Episode 16 - Kol Peterson, Understand the ADU Build Process

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Prefab Review

Hi, my name is Michael Frank, and this is the prefab pod presented by Prefab Review where we interview leading people and companies in the prefab housing industry. Today, we're actually taking a little break from interviewing prefab manufacturers to interview Kol Peterson, who is an expert in ADUs. To give a quick, probably insufficient biography of him, Kol is an expert in all things ADU. He writes for a lot of accessory dwelling related sites. I believe he's the owner of a tiny house hotel in Portland. He wrote Back-Door Revolution, a book all about accessory dwellings, and he has a course called The ADU Hour. Anyway, welcome, Kol.

Kol Peterson

Thanks. Thanks for having me, Michael.

Prefab Review

Kol I think from a lot of perspectives, I'd say progress, particularly regulatory process that's enabling more accessory dwellings just to be built is among the most exciting things we see on a day to day basis in sort of our little part of the world, which is really kind of just factory built housing, sort of full stop. With that being said, how did you get into this whole world of accessory dwellings?

Kol Peterson

Building one myself and, you know, realizing that it was incredibly challenging, difficult, and there was almost no information about how to do it. And so in the course of Building one in 2010, I documented the process on a blog, and that just kind of snowballed into a bunch of different things because there's so much stuff to do on a personal level to develop an ADU. But then on a policy level and then getting beyond policy and regulations, it gets way deeper. Still, the financing and appraisals and assessments and best practices for marketing and all the other stuff that gets into the weeds of every facet of humanity and social science and economics that you can imagine, just like any topic that you study deeply enough. So anyway, that's how it kind of started for me, I started by doing it myself, writing a blog about it, and then I started to teach a class for homeowners about it. And I've been teaching that class for like ten years now or so. And that just like snowballed into a lot of different things. And now all I do is ADU related education, advocacy, consulting, work full time. And I'm based out of Portland, Oregon.

Prefab Review

That's awesome. So your first accessory dwelling was that in your own personal house? That was in your backyard in Portland, I assume?

Kol Peterson

Yeah, that's right. Yeah. So that one was a detached ADU and I lived in it for like seven years and then I built my second ADU, which is like a basement conversion attached basement conversion. I'm living in that now and I'm about to build a third one, which is going to be a detached construction, kind of a high end ADU that I'll probably move into. I'm going to keep on pushing my own envelope in terms of you know, just to get experience with all the different facets of the stuff. So this next one, I'm going to try to ideally finance entirely, not pay any money out of pocket and try to do one where I use a design-build process. So I'm not involved with the construction at all just to see what it's like to play that role, which is more akin to the prefab space, I guess. Yeah, but the other two I've been very heavily involved in the design and the build portion of it and essentially playing a homeowner GC role.

Prefab Review

So in each of these I assume there's like a single family home and it sounds like the second one, you said, was it a junior ADU?

Kol Peterson

It's akin to a junior ADU but it's not. So junior ADU is a phenomenon that is really just parochial terminology. It's used within the state of California and that's not used anywhere else. So this is just an internal conversion ADU of a basement. So it's the ground floor of a 1973 split-Level house. And so it's a daylight basement conversion. So it's actually above grade, but it's on a slope. So one half is above grade, the other half is like quasi subterranean. And in the front portion of the house is where the kitchen/living room is. The back portion is where the bedrooms are. And yeah it's, it's a really cool unit. And you know, it's very similar to a duplex, but it's classified as an ADU for various reasons. And it was previously a garage, two car garage with one utility room and a little dinky bathroom. And they ripped everything out and started from the studs and did a gut rehab renovation of the lower level to turn it into a bona fide ADU.

Prefab Review

So before getting too deep into your projects, do you think you can just give like a quick minute or two on what defines ADU and how those definitions vary. Maybe I use the term junior ADU, which, as you said, is very California centric, but sort of how this stuff varies and varies based on geography?

