Q & A with the SDCIA Panel #649

Norris Bruce

Bruce Norris is an active investor, hard money lender, and real estate educator with over 30 years experience. Bruce has been involved in over 2,000 real estate transactions as a buyer, seller, builder and money partner.

Norris Bruce
June 28, 2019

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This week’s radio show is unique in that we are covering an event Aaron recently spoke at with SDCIA. At this event, he spoke with different people on a panel of experts. This will close out our Featured on the panel were Catherine Blakespear, mayor of Encinitas, Greg Nickless, Senior Housing Analyst for the California Department of Housing and Community Development, Geoff Plagemann, planner of Encinitas, Brent Johnson, Collateral Risk for Home Street Bank, Michelle Rodriguez, hard money lender and member of the California Mortgage Association, John Arendsen with Crest Backyard Homes, and Jordan Marks, the taxpayers’ rights advocate for San Diego County.

Episode Highlights

What are HOAs and CCNRs, and should we be watching out for them?
What rules apply to ADUs as you get closer to the coast according to the California Coastal Commission?
Where should people start if they want to get involved with ADUs?
What is the city of Encinitas and other places doing to make the ADU process quicker and more efficient?
What is the status of 3D-printed homes here in California?
How would you handle the septic system in an ADU?
What are PACE loans, and are these becoming more common practice?

Episode Notes

Aaron began this segment by asking Greg about HOAs and CCNRs and if we need to watch out for them. Aaron has an HOA that is upside down that was built in the late 70s and has been horribly mismanaged with a lot of land on it. He wants to pitch building three to five houses, but he didn’t think about the ADU thing. Aaron asked where we would start that process if we own condos and want to build more. He asked if he would talk to the planning department. Greg said it’s an agreement between members, so you would have to change whatever your laws are. The city doesn’t really factor in since people come in all the time saying they want to build an ADU. They look at the property and ask if they allow it. Sometimes they never even met or even know what the bylaws are. Aaron would just have to convince the board, that’s all.

Aaron asked if there is a rush to do HOAS or CCNRs to lock them down. Greg said there’s one bill that was proposed to address that. It said changes in the future should not go retroactive with CCNRs. Essentially it is an agreement between private parties, and this law does not prevail or trump agreements between private parties when they sign on to the CCNRs.

Aaron next asked about the California Coastal Commission and what people should be aware of as they get closer to the coast. He asked if there are different rules that they can overlay on top of state law that would cause ADUs to be an issue. With the updated ADU law, the only thing that changed in that one section was a change of second units to ADUs. There was no change, power, or anything taken away from the Coastal Commission. The best thing to do is to call your district office for the Coastal Commission and ask where they are. A lot of the jurisdictions will have LCPs, and lot of them haven’t been updated yet. Some of them are updating, so it’s best to contact the commission. There’s a big ADU book in the department that gives a history of it and a lot of frequently asked questions. It gives the intent, and you really don’t want to get into law at the end just because it’s very cumbersome.

John Arendsen also has a book Aaron wanted everyone to know about. It’s a really simple read and talks about where to get started. Aaron asked him where he would you recommend they start. John’s answer pertains to site-built as well as manufactured. For anybody that’s interested and doesn’t really have a lot of understanding, he basically published a guide and based it on what he has to go through as a contractor and a manufactured home dealer when he is out on a site previewing it or trying to qualify it for an ADU. It’s on their web site www.crestbackyardhomes. com. On the right-hand side of every page, there is a little tab that says ADU Guide. There is a price for it, but it was waived just on the night of the event for anybody sitting in the room that wanted to take advantage of it. It’s an eight-step, twelve-page guide that will give you a step by step, blow by blow, detail by detailed description on how you go about adding an ADU to your property. It’s pretty comprehensive and 8 easy steps. Again, it’s at www.crestbackyardhomes.com, and on every page there’s an ADU Guide tab on the right. It’s highly recommended, and it’s really good.

