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Fall 2019 – Workshop #3: Building Capital + Partnerships for ADUs

Our third workshop of the season was basically a cracked fire hydrant of knowledge thanks to the generous contributions of not one, but two guest speakers. This was compounded by the POV (point of view) factor - both of this week’s speakers presented on strategies to address housing shortages, but from notably contrasting approaches.

Season Theme: Accessory Dwelling Units

Workshop Focus: Building Capital + Partnerships

Elizabeth Timme, Co-Founder and Co-Executive Director of LA-Más, beamed in via skype to run us through a crash course of her organization’s work on the ADU frontier. LA-Más is an urban design non-profit in Los Angeles that has garnered something like celebrity status at City Open Workshops, especially when it comes to ADU policy and programs geared toward equitable housing. So the Skype session was trés cool. Timme set the stage with a brief overview of the housing landscape in Los Angeles, where a drastic affordable housing shortage is shaped in part by low density, single-family zoned lots. She then shared with us three ADU-related projects aimed at addressing the housing crisis: 1) County of LA ADU Pilot Program, which is experimenting with a forgivable $75,000 construction loan to homeowners in exchange for housing people transitioning out of homelessness for a minimum of two years; 2) City ADU Pilot Project, which demonstrated the feasibility for the average homeowner to build an ADU in their backyard; and 3) The Backyard Homes Project, “a ‘one-stop-shop’ incentive program” for homeowners willing to rent their ADU as Section 8 housing for at least five years.

The long and the short of her primer was that developing a pathway for homeowners to provide affordable housing via ADUs is complicated and requires a complex network of partnerships. In the Backyard Homes Project, LA-Más is responsible for program management, design and permitting; Restore Neighborhoods (RNLA) handles construction; financing is by Self-Help Federal Credit Union with Genesis LA (when LA-Más started this work, there was no existing financial product to fit the bill), LA Family Housing and St Joseph Center offer tenant matching and support; Housing Rights Center offers landlord training; and Housing Authority of the City of Los Angeles manages the Section 8 vouchers, all in addition to program funding from LISC LA and Wells Fargo. And while all this is a remarkable accomplishment, there are only 24 homeowners actively acquiring financing through this program.

The second speaker, John Oharenko, came to us from Real Estate Capital Investors, which focuses on expanding workforce rental housing stock in Chicagoland. In contrast to Elizabeth Timme, who framed LA-Más’ role in community development as community partner/facilitator/policy advocate, Oharenko took the position of socially responsible capitalist with a vested interest in “Class C” housing. (Per John, anything new is Class A, where construction costs typically hover around $400,000/unit; Class B consists of older rehabbed/refurbished homes, and the rest of maintained housing stock is likely Class C, no fancy amenities or high-end appliances but does the trick.)

Oharenko went on to explain some of the factors he takes into account when determining whether or not to invest in developing a property for workforce housing. Location, he noted, is an important consideration for workforce housing, as future users need to be able to get to and from their place of work with ease. Close to downtown Chicago, it is nearly impossible to find housing at reasonable rent rates unless you are willing to “bundle up” (aka, live with roommates). To help demonstrate his point, he gave an example of a building he bought across from the Pink Line CTA terminal at 54th and Cermak. While the property does not have a Chicago address, it’s an easy commute to downtown via the pink line. The existing building consists of retail on the ground floor with twelve apartment units above. Real Estate Capital Investors applied for, and was granted, a variance to convert the ground floor retail to 6 additional apartment units.

In a nutshell, the financing lessons he shared with us from this case study are as follows: Real Estate Capital Investors looks for a minimum 7-8% return on investment, based on the risk they assume between rezoning, finding good tenants, and construction. Other investors need a 5% return in order to justify the risk of construction costs. Lending for the Cicero property came from Self Reliance Credit Union. There are “3 Cs” to credit underwriting: collateral, character, and capacity. When it comes to ADUs, financing can get a little tricky because there is no mechanism for segregating collateral. If the ADU project tanks, the entire property goes with it. There are a handful of options available for people willing to assume high levels of risk and/or jump through daunting bureaucratic hurdles but the long and the short of it is, there is a lot of room for creativity and innovation on the financing ADUs front!

Following the speakers, City Open Workshoppers broke out into small groups to tackle a worksheet designed to generate discussion around creative financing opportunities for ADU construction.

One group approached the issue from the perspective of the individual homeowner -

Scenario: Al lives on the first floor of a 3-flat in the South Shore community area. He’s got a garage in pretty good shape and about 800 sf of unfinished basement with a laundry hookup and utility closet. Al wants to convert the basement into a 2 bed,1 bath unit. At $50/sf renovation costs, he needs to come up with $40,000 to get the job done.

Another group married the agendas of a neighborhood or community organization who wants private units in their neighborhood (low to mid-income, cannot afford to build with cash), and some version of a city-based policy program.

Scenario: An intergenerational ADU pilot program targeting senior citizens who own property in the Chatham neighborhood and young adults aging out of the foster system who attend City College. The program would provide financial and technical assistance to seniors willing to convert a basement or attic into an ADU and renting it out at an affordable rate to a young person again out of the foster system.

The final group looked at developing ADUs from the perspective of a building owner.

Scenario: A landlord owns a property in Wicker Park on Milwaukee Avenue. She wants to convert an existing 1,400 sf garage into a 2 unit rental, approximately 700 sf per unit. The primary building on site is mixed use with ground floor retail and residences above.

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