Kol Peterson

Yeah, it does vary. And increasingly, as the ADU movement kind of picks up steam and with California legislation and now other legislation occurring in different states and jurisdictions, that the tried and true definition of an ADU is being put to the test because all of the kind of progressive stuff that's happening within ADU regulations is breaking out of the mold of what the quintessential definition of an ADU is. With that caveat aside, the definition that I use is an ADU is a secondary housing unit on a single family lot, which is kind of the conventional, traditional concept of the idea. But now you can no longer say it's just a secondary housing unit because in fact, in the entire state of California, you can have two ADUs. One as a Junior ADU, one as a standalone detached ADU. And that's also true in Seattle. That's also true in Vancouver, BC. That's also going to be true in Portland as of next summer.

Prefab Review

Minneapolis maybe? I'm not positive.

Kol Peterson

Minneapolis doesn't allow two ADUs. But then it's also not just on single family lots. You can also do it on commercially zoned lots if there's a single primary residential dwelling on it. So if you had a commercial piece of property with a residential house, you could build an ADU there. The reality is that would happen very rarely because most commercial lots won't have a primary residential home on it. But nonetheless, it could be theoretically developed there. So the definition is just that it's a diminutive, architecturally subservient dwelling-housing unit to the primary dwelling or housing unit, and that the structural forms in which the ADU functionality can be housed can vary quite a bit. From internal ADUs to detached, to new construction, to conversions of pre existing structures such as garages or whatever studios or workshops, to attic conversion ADUs, to bump out attached ADUs. So the reality is most ADUs out there, probably half I'd say to 60% of them are detached new construction, roughly a quarter are carve out ADUs of existing permitted structures. And then a quarter of them are like iterations of garages, ADUs above garages, or ADUs that are converted out of a pre-existing garage.

Prefab Review

Do they need to all have a kitchen and a bathroom and a shower, or does that vary?

Kol Peterson

What differentiates an ADU from any other permitted, habitable living space is the kitchen. And really what differentiates a kitchen from when you get down into a building code details is really just the sink and oven itself. So you can have a countertop space that has a 110 outlet. You could plug in a hot plate, convection oven, a fridge. And it's not an ADU because it's not a kitchen, because it doesn't have a kitchen sink and an oven. So, you know, this is where I kind of like to push the envelope a little bit with these conversations regarding accessory dwellings in general, which is most people that have what look and quack like an ADU are not in fact permitted to use. And I'm OK with that. I think from my vantage, whether or not it's classified as an ADU in terms of the local jurisdictional code. Nonetheless, it's filling the same kind of social, environmental, economic goals that a permanent ADU can fill.

Prefab Review

And what is the size range of these. I know in California, I think I think it's technically still 1,200 sqft. But the way that we've seen the sort of regulations go it sort of becomes de facto a thousand square feet. What is the range you're seeing?

Kol Peterson

I mean, typically ADUs are limited to, they're almost always smaller than the primary house, although there's even exceptions to that. But yeah, in California, which is kind of the biggest market now in the country for sure, for ADUs and specifically, Los Angeles, I'd say, is the biggest among them is 1,200 square feet is the limit. I couldn't actually tell you what the average statistical size of an ADU in California would be, because the data on ADUs sucks. And that's among the many, many, many, many kinds of policy things that I'm interested in is collecting, forcing jurisdictions to create better reporting about specific aspects of development so that we can start to understand how big are these things that people are actually building when they're said and done. So in the Portland market, we limit ADUs to 800 square feet. The average size of ADUs that are built in the Portland market is something like 620 square feet, statistical average. But if you looked across the I the median, but the mean would be like 750 square feet. So a lot of people are building, basically maxing out their entitlement. Now if the limit of an ADU were say 1,200 square feet in Portland, people would probably try to build them bigger than seven hundred square feet. But there comes a point at which the sites constrain themselves, the ability for people to build up to what they're allowed to build via entitlements.

Prefab Review

And on the new Portland stuff, is it going to be similar to California where it's basically one thing within the house and one detached structure outside of the house? Or will there be a different regulatory framework?