John said they’re having a lot of success with that, and it has saved a lot of people a lot of money. It has cost anywhere from about five to five thousand dollars. Whether you hire a consultant, an architect, or a design building contractor, you’re going to spend money to get to the permit counter. You’re not going to go out on the job site, spend a lot of time surveying your property for free. They’re going to want to get paid a fee for service. If you go through this step by step and answer all those questions for yourself, some are pretty complicated. You may get to a point where you don’t want to do this anymore. That’s when you bring somebody in to help you finish it. If you do have the savvy to go through it step by step, you’re going to save yourself quite a bit of money.

Jordan Marks said the city of Encinitas has a guidebook that they produced as part of their Housing for Generations, so it has some of that similar information. It also gives props to other municipalities that they either researched while doing theirs or they actually worked with them throughout the process. The city of Santa Cruz has a great guidebook that is universal for anyone. Another is the county San Mateo. They have a really interesting guidebook as well.

Lenska just updated their ADU code. For example, ADUs have to share the same setbacks that primary residents have. That’s a big change and difference from other municipalities in the county. There are tax implications for unpermitted and coming out of the darkness. At the assessor’s office, they don’t care whether a structure was permitted or unpermitted, but the municipalities do. So you have to be careful when you are bringing it up to code. But what they care about is whether or not when the property was purchased whether the structure existed. If you had purchased a home and there was a back structure that you’re turning into an ADU, it’s considered part of the economic unit, whether it was permitted or not. They don’t look to charge additional taxes. But, if you bought a property, added a structure later on, and they didn’t know about it, if you bring it online they’ll go back as far as eight years on back taxes.

The good news is if you bought a property in 1950 and you added a building in 1951, they’ll assess it based on the time that it came online. They won’t go and say the structure today is worth $1 million, but they’ll say what it was worth when it was built. That will be the base year value and will have the same protections under Prop 13. But, they can’t go back as far as eight years for property taxes. Jordan said as the taxpayer rights advocate, he comes across this issue all the time where people get great advice from the government. They always make the mistake of getting that great advice and not getting it in writing. If you don’t have it in writing, it’s not worth anything. If the city or county doesn’t have in writing; if you’re at the counter, get it in writing and that will protect you. He just had somebody come up that night and tell him they were working on bringing something back online and were going to get these fees waived. When they spoke to him on the phone and they showed up, it was $14,000. He said if he didn’t have it in writing, Government Code generally says they have to honor what’s in writing. This was his number one piece of advice that night.

Aaron said if you’re doing rehabs and doing flips, always check with your local utility. If you’re going to be in there doing anything, replacing windows adding new appliances, and you’re for building an ADU, they may go ahead and extend some of those rebates into the ADU as well. When Aaron redid his house, even though it was built in 2005, he ended up getting over $4,000 back for some of the things that he did, things involving energy efficiency. A lot of cities are also having grants if you’re willing to take in a specific clientele in the ADU. This could include housing the homeless short term. You just never know what’s going to pop up. It could be veterans in need.

Some of the non-profits are getting very creative. Aaron had a conversation with a veterans group out of L.A., and this is all they’re doing. They’re even training former veterans to build these ADUs, like a work program, and they asked for funding from The Norris Group. Aaron’s advice was to stay plugged into the local communities. If you’re planning the buildings in a city that you don’t live in, it can get political, and you just need to know where to start.

The next part of the event was the Q and A. The first question was in regards to the aspects, not of how to, but about how fast we can get things done. So from the speed aspect, especially Encinitas or county, even though they have pre-approved plans, they still got a long process to get that stamp set. He asked what the county is doing to make this more efficient and quicker. This means 30 days. If you vetted a set of plans and the structure, architecture, and mechanics are great, he wondered why that can’t be stamped in 30 days.

Geoff, the planner for Encinitas, said the goal of the permit ready program was to have it approved in two weeks. They are so overwhelmed right now in the planning department as far as reviews go that for the permit ready ones are, they are looking at about four weeks right now. They’re close to that 30-day timeframe. For the other ADUs, because of the amount of work that’s going through the office, are definitely still in the four to six-month range. The questioner asked if they can expedite the process or offer a fee to do so. Geoff said a fee would be another discussion, but they’re certainly pushing for that. The goal is for two weeks.

