, or it's set up as condominium. But the condominium provides the flexibility to finance it differently. It means that if you have a house and an ADU and a two-unit condo, the person who was the ADU can get their own independent financing.

There is mortgage not intertwined at all with the mortgage of the person who has the house. And that means that the [00:13:00] ADU behind it could be sold for a lot less money than any other house in the neighborhood. Cause it's probably a lot smaller than the other homes. I did one project where I had house and ADU. The ADU sold for a $120,000 and the house sold for about $360,000. This is 10 years ago. Now they resell for twice that, but in a neighborhood with $600,000 homes that ADU in the back is a third, the cost of a single-family home in that neighborhood. So, it provides a homeownership way of creating relative affordability and but it also gets some people antsy because what happens is someone buys a lot, scrapes the house off of it and builds four townhomes or three townhomes and sells them all as condos? People are going to be concerned about the house that got taken out to make that happen. And maybe condominium ownership increases the value too much.

My sense is that there are some places where that could be a concern. And I think that Vancouver, BC is a, is a city where they've already clamped down on condominium conversions because of that in the Bay area that's happened already. You can't just do a condominium association by, right. [00:14:00] There's a lottery process to make sure there's some rental housing preserved in the city. Most places aren't like that. So, I'm, I'm kind of a supportive of cities allowing. Condominium ownership in ADUs is not very common. I did it the first time in Portland, 10 years ago.

It's happened a few times since then. And actually, recently I saw 23 of them were being sold right now. And we're in the past six months. I know in Austin; Texas will be a market for that. Or a developer's been building houses and ADUs and selling them separately is still a pretty tiny piece of the market.

And I think it provides some flexibility to provide some first-time home buyer opportunities. I know that Habitat affiliates have looked at this for example, as one way to get more homes up than they otherwise would, but there's challenges. And this is where the home builders they're really squeamish about condominiums because when you do a condominium, you take on a 10-year liability period.

Whereas this is true in Oregon at least, it's not true everywhere this way. We could get sued by the homeowner association for construction defect. And if you build the exactly the same product, but sell it as a single-family home with the ADU rented in the back, then you've got one [00:15:00] year of warranty period.

So that liability exposure is something that really does get builders, antsy. Their subcontractors get worried about it because no one wants to get a phone call nine years after building a product that they've basically forgotten about that based on they have to write a big check to deal with an issue that arose later on.

So, there's some initiative in, in Oregon and in California to try and change those condo statutes. Because if you're ever going to see small condos get built in any scale there's going to need to make it a little bit closer to the way single family homes handled for liability reasons.

Kol: [00:15:32] And as a side note, I believe people in the chat box can correct me if I'm wrong, but in California, that condoizations not going to be allowed for ADUs at all, whereas it is allowed in Oregon.

Eli: [00:15:45] Yeah. I think that, I wish that California had given that latitude to the local jurisdiction rather than doing a state. And I think the state mandate does have an exception for affordable housing and some limited situations. But I kind of wished they'd left that as a local option.

Kol: [00:15:58] Yeah. And I’ve [00:16:00] expressed to you in the past, I have mixed feelings about condoization with ADUs, but in general, I think all the points that you've made are, are correct. And in the big picture, it's probably a good thing in terms of providing more affordable housing stock.

Eli: [00:16:13] And for anyone out there worried about condos happening, it only happens in very expensive housing markets. So, if you're in a housing market where you're not seeing condos at all. It's not going to happen with ADUs. It's something that only in expensive neighborhoods.

Kol: [00:16:24] So as we start to consider middle housing, what are some middle housing, meaning triplexes, fourplexes, primarily what are some tiered sizing policy considerations? So Just to frame this context, this whole middle housing phenomena is kind of starting now and we're seeing, you know, we're seeing this happen now in Portland and Oregon. And there's a lot of conversations about this in California. Nothing's really kind of passed into law there. And similar conversations are occurring in Washington and Vancouver, BC. And we'll be talking about those more this week in [00:17:00] Portland the city that's been working on this kind of initiative for quite a while now, few years, Portland has decided that the tradeoff is that as you build more additional units, your collective habitable square footage is ratcheted down. And I'll maybe let you clarify that a little bit Eli, so people understand what Portland has done, but also, I wanted to see whether it should apply in other jurisdictions that are considering middle housing.