Kol Peterson

It's going to be different and better. And I'm really proud to say it's the code that's coming forward in Portland in one year, the residential infill project coming into effect in August. 2021 it's going to be the best code that's ever come forward in the United States for residential development, period. And so ADUs in particular, you can build two detached ADUs, you can build two ADUs within a single detached accessory structure. You can do one internal ADU, one detached ADU. It's much more liberal than any other code that allows for two ADUs, including Vancouver, B.C., which is always kind of the godfather.

Prefab Review

Do you think they can both be detached? So they can both basically have new space?

Kol Peterson

Yeah

Prefab Review

So let me run through a bunch of questions. These are the things that we see that are kind of interesting decisions from time to time. So I'm very uninformed on the Portland one, partly because it doesn't exist yet. So we're sort of interested in your thoughts, one of their height limits, because like we see in San Jose, for example, that you can effectively build two stories where I think in California, otherwise, I want to say it's a 16 feet maximum, which sort of basically makes it so like putting stuff over garages and stuff like that is much more do-able. What is the height regulation?

Kol Peterson

Yes, you can build to 20 feet at the midpoint of the gable, which is a weird way to frame basically being able to do a two storey dwelling. So you can do what would be equivalent in California, be building, building up to twenty five feet. So you look at California's code, California's code, it is incredibly good, but it's incredibly bad in that one regard because by limiting structures to 16 feet, you're forcing

Prefab Review

California's code is a minimum. Right. So like San Jose's gone beyond that, for example. But I don't think most areas have.

Kol Peterson

Right, like Los Angeles has and San Jose downtown has. But other parts of San Jose have not. And pretty much the vast majority of California is stuck with that 16 foot height limit, which is driving a one storey dwelling, which, you know, if you don't know any better, you'd say, oh, that's great. We allow one storey dwellings. But the reality is vantage, that's killing at least one third of the ADU market overall. So I'd say, that's not only just bad, it's a poison pill. California doesn't know it yet. And as an advocate, I would say that's the next big thing for California at state levels, raise that minimum from sixteen to twenty five. That opens up the door for a variety of really specific reasons which you can go into to enable a lot more ADU development. The biggest one is that most lots where we want to see ADUs built are urban infill lots i.e. small plots. And so if you're forcing people to make a trade off between, say, an eight hundred square foot ADU, that's one story, it's going to eat up most of their backyard or build a smaller area in order to preserve their backyard. Well, it's a tough call and you might end up building a smaller ADU, but that also means you're building like a zero bedroom or one bedroom ADU, which doesn't pencil nearly as well as a two bedroom would. And you can easily do a two bedroom in a 500 square foot footprint. If you go up two stories it can feel huge. If you can do one story, it's 500 square feet, and then a loft and bedroom on one side. It has this gorgeous, huge, voluminous, lovely spatial feeling that you cannot achieve with a one story ADU. And yet it's not taking up any more square footage of the plot. There's no reason why jurisdictions should require it to be only one story that's old school policy. And if you want to actually make ADUs pencil, make them take off in a bigger way. You want to at least allow for people to be able to develop something that's going to pencil on their lot. In Portland we allow detached ADUs and definitely fewer than half of them are one story. That's a big portion of the market that doesn't make sense.

Prefab Review

The way we've been hacking that a little bit internally, which is definitely not as good as just having a two story ADU. But for that situation we've been doing a lot of these like four foot sleeping lofts. So you get like a little bit more height on the room and then you at least. You can basically do, like a bedroom, sort of living room, dining room area with a sleeping loft in that.

Kol Peterson

And you could totally hack it in different ways. You could also do a subterranean portion of the first story. And the other thing I should say, since we're on this particular podcast, is two story ADUs, probably wouldn't in this context, it wouldn't work as well in the prefab space, but nonetheless, from an ADU vantage going up two stories is pretty critical.

Prefab Review

Two stories work fine. We've done them honestly.Typically when we're seeing prefabs, you're really specifically talking about volumetric modular housing. Right. The things that sort of look like containers that you see on the highway. Those I think typically can go up to 13 feet high. So typically we've just done one on top of another.

Kol Peterson

OK, so, yeah, so I guess it can be done, right?

Prefab Review

Yeah, it's just like a normal house.

