Norris Bruce
Jan 24, 2020

ADUs and the TIC Model with Dossier Capital #679


Aaron Norris of the Norris Group continues his discussion on accessory dwelling units with Dossier Capital. Joining him are Michael DelaCruz, Dennis Battung and Michael Randall. A little over a year ago, a year from last September, they were very instrumental in helping write an accessory dwelling unit chapter as they rolled out hard money funding for investors doing this via flips, holds and even secondary units on rentals already purchased. Aaron followed with people he had worked with on this, including Kristi Cirtwell, and he looked at Dossier Capital’s properties this summer. This interview is a follow-up to what they have done and if they still love ADUs. 

Episode Highlights

  • How did the three of them get started in the business, and was it hard when they first started out?
  • What has been the response from both the cities and buyers regarding their projects?
  • What is the definition of a cram lord, a term Aaron coined?
  • What is their approach to designing ADUs, and how does the area they are in affect what they do?
  • What is covered under SB 13 that will be greatly beneficial to both homeowners and investors?
  • What is the TIC model for an ADU?
  • How can people talk to them if they are interested in exploring ADUs?

Episode Notes

Michael Delacruz began by talking about how they started the business. This is going to be their 12th year in business now. They started the business flipping, developing, and really looking at the next big thing. They call it seeing the invisible and trying to stay ahead of the curve. For the past few years now, starting in 2017, they have been really focused on ADUs and seeing the huge benefits for homeowners and investors. A lot of properties that were not able to pencil out are now penciling out. They have really been focused on that and buying in bulk. Today, they’re still flipping and developing, but they’re using the ADU ordinance as their advantage to keep some of the properties that they’re purchasing.

They didn’t have the advantage of all the bills that just went through in 2019. Aaron wondered if it was a rough start for them. Michael said it absolutely was, and not only for them. There’s a major learning curve for the city as well. This is all new to a lot of new planners, and there is a new audience on that is now available in 2020 that the planners have yet to get training on. They should be getting to train any day now, but there was a lot of confusion when they first started submitting ADUs from both their side and the planning side. Now people are getting more familiar and it is gaining a lot more popularity. Even with these new rules coming in 2020, there’s will be a new learning curve on that as well.

When Aaron spoke to the Long Beach Landlord Association on ADUs, they gave him a little sass on the phone and seemed very annoyed. They hadn’t looked at it yet, and that was in November. A lot of cities haven’t spent the time to look at what’s actually already in play in January. People are allowed to submit their plans, but until some of the planning departments get training on what the new rules are and what’s allowed, they’re not able to start processing them. They have been hearing that any day now they will be getting training in and reviewing plans. Aaron asked if they are attaching the new rules to their application to help them. They said yes and that they are being kind and educating them as much as they can. They’re going to get there, and everyone’s well aware that this is going to be an influx of new applications based on this new ordinance and the changes to the new ordinance.

Aaron next went on to ask what the response from the cities has been. They said the experience has been great. They have been working in these cities for 10 years plus, mainly in the city of L.A. and the county of L.A. This is where they design and build ADUs not only for themselves but for other homeowners and other investors alike. It’s been great. They’ve been willing to work; and although they may not have all of this information, they’re willing to work with them and get them to the right person to get them that information. It’s nothing new, and they have had these relationships with many of the planners and people in those departments, so it’s been a great experience on their side.

Aaron got to tour two of their ADUs in Frog Town in the L.A. area. Aaron wondered what the neighbors’ response has been to them. Oftentimes with the two projects that he saw, it wasn’t just the ADU that they were rehabbing. They were also rehabbing the primary residence. Aaron wondered how the neighbors felt about them in the neighborhood?

Mike said he has spoken to some of the neighbors in the areas that they are in, and so far it’s been great, granted that they love building appropriately for the neighborhood. They are always mindful of what the neighbors are thinking and saying and not building monstrosities in some of the neighborhoods that they are in. One thing that they always keep in mind as well is the aesthetics. If they have a beautiful Spanish home, then they are building the ADU appropriately for that neighborhood.

The other great thing they have had is a lot of neighbors and homeowners coming to them and asking what they’re doing. A few of them have actually brought them on as a consultant or two to actually get their home entitled and build an ADU for them. That’s been a great experience as well.

It’s good to hear that the neighbors are all for it since there’s sometimes a fear that they’re getting rid of parking. This is something with which they haven’t really dealt. Those concerns do exist out there, and there will be people who don’t want that in their neighborhood. For the most part, the beauty of them being in this urban oasis is that there are a lot of the people in the neighborhood that they work with who understand that there is a housing shortage. Building to the consideration of the local neighborhood and architecture and being mindful of that really helps their case.

Aaron said it comes down to the buyers. They have been at this for a year and have the experience. Aaron wondered what the buyers’ response has been and what their plans are for the ADUs. He wondered if they are looking to buy one of their flips on the ADU to rent it out or to use it for a family member. He wondered if there is a general rule or if everybody is looking at it differently? They said they actually got to talk to the owners of the ADU in Los Angeles that Aaron looked at with them. They rented theirs out for $2,500. Dennis said they had bought it for $1.25 million, and it rented out within a week. That helps them afford a property they may not have been able to afford on their own.

