TO: Board of Supervisors
FROM: Minh C. Tran, County Executive Officer
REPORT BY: David Morrison, Director of Planning, Building, and Environmental Services
Jennifer Palmer, Director of Housing and Homeless Services
SUBJECT: Discussion and Direction on ARPA Investment in Affordable Housing Programs
RECOMMENDATION
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SET MATTER 10:30 AM
Directors of Housing & Homeless Services (HHS) and Planning, Building, and Environmental Services (PBES) request discussion and direction regarding the following actions related to the U. S. American Rescue Plan Act (ARPA) standard allowance allocation of $7 million to Affordable Housing Programs which will lead to the construction of more affordable housing through expanded affordable home ownership and the creation of Accessory Dwelling Units (ADUs):
1. Adopt a Resolution updating the Proximity Workforce Housing Assistance Program Guidelines to increase the down payment assistance maximum, and consider increasing the overall program funding using approximately $1 million of ARPA funding and $2 million of Affordable Housing Fund available fund balance to meet the anticipated increased demand;
2. Directly invest in programs that support ADU market-rate development using approximately $1 million of ARPA funding;
3. Expand the existing County ADU loan programs to support affordable housing development through funding and expansion of program guidelines using approximately $5 million of ARPA funding; and
4. Streamline permitting processes and consideration of fee waivers under specific circumstances.
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EXECUTIVE SUMMARY
Napa County received a federal grant allocation totaling $26.76 million in May 2021 and continues to evaluate how to provide for its local public health response and economic recovery. On February 8, 2022, the Board received a presentation on affordable housing program investment opportunities and directed staff to return with recommendations supporting modification and expansion of housing opportunities.
This substantive one-time funding allows the County the opportunity to make bold, transformative investments in affordable home ownership opportunities and the creation of a unique public-private partnership in ADU development across Napa County. ADU’s are naturally occurring affordable housing that provide badly needed rental housing units, leverage existing residential parcels supporting development within established neighborhoods, help all our jurisdictions meet Regional Housing Needs Allocation (RHNA) goals, and can help families build wealth by providing a low- or fixed-income homeowner with a steady income stream. In short, investments in ADU development provides a constellation of returns to our community that benefits us all.
PROCEDURAL REQUIREMENTS:
1. Staff Report.
2. Public Comment.
3. Motion, second, discussion and vote on Resolution.
4. Direct Staff to develop contracts, programs, and guidelines for ADU development and financing, returning to the Board in Fall 2022.
FISCAL & STRATEGIC PLAN IMPACT
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Is there a Fiscal Impact? |
Yes |
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Is it currently budgeted? |
No |
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Is it Mandatory or Discretionary? |
Discretionary |
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Discretionary Justification: |
There is no mandate to allocate American Rescue Plan Act funds to increase investments in affordable housing program expansion. |
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County Strategic Plan pillar addressed: |
Healthy, Safe, and Welcoming Place to Live, Work, and Visit |
ENVIRONMENTAL IMPACT
ENVIRONMENTAL DETERMINATION: The proposed action is not a project as defined by 14 California Code of Regulations 15378 (State CEQA Guidelines) and therefore CEQA is not applicable.
BACKGROUND AND DISCUSSION
On February 8, 2022, the Board received a presentation on affordable housing program investment opportunities and directed staff to return with recommendations supporting modification and expansion of housing opportunities with American Rescue Plan Act (ARPA) grant allocation.
Proximity Workforce Housing Assistance Program Investment
The Proximity Workforce Housing Assistance Program was established in 2011 to address the needs of the local workforce. The purpose of the program is to assist low- and moderate-income households who are part of the Napa County workforce with purchasing a home close to their place of work. The intent of the program is to strengthen the jobs-to-housing nexus for individuals and families working in Napa County by:
1. Increasing housing opportunities affordable to members of the proximity workforce, and
2. Reducing displacement of those members who may otherwise choose to purchase homes outside of the County due to lower home prices.
Staff will provide an overview of proposed updates to the program guidelines as well as an overview of investment needed to support increasing the percentage of down payment assistance from 10% to 16.5% and increasing the number of applications which can be funded annually to 30 with loan fund balance and ARPA funding.
