Manufactured Housing and ADUs with John Arendsen #672

Aaron Norris is joined again this week by John Arendsen of Backyard Homes and several other companies to discuss accessory dwelling units. John is a licensed general contractor, manufactured home contractor, a licensed real estate broker and manufactured home dealer. This makes him a quadruple threat. He’s been Aaron’s go to for the last several years about accessory dwelling units. They met because of an introduction by Linda Scott out at SDCIA, and they’ve just had a great time getting to know each other. He gets to nerd out with legislation, anything around accessory dwelling units for the last year, and his whole family is actually involved in the business. His son and daughter run the main operations for on-the-level general contractors. His wife operates MH Processing LLC, and she’s been a great resource for lending around the manufactured space. Aaron always bugs her about questions regarding ADUs. 

Episode Highlights

• What effect could Prop 13 have on commercial real estate?
• What is covered under SB 13?
• How does AB 671 relate to ADUs and Junior ADUs?
• How do impact fees and permit fees come into play with ADUs when it comes to utilies, gas, water, and sewer?
• How does AB 881 related to ADU utilities?
• What do AB 587 and 671 cover?
• How far can an investor go with the Planning Department to offer new ideas on ADUs?

Episode Notes

There is some talk on the street about Prop 13 as it relates to commercial property. This has always been his one big nightmare. He and Janice have had this discussion several times. She’s always been of the opinion that HELOC was voted in by the voters. John would say what’s voted in by the voters could just as easily be voted out by the voters if you have enough of the right kind of voters. Right now with the political sway we have in our state, it wouldn’t be difficult to vote out Prop 13, and they want to start at the commercial level. Aaron said we are fully expecting them in 2020 to try the proposition split between commercial and residential, and everyone’s assuming it’s going to pass.

This is going to kill commercial real estate and is likely the path to get rid of Proposition 13 altogether. It’s been on people’s radar for a while, and it’s something that they’re definitely watching because they think it’s going to impact a lot of investors. It impacts our family and anybody who owns commercial, so it’s definitely a possibility. John jokingly asked Aaron if he would save some of his Florida properties for him and Janice, although he said they’re continuing to build and are creating them all the time.

SB 13 was pushed by Senator with Wieckowski, who was on the radio show. He has been such a great resource. He talked about how the cities have 60 days to pass a permit. The total floor area of an attached ADU is limited to 50 percent of existing structure or 1200 square feet for detached. These can get big, so Aaron wondered what the biggest data was John had seen. He said 1200 is about it right now, although there’s one right down the street from him that looks a lot bigger. It’s been there for 30 years. This is only ten years shorter than the amount of time he has been in his home, which is in a semi-rural area of north San Diego County. It’s no Brentwood, and there’s no CCNRs. It’s a little neighborhood where, although they love it, it’s quaint, and they’ll never leave, you just have to drive up the street and see these guys with their motor homes parked in their properties. It’s one of those “anything goes” type of neighborhoods. The primary residence is a nice home, but about 25 or 30 years ago, he threw up a great big mobile home. It was about a 1450 square foot mobile home. It’s been there forever, and it’s still there to this day. He doesn’t even know how he did it. That was back in the day when it cost you $50 grand to get a permit for an ADU from the county.

One thing SB 13 spells out is no impact fees are allowed for units smaller than 750 square feet. When it’s over that amount, the percentage is based on size. Aaron asked if permit fees and impact fees are the same things. John said no. An impact fee has more to do with your traffic and developmental impact. Aaron wondered if this includes schools, although John said this is a separate entity within itself. However, they are not exempt from any of these laws. They still have the right to impose their fees on any kind of development. A lot of that is still going to be there. By and large, at least in San Diego, from what he’s seen, they’re complying countywide. Almost every single one of the jurisdictions are coming into some form of compliance, and they’re all waiting for these new laws to be implemented, as are guys like John who are trying to put these things on people’s property.

The good thing too is that one of the laws, A.B. 671, specifically spells out that ADUs and JADUs count against a city’s RHNA, or affordable housing goals. There are only six cities in all of California that are on track. So we’re all so far behind, and the RHNA goals are tied to other funding specific for the cities. Aaron fully expects the state to start playing games with people’s money, and that’s when things will really happen. When it comes to impact fees and permit fees, it’s good to know those are different. Utilities can require a new construction and connection fee, but it has to be reasonable. Aaron said that seems a little bit too vague for his taste.