Eli: [00:17:27] Well, Portland, this is part of the big deal Portland made. And the strategy Portland took is that if you have a 5,000 square foot, lot 50 by a 100, which is pretty typical here, then you can build a house that is 2,500 square feet. That's like a floor area, ratio of 0.5. That's geeking out, but that's basically regulated how much floor area you can have in that house.

If you go to a duplex or house, plus an ADU, you can get 3000 square feet to play with. So maybe it's two 1500 square foot units and a duplex or a house plus an ADU. If you go to three units, then [00:18:00] that pops up the threshold once again to 3,500 square feet. If you go to four units, you're still at 3,500 square feet, because at some point we decided you just can't go too big in the city on the, on a 5,000 square foot loft. And the exception is if you do affordable housing, then you get a density bonus above 3,500 square feet. So that's the way we're playing it out here. And the reason is because from a policy perspective, we want more people housed in these great neighborhoods and we wanted to incentivize putting more than one house on the lot.

If we just had the same size cap regardless of home size, then you probably would end up seeing just single-family homes, massing out the footprint. We wanted to give some incentive for someone to go build an ADU or duplex or triplex. In terms of the market, I think that four is going to be a sweet spot because financing from Fannie Mae, Freddie Mac, FHA, really is uniquely wonderful when you go one, two, three or four units, each one of those is considered a house. So, you've got this development model that you see probably more often on the East coast than out here where someone builds up a threeplex or a fourplex and moves into it. [00:19:00] Rents out the other units till it's stabilized. Then they go do it again, you know, to stay there for two years. And, and it works well for owner-occupied financing, great terms. Once you get the five units or more there's financing for apartments, but 5-20 units is kind of a weak spot. So, I think you'll see the existing financing works pretty well for fourplexes.

And I think that'll be a natural housing type. And if the city implements the policy well, they'll make sure that that fourplex fits in, they'll make sure that it's not, not gargantuan compared to every other house on the street. And I think Portland's done a pretty good job of that.

Kol: [00:19:31] Do you think other cities should consider a tiered size strategy when considering middle housing?

Eli: [00:19:40] I think that's ideal. The pushback that the cities will get is that plan reviewers aren't used to looking at floor area ratio for single family zones. So even though I think that's the best way to do it, that that relies on a pretty sophisticated building review department in your city and if you don't have that, then the other approach is just to say, well, whatever size you can build a [00:20:00] single family house, you can build the same. You can build two, three or four units in the same envelope, meaning the height, the setbacks, the yard setback and not try and measure the square footage.

But I think the ideal thing is to measure the square footage of the home, both for incentivizing small plexes and also down the road, tiering system development charges or impact fees based on how big the house is. So, there's some other reasons to measure house size.

Kol: [00:20:25] What other emerging trends in zoning or financing are intriguing you these days?

Eli: [00:20:31] Good question. You know, I'm excited seeing all the jurisdictions experimenting with loan products for ADUs. And I’m sure you're gonna talk about that with other folks who've been tracking it as well. But especially community nonprofits in CDFIs, which are community development, financial institutions, or like non-profit lenders are really getting creative to try and make the financing more available to owner builders.

 Let's see, zoning trends, you know, what's interesting to me is seeing the we started off Kol, both of us really operating at the city level of Portland just looking at our zoning [00:21:00] reforms and then Metro our regional government with 18 jurisdictions or something like that. They got interested and through some advocacy we did, we gave technical assistance, to all these other jurisdictions. And suddenly you start seeing ADU codes pop up in other parts of the region. And now this whole State of Oregon, it's not statewide and state mandates are coming out, not just Oregon, but Washington and California, Vermont already had one. There's a few other States that are doing at the state level. And so, I'm seeing more action right now with a regional level. So, I've been out to Chicago, that region does a lot of activity there, the Denver region we're doing some work right now in Des Moines. We were in Nebraska last year. This is some of this with AARP, which has taken a big interest because it's perfect housing for their members.