Investments in market-rated development
Accessory Dwelling Units (ADU’s) and Junior Accessory Dwelling Units (JADU’s) are small living units on existing residential properties. ADU’s are small (typically between 400-1000 sq ft) independent homes with their own cooking and sanitation facilities and outside access. JADU’s are typically even smaller than ADU’s (cannot exceed 500sq ft), are enclosed within a single-family home, have independent cooking facilities and outside access, but can share sanitation facilities with the primary home. Because of their small size, ADU’s and JADU’s are considered “naturally occurring affordable housing” that helps jurisdictions affirmatively further fair housing (AFFH) and increase equity in housing opportunities in the community.
Bay Area housing costs are at historic highs. Recent California legislation has facilitated policy changes at the local level that encourage ADU development by streamlining permitting processes and shortening approval timelines. State law requires jurisdictions to allow at least one ADU and JADU per residential lot. These legislative and policy changes have supported increased ADU development across many communities in California. Constraints related to access to capital to finance construction and lack of understanding about the permitting process, project costs and site feasibility hinder the market despite these legislative advances.
Locally, innovative new services and programs providing homeowners with education, access to capital and technical assistance with purchasing and installing prefabricated ADU’s have been initiated. Today’s report includes presentations from two organizations, Napa-Sonoma ADU Center and Homes for Sonoma, providing unique technical assistance and project management services to homeowners.
Napa-Sonoma ADU Center
The Napa Sonoma ADU Center (“Center”) is a fiscally sponsored three-year pilot project of Napa Valley Community Foundation with support from Community Foundation Sonoma County and others. The Center began its work in 2019 by conducting a series of surveys, data gathering, and focus groups with city and county staff, builders, and architects, as well as homeowners who have built ADUs or are interested in building one in the future. This information helped shape a website (www.napasonomaadu.org) which now features an ADU Workbook (also available in hard copy), ADU Calculator, and spotlights of Napa and Sonoma County homeowners who have built ADUs. In addition to learning about the process of building and financing an ADU, the Center also provides feasibility consultations which include information on local ADU rules as well as a site visit at the property or virtually. Finally, the Center is preparing to launch the Napa Sonoma Standard ADU Plans Program. The program provides homeowners a gallery of diverse, “pre-reviewed” ADU plans as well as prefabricated ADU plans that have already been reviewed by a 3rd party consultant.
Redwood Credit Union ADU Construction Loan Product
Napa Valley Community Foundation (NVCF) and Redwood Credit Union (RCU) recently entered a first-of-its-kind partnership to accelerate the adoption of ADUs in Napa and Sonoma Counties. The result is an innovative ADU construction loan product that enables more homeowners to borrow the capital they need to construct second units. The product is designed to help homeowners who do not have sufficient income or equity in their existing home to finance building an ADU. RCU is managing all aspects of the ADU lending program. NVCF has set aside reserves that will be available to help defray losses that the credit union may incur under new underwriting standards that take future ADU rental income into account in ways that traditional loan products do not. RCU’s product makes up to $300,000 in construction financing available to homeowners who otherwise would likely not be able to finance building an ADU.
Homes for Sonoma
Homes for Sonoma is a nonprofit developer creating quality workforce housing options that support a safe and sustainable community. Founded to create affordable housing options in the immediate aftermath of the 2017 fires, the organization has since expanded its mission to find efficient, scalable solutions to address the housing crisis throughout California with an emphasis on accessory dwelling units (ADUs). The organization partners with homeowners to build and lease ADU’s using a ground-lease model. Homes for Sonoma handles all the design, project management, financing, and permitting responsibilities associated with building the ADU. Once the ADU is built, Homes for Sonoma handles the rental agreement, repairs and maintenance on the unit, and any lease enforcement issues. In exchange, homeowners split the rental income with Homes for Sonoma for a defined period. At the end of the ground-lease (or if the homeowner chooses to pay off the remaining balance on the unit sooner via refinancing), the homeowner owns the unit outright. The program is designed to make adding an ADU-to-rent to a property as simple, cost-effective and turn-key as possible.
