Previous editions of the Eliot News have discussed Portland’s new, and novel, Residential Infill Project (RIP). On paper, it changes the zoning code to allow “higher” density development on what we normally consider single-family lots and associated neighborhoods. The objective is to address the “missing middle” of housing options between single-family homes and large apartment blocks by mixing other multi-family dwelling types amongst single-family homes. Two of the obvious examples of this are Accessory Dwelling Units (ADUs) and “flag” lots, both of which incorporate new dwelling units on a single lot.
Many single-family neighborhoods are afraid of RIP. A good example is the headline of a local realtor’s marketing paper. Stephen FitzMaurice publishes this paper, the Portland Real Estate Paper in both print and on the web at www.portlandrealestatepaper.com. The January 2021 print edition had the headline “Staring 2021, a Six Plex can be built next to any Portland Home.” Pretty alarmist! Fortunately, the article itself is not alarmist and is one of the best I have seen on the topic. Rather than duplicate his detailed article, I urge you to find a copy of this paper (I got mine outside Café Destino at 14th and Fremont) and read about it there. You can also find the article if you search for the title of the piece online or find it here – https://realestateagentpdx.com/starting-2021-a-six-plex-can-be-built-next-to-any-portland-home/18790. The article includes useful references, and the paper has other useful articles about property taxes.
Residents should not be alarmed about what RIP “might” do to a neighborhood. The reason for this has to do with how residential housing is financed. The residential mortgage market is dominated by government-backed financing products and bank regulations, which are conservative and designed to protect the lender’s investment (their loan). The bulk of residential (versus commercial) housing uses mortgage financing that is limited to 4 or fewer unit buildings by the mortgage industry. This makes it easier for lenders to “securitize” or sell off mortgages to other investors. In order to protect the funds they loan, as well as to bundle unrelated mortgages for sale to investors, lenders have strict income requirements, usually a proportion of income available to repay the loan, such as the mortgage payment being no more than 30% of income. This and down payment requirements dictate how much someone can borrow, and consequently, how much they can afford to pay for a residential building. For a “homeowner” this is a simple calculation that can be done using online tools.
It is not so easy when the property owner wants to add additional dwelling units on the same site, as is allowed under RIP. To a lender, these look like a unit separate from the home. If the owner has a high enough income, this isn’t a problem. However, if they expect to cover the additional loan cost through rents (Airbnb or otherwise), the lender typically treats it as a commercial, or income-producing, unit. They have different (higher) loan and income standards for units for rent. An additional concern for a lender is what if the borrower defaults on the loan? What can they sell the property for? It isn’t a single-family home anymore, instead, it is essentially a duplex, which is a form of investment property. As a result, homeowners wanting to use RIP to add dwelling units to their lot will confront unfamiliar barriers to borrowing money. The situation is worse for someone wanting to build multiple units, and once the number exceeds 4, conventional “residential” loans aren’t available and the borrower transitions to the “commercial” market, which has its own standards and regulations and where long-term, fixed-rate loans aren’t the norm.
For this reason, RIP is much more likely to stimulate the development of ADUs in the basements or garages of single-family homes in low-density neighborhoods than it is 2- or 3-unit buildings in the back or side yard. The “Six-Plex” in the headline is unlikely to be built next to most residences. Increasing housing options within city limits is a noble objective, but even the architects of RIP recognize it will not result in many new housing units, probably because of reliance on the private sector for residential finance. It will take significant government involvement in those markets and/or direct government funding for RIP to realize its goal of a robust “missing middle” housing supply.