Aaron was at an event where somebody was getting a divorce, but they wanted to keep the home and were looking at an ADU. He wanted her to feel comfortable owning the house, which they were going to keep together. She was going to live there either in the ADU and then rent out the primary. It was an interesting option. Mike said they are also designing and eventually will be building a home for a couple who were considering moving out and downsizing. With the new ADU ordinance, their thought is that they can build an ADU for themselves at the rear of the property, single-story and possible ADA compliant. What excites them the most are the clients who are interested in the ADA compliant building of these ADUs and renting out their existing homes. This a great option that a lot of people did not have before 2017.

Another interesting thing they have noticed is they have two clients they are working with right now. One couple wants to build the ADU for one of the parents; and with the other couple, the parents are building the ADU for their newlywed kids because of affordability and because their home sits on a large lot. They decided to build an ADU for their kids to move into. It’s really interesting to see buyers and homeowners getting creative in this way and being able to share the land but not have to share the space. They both have their own privacy, and one of these couples is building the ADU with privacy. It’s going to have a fence surrounding the perimeter and their own private space even though they’re living with them in the same rent.

Aaron did an interview last week where he said he thinks design is very important, and he would hate for investors to become cram lords. He created the definition of a cram lord being an investor who crams as many ADUs and square footage onto a lot as possible, therefore ruining the design and lowering value. Aaron has followed Dossier online for years, and they have always done a very beautiful job aesthetically on the design. He never imagined them going into a property and seeing how they could blow it up.

Aaron asked if they have an approach to designing ADUs. They said it definitely starts with the neighborhoods they are in and the lot size they are given as well as the aesthetic or design. It’s really about knowing who is going to be either buying or renting in these neighborhoods and what amenities they want. One way of capturing an amenity if they don’t have a lot size is building rooftop decks and being able to have the ADU folks that are either renting or buying have access to an area where they can entertain on a rooftop. With the neighborhood that they’re in and the views that they have surrounding, it’s a great add on and value for these folks.

Aaron was shocked by the ADU in Frog Town because it seemed like the setback wasn’t very far, but it was a great example of what they were discussing. They are doing a vacation rental on the front, which is very smart, and in the back, it was basically a three-story with a two-story live space. At the bottom was the garage, kitchen, and living space, the second level were two bedrooms, and on top was a great deck on the very top. Aaron wondered if this freaked people out or if they were cool with it. They said they haven’t had any issues with that. What’s cool about these neighborhoods is there’s already apartments and multifamily type buildings scattered throughout these neighborhoods. For example, their neighbor has a two-story apartment that’s four units. They have been towering over the property for 50-60 years. They’re lucky in that sense that in these neighborhoods where they work in L.A., people understand that this is where they’re headed. It is what is necessary now with the housing shortage, the current rental market, and the feasibility for people.

Aaron asked if this property was finished and if they had already sold it. They said they are almost finished with this one and will be ready to go on it within the next three weeks. They are very happy with how it turned out and are excited to see how the market appreciates in value. It will be the first one with a rooftop and that two-story build out that they sell.

The nice thing is that they are creating comps in that neighborhood. The first one that Aaron went to was a single-family residence that was a three-two. They did a beautiful renovation on the front house, and on the back, it was a garage that they converted to an ADU that was around 600 square feet. It was really nicely designed. Aaron finally featured Dossier Capital in the Forbes story that he did that featured their ADU. Aaron wondered what the buyers’ response was to that specific comp. He wondered if it sold quickly and if they got what they wanted for it. He said yes and that this was actually the one he talked about earlier that they were able to rent it out for $2,500. They were in escrow very quickly, within ten days.

The guys at Dossier really enjoyed finding out the story behind the ADU and what motivated people to have it and what they loved about the house. It’s not often that they can actually connect with the buyers. Being that they were able to talk to them, the customers said they had lost out on a bunch of properties in the area. When they saw Dossier’s property come up, they just knew they had to have it. They came in above the asking price and mentioned that they lived in Silver Lake.  He mentioned that this particular part of L.A. was exciting to them because it felt like old school Silver Lake.

Aaron next went on to ask them if they talked to the realtor Jay about this property, but they did not. Although, it could have been their agent who talked to him. Aaron just happens to know the investor/realtor on the other side of that transaction. When he posted the Forbes story, Jay said it was his buyers bought that property. They get to store that comp in the same neighborhood, but this is a really different one because of that rooftop. It will be very interesting to see how that compares pricewise and if they get what they want.

Aaron wondered if they pre-list their properties or if there is a buzz about it already. He wondered if they had some early interest on the one that’s in the same neighborhood with the three-story ADU. They said they haven’t listed it yet. They are at the final stages, so they start pre-marketing in about two weeks, and then they will be on in February. ADUs are something they will continue to look at in the year ahead

The newly revised ordinance, SB 13, will be huge for many homeowners and investors as well. A couple of the big-ticket items are no development fees. For cities in Pasadena, where they had a large development fee for you to even submit and then get an ADA you approved, that is no longer the case. The second is you can now add an ADU to a multi-family zone block. That’s also significant for them as well in being able to pencil out lots that they have currently, including two units in addition to that where they can have an ADU on the lot as well. This takes into account the caveat that it meets all other requirements in terms of setbacks and height restrictions. It’s going to be significant. They’ve already received many applications starting on January 1st, and they’ve been sitting there until the planning departments get training on what the new ordinance is going to be. They’re really excited about what they can submit for this year.