And the Massachusetts around Boston, there's a cluster there. Magic CC. These regional, a lot of regions have planning associations. Their whole job is to help the local municipalities update their codes with smart best practices. And increasingly they're getting interested in expanding housing options to neighborhoods.

And so, you're seeing a lot of technical assistance percolate out [00:22:00] all over the country so that's a neat trend for me to see is how a zoning reform that pops up in a few little places in the country can start spreading all over.

Kol: [00:22:08] Indeed. So, since you mentioned the AARP work, let's talk about that for a second. So, tell us about the AARP technical assistance team and how people potentially on this call who are interested in bringing technical assistance from you or from me, or from a colleague Elizabeth can potentially apply for that subsidize technical assistance.

Eli: [00:22:29] Yeah. So, AARP is a, it's a massive organization. Many of the parts don't speak to each other that well. But within it, there's a group called the livable communities initiative led by Danielle Arigoni and they are really entrepreneurial and they've got, I think over 500 local chapters at this point, each focus on making their community more livable for people who were getting to be older in life.

And they really taken on ADUs with gusto. I mean, they worked with me to write [00:23:00] the ABCs of ADU, which is a free flyer. Anyone can get that for free. Just go to the AARP website. It's 15 pages, it's short readable and one page of it has a code guide in it, basically. They've also put out some other publications to support this.

And it's about to be in a national bulletin which of the big publication they do. And the other thing they had done is provide free technical assistance to communities around the country who apply to get help with things, to made their community more livable. So Better Block has worked on this Locus, Opticos, some of the national consultants that worked with this, but also one of the groups is Orange Splot, my company teaming up with Kol and Elizabeth. And so, we've provided assistance in Vermont, Nebraska, Chicago. We're working with Florida this year and cities through the AARP chapter can apply to the national group happens once a year and they can get an 8- or 24-hour assistance package, which means getting someone into a site visit or remote assistance to help them get over whatever hump they have to try and make this housing option more available.

And it's fun for us. We get to see what's happening around the country and we can share our [00:24:00] experience and help launch ADUs in places where we don't live. So, it's a great program and you can go to your local state office. They'll know about it.

Kol: [00:24:08] Thanks. So, you also touched on something that you and I have been heavily involved with for almost a decade now, which was the space efficient housing work group initially, which was hosted by Oregon DEQ, and then later that transitioned to something called the Build Small Coalition, the BSC for short, and that's hosted by Metro, which is the regional governmental body in Oregon that works with the 28 jurisdictions around the Portland Metro area. So, can you just kind of talk about this coalition for the benefit of attendees on this webinar, because I have, I now kind of classify a coalition of that sort as a best practice for jurisdictions who are trying to do work on increasing housing supply specifically with ADUs.

Can you just talk about the, the role that that group has played over the decade and what your thoughts are about that?

[00:25:00] Eli: [00:24:59] Yeah, I think you're absolutely right. It's the best practice. And it takes a hosting capacity. It started off really, I in my living room, tiny house society, informal working group out of green building folks who were frustrated by the LEED McMansions being built.

And we knew that is better environmentally built, small. But importantly, our Department of Environmental Quality picked up the facilitation, Jordan Palmeri and stewarded it for, I don't know, over five years, probably longer than longer than that. And it was really an informal collective of volunteers, who cared a lot about changing housing practices.

We're pretty connected designers, architects, planners we're involved, entrepreneurs. And so many of the changes are local to be made. So, either changing city level zoning rules or state level energy rules. And some things, not regulatory at all, like creating events, like it Built Small Live Large Summit that we've been throwing every couple of years came out of that group.

Also, guidelines for heating system selection for your ADUs, lots of little, just nuts and bolts thing, financing options, that are all quite local. And I can see this as [00:26:00] having a role in a lot of different parts of the country. Chicago has got a great group of folks who were already really doing this kind of work informally.