Recommendations for capacity-building investment in these innovative new services and programs include:
1. Grants for feasibility assessment and “pre-reviewed” plans fees. At this time, the Napa Sonoma ADU Center provides free ADU feasibility consultations with interested homeowners, funded by philanthropic start-up capital. Soon the Center will begin charging a flat fee to cover the cost of the consults, which run around $500, and can be higher depending on the complexity of the site. The Napa Sonoma Standard ADU Plans Program will make plan documents available to homeowners at fixed fees between $1,000 to $2,000, paid directly to the designer, architect or prefabricated manufacturer who owns them. The use of “pre-reviewed plans” may also have the added benefit of saving time and money for both the homeowner and the jurisdiction, reducing staff time spent on ADU permit processing. See further discussion of options to streamline permitting for ADU’s and JADU’s below.
2. Financial support for long-term continuation of the Napa-Sonoma ADU Center. The Center was funded as a three-year pilot through June 2023. Funding will provide needed capital beyond the pilot period to maintain the ADU website, conduct webinars, update the ADU workbook, calculator tool, Napa Sonoma Standard ADU Plans program, and other ADU services and tools currently offered.
3. Grants to cover costs ancillary to the new Redwood Credit Union ADU loan product. Ancillary costs for the loan include origination and processing fees, lender fees paid to 3rd party (such as tax service contract or flood zone check), title insurance, notary and recording fees, and appraisals can range from $3,500 - $5,000. Grants to qualified homeowners can ensure access to vital construction financing and support this innovative new loan product.
4. Investment in prefabricated unit production to streamline the pipeline for homeowners interested in the Homes for Sonoma program. The single biggest limiting factor for prefabricated ADU development is production. The pandemic has wreaked havoc on supply chains globally, and manufacturing delays can negate the savings offered by prefab by causing months of lost rental revenue. An upfront investment supporting a pre-order of units will accelerate the pace of installation and support scaling the program in Napa. This investment will allow proceeds from units which are refinanced and paid back after installation to be re-invested into more pre-ordered units, effectively creating a revolving loan fund program for prefabricated units.
5. Grants for professional project management support. Provide grants to homeowners to cover costs related to construction management services by professionals qualified to do project management support, including the creation of construction contracts from the beginning of the ADU or JADU creation process through the completion of the project in return for a one-year deed restriction to rent the unit to an individual or family earning a low- or very-low income.
Expansions of existing County loan and incentive programs to support Affordable Housing
In the last few years, multiple well-intended ADU financing and incentive programs have been launched in California and have not been successful in rapidly changing the pace of ADU development. In June 2018, the Board of Supervisors approved a Junior Accessory Dwelling Unit Loan Program. The program provides a $40,000 no-interest, forgivable loan (plus the cost of permit fees) in exchange for a 10-year deed restriction to rent the unit to an individual or family earning low- or very-low income. Homeowners participating in the pilot program are required to utilize Napa Valley Community Housing’s (NVCH) Home Sharing program to select a tenant. NVCH conducts background checks and verifies the tenant meets income requirements. For every year the unit is rented to an income-qualified tenant, 10% of the loan is forgiven. If a homeowner opts to end their participation in the program before the 10-year period expires, forgiveness stops, and the remaining loan and permit fees are due to the County. At this time, the program is only available to homeowners in the unincorporated County, and to-date has not had any applicants.
From the many tried-but-not-successful programs across the State have come an overarching understanding of best practices in ADU incentive program design:
• Avoid long term affordability restrictions. Homeowners do not want to make decade-or-longer commitments.
• Offer an out for homeowners. Ensure loans and grants can be paid back and homeowner can exit the program when desired.
• Match the incentives to the requirements. If more restrictive conditions are desired (for example, limiting tenants to individuals and families with very-low incomes), the incentives need to be large.
• The simpler the better. Confusion around funding conditions or geographic constraints, coupled with uncertainty about the development process itself, prevents many qualified homeowners from moving forward. Keep the program simple and clear.
• Grants have much more success than loans.
With those best practices in mind, the following are a set of financing and incentive recommendations for loan program expansion and development:
1. Expand the existing County JADU program to include ADU’s, extend eligibility to all homeowners in the County, allow homeowners the option of using a tenant screening program or finding a qualified tenant directly, and increase the loan amount to $50,000 in return for a 5-year deed restriction to rent to an individual or family earning a low-or very-low income. Further considerations to increase the loan amount can include loans up to $100,000 for qualified low- and/or fixed-income homeowners for whom a rental income stream could ensure long-term financial security and the ability to age in place.
