Second Units in the CountyOct 24, 2019

WHAT TO EXPECT TONIGHT

Welcome, Introductions, HAT, Q&A, County ADU Plans

Dan Gjerde, 4th District County Supervisor

County and Coastal Zone Second Unit (ADU) Regulations, Requirements, Coastal Ordinance

Linda Ruffing, North Coast Community Planning

Construction and Working with a Contractor

Cynthia Sharon, Dancing Dog Design Build

Finances of Building and Renting an ADU

Marie Jones, Marie Jones Consulting

Requirements for Accessory Dwelling Units in Mendocino County

Linda Ruffing forHousing Action Team workshopThursday, October 24, 2019

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1. “Accessory” to an existing residence. Independent living unit with

kitchen and sanitation facilities. May not be sold separate from primary

residence. Intended to increase supply of rental housing.

2. Junior ADU (JADU) –

▪ Contained within an existing residence

▪ Considered to be part of that residence

▪ 500 SF size limit

▪ Separate entrance required

▪ Efficiency kitchen required

▪ Separate or shared bath ok

▪ May not be used as vacation rental

▪ Owner must live on premises

▪ JADU deed restriction required

3. ADU –

▪ Attached or detached

▪ 1,200 SF size limit (detached)

▪ If attached, may not exceed the lesser of 50% of existing living area or 1,200 SF 2

What is an Accessory Dwelling Unit (ADU)?

Three Sets of Regulations for ADUs

in Unincorporated Mendocino County

1. Inland: Mendocino County Code, Title 20, Division I

2. Coastal Zone (including Gualala Town Plan area): Mendocino

County Code, Title 20, Division II

3. Town of Mendocino: Mendocino County Code, Title 20,

Division III

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First Question: Inland or Coastal?

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▪ ADU is not allowed if there is more than one dwelling unit on parcel. (JADU is not

considered a separate dwelling unit)

▪ ADU is not allowed if there is more than one “accessory residential unit” (guest cottage,

detached bedroom) on parcel.

▪ 1 parking space is required per ADU. Tandem parking is ok. No parking required if located

within ½ mile of public transportation stop.

▪ Fire sprinklers are not required if they are not required in primary residence.

Process:

1. Environmental Health sign-off on septic

2. Environmental Health sign-off on water

3. Preliminary clearance from CalFIRE

4. Building permit

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Mendocino County – Inland ADU Requirements

▪ Only one JADU is permitted per parcel.

▪ Owner must reside on site.

▪ No additional parking required.

▪ JADU is considered part of primary residence.

▪ JADU may not be used as vacation rental.

Process:

1. Environmental Health sign-off on septic and water. For

purposes of evaluating septic and water capacity, JADU is

not considered an additional bedroom

2. Deed restriction

3. Building permit6

Mendocino County – Inland JADU Requirements

▪ Current Local Coastal Program (LCP) prohibits ADUs, except in Town of

Mendocino and Gualala Town Plan area

▪ Planning Commission made recommendation to BOS on draft LCP

Amendment for ADUs (July 18, 2019)

▪ Board of Supervisors will conduct public hearing and consider action on LCP

Amendment for ADUs (Nov 5, 2019 at St. Anthony’s Hall in Mendocino)

▪ Once LCP Amendment is submitted to Coastal Commission, it will take about

6 months for review and certification

▪ Then LCP Amendment (General Plan and zoning ordinance amendments)

must go through local adoption process

▪ New regulations for ADUs in coastal zone should be in place by late 2020

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Mendocino County - Coastal Zone ADU Regulations

Status Update

In general, Coastal ADU regulations will be aligned with Inland ADU regulations, with the following

additional requirements:

▪ 500-unit cap will be established on number of ADU permits that may be issued after which County

must update SR 1 Capacity Study and process an LCP Amendment to modify or remove cap.

JADUs are not subject to the cap

Gualala Town Plan area retains separate 100-unit cap on ADUs

▪ ADUs and JADUs may not be used as vacation rentals (Inland: ADUs can be VHRs)

▪ Deed restriction required for ADUs and JADUs (Inland: not req’d for ADUs)

▪ Local fire district and CalFIRE clearance required (Inland: only CalFIRE clearance req’d)

▪ In Gualala Town Plan area-

Existing size limitations for ADUs are retained: 960 SF for detached; 500 SF for attached

Existing prohibition on ADUs west of SR 1 is retained

▪ Coastal resource protection policies and Coastal Development Permit requirements

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Mendocino County Coastal ADU and JADU Requirements

1. JADUs will be Exempt from the CDP requirement.

2. ADUs that are consistent with “objective criteria” in checklist (shown on next slides) will

be eligible for a new Ministerial CDP process.

▪ Streamlined permit process

▪ No public hearing required

▪ No local (BOS) appeal process

▪ If within Coastal Commission’s appeal jurisdiction, may be appealed to Coastal

Commission

3. ADUs that are not consistent with the “objective criteria” but can be found to be

consistent with LCP coastal resource protection policies may apply for a Standard

CDP.