Part of what Aaron is excited about is investors who are not cram lords and have a very design-focused aesthetic and really looking at the livability of the units can play a huge game in having cities offer some other tools. The law basically says at least one ADU. It doesn’t mean that you can’t come forward and say, “Hey, this is a really big lot in Pasadena. This would be really easy to put a JADU and ADU on. We have beautifully designed it. What do you think?” You might be surprised what a city will allow you to do if you come in it with a really good design. The state is basically allowed to count ADUs towards some of its affordable housing goals. This might be a huge win for both, but they’re not going to do it for people that they don’t like.

On the multifamily front, the rule says cities can go upwards of 20 percent of the units. They’re supposed to allow at least one, but it doesn’t mean that they can’t do more. If you have a ton of land on a multi and you approach them and say, “Hey, I know this is a four-unit, but it could easily be an eight if we reconfigure,” they might say yes. You just never know. It would actually be a lot more than 20%.

Aaron asked if they decided to push the edge of what cities are saying they will do. They said they haven’t, and they don’t want to push the envelope on that. If you start seeing #cramlords, make sure Aaron gets the credit. They don’t want to be cramlords, and they want to make sure they are building appropriately. In the areas they plan to submit for multifamily, they have the lot size and the ability to have some parking. With an ADU, you’re not required to have parking. In some neighborhoods, they even have the ability to have parking on the lot.

Aaron said this could be worth a lot of money. He grew up for seven years in New York City where parking spaces were forty thousand dollars in the 2000s. In some cities, it’s terrible, and some people just don’t have cars. That is definitely a thing if they’re going to take mass transit and that’s the game. But even if you have a car, a parking spot could be worth a lot of money. This is what Aaron thought was so interesting in Dossier’s design on one of their properties. They had a single garage space for the ADU in the back, which was really smart.

The law states that you can’t sell the ADU separately, but they have have been exploring the TIC model for ADUs. Aaron wanted to discuss this since it’s not on very many people’s radar. Aaron wondered if they have thought outside the box on this one. Dennis said with the TIC model, instead of actually subdividing your lot and waiting for a longer period of time, they’re able to sell basically partial ownership, fractional ownership of the property of the asset. In San Francisco, they’ve been doing it for quite a long time. Dossier has a great attorney out there who’s been putting together these TIC projects for the Bay Area for over a few decades here. They’re working with her, and she’s helped them redo a couple of their triplexes to fit a TIC model. They’re able to sell these units independently to different buyers, and they own a portion of that property. There are only two lenders in Southern California now that could lend for it. They have had one specific lender visit the TIC properties, and they showed the lender their ADU property as well. They got their opinion on whether they could do a TIC, and they loved the property just because it’s clean and it’s already split up. They mentioned that they could do the TIC financing for it, so they had already given approval on the financing in that they would love to finance the ADU if they split it for TIC. They haven’t spoken with our attorney yet to see if that’s possible, but from a lender’s perspective, they mentioned they would love to finance it.

The TIC refers to a share of the square footage that you own. Aaron asked if there is any room for Dossier as investors to withhold the share for their own. Dennis said no unless there were more units. They are in escrow right now on a four-unit property right in L.A., and one thing they have been toying with and speaking to other investors about is how they could get the property ready for TIC and renovate everything. They could sell three of the properties and keep one free and clear. If there are enough room and enough units, then they can keep a specific unit. Actually holding a piece or a percentage of a unit that we’re looking at is not possible. You only keep units as a whole, which would then be a fraction of the cost.

Temecula just outlawed vacation rentals this week. The state law basically invited cities as they were updating their ordinance to get rid of vacation rentals. Aaron asked if they are worried this may impact the price of people who might buy these with the ADUs. Mike said it seems like they are working towards that in L.A. They don’t know if they’ll be able to do an all out ban there because it’s so expensive. However, they have found that in the neighborhoods they work in, the long-term rentals are just as good, if not better when it comes to the wear and tear of vacation rentals. That is definitely an issue. You have different people with different living styles coming through the house every few days. There’s that component as well as just having to actually manage it or paying a property manager to manage your vacation rental. This can run up to 20 percent of the gross rent. In that sense, they have also found that in a lot of the neighborhoods they work in, the long term rental rates are just as good when you factor those things in.

Aaron ended by asking them how someone can get a hold of them if they were interested in exploring ADUs. They said they actually just opened their design and build company DCLA Design Build. They are now starting to work with many more homeowners to design and build their ADus, but also for designing and building their custom home or their addition and full remodel. That service is out there now. You can reach them at info@dcladesignbuild.com. Let them know your thoughts are and how creative you want to get with ADUs or home remodels.

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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