The convening organization can shift. In our case, DEQ started now our Metro regional government convenes it. In other jurisdictions, it might be something totally different. It could be a, a ULI chapter or a CNU chapter, or it could be a local government affordable housing working group. There's lots of ways it can be convened, but there's volunteers we find, I know, I'm sure you find this too Kol, everywhere you go. There's early adopters. There's people who are enthusiastic, who are willing to put in, you know, they figured out how to build an ADU on their property, or they're trying to do the homework and they're willing to volunteer some time to help make it easier for the next person. And those are the folks who you want to tap both to help plan and also to show up and testify when you do need to make the changes to the code to make it work better.

Kol: [00:26:44] Awesome. So, I'm going to transition to one final question for you before we move into kind of the questions from the audience. So, I think you are particularly prone towards investing or putting your money where your mouth is on projects that are [00:27:00] risky by conventional standards, meaning projects that aren't proven models.

And I, you know, it's very inspirational for a lot of people who are trying to do innovative housing developments, whether it's cottage clusters, or tiny house on wheels or other stuff. So, what's your mentality about undertaking these potentially financially risky property developments that you do?

Eli: [00:27:22] Well, I am a risk taker, I guess, I didn't expect I would be. I think it probably helps that I worked in the nonprofit sector for over 10 years first. So, I got used to a regular paycheck that wasn't very large. So now that's sort of my benchmark. So, although I did make a fine living as a developer, other developers with some of our skillsets could make a lot more than I do.

So, I don't have, I'm not I guess I have enough. And, and I'm okay going that way. Cause I like to do stuff I care about. And I found that as a developer, you really can you have to have some appetite for risk, but you also have to realize that if you just make not quite as much as somebody else on the same property, you can have much broader latitude to do something that expresses your values.

And [00:28:00] so I love doing co-housing communities, cottage, clusters, I like to experiment. And, and if I just knocked down my profit expectations, I can do that. And so, I think a lot of people would like to do that as well. It takes learning the skillset and I've got plenty of hard knocks this year from that.

I won't try and do that on this call. But I I'm a big supporter of getting small developers to try it out, start small. Don't be as insane as the way I do it, where every project is a different model. I somewhat like a developer with ADD, if I do it once and it works well and I'm happy for others to copy it, but I might not never do it again.

That's not really a smart business model. And then also being involved, at least it gives them a little more time to do the policy side. Cause I'm trying to figure out what kind of impact that you have. And part of it is doing nice projects that people say, Oh yeah, I'd like to see one of those in my neighborhood.

And the other part is changing the rules for everybody. And that's important too. So, I'm glad people are interested in changing the rules. Put your, put your time in for that too, because as much as I've done development, I built like 75 homes or something like that. That's a, no, some builders build that many in one year.

A lot of the impact we can have a change in the rules that everyone works by.

[00:29:00] Kol: [00:29:01] Good message. And so, what people should take away from that is if you don't care about making money, just do, what do what Eli does, it’s awesome. Now, but seriously.

You have to be willing to risk a lot of money,

Yeah exactly. Yeah. Not only do you get to spend a lot of money and potentially not make a lot. But it's also really risky, so what's there to lose?

Kelcy King: [00:29:51] What are your thoughts regarding the use of federal funds, such as the community development block grants to help homeowners finance construction of an ADU?

[00:30:00] Eli: [00:30:00] Okay, well, I'll try not to delve back to my affordable housing days too much, but there are federal programs. CDBG is community development block grant, and they're also home funds that are available throughout the country by local jurisdictions to support affordable housing goals in their communities. And those affordable housing money tends to go either towards multifamily projects, like 40 plus units, cash rate and stuff like that.

That's not the kind of products that are going to work for these infill types. However, most communities have some project down payment assistance or community land trusts, or other ways to subsidize first time home buyers to get into a house that they can afford. And those subsidy programs, including home and CDBG, and there's some others as well who work really well with some of these infill housing models.