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Mendocino County Coastal ADU Requirements

Coastal Development Permits

❑ ADU (including site improvements such as parking, driveways, wells,

septic, etc.) may not be located within 100 feet from boundary of

Environmentally Sensitive Habitat Area.

❑ ADU may not be located within Highly Scenic Area unless it would not

be visible from public areas (highways, roads, coastal trails, beaches,

parks, streams and waters used for recreational purposes).

❑ ADU may not be located within 125 feet from edge of coastal bluff

unless within existing legally permitted structure.

❑ Total amount of grading may not exceed 20 cubic yards.

❑ ADU may not interfere with public or prescriptive access to blufftop or

shoreline. (no exceptions)

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Mendocino County Coastal ADU Requirements

Coastal Resource Protection Checklist

❑ ADU may not be located on parcels designated as FP, DL or SS

Combining Districts.

❑ On parcels with AG, RL, FL or TPZ zoning, ADU may only be located

within 150’ of existing legally permitted structure. (no exceptions)

❑ On parcels with AG or RL zoning, ADU may only be located on non-

prime soils.

❑ On parcels zoned FL and TPZ, ADU may only be permitted in locations

where no timber removal is necessary.

❑ ADU may not be located within 200’ of lands designated AG, RL, FL or

TPZ unless it is attached to existing residence and maintains existing

setback. (no exceptions)

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Mendocino County Coastal ADU Requirements

Coastal Resource Protection Checklist

✓ Stay involved. Attend the November 5th Board of Supervisors hearing.

Write to the Coastal Commission and voice your concerns. Attend

the Coastal Commission hearing.

✓ Be patient. Coastal ADU regulations are still a year out.

✓ Getting permits for a JADU or an ADU that qualifies for the Ministerial

CDP will be much easier, quicker, and less costly than getting a

Standard CDP for an ADU.

✓ If you need a Standard CDP, be prepared to provide supplemental

studies (botanical, geotechnical, story poles, etc.).

✓ When you file a CDP application - make sure it includes a very clear

and thorough site plan.

GO FOR IT + GOOD LUCK!12

ADVICE

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QUESTIONS?

Dancing Dog Design BuildCynthia Sharon, Contractor

www.dancingdogdesignbuild.com

A Small Sample of

Dancing Dog Small Units

2nd Unit Design Considerations

Smaller & more efficient

Build in flexibility

Focus on quality & details

Simple = less expensive

Always do passive solar

More environmentally sustainable

Right size for smaller household

Ways to proceed....

Option 1: Hire an

Architect & Contractor

and let them do most

of the work

Option 2: Use free

second unit and plans,

with small modifications

and hire a contractor

to do the work.

Option 3: Use free plans, hire

a contractor to do most of

the work, and complete some

of the finish work yourself.

Option 4: Act as your own

general contractor and hire

and manage all subs.

Considerations

Selecting a contractor

Word of mouth, reputation

Check status of License at the

State Licensing Board

Ask to talk to previous clients

Ask for pictures of work

Goodness of fit - comfortable

working together

Further Considerations

Construction is stressful

Commitment of time

and money

Realization of your

vision

Give yourself a

financial cushion

Types of Contracts

Value of the Contract - defines expectations and

protects both parties

Fixed Bid - requires all design decisions be made

before biding or many change orders....

Time & Materials - get a budget (estimate) allows

for more design flexibility throughout the

construction process.

Not to Exceed Contract - Hybrid

Contract Questions

Fixed bid

What is in the bid?

Get as much detail in the bid

as you can. Provides info to

negotiate future change orders

What are the allowances?

How are change orders

handled?

Do you have a time frame in

your contract with penalties for

non-performance?

Time & materialsWhat is the P&O rate

What is the hourly rate

Can you purchase some of the materials yourself to save on markup?

Good communication regarding changes in design & materials

Comparing bids

Price is not the only

issue

Quality of workmanship

Reputation

Timing of job

Handling change

orders

Quality of

Communication

Cleanliness of job site

Paying the contractor

Fixed Bid - monthly

progress payments

based on amount

complete

Time and Materials -

payments based on

work completed and

materials used

Retention is 5 to 10%

Construction - Straw Bale

Sustainable

Super insulating for

sound and heat

Fewer local

contractors with

skill

Beautiful aesthetic

Construction - Stick frame

Easy permitting

Most flexibility of

design

Most customizable

Easier DIY

Proven in our area

Many capable

contractors

Easy resale value

3 to 6 months for

construction

Slab or perimiter

foundation

Type of finishes drive

cost

More articulation =

more cost

Tiny Home

Can you really live is

such a small space

Permitting & legality

“Affordable”

Customizable

Many self-contained

systems

Construction - Manufactured

and Modular

Variable time frame for

delivery

Transportation costs &

timing

Difficult to find contractor

to take on this type of

project

Can be lower quality

Financing issues

May be less expensive

Questions?