Kol Peterson

To go back to the Portland market just to go back to the rip conversation. Yeah, you can do a two story detached. But the biggest innovation, the sleeper innovation, which I think is amazing, is you can do two ADUs within a single building, so basically a duplex backyard duplex that's going to pencil really well. Right.

Prefab Review

So then you start getting to like a real sort of small, multi family, it gets closer to that.

Kol Peterson

Yeah, exactly. It's kind of bridging into a new structural form, which I anticipate will be expensive, but it'll pencil really well. So I think that's going to drive a lot of innovation on the kind of more sophisticated developer side of things. And the amateur homeowner might not be able to figure out how to fund a $350,000 ADU. But a small scale real estate investor will be like, oh yeah, I'm definitely going to do that. I don't want to do a single at this point.

Prefab Review

I've got a couple of questions about that, but I totally like it when I see real estate opportunities. And partly this is just because in California they're really easy to permit. And I want to get to a segment on that. I do think there's a bunch of really interesting investment opportunities related to this stuff. So that's totally cool. Another question on the portfolio. And so one of the things I think San Diego is doing this, but again, you're the expert on different types of foundations. So what does the Portland law entail in terms of foundation? Like what kind of flexibility is there on that?

Kol Peterson

Yes, and this is definitely up my alley. I'm very intrigued by the merging of mobile dwellings and ADUs. I think that's where there is huge potential to actually drive down costs for development. So there's five major jurisdictions in California that allow for movable, tiny homes MTH to be classified as forms of ADUs.

Kol Peterson

What are those?

Kol Peterson

Los Angeles is a big one, the second biggest city in the country. So you can do it now. So that's huge. Los Angeles is a really, really amazing market for ADUs for a few reasons, but that's one of them. Fresno, California. Ojai, California. Placer County, California. San Luis Obispo.

Prefab Review

Really, Placer County? I'm a big skier. I'm doing a personal thing near Squaw Valley. So that's cool. That's awesome. I didn't know that. That's great.

Kol Peterson

Yes, Portland then doesn't allow for it, besides those places, there's no other place in the country that allows for tiny homes to be classified as ADUs. There's very few places that really even allow for tiny houses to be lived in on residential lots in general. And this is a whole kind of side, an interest of mine that I really want to see progress on this because I think we're just at the very baby steps of where that is. That aspect of things is going to go. But I think what California is doing is OK in these five jurisdictions. But they require that the movable tiny homes meet park model RV standards, which is in and of itself a pretty expensive form of mobile dwelling. So let's say that those will cost minimum $50,000, probably more like $100,000 for a normal one, which is great. But what about travel trailers that cost $10,000? If we're actually trying to solve for affordable housing, why are we making it so damn expensive to build it? And in Portland,

Prefab Review

Sorry to interrupt. What would the counterargument be? Are there specific, like structural necessities that the park model stuff have that the travel trailers don't?

Kol Peterson

Well, I mean, I think park model RVs are intended for, I guess they're all kind of classified as forms of RVs which are intended for temporary habitation. But people do live in RVs and park model RVs and different forms of mobile dwellings vans, tiny house on wheels for years and years and years. So I think that these standards that people are ostensibly putting up barriers to living in mobile dwellings are a little bit fabricated and not based in actual fact, they're based in bureaucratic legacy, outdated, outmoded ways of conceiving of this stuff. I mean, and the bottom line is, by compelling people to have foundations or driving up traditional conventional foundations, we're driving up the cost of construction, which is causing an affordable housing crisis, which is causing people to live in the streets, in tents, under bridges. And so I think what I would like to see is a lot more creativity around this question of enabling mobile dwellings, whether they be park rental RVs or Tiny House on Wheels or RVs or travel trailers or anything, and just allowing for those to be used on residential lots and coming up with standards that are reasonable. I think it's reasonable to say, you know, we are going to require that these mobile dwellings have legally permitted sewer connections. And so you have to have a conventional toilet that you can plug into that sewer connection. But to compel that, the structural form must be wood clad and must be built to park model RV standards to me is arbitrary. I'd really like to question the rationale of that, because I think as an interim step, I get that it's a step forward in the right direction because it allows for mobile dwellings. But I think it's causing the prices of those mobile to be roughly eight times what they would be. If you go on Craigslist right now in your jurisdiction, type in “travel trailer”, you will find one hundred travel trailers for sale that you can live in right now for less than ten thousand dollars. So I just think, I think the pushback might be aesthetic NIMBY stuff about how we don't want the town to become trailer trash. But I'm very skeptical of that kind of B.S. because the stuff that comes up with prefab the same stuff that comes up with ADUs in general.

