Manufactured Housing and ADUs with John Arendsen #672

John Arendsen blog

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 kn