John actually read this differently. If you’re pulling the utilities from your own grid, there are no allowable connection fees. If you have to pull from the jurisdictions grid, then there will be meter and connection fees. Aaron’s note said utility can require a new connection and fees, but it has to commiserate with the price. It has to be proportionate to the square footage of the ADU.

Aaron asked about when it comes to utilities and how often he installs new panels so it’s completely separate. John said everybody wants a subpanel. Most of your property owners want a subpanel because they’re going to use it as a rental, by and large. Even if they’re not, they still want to have an idea of what that extra unit is costing them. In many cases, you have to put in subpanels.

Aaron next asked about water, which John said he is not seeing that as much. With water, you can pretty much tap in from your own home. If you have to go out to the middle of the street and tap in from the city source, then that’s a different story and you’re going to be paying. You’re going to be adhering to the city requirements for connection fees and other things.

Gas and sewer are interesting because that’s all over the place and their biggest concern. The challenge right now is trying to figure out how to get gas and water to the new site. You’re dealing with a lot of really old pipes and sewer lines. You could have clay or cast iron steel, and if you happen to go down and try to connect to something and you break it, then you’re going down to the city to get a permit to replace it. The city will then tell you that’s old and needs to be taken clear back to the mainline. That’s a real health and safety risk. They could absolutely do that, and those are not cheap. They’re deal-breakers. that can stop a project dead in its tracks.

Aaron has seen investors do something like buy a house in Palm Springs and think they will make a certain amount if they rent it every day for $300. They then learn all the rules and see that it is not what they thought it was going to be. If you don’t do your homework, it will be really painful.

A.B. 881 is interesting because it requires the cities to work with utilities to identify the appropriate areas for ADUs. Some of the other bills that passed in October really had to do with the digitization and modernization of the state’s databases of housing, land, and identification of affordable housing sites, so it’s easier for them to see. They’re going to be spending some money over the next couple of years doing that, and this is really going to help because it is what it is. If utilities can’t reach and it’s not appropriate to build ADUs in some spots, it would be nice to know that up front instead of having to do all this work by hand and going down and planning and the utilities separately. However, we’re not there yet.

John went on to say how after the first of the year, the city of San Diego is going to be discussing the possibility and the viability of allowing tiny homes and/or park models to be installed as ADUs. There are some other cities around the state and the country that are already doing that. What he questions is if you buy a park model for $35,000, can you hook that up like an RV with an RV stub out, or do you have to go through the same procedures as you would by building a regular ground up ADU in terms of all the utility requirements? What he is seeing happening is a lot of people and properties, especially in the county, have stub outs and what they call pedestals to accommodate RVs. It is inadvertently connected to the city because the stub out is connected right into the sewer line. You can run an extension cord, essentially, or add another circuit to your panel and throw in more juice to activate the electricity on the park model or the tiny home. If this all goes the way it could go, which means you have an existing park model or RV hookup, you’re good to go. That’s going to send this ADU in the street into a completely different direction altogether.

If that’s the case, and if it’s mobile, Aaron wondered if they’ll allow it to count as affordable housing since it’s not permanent. It’s not like a permanent housing structure that stays there. John said no appraisers are going to factor that into the equation for sure. It’s personal property. It would have to be a bill of sale.

Next up on their discussion was A.B. 587, which has to do with sale and separate conveyance of an ADU. There’s a very narrow exemption for affordable housing organizations and nonprofits to sell the ADU off on its own. Aaron thinks this is going to happen rarely, but we will have to wait and see. A.B. 671 had to do with incentives. The local governments are now being asked to actively promote affordable and creative accessory dwelling units, so it’ll be interesting to see if the state puts some money behind it in some way, shape, or form. If cities are willing to do creative things, if maybe they’ll provide extra funding in some way, it’s possible. They’ve been focusing a lot on the stick in the last couple of years. We will have to see if they throw some bones and do the carrot approach in the following couple of years to smooth transition. Aaron knows the planning people are not happy about it for sure.