Prefab Review

So I interrupted you. I think you were continuing to let us know about the Portland regulations. Were there any other things that we should know about that specifically?

Kol Peterson

Oh God. Yeah, it's incredible. It means you can do up to four units on every lot, so you can do a duplex, triplex, fourplex. They're eliminating all off street parking requirements altogether.

Prefab Review

So how does that work? Because you said you could add like a triplex or I think you were saying you could only do two. Do you have two outside the single family home and one within the envelope?

Kol Peterson

You can do two ADUs. So if you do an ADU, you don't have to pay residential impact fees. But they're limited to eight hundred square feet. And if you're doing two ADUs those are allowed as a detached accessory structure. If you do a duplex, triplex, or fourplex, the way Portland isPortland defining that is that they have to be sharing a conditioned wall. So the structures have to be attached basically.

Prefab Review

So you could basically take a single family home, add a triplex and share a wall and it'd be cool?

Kol Peterson

Yeah.

Prefab Review

OK.

Kol Peterson

You can add a triplex. Yep, totally. And then they're going to allow cottage clusters by right. Pretty much everywhere. So that's like four or more detached accessory structures on a lot retaining the single family house or not. So that's going to be allowable structural form. So those are the big changes. It's complicated stuff, but ultimately it's just enabling the type of freedom that allows for the free market to operate as it should without the artificial constraints that have been put in over the decades by, you know, zoning regulations that were informed part by racist ideologies.

Prefab Review

So should me and you go into business together tomorrow and raise a fund and just start buying like single family homes with backyards in parts of Portland? I'm joking, but like, are people starting to do that? Six months or a year isn't that far from now.

Kol Peterson

No, it's not. Yeah, I mean and and everybody well I shouldn't say everybody, but a lot of people have already built an ADU and now, they're just like, yep, I am ready to start playing my process here of building a second ADU. I mean, I'm one of those people I'm going to start my own pretty soon.

Prefab Review

So you couldn't do a three story per-say? You couldn't do a three story triplex?

Kol Peterson

No, you can. Yeah. But if it's a detached structure its limited to 20 feet at the midpoint of the gable. If it's a primary dwelling or a duplex, triplex, or fourplex, you up to 30 feet at the midpoint of the gable.

Prefab Review

When you say fourplex, does that count the primary residence or are you saying there could be five units on the property?

Kol Peterson

Four is the limit. So it gets deeper still. So if you meet what are called deep affordability requirements, which are like half the units are rented out at a certain price point, then you can build six on a property. That'll be a code that's utilized by affordable housing groups to own single family housing stock more than enter homeowner developers or developers in general.

Prefab Review

I don't typically have any sort of mixed feelings about these kinds of laws subsidizing certain groups. Oftentimes I feel like it's being a little counterproductive, but that's cool. But I at least understand the ideology is right, that you are making it more palatable to build affordable housing, right?

Kol Peterson

Yeah, exactly. It just happens to pencil for affordable housing developers to do it if they do it this way, whereas I think the math, the kind of the performances that were worked out showed that it would be difficult for the math to pencil out for affordable housing developers to build fourplexes. But the deeper affordability bonus facilitated a kind of pro forma that would allow for sixplex development. I don't know how much it'll be used.

Prefab Review

We've gone way deeper on this Portland regulation. Is there a bill name or law name on this specifically?

