Housing justice on a small lot?
Can you build equity on a small single-family lot? Three folks in San Jose try to make small scale development work for people and community
Bigger Ideas 5 : Where We Go From Here 13
Across the country, zoning codes are being loosened, especially in neighborhoods zoned exclusively for single-family housing. In California, state laws like SB9 and years of reform to Accessory Dwelling Units (ADU) regulations have started to unlock the housing potential of residential lots across the state.
Even as units start to materialize in neighborhoods, one major piece missing from this puzzle is a development model that allows lower- and moderate-income homeowners, especially in gentrifying neighborhoods of color, to take full advantage of these laws without having to leave the property.
Lower-income homeowners generally face a brutal choice: either try to stay in your aging house, or sell out and have to leave the community - and perhaps the state.1 It’s part of a long list of frying pan v. fryer choices that communities of color have faced for generations in California. So rarely are folks of color given real choices about what to do about their housing futures - even when they own.
We’re starting to see some pilot programs aimed at helping lower income folks build an ADU, part of what I consider the larger effort to build real choice. But what about more significant projects like an SB9 duplex or lot split? What about larger projects where the original house gets knocked down, and you get four units on the property? Or maybe more? Where are the creative models that enable longtime homeowners of color to stay in place, make money, build more housing - and help give the next generation an opportunity to do the same?2
In a quiet neighborhood in central San José, three people from different walks of life are trying to do just this - and do it right.
Raul
Raul Lozano grew up in the South Bay, and has owned a small red house in the Gardena neighborhood of San Jose since 1999. He worked for decades in a variety of nonprofits - youth work, local theater, and ultimately food systems advocacy with Valley Verde. It’s the kind of work that sustains communities across the country, but not the type of work that necessarily gives you a great pension.
Gardena is pretty typical central San Jose - neither rich nor poor, a little less than half Latinx, and wedged between highways, Downtown, and a bunch of other small neighborhoods. Almost half the households speak a language other than English at home, which sounds high in much of America but is actually below average for the incredible diversity that is Santa Clara County.
As Raul got older, it became clearer and clearer to him that he had a problem when it came to retirement. His mortgage on the small house was affordable when he was working, but after a lifetime of non-profit work, his post-retirement income wouldn’t be enough to stay in the house. He could sell and try to find a place somewhere else, but there isn’t exactly a lot of cheap smaller housing around, especially not in the neighborhood or nearby. He didn’t want to follow his brothers - and so many other folks, especially people of color - out to Tracy or Manteca in the Central Valley.
He was, in his words, “between a rock and a hard place”.
Kelly
Raul’s house is on a corner, with a huge backyard. He started thinking about building an ADU, which for some in Raul’s situation is ideal - he could have lived in the ADU and rented out the main house. But getting financing was a challenge, not to mention the work that would be needed on the main house. Folks like Raul are also the constant target of unscrupulous home flippers, fraudulent reverse mortgage sellers, and any other number of ‘businesses’ who prey on older and lower-income homeowners. He needed help, and needed someone he could trust.
Through mutual friends, he met Kelly Snider. Kelly has worked in real estate development for two decades, both in-house with major developers and now as a consultant and educator at San José State. Kelly was looking for an opportunity to build what she calls the Missing Middle Homeownership Program - a plan to convert older single daily homes into multi-unit properties in ways that don’t force anyone to decide between two bad options. She saw the clear potential of Raul’s property - a massive back yard on a corner lot, plenty of room on the property for 4 units - and perhaps more. An SB9 lot split was a possibility, as are other options now that local and state policy has gotten more flexible.
After putting their heads together, Kelly and Raul figured out a way for Raul to stay on the property for the rest of his life, and to pull a portion of his equity out. This would be useful for him since he doesn’t have children, and was interested in supplementing his retirement savings so he could actually enjoy this wealth while he was alive (you can’t take it with you, as they say). He wanted a new home, the choice to stay on the property for the rest of his life, and a voice in who got to live in the three other units.
This is what they came up with.
Raul and Kelly formed an LLC called Inca Homes.
Raul transferred title for the property to Inca Homes, and became a 5% owner of the LLC.
Kelly owns the remainder of the LLC, and provided the LLC with initial capital.
Inca Homes built Raul a brand new 2BR/2BA house in the backyard.