On AB 671, the thing that stopped John dead in his tracks was just a little sentence that said the California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions to establish procedures for making that reimbursement. The answer is this bill, 671, would provide that no reimbursement is required by this act for the specified reason. When Aaron and John spoke in San Diego at the ADU panel, a builder came up to Aaron afterwards and said, “Well, this is cute because my city that I’m building into is taking a year to get me through the permitting process.” All of a sudden, you have all these people rushing to get ADUs, and there’s an expectation that you will get them through in 60 days. So many cities are struggling with budgetary issues and pensions. They can’t hire more people, so Aaron wondered how they afford to do all this? John said a good friend of his summed it up perfectly. He used the illustration of how he and his wife are Disneyland freaks, have held annual passes for years, and she would rather go there than on a cruise unless it’s a Disney cruise. Now, imagine when the word gets out about Fast Passes. However, the word is already out about Fast Passes to Disneyland. You’re already waiting in line in the Fast Pass line while the other people in the regular line are passing by you.

The bottom line is there’s this so-called rapid permanent process that is just as clogged up as any of the other options that are available out there for going through the permit process. Case in point, right now the city of Encinitas is struggling with this new law, the PRADO program, or Pre-Approved Design, an ADU program of theirs that has just hit the skids. The word is out they may not even renew it for that very reason. There’s already some dissension among the architects, the AIA and other entities that these two architects that got awarded this privilege of using their design and created a little monopoly of their own within the city. There are issues there. The guy who was awarded for them is not even sure he wants to continue doing him. What happens is nine out of 10 people do not want to use the design that the city has approved for the fast track permit process. They want to make modifications. The minute you make the slightest little modification on a pre-approved plan, you’re going right back to the permit counter. You’re going right back through plan check and through the whole process, and now you’re in line for six to eight months. John is a resident of Encinitas and loves it, but in many respects, they have shot themselves in the foot, and now they’re in a quagmire.

That’s sad to hear because they were really at the forefront, and it felt like they were trying to thoughtfully approach this issue. If you’re not familiar, Encinitas had plans designed. It was almost pre-approved where if you took their plans, they were basically ready to go on the same day. It’s interesting to hear that nine out of 10 people want some changes, but it seems like that shouldn’t be it. How many changes are going to be made? Is it substantial or swapping out certain features? It seems like they can keep building and pricing the options.

John said they run into mobile homes all the time and have to make changes on them because you can’t plunk those down on a lot. It’s easy to say, but in all reality, what if that front door is facing the garbage can? These are just little examples, but people want to change a door and change where the entrance is. They want to put a doorway where a window is, or they want to make a double window where a door is. These are all structural changes, and that means going back to the architect, having him redesign it, then taking it back to the architect and starting over. Now you’re just a regular plan check. Now you’re back in line A instead of line B, which was the fast track line. Line B is so backed up with applications, and they don’t have the employees to accommodate it. They’re looking at six to eight, nine, twelve weeks to get permitted.

Aaron said the last time he checked, in Los Angeles they had around 2,500 ADU applications sitting on the utility desk. It didn’t even have anything to do with the city, and it’s gotten very political because the whole housing and homelessness have become such an issue it makes the mayor look bad. There’s a lot of pressure in politics getting involved, so maybe that’s where we can hope the state’s going to come in with the carrot and help in some way, shape or form, because Aaron just doesn’t see how this is sustainable. It’s great in theory, but the question is how you get through the process fast.

John and his company have been working with this now for three years, and it’s still just as confusing today as it was when the first laws went into effect in 2017. It’s even more so now because they’re introducing even more laws. You’re talking about bureaucrats and clerical folks sitting there having to figure all this out. In many respects, it’s not fair for them to have all this stuff pushed on them that they have to assimilate and regurgitate to the thousand folks that are down there at the firm at counters trying to hold their permits. It’s really a quagmire right now, and the worst is yet to come. However, he thinks at some point they will start to get it figured out, and it will be slowly assimilated into the mainstream. However, we’re a ways away from that. John has been cautious for the last three years with a lot of his clientele for that main reason. He does not want to push people into things that they’re going to come back a year later and say they could have saved themselves an extra fifty thousand dollars if they hadn’t been told to pull their permits.

Aaron and John knew an investor who was part of the original ADU chapter, Kristi Certwell, who has been building ADUs in Long Beach. She shared this week how the Planning Department showed up and basically told her these items have changed and it’s costing her more. After she was already done, she basically got a bill from the Planning Department because they updated fees, and it wasn’t a small amount. That’s messed up and shouldn’t be allowed.

