Redwood CU Helping to Finance Homeowner Rental Units

Redwood Credit Union is helping homeowners finance construction of garage apartments and other rental units as part of a program to increase affordable housing in California’s Napa Valley, one of the most expensive housing markets in the nation.

The Napa Valley Community Foundation is setting aside reserves to help cover losses that the credit union might incur under the program’s new underwriting standards, which take future rental income into account in ways that traditional loans don’t.

RCU of Santa Rosa ($7.4 billion in assets, 315,933 members) is managing the lending program.

The foundation and credit union refer to the garage apartments, backyard cottages and duplexes to be built as “Accessory Dwelling Units,” or ADUs. Many are just 500- to 700-square-foot one-bedroom units, and are seen as a tool to increase the stock of workforce housing in the pricey Napa Valley. Realtor.com showed the median sales price in Napa County is $901,000, compared with $363,300 nationwide and $516,600 in the West.

The Association of Bay Area Governments said Napa and Sonoma counties need 18,400 new housing units by 2031.

A March 15 news release from the foundation and credit union cited a University of California study that found 85% of ADUs rented on the open market in California were affordable to lower- or moderate-income households. The groups said the study’s findings were consistent with what has been observed in Portland, Ore., and other more mature ADU markets.

The groups said the units tend to be rented at a substantial discount, often leasing for 20% less than traditional apartments, in part because they are generally smaller and afford a bit less privacy.

RCU President/CEO Brett Martinez said the credit union is managing the loans to improve housing opportunities and economic stability in the region.

“The need for affordable housing has never been greater, and we see this partnership with the Napa Valley Community Foundation as a way to be part of the solution,” Martinez said.

RCU Chief Lending Officer Michelle Anderson said the credit union hasn’t set goals on the number or amount of loans it will make.

The program provides residential or construction loans as a second mortgage.

Foundation President Terence Mulligan said the loans are different that others in that they allow borrowers to include a significant share of their expected rental income during the underwriting process, “which means a more favorable debt-to-income calculation, which generally means a bigger loan.”

Also, he said more money can be lent because it establishes a value for the completed unit based on future rental cash flows instead of the cost of construction.

“We think our collaboration with RCU will open the door to thousands of fixed-income, middle-income and lower-income homeowners in the North Bay, people who would not otherwise be able to afford to finance an ADU,” Mulligan said.

Some units might be as simple as converting an attached or detached garage space into an apartment. Other plans might involve construction of an addition.

The idea is that low- and moderate-income households might be better able to afford to buy — or just remain in — a home with an income-producing unit. While the program is designed to bolster the area’s stock of affordable apartments, Anderson said there are no limits preventing homeowners from short-term rentals, like Airbnb.

“Many members are building these for an income opportunity [long- or short-term renters], or the opportunity to host extended family such as elderly parents or young adult children who may be struggling to find affordable housing. It’s a win-win,” Anderson said.

She said good candidates for the program include “retirees looking to subsidize limited income; empty nesters who have more room than they need and are looking for alternative income streams; young families looking to offset the high costs of owning a home; and anyone who may want to care for a family member, and still have their own space.”

The program includes the provision of free technical assistance to local homeowners via the nonprofit Napa Sonoma ADU Center, a fiscally sponsored project of the foundation that has helped 335 homeowners build apartments since its launch in May 2020.