As part of the operating agreement of the LLC, Raul has a contract which allows him to live rent-free on the property for the rest of his life. This is a non-transferrable agreement.
The LLC paid Raul a certain percentage of the equity in the home at the time of transfer. This is now his cash to do with as he pleases. How much he got depended on choices he made. Had he asked for a bigger house with fancy appliances, he would have gotten less. He chose a smaller, simpler structure with recycled appliances, which enabled him to pull more cash out.
With his 5% stake, Raul has a say in all future decisions of the LLC - including how to develop the remaining units, whether to sell or rent them, whom to sell or rent them to, etc. He also gets a 5% share of any revenue the company earns.
In some ways, it functions like a reverse mortgage - but one rooted in equity, not exploitation. Raul can draw down on the capital he has in the house, and use it for his retirement. But he can also stay in the house forever.
Bertha
Raul and Kelly’s story doesn’t end with a nice model or a good pro forma. Someone actually has to build the project. And building the project is where many socially minded projects either die, or become much less just. If the folks doing the work to build the house are exploited, it’s not a just project.
Bertha Aguinaga emigrated from Peru in less than ideal circumstances a few decades ago. She worked in a variety of jobs, ultimately working for Kelly caring for her father as he aged. When this project started to come together, Bertha began helping with project management. She was bilingual, and helped communicate with the Spanish-speaking builders.
Everyone on the project agreed to take steps to reduce exploitation on the site. “There is a lot of injustice in the construction industry,” Bertha says, and it was important to all of them that this project be built differently. They eliminated the all-too-common practice of garnishing a portion of the wages of the workers as a check-cashing fee, and strove to be a site where workers get treated well. Bertha also talked to the workers about what they experienced. “Just being aware that by talking about the abuse they faced,” Bertha says, “we are trying to protect other workers and trying to prevent this from happening again and again.” People now call them hoping to work on the project.
It wasn’t always the easiest of jobs for Bertha. It took a little bit of time for the all-male workforce to get used to taking instructions from a Spanish-speaking woman. But they adjusted, and Bertha is now the site manager for the project. She is continuing to learn from the workers about life in the construction business, and what she can do to help them on and off the job site. Most importantly, Kelly and Raul and Bertha have agreed to do everything they can to enable Bertha to become one of the future owners on the property.
Raul and Kelly and Bertha
Raul’s house is now almost finished. It’s simple, beautiful, and efficient. Once the house is done, Raul will move in and they will begin the next phases of the project. They’ve already brought on Adam Mayberry to do the site planning, and intend to pull permits for phase two before the end of the year.
It’s not a project without major challenges along the way. The price of lumber and materials isn’t helping anyone. Their workers come in every day from the Central Valley and Gilroy, as Santa Clara County long ago priced out its construction workforce. Financing is done in house, both to avoid massive debt that would curtail those choices, and because mainstream finance isn’t here yet.
Many choices remain on what Kelly calls the “journey to four units”. Theirs is not a fixed-revenue model, or really a fixed model in any way. As Kelly puts it, “they make the money flow around the people, not the people flow around the money.” It’s designed for maximum flexibility. They haven’t decided on what the optimal ownership structure will look like. They may make it a condominium, co-housing, a tenancy-in-common or a community land trust. They may push beyond four units, depending in part on whether they keep the old house or tear it down. Since communities and families and households ebb and flow, they are building something designed to be adaptable.
The only thing truly fixed is Raul. He gets to live in the new house as long as he wants to. He can continue to be a pillar in the community, while also providing new opportunities for others to live there. He can continue to make choices, and can continue to be part of the constant change and adaptation needed to keep his house - and his community - stable.
This is the true potential of transforming land use. Housing should provide both stability and mobility, new opportunities for some and renewed opportunity for others. But it only works if you have folks like Raul and Kelly and Bertha. Without landowners, builders, lenders, and workers willing to do real estate development differently, policy changes will have a much more limited impact on our dreams of a well housed and equitable future.
All that money doesn’t do you any good if you have to buy back into California at 2022 prices - even with a Prop 19 tax bill.
There are many who would like to legislate something like this - see for instance the various debates about San Francisco’s fourplex legislation. A first step is to make sure we have good models on how to do this, and reputable actors willing to do it and do it right. Do you have examples of your own? Send them to me!
I appreciate this story. Thank you for your work.
Great story, we need more about small lot innovative developments like this one. These stories can inspire small investors to be different!