Kol Peterson

So, yes, it has the unfortunate acronym of RIP, R-I-P, and that stands for the residential infill project. Incidentally, since we're talking about this in depth, I'll just mention that on October 14th, I'm going to be teaching a one hour class about the residential infill project and Portland House Bill 2001 through an organization called Earth Advantage that I partner with. And I would invite anybody who's interested in this, it's going to be targeting my presentation for the homeowner, developer, realtor, developer types. And I'm going to be teaching that workshop. And then there's going to be two guest speakers are the authors of the two regulations in Oregon House Bill 2001. We haven't touched on it yet, but it's essentially taking RIP and expanding it statewide. So every single city is going to have a regulation that's equivalent to RIP.

Prefab Review

That's awesome. That's really cool. OK, so a couple of things on this. Financing. I think that's one of the most challenging things. But before that, short term rentals. Are people actually using these new units for short term rentals, because it seems like a lot of the areas in the country have basically said, hey, we want you to do this, but you can't make money on short term rentals using this. You can only do X, Y, Z on these things, which, again, I think depending on the area, can also make it more challenging. What kind of limitations are there on that, if any, for the Portland rule?

Kol Peterson

Yeah, and this is like the most controversial question amongst jurisdictions that are considering ADUs that come up everywhere. So basically what Portland does is we allow for it to be used as short term rentals. You can rent up to two bedrooms on your property as a short term rental, whether it's in the primary dwelling or the ADU, it doesn't matter. But if you choose to do that, if you choose to build an ADU and have a short term rental on the property, then you have to pay the residential impact fee, which is $25,000.

Prefab Review

Per Unit or total?

Kol Peterson

For the ADU. Yeah, and primary residential dwelling would be like thirty, thirty five. It's a pretty big disincentive given how expensive development is. People can't afford the extra thirty or twenty five thousand bucks. So people typically won't do it. And as a result fewer ADUs are built. But the city is like why would we want to subsidize you to add a hotel room? Like that's not meeting any of our policy objectives. Right. I fully support the city's approach because I don't see how they could rationalize subsidizing a hotel room. However, as you know, that does undermine the interest of a lot of people. So it's a complicated conversation. But California has just simply, I think, simply outright banned short term rentals in ADUs under the 2019 legislation. And I think it's a trade off to getting good legislation, I think that's a fine approach. I've come around, I used to think, you know, free market libertarian, but I've kind of come around to saying, you know what, a lot of these ADUs are being used as short term rentals. And as an advocate for ADUs, I don't have any passion for that problem. Why are we doing it?

Prefab Review

So let's talk about the financing of ADUs. I'm definitely interested. We see people finance them constantly and luckily a lot of the people in the country who own single family homes, who want to build ADUs have some equity in their home and they can use some form of home equity for this. I haven't seen many examples of alternative financing based on the cash flows of a property like in some other business type expenses. But, you know, I think dwellers. I don't know if they're still doing it, near you guys, are experimenting with this. There have been a bunch of these sort of like, "hey, we build something on your property and split the profits for a little while," which I think is an OK, not perfect model also, what are the interesting things that you're seeing from a financing perspective?

Kol Peterson

Yeah, I think I think that's an interesting set of experiments that are going on, I really like that. I really like to see private development models that cut out conventional banks and kind of come up with some innovation. And they're all kind of spinning off the same concept that dweller is, which is to say we will build an ADU and we will somehow come up with private equity to finance it, and then we'll take the majority of the rent. And there's five things I know that are doing that now. No, California primarily.

Prefab Review

There's United Dwellings. Right. There's Rent My Backyard. Who are the other ones? I'm just curious.

Kol Peterson

Those are two, there's one, there's dweller, there's homestead, and then there's one other one thinking,

Prefab Review

I was just curious how to finance this stuff.

Kol Peterson

I mean there's a lot of innovation occurring in the finance space. The thing that I'm most excited about is that Fannie Mae and Freddie Mac conventional portfolio or conventional renovation financing standards are getting better and better incrementally. And so on this next project I'm going to be using hopefully just a conventional FHA 203-K1 financing option.

Prefab Review

Those don't provide cash, though, for the remodel, right? You can tell me, when I've looked into those before, aren't they fairly limited in terms of the amount of money they give you towards the repair?