Aaron asked if people could buy his plans from other cities, which he said they’ve been in discussions with other municipalities. They’re not necessarily buying their plans because the ones that they ended up getting through the RFP process are stamped and behind the counter. Those are for the city of Encinitas to come get. That’s not to say that someone couldn’t go download the plans and have somebody else look at them who will stamp them. There are all kinds of other legality out there. The plans are downloadable from the Web site and are public right. Encinitas paid the architect to have them behind the counter and have them available online. However, you’re still going to run into issues. Nobody from another municipality will be able to take those plans that are not stamped because the ones that are online are not stamped to another municipality without getting them run through some other approval process as far as a licensed structural engineer, architect, or other.

Another one of the speakers said he works with 18 jurisdictions across the county, both the cities as well as the county services. There is not a city or a county department that doesn’t want to do it faster or hasn’t had the will to do that. A lot of folks are watching the city of Encinitas and looking to see how that is playing out and seeing similar development of those plans. The city of San Diego thought it was a great idea. They’re a little bit more gun shy on the liability attached to some of the preplanned, but everybody’s trying to get there faster and better. It’s not for lack of will.

The next person to ask a question said she lives in La Mesa, and they just recently changed their ADU ordinance. She asked if anybody knew or had any information about what they should be aware of in terms of their new ordinances. They said La Mesa was looking at its Encinitas’s plans, and the council member and the staff member were looking at the Web site and saying they should just take theirs. They have as liberal an approach in terms of their desires. They allow 30 days rentals, and they allow no covered parking areas required for any single family house in La Mesa. Everyone that has a garage can be converted to an ADU, and they can have less than 30-day rentals to create additional income for that city. There’s a lot of income potential for the city of La Mesa.

The most notable portion about La Mesa’s ADU is it’s the only jurisdiction where the square footage of the ADU could be larger than the primary residence. Almost every other jurisdiction across San Diego is subscribed to the1200 square feet or 50% of the primary residence, which tends to be following the state rules. La Mesa is the only jurisdiction that allows you to go above that, so it’s gonna be really interesting to watch and see how that development plays out. In addition, that ADU exceeds the size and GLA of the primary dwelling. That does trigger some issues. So in terms of conventional mortgage lending, be aware of that. Private mortgage lenders probably wouldn’t have a problem with that. There are alternatives to conventional lending, you just need to find yourself a hard money or private mortgage lender.

Somebody else mentioned incentives for a special population, maybe seniors or affordable housing. The panel was asked to elaborate on that a little bit. Aaron said you’re going to have to plug into the nonprofit community. He is on the board of 211 of Riverside County. Housing has been on over 30% of the calls for the last three years. They also run a suicide hotline. Just plug into the nonprofit community and see what’s there because some of them are just doing some really interesting things, some city by city. Community Housing Works does a great job leading the downpayment assistance programs. They also have a great breakdown on their Web site of each jurisdiction’s incentive programs. So that includes downpayment assistance.

San Diego is trying to launch for the city incentive program for their officers, and you’re going to see military-specific programs. But if you want to get a good grasp of all 18 jurisdictions, they have the best layout and the best pre-accreditation programs. Fannie Mae actually has a program called Home Action where an accessory unit can be built and that income can be included in the income qualification process.

The person on the mic next asked about 3D printed homes, which she found incredibly exciting. Aaron said he hopes they will be able to announce it by the time I Survived Real Estate happens this year. But, the first one will end up in California, hopefully by the end of the year. It will probably be 282 square feet, and it will be interesting to watch.

The next person asked them what they would say about a city that has an ordinance that says the minimum rental time for an ADU is six months, but their regular rental time is 26 days. His understanding was that a city could be less restrictive, but not more restrictive. Aaron said as real estate investors, we’re just going to have to know that this is going to be regulated. The intent of this law is affordable housing; and as soon as you get into the vacation rental space, it’s going to be a hot mess. He thinks as real estate investors they should just take one for the team. It’s such a cool opportunity, and they should take it as that. He expects almost every city to outlaw short term rentals as part of this process.