So, they could let someone who maybe be couldn't afford to buy. Maybe you're building a four-plex on a lot. That would have been a single-family house. Each one of those homes, maybe you need $50,000 to cover the gap from the market value is what a low-income school teacher say could afford to purchase that $50,000 [00:31:00] might be able to come from home funds or CDBG to make that home affordable to someone, not just for the first buyer, but if it's with a land trust in perpetuity,

Kelcy: [00:31:08] How do you see this being possible in the federal funds being used in exchange to homeowners in exchange for affordable rent? 

Eli: [00:31:16] There are definitely programs that help reduce people's rent. Let's see, boy, this, the city, this country so varied on this. If, if your single-family scale projects, whether it's one, two or three units, don't oftentimes work for long-term rental properties that the management costs can be high compared to having a property manager operate it. So except for pretty small communities usually rental housing funds go towards larger multi-family developments. There can be niche situations where you have single family rentals with public subsidy. But they're kind of going out it's less common than it was in the past.

So more often it's single-family home ownership, single family affordability is going to be home ownership style rather than the rental style.

Kelcy: [00:31:56] And then two into condoization. Isha asked, [00:32:00] "What do you need to think about for a condo conversion? Is that something that you initiate before the building process after it's built? When can that happen?"

Eli: [00:32:08] You can do it at any time. Really. And some people I know in Portland had built a house and have an ADU as a rental associated with the house. And they know that when they eventually want to sell the property, they're not sure whether they'll sell it as just the house or the Navy as a rental or the condominiumize it or as itself, sell it separately.

That's a decision you can do down the road. If some people would go into a project knowing specifically that they are going to sell them separately. And then you can do the condominium process in parallel with the construction process, because while you're building the buildings, once it's framed up and you can actually see it there and survey it, then you do a survey.

You literally make a map of the property and define a three-dimensional volume of air.  This can be the condominium unit, then there's some, there's some work involved there. You have to work with an attorney, a surveyor --in Portland it used to be 20,000 bucks was sort of like the rough number to go through that process so that you could sell them separately.

So, it takes getting some local experts who've done it, [00:33:00] but it really can happen while you're physically building the structure so that when it's completed, you're all ready to sell them separately.

Kelcy: [00:33:08] Thank you. And can you speak a little bit to the shared space? Like the yard and the,

Eli: [00:33:16] Yeah. And for those interested in condos, I did a post a little while ago on AccessoryDwellings.org, which goes into pretty good detail on how to, how to think about condos as an ownership style.

But it's a really flexible style of ownership. In terms of common areas, you can say you've got a lot with two different structures on it. You can make it so that all the grass, all the landscaped area between the homes is all common areas, or you can make it so that you've got a fence between the two homes. And on one side of the fence, all the land goes with one home. The other side of the fence on land goes with the other home. So, there's no common space really at all, except for that shared fence. Or anything in between. I think the more common idea is to have a small, shared small private yard --maybe some common area for a Grove of trees or, or some common shared space, but it's really mutable.

It can [00:34:00] be designed as, as someone wants, whatever makes sense.  One really quick item related to associations. That Kol didn't pin me on, but homeowner associations are common in new development areas and a lot of times they have rules saying you can't do accessory dwelling units in the HOA.

I'm not a big issue in the city, but in suburban areas, almost every home is within a HOA. And I should say Oregon and California have both said HOAs can’t do that, going forward-- is one way to allow these middle housing types to grow. So that wasn't a question I asked, but I wanted to toss it in there.

Kol: [00:34:31]. Eli, you had talked about the construction defect legislation.  Is there any updates you could share that you know about that particular piece of legislation?

Eli: [00:34:41] I think that it was proposed for this past session and when our legislature got shut down, because one party left the building that got dropped on the floor.

So, I don't know whether it was likely to pass anyway, but there's for several legislative sessions, there've been attempts to try and decrease the liability period from 10 years down to something shorter. [00:35:00] And it hasn't succeeded yet.