Kol Peterson

No, they're pretty good. I mean, you have to find the right lender to work with. But like my case, because I'm going to be building a second ADU our goal is to finance it as though it's a triplex from a financial perspective. So that brings up the loan limit from $524,000 to s$789,000. So that's enough to be able to build not just an ADU, but like a really high end, large scale ADU in the Portland market. This stuff is getting really interesting as we get into things like bridging the gap between single family homes and middle housing, which is two, three, four units, then the financing is going to become all the more interesting, complicated and critical to being able to develop the stuff. And it's not really the government's, it's not really the local government's job to figure that out, but lenders should. And in any case I'm really interested in those kinds of incremental changes that are happening within Fannie and Freddie to enable renovation, loan financing, using home style renovation, loan financing. There's mission driven philanthropic lenders that are lending quite a bit of money, upwards of two hundred fifty thousand dollars to build an ADU with pretty reasonable interest rates under some conditional applications like the ADU has to be rented out to Section 8 for a separate set number of years or whatever. That stuff is all fledgeling. I wish I could say this is taking off. It's not really taking off. But there's a lot of pilot efforts going on from that.

Prefab Review

We've talked to a few people in San Jose, in Portland doing that stuff. Yeah. Yeah. The ones we've talked to have had awesome deals. Like no money up front, like five percent interest rates, six percent interest rates. And that actually seemed like they were having a hard time getting enough people. It was really surprising.

Kol Peterson

The market is interesting because like I was mentioning how we no longer allow for short term rentals, pay the residential impact fees. When that change occurred in twenty eighteen, that dropped the number of ADUs being permitted quite a bit. So now the demand for ADU development has gone down quite a bit because it's been around for a longer. So it's not like it's not like a mad rush like there is in California right now. So it's hard to know whether the lack of interest in those kinds of mission driven lending options is just a result of the lack of overall demand for ADU development or what. But, yeah, I concur that they've had a surprising little amount of interest. Maybe they've just done a poor job marketing. I don't know. But most people, as you mentioned, are not using these innovative ways of financing. They're using HELOCs, cash, family loans and stuff. And so, like, that's still kind of the main way that people are doing this stuff. But there there's several other approaches that people are experimenting with, things like equity sharing, financing equity models or shared equity model financing. So there's a couple other small experimental things that are going on here and they're hard money lending. But I'd say that ninety five percent are using some kind of traditional HELOC, cash savings, family loan, financing options. And then what I see on the horizon is really just like renovation loan financing getting better and better and better. And I hope that it does, because that's what we need to happen and really to scale up new development.

Prefab Review

The thing that we're trying to push more people who come into our concierge service to do, because I think it's interesting, that honestly seems better on paper than just the number of people who've done it in practice, and this is potentially more of a California concept. Have you seen many people trying to do different kinds of arrangements, particularly from an owner occupiers. So TIC is sort of a hack in California. I think it started in the San Francisco area that people did to get around the inability to condo-ize places. So you basically do an equity share, typically called tenancy in common like a multi unit building. And then you assign occupancy rights.You're essentially creating separate units and there are a couple banks, because these are like a mature product. There's a couple of banks like Sterling Bank. I think it's probably the best known one, they have TIC loan products and they underwrite them similar to condos. So things like that seem to make it easier if I owned a single family home and someone wants to have a friend who wants to build an apartment on my property. I haven't seen those used a lot.

Kol Peterson

A lot of the innovation on this stuff is and will continue to occur out of the San Francisco Bay Market for a few reasons. But I think that type of like code ownership financing model, it's a financing by necessity type of option in the San Francisco market. And so hopefully that will kind of percolate into other areas in the United States.

Prefab Review

OK, this has been one of our longest running sessions, probably because I think we're both passionate about these issues, but we want to get into a sort of a quicker than normal fire around, ask you quick questions, try to do one minute answers, but we won't come down too hard on you if you don't. So first, quickfire. What do you think are the one or two most interesting investment opportunities created by ADUs these days?