Aaron asked how far he can go as an investor. He’s looking to buy a property, and in his mind, he would like to build an ADU. He wondered if the Planning Department would allow him to come down if he were organized and had a plan he would like to draw out for them. He wondered if they can give him a rough yes or no at the counter. John said it really depends on the jurisdiction. He finds a lot of jurisdictions very accommodating and very helpful, but he finds a lot of them that are extremely ill-informed or just don’t want to talk about it or just brush off to the side and make you wait for a day or two before they can even get to you. Maybe they don’t even have anybody on the counter that has the answers for you. That’s the big part.

John said they go around the county several times a month to pull permits, and there are only one or two people down there that know how to deal with the type of firmness they need to pull. That’s what the county of San Diego, and that’s not for ADUs. That’s for foundations for manufactured homes. Not all things are to all people. But, it really depends on the jurisdiction. However, he did tell Aaron to still go for it. He always encourages people to start out at the planning counter. That’s the easiest way to do something. You could even make it one step easier with a phone call before you even go down there. Aaron wants investors to do their homework before they buy a property, assuming they can do something. You just mitigate the risk by doing your homework.

Aaron had some really good questions from the property managers because in October, the rent control stuff went through as well. They asked if you can you have a rent control primary and the ADU and what it would fall underneath? This is where he thinks it it depends. He asked if you need a separate certificate of occupancy when doing a junior accessory dwelling unit. John believes you do since you’re pulling in a permit for an extra dwelling. His son would know more since John does not work with Junior ADUs. He is just in manufactured housing end of things as well as fresh, ground-up design-build. But, his son does do JADUs. In fact, he just rebuilt a home. He bought a piece of property and rebuilt it for their own primary residence. He built within that everything but a kitchen on the bottom level of his home. It’s about an 800 square foot JADU, but he intentionally didn’t put a kitchen in it because you didn’t want to have to go through that added permit process at that time. He’s going to do it eventually, but he didn’t want it to kink his loan or any of the other things that he was going through with the permits or inspections or anything like that. He just left the kitchen out of it just to be safe. He thinks when he does go to finalize it and really officially turn it into a JADU, then he will need a CO.

The bill specifically spells out if you have a primary that’s over 15 years, it could possibly apply in the single-family residence realm. If it’s owned by a corporation, an LLC, where one of the members is a corporation or REIT, you fall under that category anyway. On the accessory dwelling unit front, the bill specifically points out if there’s been a certificate of occupancy within the last 15 years, you’re exempt from the rules. What Aaron doesn’t like about junior accessory dwelling units is you’re largely within the square footage of the existing property, which has existed for over 15 years. He just doesn’t like the gray area. This bill is the rent control bill that just passed in the state.

If you own commercial, it’s going to apply to you. But, if you’re looking to split up the square footage of the existing property, he doesn’t know the logistics of how that works. If you’re dividing a two-bedroom, one bathroom into two studios, do you get a certificate of occupancy for the different ones, and will the city rope you into the rent control? Aaron urges everyone to do their homework on that front and work with the city to see what they’re going to do. He would just hate to see anybody do something like that and get locked in somehow.

Aaron said they are definitely going to continue this conversation, especially when 2020 rolls around. Aaron loves working with this, and The Norris Group has been funding ADUs as part of flips, as part of rentals, although not as new construction. They have launched a second program because of all this research for investors that have existing rentals, so he is excited about the opportunity. John has a great ADU guide on his website, and Aaron asked where they can find this. He said you would go to www.crestbackyardhomes.com, and on the right side of every page on the Web site, you’ll see a little green tab that says ADU Guide. Punch on that tab and download the guide. It will cost $14.95, but it’s the best $14.95 you’ve ever spent. There’s a lot of other good information on their Web site as well, and they’re adding to it every day. There are some really good blogs on the Web site that you can read as well as a lot of different models. It’s a lot of really good information, so take your time and surf through that entire Web site. It will really help you a lot.

John added a bit of interesting information that manufactured homes are exempt from the solar requirements. Aaron asked if a detached accessory dwelling unit don’t apply here and he would have to put in solar. John said he would have to include solar. Title 25, fortunately, is the mandate that preempts Title 24, which is the manufactured housing mandate. They are not under that auspices.