 Kelcy: [00:35:01] This question is from Christopher Seymour with condoization, how does it relate to the deed ownership? So, if one owner wants to sell, does the entire property convey at the same address or do you sale as two separate buildings?

Eli: [00:35:14] It's all separately. So, the separate deed for each property. Yep.  I mean, there's an association, you have to maintain with some common expenses, but people can sell independently from one another.  At the initiation of the condominium there is a time where you have to sell one home and then pay down whatever mortgage is on the property and with a partial lease and then sell the other home and pay off the rest of the mortgage.

So there is a little bit of a dance to do at the initial sale. So, I'm not going to get into that though on a little podcast.

 Kelcy: [00:35:38] This question is from Brooks Gibbs and he is in Utah and ADUs are becoming a new building alternative there. So, he wants to know what suggestions do you have to build awareness in communities at the homeowner level?

Eli: [00:35:50] Well, I'll start with this, but Kol will definitely piggyback on.  A lot of this is not regulation. It's not a regulatory thing we can do.  I met Kol when I led a tiny house, [00:36:00] a tour of tiny homes in ADUs, and he jumped on it with a hundred people on their bicycles, just seeing them in Portland.

They're discreet by nature. So, people, if they don't see them, they don't know they exist and don't get inspired to make their own. So, doing a tour is great, whether they're legal or not, who cares, we just get people into them, gets people's gears turning. Also getting media stories about them. Not media stories about NIMBYs versus YIMBYs. Media stories about this is why I built the ADU and it works for my family and my mother-in-law can stay there and telling the story behind them is critical.

That's one of the reasons we started this website, AccessoryDwellings.org is to share the stories behind real built ADUs. And then part of it is communicating with real estate agents. They're the ones at the point of sale for homes, as people are trying to dream about what they might do with their property once they own it.

So, they're the ones who always need continuing education credits so they can get that done at the same time that they're learning about ADUs, and providing their clients with information about, "Hey, if you get this house in lot, you could actually build a granny flat behind your house. Pretty cool."

And if you're selling a house, [00:37:00] sell it as bragging rights. So, you could actually a separate unit if you want to. And then lastly, something I'll just hand it over to Kol is that having a local expert who makes a little cottage industry about coaching people through the process is, is incredibly important. Because ADU's are built as Kol pointed out many times by amateurs, but probably the only housing type in the United States built mostly by amateurs, who need people to help them along the way there's enthusiasm. But they need some coaching and being able to have short one-on-one sessions or weekend trainings gets people high up enough the learning curve so that they can take the rest of the project themselves.

Get that architect involved, get the contractor involved and actually make it happen. You want to piggyback on that, Kol? 

Kol: [00:37:38] Yeah. You forgot the biggest, most important tip of all you, I would just buy this book.    So, I'd say of all the things you just rattled off Eli, the one I think that is most applicable and most broadly useful, and I see the need for this everywhere really is what you said regarding local media stories that are just first-person narratives in [00:38:00] local outlets, whether it's radio, TV, or newspaper that cover the life-changing story of somebody having built near an ADU and how, why they did it. And those stories are really powerful. And you can read those kinds of stories on AccessoryDwellings.org. But if you want to get that message infiltrated into the broader market, that is the way that you start to turn ADUs into something that's threatening into something that, "Oh my God, I want one of those" because I also have a mom that's aging, or I also want to have retirement income that doesn't come solely from my job that I may or may not have right now. So, I think, I think those first-person narratives are really important and they also help kind of dispel that the myth that people have around ADUs being some kind of boogeyman developer housing type. That's going to increase parking problems in my neighborhood and cause the downfall of my pristine single family, residential zone setting.  I'm not talking [00:39:00] New York times and talking like your local Tribune newspaper.

Get a reporter on the line and say, "Hey, I know somebody just built an ADU. Would you be interested in covering a story about it? They just build it from their parents." And if you can somehow tie it into a bigger story, that's great. From a reporter's point of view, but that, that kind of normalization  is a really powerful mechanism to first-person help raise awareness and, and help kind of create a cool factor or a factor that would help inspire other people to build them. If they're not gonna actually get access to seeing an ADU itself, because there isn't enough ADUs to see, to merit an ADU tour.