Kol Peterson

It's a great question. I mean, if I was a real estate investor, which I'm not, I would probably be looking at, you know, just doing a good analysis of properties in California where you can have a junior ADU and a primary ADU. I mean, there's nothing too innovative about it, but I think that's looking like what kind of housing stock can do that? Where is the market ripe? Where does it pencil and just do that, I think that's a totally reasonable thing. I think that's in and of itself a little bit controversial because I think there is some hesitancy about this and concern about investors scooping up residential property and turning into a rental stock. But I guess my interest is in just seeing more small housing units overall. So I'm pretty happy when it comes to this stuff. Like more housing.

Prefab Review

OK, next question. What are your favorite ADU designs? I mean, we see this a lot because of what we do. Are there specific designs or specific ideas that you think are really beautiful or really cool?

Kol Peterson

I like two-story ADUs with a lofted bedroom on one half and a great room below. And that's the bomb design. It always looks good. It's pretty simple. You can see a lot of creativity within that envelope and it's just the way to go. It's like it's perfect. It makes a space feel huge. It gets you everything you want.

Prefab Review

So build firms or I mean, or whether they're prefab or modular or just stick built or architects that you think do a really good job with that.

Kol Peterson

I mean, like I said in Portland, I couldn't point out, like a particular designer. I just go to AccessoryDwellings.org and look at all the designers there that are listed. And because that's what most ideas are in Portland, you'll see a lot of those. And so it's kind of just the natural way that you would design an ADU.

Prefab Review

We tend to be pretty domestically focused, a little bit of expertise in Canada and I think they're called laneway houses or something similar to that in Canada. Are there international examples of the accessory dwelling trend that you think are really interesting?

Kol Peterson

Yeah, I mean, Vancouver is, like I said, kind of the godfather of ADUs with allowing for ADUs, among other things, laneway homes and secondary suites is what they're called there. And that's really the best market in terms of concentrated ADUs. New South Wales in Australia is another big area for ADUs. And I'd say the sheer number of ADUs is probably more in New South Wales and there is anywhere else. But it's dispersed over a greater state of New South Wales. So it's a pretty broad area. But I think that's Sydney, if I'm not mistaken, or Melbourne, I don't even know. Outside of that, those two locations and in the United States like ADUs are not really a phenomenon. There's some legacy ADU type stuff in England that I've never seen in person, but they're called new houses and they're on like alleys. But yeah, that's it.

Prefab Review

And then the final question, we'll exclude Portland for the sake of this. And you can even exclude California if you want, because we've talked about both of those states at length. What do you think the best legislatures or the best cities or states are in terms of regulation these days for looking for interesting examples?

Kol Peterson

Oregon House bill 2001. And it's not very well known yet, but you'll be hearing about it. It's a big deal. It's just it's just taking RIP and putting that same mentality into the code statewide. And as a result of it being statewide, that means it's essentially a universal model that could be utilized anywhere. So I am excited to see if that gets picked up. So we're seeing Connecticut and Virginia now look at allowing for middle housing based on House bill 2001. And so I think we're going to ultimately see that crack open up in more places. And hopefully hopefully so, because the entire East Coast is abysmal and needs to leapfrog out of their antiquated zoning regulations and go well beyond where they are now. So I hope that they do leapfrog and they can look to Oregon House Bill 2001 to do so. But I think it's yet to be determined how all this stuff will actually pencil whether people build middle housing or not. It's not like California where the numbers will obviously make sense. It's Oregon's not it's not as expensive. So even with the best code in the world, we're not going to see tons of the stuff being built.

Prefab Review

Well Kol, thank you. Thank you so much for being on the Prefab Pod.Prefab Everyone, if you want to learn more about Kol, again, search, accessorydwellingstrategies.com is probably one of the best places to find him. Google backdoor revolutions, Google the ADU hour is another. To find out more about some of the stuff I talked about as it relates to accessory dwellings and prefab and modular housing. Prefabreview.Com is always a good place to check things out. Kol, Thanks very much. Really appreciate the time.

Kol Peterson

Yeah, it's been great. Thanks, Michael.

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