Aaron asked everyone listening online to do him a favor and look up John Arendsen and San Diego since they were in an article together. He has a beautiful 430 square foot ADU that was featured in the San Diego newspaper. You just have to see pictures. A lot of people still think manufactured homes sink the wobbly boxes of the 70s. They think it’s a dirty word. However, we’re not talking about mobile homes here. You have to see this thing to believe it. His daughter did the design on it, and it’s stunning. John said they only have two of their ADU models left, and they are still holding open houses by appointment. They had five at the beginning of the year, and three were sold. One is a two-story hybrid that Aaron saw.

The other one is the little one Aaron mentioned, and that is number one off the silver crest assembly line. It is the first official accessory dwelling unit in California off the Silver Crest manufactured home assembly line. The starting price on that is about $65,000. That does not include the delivery or the setup or any of the site work or utility connections or permitting. That is all something that you have to work out with your contractor. This is something his son can help you do since he does all of the construction and installation work. By the time the dust all settles for all the other work that’s involved, you’re probably doubling that price easily. You’re probably up around $125-$150 grand by the time the dust all settles now. That’s a bad reality of what it’s costing to do these ADUs nowadays.

Aaron said what is fun about working with John is he can do either Title 24 or Title 25: stick-built versus manufactured. He is going to do what’s best for the client based on timeline and budget. Unfortunately, there’s not a lot of people who do what he does. Aaron asked him what markets he serves. He said primarily San Diego, although he does a little bit in South Orange and Riverside Counties. Aaron asked if he can help people on the manufacturing front. He said he can refer them to folks if they’re interested in going manufactured. He can definitely refer him to their manufacturer. The sales and marketing manager in Silver Crest in Corona is a valuable resource. He can refer dealers that do represent other areas. Champion Homes is another that is up in northern California. They’re the holding company for Silver Crest, which is a subsidiary of Champion Homes. Champion Homes is on the New York Stock Exchange and have been around forever. They’re a very reputable and very solid company.

If you haven’t taken the time to look at manufactured homes lately, they’re stunning. In some cases, the quality is better. These are being built in factories, and workers are doing the same thing over and over again. It’s in a controlled environment, so it’s come a long way. The technology has come a long way, and you’re going to start hearing a lot more about prefab manufacturing in the Title 24 space as well. There’s a lot of conversation in the builder community that a lot of people aren’t coming out of high school saying, “Hey, you know what, I should be in the contracting field, and I should build a house.” You’re going to be seeing a lot more conversations about interior builds with robotics as well as it being green and sustainable. Aaron expects to see a lot more in that realm in the near future.

Aaron is also working on 3D right now, but he does not think this will end up happening. However, he is excited about the technology, and you have a few different people working in the space. You also have companies like Amazon investing in the prefab space. It’s almost a race.

John reiterated the website for people to go to is www.crestbackyardhomes.com Perfect. Aaron will be the MC for their event at SDCIA on February the 22nd. It’s a Saturday and will be all day from 9-4. They call it the 2020 ADU Summit and Expo, and they are going to have Senator Wieckowski as their keynote speaker, along with Greg Nickless, who’s a senior housing analyst for HCD. John has worked with these two gentlemen several times, and they’re very good in front of large crowds. There will be a large crowd since the Scottish Rite Center can hold up to a thousand people. They are also going to have a couple of mayors from the county of San Diego talking about some of the programs that they’re coming out with for their constituents. They’re also going to have a space available for any of the city planners to have little exhibit tables to basically answer questions for their constituents on how and to work through the process of applying for permits and maybe even some of the cities that have the pre-planned approvals going. There are other cities now besides Encinitas, including the county, that do have the preplanned approval programs. It’s getting more exciting by the day. There’ll be a lot of exhibits found there, including John’s exhibit. They’ll have a little exhibit set up to answer questions for people on a one on one basis about manufactured homes. There’ll be other contractors, lenders, appraisers, and people that answer questions about your taxes. It’s going to be an all-day event, and it will be on a Saturday when they are anticipating beautiful San Diego weather.

There will be plenty of parking, and Scottish Rite is always good for that. Aaron usually only markets down to the city level, but as they get closer with that, he will definitely get the word out in Southern California. It’s something that people will want to attend, especially since you’re going to meet some of the legislators that have been working really hard to make this happen. If you’re working in cities that you think the city planning departments need to be invited to, Aaron asked people to help spread the word. They’ll hear some good case studies of how other cities are doing it. We need more planners to be aware of this.

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.

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