We are also seeing a lot of the jurisdictions step away from owner-occupied. In March, the county of San Diego just stepped away from that. You don’t have to be owner-occupied, but you should check in with your jurisdiction. Aaron said if they do that, he’s fine as long as they’re non-owner occupied across the board. One of the new laws in assembly, SB13, would get rid of the owner occupancy requirement. Then you have cities that are coming on and saying you can’t rent the ADU to somebody separate from the primary. They’re still overlaying nonsense.

The next speaker thanked the panel for being there and told them how he has a home in Encinitas. The first thing he thinks about in doing an ADU is a septic issue. He has a septic tank and wanted to know more about it. Turns out, for septic you would just have to go to the County Health Department and determine whether or not your current system has the regulations. It’s the same rules, they just can be adding more bathrooms and bedrooms. The biggest problem coming up with ADUs and septic from the county is if you do have to expand your space, they are requiring additional safe space. The double set aside space that you have is causing an inhibition for folks to actually builder their ADUs. You want to be careful with the additional set aside space you need for the septics. In addition to the regulation, the fire departments actually have a lot of say as well as the fire authorities on the ADUs. When you’re checking in for your ADUs, make sure you’re stopping by your fire authority in whatever jurisdiction you’re in and making sure you’re complying with those rules. They do supersede the municipal jurisdictions and the county jurisdiction rules.

The next question was in regards to separate metering and separate addresses for ADUs. Geoff said for addressing, that can be determined by your municipality. For the addressing in the city of Encinitas, they just do Unit One and Unit Two. For the metering, they leave it up to the property owner. If you want to just tie into your main, then you can do that. But if you want to keep it separate, like if you have a renter, then you can go ahead and do a separate meter. She next asked what it would be if there is no municipal ordinance and we’re just going off of the state. As it turns out, the address rules are actually governed under fire rules. The fire rules allow you to get an address to be more specific in all jurisdictions. Whether you want to be a half or a full, you can work that out with your local fire authority. The county did require separate metering, but they just removed that restriction as of March of this year. That could be done by each local jurisdiction and their own particular rules.

Aaron asked if this changes any lending rules depending on what you separate. This is something Fannie and Freddie have both chimed in on recently. Multiple addresses and multiple meters, in fact, do not impact the conventional mortgage lending process. The people at the water authority said there are new tools out in the private sector to allow you to put those on the pipes without having to get a separate meter, which is very expensive. There are other ways of measuring water and usage. As ADUs become more prevalent, you’ll see those tools become more prevalent for investors.

Aaron said at the Consumer Electronics Show, there was a company called FLO. They monitor leaks, even the smallest drops. There’s one that has a specific plugin for landlords to where you can see all of your properties on one and see all the track leaks and things.

The next speaker from Los Angeles asked about the typical suburban home. When the home is across the whole entire front of the lot with a little setback and a garage in the front, where would you park if you converted the garage to an ADU? They said in some fashion, you are forcing the park into the street. Part of the original rule was that you had to have enough parking for what was there. It would seem if you were converting it, you would take away that park. The state law says if you’re converting a garage and you’re not expanding upon it, then you don’t have to replace it.

If you’re displacing the parking spaces that were in the garage per, state law alone, they need to be reconfigured someplace else in the lot. If you didn’t have spaces on either side of the house, but there was still enough between the front property line, the ride away line, and the front of the house to park there, that would suffice. You can never be required to replace a parking structure. Catherine said they made the envelope bigger by saying that the setbacks were smaller and changing things just for ADUs. However, it would depend on what your city’s done.

The next speaker asked John Arendsen about a 1,200 square foot manufactured home. He wondered what the gross vehicle weight or gross weight from Radko is for the trailer. John said it is about 20,000 pounds for a 600 square foot house. The hydraulic crane could conceptually lift over the home and drop it in the backyard. He next jokingly asked if Catherine is available to be the mayor of Los Angeles. They replied you can’t get her away from the beach.