The Business of Building,

Owning and Selling a 2nd UnitMarie Jones

Marie Jones Consulting

Topics...

Do second units add value to your property for resale?

Designing and locating a second unit for maximum

value

Typical cost of construction

Is it financially smart to build a second unit? Understand

the Cap rate and IRR....

How to finance your second unit

How to run it like a business

Tax implications of a second unit

How do realtors and banks value

second units?

Biggest purchasing demographic is the out-of-town buyer, retiring sometime in the future, who wants to get income from their property, but still have a place to come and stay when they come to the area themselves.

Glut of vacation rentals, vacancy rates are increasing and income potential is going down.

Rent the primary home on a month-month, and the 2nd unit has value for an out of town owner who wants a place to visit.

Typical appraisal valuation of a second unit is around $100,000, implications for bank loan

Second units are currently a fair investment for resale, although it depends on the cost of construction.

Design/location for Maximum Rental &

Resale Value

Considerations: How good is your neighborhood? How much can you anticipate in rental income? Nicer units attract better tenants who are more responsible and can pay more. You can spend too much money making the unit nice....

Option 1 - Separate Second Unit

Separate vehicle entrance

Construct the unit a fair distance from primary unit, consider utility connections....

Separate yard & landscaping

Quality kitchen and bath

Best size is in the 800 to 1,200 SF range

Option 2 - Second Unit above a garage.

Construction Costs

Soft Costs (15 to 25%)

Permitting (time & money) - $8,000 - $15,000

Studies: Botanical & Biological, Geotechnical, Archaeology, Visual

Analysis $3,000 to $10,000

Design & Engineering $0 to $15,000

Hard Costs (75 to 85%)

Site Clearing & Access - $5,000 to $20,000+

Construction - $120,000 - $170,000+

Utilities (septic, water, PG&E, Propane, etc.) $3,000 - $15,000+

Landscaping $1,000 to ?

Realistic total cost $150,000 to $200,000 could be more depending

on site conditions and design

Feasibility Analysis

CAP Rate

Simple way of evaluating the financial performance of a real estate asset

(Total Annual Rent-taxes and insurance)/Total Cost of Structure

Preferred CAP rate for a real estate investment is 8%+

Example: Second Unit Evaluation

Total cost to construct second unit estimated at $120,000

Total Annual Rent estimated as $14,400 ($1200/month)

Total annual taxes and insurance $1,500

Cap Rate ($14,400-$1,500)/$150,000 = 8.6%

Feasibility Analysis continued

Internal Rate of Return (IRR)

Complex evaluation of return on investment.

Considers the cost of the improvement, the

revenues minus expenses over a twenty-year

time frame and the appreciation of the asset

upon sale in 20 years.

This is the actual amount of money you will

make from the 2nd unit.

Financing Your Project

Your Cash – may be best option…

Construction Loan

Pay interest only on out standing amount. Higher interest rate.

Loan to value ratio 70% - 80% based on value of improvement upon

completion

Take out Mortgage

Manufactured homes not eligible for secondary market financing.

Second Mortgage, may be difficult because most mortgage companies

don’t want to hold a second mortgage due to heightened risk. Possible if

you have significant equity in your property. Higher interest rate.

Refinance Existing Mortgage – probably not a great idea if you have paid

off more than five years of your mortgage.

Operating a 2nd Unit Rental

Revenues & Expenses

Expenses

Taxes – reappraisal

Insurance

Utilities – separate electrical meter, well cost, septic pumping, propane

Maintenance & repair reserve (3 to 5% of revenue per year)

Depreciation

Management costs (plan on one month of vacancy every 2 years and

associated cleaning costs)

Revenues

Rent

Utilities payment (Sub Metering)

Operating a 2nd UnitTax implications

Schedule E for rental income

If your residential home is on the same property as the rental unit,

you can not have a net negative (loss) income from the rental

Depreciation (loss) = value of 2nd Unit/27.5 years.

Tax rate for net rental income is the same as your

income tax rate.

Income Analysis Example

$150K Second Unit

Second Unit Tax Analysis

Annual

Rental Income 15,600.00$

Expenses

Mortgage (Attributable to 2nd unit) 5,700.00$

Property Taxes 1,500.00$

Direct expenses 700.00$

Depreciation 5,454.55$

Total Expenses 13,354.55$

Net Taxable Rental Income 2,245.45$

Actual Rental Income 7,700.00$

Operating a 2nd Unit Rental

Enjoy working with people, who may

sometimes be demanding

Enjoy small repair projects

Can handle the rental cycle: advertise,

show, select a tenant, lease for a year or

two, repair & clean and repeat.

Inspect and repair properties

Book keeping, tracking revenues and

expenses and completing schedule E

Questions?