Key Changes in ADU Lending: CMA Fall Conference
As the ADU market expands, significant legislative updates are reshaping the legal and lending landscape for private lenders. Here’s a detailed look at the most impactful changes in 2024 and how they can affect your lending practices.
The 5 Key Changes
1. Selling ADUs as Separate Properties (AB 1033)
Under AB 1033, homeowners can now sell ADUs independently from the primary residence, a significant shift from the previous rental-only model. This law allows property owners to treat ADUs more like condominium units, giving them flexibility to create new investment and revenue opportunities. However, since this is a new model, some uncertainties remain about how these transactions will be structured, including issues related to shared utilities or property access.
Lender Impact: This change introduces complexity in ownership structures, so loan documents must be updated to reflect the potential sale of ADUs separately. Collateral must be carefully structured to ensure the lender is adequately protected in cases where the ADU is sold independently. Lenders should also be aware of any local ordinances or HOA rules that might impact the sale or financing of these units.
2. Owner-Occupancy Rules Removed (AB 976)
Starting in 2024, AB 976 permanently removes the requirement for property owners to live on-site when renting out ADUs. This provides investors with more flexibility, allowing both the primary residence and the ADU to be rented out simultaneously. This development is particularly beneficial for non-owner-occupied properties, expanding the potential rental income for investors. However, Junior ADUs (JADUs) are still subject to the owner-occupancy requirement, so lenders need to distinguish between ADU types.
Lender Impact: Lenders should update cash flow and DSCR calculations to reflect the increased rental income potential from non-owner-occupied properties. Additionally, loan documents must clearly outline whether the property includes an ADU or JADU and ensure that borrowers are complying with the relevant occupancy regulations.
3. Streamlined Permitting and Pre-Approved Plans (AB 434 & AB 2221)
With AB 434 and AB 2221, local agencies are now required to approve or deny ADU permit applications within 60 days, significantly speeding up project timelines. Additionally, by 2025, cities must offer pre-approved ADU plans, reducing design and approval costs for homeowners and developers. This creates a more predictable and efficient construction process for those looking to build ADUs.
Lender Impact: Faster approvals reduce the time from loan origination to project completion, meaning lenders can see quicker returns on ADU loans. Loan agreements should include construction milestones to protect against delays. Encouraging the use of pre-approved plans can minimize design-related risks and streamline the underwriting process. Lenders should also consider revising loan terms to reflect the reduced timeline.
Dennis Doss Breaks Down ADU Developments at the California Mortgage Association Fall Conference
Don’t miss this opportunity to hear directly from Dennis Doss, Doss Law and Doss Docs’ Founder and CEO, at the California Mortgage Association Fall Conference. Dennis will join leading industry experts to discuss the latest ADU legislation, construction practices, and lending insights. Stay informed on how these changes shape the future of ADU lending and how lenders can capitalize on these opportunities.
Hear more about compliance challenges, new investment strategies, and practical lending guidance.
Stop by Our Booth
4. Relaxed Height and Size Restrictions
Under the new regulations, detached ADUs can now be as large as 1,200 square feet, and height restrictions have been eased in transit zones, allowing ADUs to reach up to 25 feet in height. This increase in size and height offers greater flexibility for homeowners and developers to maximize the use and value of their property, particularly in urban areas where space is at a premium.
Lender Impact: Larger ADUs mean higher property values, which can positively affect loan-to-value (LTV) ratios. Lenders should adjust loan limits and consider the higher potential rental or resale value that these larger units offer. Additionally, loan documents should include provisions ensuring that the ADU’s size and height comply with local zoning laws, especially in transit areas.
5. Lower Fees for Small ADUs (AB 68)
AB 68 eliminates impact fees for ADUs under 750 square feet, reducing the cost of development. Larger ADUs still face fees but are charged proportionally based on their size, making it easier to budget for both small and large ADUs.
Lender Impact: Lower fees for smaller ADUs increase the affordability of development projects, allowing borrowers to reduce their upfront costs. Lenders can update underwriting models to reflect these cost savings, potentially increasing the loan amount or offering more favorable terms. Additionally, loan documents should clearly outline the fee structure for larger ADUs to ensure that borrowers have accounted for all costs.
Get in touch
We care about your lending success.
Prudent legal advice comes from experience. We have over 50 years of it.
© Doss Law, LLP. Attorney advertising materials. These materials have been prepared for educational purposes only and are not legal advice. This information is not intended to create an attorney-client relationship. Consult a knowledgeable lawyer before implementing any of the ideas in this publication.