The next speaker asked if Oceanside and Carlsbad are moving progressively in this area too. Vista definitely is, while Oceanside is believed to be also. Oceanside has the best animated video of the whole ADU process. Just go on their Web site and just punch in ADU. Another of the attendees lives in Ramona, and here there is a lot of land lots of unpermitted outbuildings everywhere. That would stop people from thinking they could put an ADU on their homes because they would be afraid of having to tear them down. She wondered what would happen if you had an ADU on your property and you have an old outbuilding on your property. To answer, the county is not going out and requiring folks to tear them down. But, if you bring them up to code, bringing them online, retrofitting a current structure, bringing it up to code, and you’re getting it permitted, you’re going to owe some back taxes potentially for that. But, the county does flyovers throughout the entire county of San Diego, so they see when structures are being added and when they are coming down. There is a desire for housing. Nobody’s opposing housing. They just want safe housing.

Aaron asked if they were going to leave that structure there and want to build an ADU. If you bring Code Enforcement out to your property, they’re going to look around and see what violations might be there. Someone once said that getting permitted is not necessarily a cost, but it’s a safety precaution for you and protection for somebody else who is looking into the work that was done on your property. There are different ways to look at it, but there’s going to be no hidden surprises. If you had something built after you bought the property and you bring it online, folks want to know when the taxes take place or when the assessment get placed on it. Once you get permitted, the city sends the permit at the county of San Diego, and then they work it. So if you upgraded a building and you did a permit because you’re bringing in a kitchen and you’re adding different items that require a permit, the county planning division will send that to the people in San Diego, and then they will come out and work it. Within six to eight months, they’ll get added to the property tax bill. So that’s the communication. If you do something that doesn’t require a permit, generally it doesn’t come across their desk as far as a tax assessor’s concerned. There are companies that will come out look at a property to help you go through that and get it permitted properly.

In California, we’re famous for dueling statutes. The next speaker on the mic heard that in 2020, you’re going to have to put solar on any new building permits. She wondered if this will affect ADUs. With timelines being a constraint. and if It’s taking four months to get a permit, are any homes that are in the process now have to have solar on the existing unit and the ADU? The California Energy Commission has a bulletin that they put out every once in a while, and they had in their bulletin from 2018 in the January to March edition, they covered ADUs and where they were going to need to be complying with the current code. It said if it’s attached to the existing dwelling or created within, it’s an addition. There are exemptions there. If it’s a brand new structure, it will need to comply with the energy code that’s in place at the time. Beyond that, it gets into a whole other set of rules, so everyone should contact the California Energy Commission on that. They have looked at ADUs, and they have addressed it.

She next asked if someone has a new permit starting in 2020, will you be required to have solar on that new a deal. Typically the way they handle something when a new law comes into effect is if it’s already been submitted and it’s in the permitting process, it doesn’t affect that permit. They wouldn’t go back and change something that has already been permitted. Once you’ve made that first submittal and the reviews are starting on it, you’re in the system and they’re not going to come back with any new laws on top of it. Get those solar rebates while they’re good.

Real estate broker Bill Roberts asked about the ADU plan Oceanside recently adopted. He was very interested in Oceanside, so he went there and looked at their plan. They have a coastal exemption where they do not allow ADUs. He wondered if that was legal. It depends on how much they would exclude for an extreme example. For example, if they excluded the city, that would be a prohibition. It all depends on what it is. To answer this question, they would probably have to work with the Coastal Commission also. It goes back a little bit to the minimum lot size. If the jurisdiction said 12,000 square foot minimum lot size but they didn’t have any lots less than 12,000 square feet, it would be a prohibition. It all depends what the size of the impact is for that condition. They are allowed by state law to designate areas where ADUs are allowed. The question is how far they go with that. The senators’ staffs have been very helpful in most cases by giving the leaders in San Diego some information.

Regarding the solar requirement, one of the guests wanted to know if the solar requirements were for new homes and not current existing homes in stock. They did confirm it is for new construction, and it will be required on new ADUs.