Eli: [00:39:37] Yeah. And don't forget about TV. I'm not, I don't even have a TV, but whenever I've been on TV talking about ADU, I find out everyone I know who's seen that show.

You've already got the advantage. HGTV, tiny homes. People are already saturated with tiny home enthusiasm on TV. But if they see it happening in their local community, that'll be important. And the last thing I'll say on that is get the history. I mean, almost every city in this country has some [00:40:00] history of ADU.

They just call it by different names. So, coach housing in Chicago, casitas in some Southern cities bungalows, granny flats, you know, there's different names for them everywhere. And if you've got a history in your community of these already been there, just say, you're re legalizing, you know, you're bringing back something that's been there. you know, going back 80 years. That seems to get traction too.

Kol: [00:40:21] Kelsey let's take one more question. And then we'll wrap up today's show

Kelcy: [00:40:28] What innovations are you seeing in the market to lower costs to build ADUs as affordable housing solutions?

Eli: [00:40:35] Well, there's some great initiatives going on around the country to try and bring down the cost of ADUs, because one of the challenges is that right now, they're almost always built with cash or home equity lines of credit, which means you have to be pretty affluent to be able to build one.

And there's a lot of groups trying to bring that cost down.  There's a few companies that are doing modular versions of ADUs.  Wolf Industries is one, Dweller is another one. And, frankly, none of them have done that many of them. I think we're at a dozen or [00:41:00] less, I think for any group. So, people are working hard to get modular housing into the ADU world and it hasn't really launched too much yet probably because mostly the people who can afford to do them.

If you can write a check for a hundred thousand bucks for somebody to be in your backyard, you might have some pretty strong opinions about what that's going to look like. And people start tiptoeing towards more and more customization. Once they realize what it's going to cost. I think though that there's great opportunities there.

And especially as affordable housing nonprofits get into building ADUs, they'll start coming up some very simple designs. The person, the contractor in Portland has been more ADUs than anybody else build some pretty simple, absolutely decent good-looking designs of ADUs. And I think that you'll see that’s the future I see, I think they still might be stick-built, but they won't be like the, the fancy violins of ADUs that, that    show up on the tours.

Interview Questions and conversation topics

What’s happening now in Portland and in Oregon at large with changes in residential zoning standards?

Who is going to buy this? What needs to happen next legally, or with financial products to allow for there to be a market for middle housing?

As we consider middle housing, what are some tiered size policy considerations?

What are some other emerging trends in zoning or financing?

Roles that a coalition can play in building a housing movement

Technical assistance for ADU policy

What’s your mentality for undertaking potentially financial risk?

ADU condoization

Kol: Hello! I'm Kol Peterson based out of Portland, Oregon. I'm author of backdoor revolution and host of the ADU hour, a podcast where we probe deep into ADUs and other small alternative infill housing, expansive and deep thinking about small infill housing is our jam.

Kelcy: I'm Kelsey King and a credited ADU specialist in realtor, interested in creative solutions to home ownership. I specialize in supporting homeowners to purchase properties with ADUs or ADU potential for a variety of different lifestyles, including multi-generational living co purchasing as a strategy to enter the market for the first time and for rental income.

Kol interviews experts in the ADU space. And then we take some questions from our live audience. Guests include prolific ADU builders, policymakers, architects, lenders, researchers, academics, appraisers, property managers, and more. [00:01:00]

Kol: We get into the weeds on all of these topics and explore the edge of what is coming next with ADU trends, including middle housing policy and mobile dwellings. We cover topics from research that informs large-scale policies, valuation of ADU permitting and development costs to more obscure topics like ADU site planning software..

Kelcy: This podcast series consists of episodes that are 30 to 50 minutes long and will be released weekly. We hope that you'll join us for this limited series and that you'll be able to put some of the things we covered to practice in your own community.