2. Establish a landlord risk-mitigation program for ADU rentals. One popular incentive used to engage new landlords is a landlord mitigation fund (also called a landlord guarantee or risk reduction fund). A mitigation fund is essentially an added protection for landlords who are willing to rent their ADU to an individual or family earning a low-income. Qualified eligible expenses for risk mitigation reimbursement include unpaid damages, unpaid rent or late-fees, loss of rent due to tenant abandonment, security deposits and housing stability bonuses (at lease-up for the first year-long lease, and each subsequent year for lease renewals.)
Permit Streamlining for ADUs and JADUs
On September 12, 2017, the Board of Supervisors unanimously adopted an ordinance amending the County Code to bring it into conformance with State law to specifically allow for and facilitate Accessory Dwelling Units (ADUs) and Junior Accessory Dwelling Units (JADUs). On February 4, 2020, the Board of Supervisors unanimously adopted an ordinance amending the County Code to further encourage ADU and JADU development, in accordance with recent State legislation.
Napa County’s support for ADUs and JADUs has been long-standing. Over the past 8 years (2014 to 2021), the County has approved 90 ADUs and JADUs in the unincorporated area. These units have played a key role in the County’s efforts to satisfy its Regional Housing Needs Allocation (RHNA) requirements. Since 2019, staff has worked closely with the Napa-Sonoma ADU Center to promote the development of ADUs and JADUs.
When a landowner applies for an ADU permit, the County charges fees to cover the cost of processing, reviewing, and approving the Building Plans, as well as inspecting the construction. Fees are set to recover staff costs and are paid into an enterprise fund, which is independent of the general fund in the budget, as the Building Division is 100% fee supported. For example, assuming the value of a new ADU is $160,000, the County building fees would total approximately $13,000 (including a $4,400 affordable housing fee), or an additional 8% to the cost of construction. If a new well or septic system is required, fees may increase to about $15,000, which is still less than 10% of the construction cost. These fees generally are a small part of the overall project cost to install a new ADU but can act as an unexpected and additional obstacle to developing affordable homes.
One way to potentially reduce this barrier would be for the County to waive all or a portion of the building permit fees. Assuming the County continues to approve 11 new ADUs per year and that the fees for each ADU are $15,000, the annual cost of the program could be around $165,000. Such a program could be made even more cost effective, if fee waivers were pro-rated based on the owner entering into an agreement with the County to limit tenants of the ADU to families with low- or very-low incomes. These would be agreements similar to those already in use by the County today. As an example, if the owner is willing to enter into a 5-year agreement, 100% of the Building Permit fees would be waived. A 4-year agreement would result in an 80% fee waiver; a 3-year agreement would provide a 60% waiver, and so on.
It should be noted that if a fee waiver plan were to be enacted by the County, the costs to the Building Division would have to be fully reimbursed by the County general fund or other identified ongoing funding source.
In addition to a fee waiver for those owners who choose to enter into a rental agreement, there are other actions that the County can take to reduce costs and expedite the permit review process.
• Building construction involves numerous State and local requirements, which can sometimes conflict resulting in additional time to find a solution that complies with all regulations. The PBES Department can designate a single point of contact, to assist landowners in navigating through the various permit approvals and requirements. The point of contact could also work with individual divisions and departments within the County to ensure that permit roadblocks are identified and resolved early in the process.
• Similar to the success of the County fire rebuild program, the PBES Department could prioritize ADU permits and reduce the initial permit review from the standard 30 calendar days to two weeks.
• The PBES Department could make free pre-application meetings available for owners looking to develop an ADU and/or JADU. The meeting could answer questions about the Building Permit process, identify potential issues, and inform owners of additional development costs such as wells, septic systems, fire protection, and access.
Developing an ADU or JADU involves many different considerations for landowners, including impacts to homeowner’s insurance, increase in income and property tax, reduced privacy, renters’ rights and eviction limits, availability of contractors, cost of construction materials, and more. Installing a new home on your property can be a challenge. While Building Permit processing time and costs are significant factors, they are not the only concern and may not even be the primary one. Nevertheless, if taking one or more of the steps described above makes a meaningful difference in developing new ADUs or JADUs, it will not only help the landowner but will also help provide homes for people who shop and work in local businesses, send their children to local schools, and participate in local organizations, which benefit us all.