The next question was related to PACE loans. Something she is seeing in Los Angeles is a number of contractors are promoting zero down, no payments for 12 to 18 months on your ADU. They’re doing this through PACE loans. These don’t necessarily cover an ADU, but she’s hearing that the reps for some of the companies are actually approaching the contractors and saying if you itemize out all of the energy efficient things that you’re doing for your ADU, they can apply the loan toward that. She was curious if that is that common practice and legitimate. She wondered if PACE loans are only supposed to be for retrofitting or if they are also for new construction. Aaron said if it smells of energy efficiency, they’re going to get away with it. However, he and others on the panel do not like PACE loans.

A PACE loan is a lien that’s put on your property that shows up as a lien and has to be paid off. However, it attaches to your property taxes and it’s supposed to be used for things like replacing with an energy efficient roof, windows, insulation, solar. You might have gotten calls from folks that say they’ll ask you questions like whether or not you have solar or if you need energy efficient windows and software. It’s a more superior position than your first, so a lot of lenders don’t like it. If you’re trying to sell your property and there’s a PACE loan in place, the new lender, at least for the take out loan, may require that PACE loan to be paid off.

In Riverside, it goes by a different name of the HERO program. Otherwise, it stands for Property Assessed Clean Energy. It creates issues if you want to get a conventional mortgage loan of any type because oftentimes that does take superiority. It will also affect your ability to get a private money loan as well. There are several Wall Street Journal articles about PACE loans and the companies that run them. He recommended Googling them and reading about them before taking out a PACE loan. The PACE providers are coming back to jurisdictions like the county and asking for an expansion of the PACE product for ADUs. But, if you’re doing a retrofit of a garage, PACE loans have been used in those circumstances. Those do seem to fit within the jurisdiction’s allowance.

Aaron’s grandmother decided to get a roof on a 1400 square foot house, and the insulation on the roof ended up costing over $16,000. It was way out of line. Aaron thinks there has not been enough checks and balances, and the leaders have been terrible. They target seniors, and it’s a huge problem.

The last person to ask a question asked about rent control and if they have it in Encinitas and in San Diego or San Diego County. In Los Angeles, anything built prior to 1978 is subject to rent control. If you put an ADU on your property and get a C of O in 2019 or 2020 or anytime current, he wondered how this is being addressed. Is that unit subject to rent control? It seems it’s exempt from rent control because it’s 2019, but the primary structure is subject to rent control because it’s pre ’78. On top of that, how would the lenders address that? Now you have a lot of funk involved in this thing and a lot of people involved, and nobody’s really sure how to address this. Catherine said they do not have it. He wondered if there are any future projections for rent control. However, she said there is no political will for that in Encinitas.

However, you have to break it down. There is rent control throughout San Diego County and various jurisdictions. You mostly see it in mobile home parks and senior citizens. Santee has it, and you can look in other jurisdictions and find it. If you’re talking about the greater scale applied to everybody rent control, the housing crisis rules actually limit how much you can actually increase your rent percentage. Like the way that most people think about rent control, it was just on the ballot and was defeated in National City, which is the only jurisdiction that tried to have a companion legislation to the state legislature, which failed. As a general rule in the rent control across every piece of property, they don’t have that in San Diego County. However, in minor pockets, there are versions of rent control, especially with sensitive populations.

There is a bill that’s active right now in the state legislature for statewide rent control. They just bumped it up to 7% increase per year, but it’s only going to apply if the property owner, the landlord, owns ten properties or more. This means lots and lots of entities. It’s a bill, and it’s not law yet, but there is a real appetite for statewide rent control. Just because there isn’t any now doesn’t mean anybody who ever wants to become a landlord should breathe easy.

Typically, the mortgage lending function is the value the collateral is based on, the market reaction, how they perceive what the reaction is towards those rent controls. It will impact the value of that collateral for a mortgage lending decision. Aaron said for hard money, they’re just looking at the value of what the appraisal came back. It’s not about the income, so that would have that be up to the people in charge.

To end the time, one person said if you bring a tiny home on your property, make sure you register that with the DMV. It is not an improvement as far as the assessor’s office is concerned. Some cities are wrapping those into their plan. Riverside just did that, so you can do tiny homes as part of the ordinance in which they built it.

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.