Urban Wire California’s New Zoning Law Eases Building Restrictions but Depends on the Financing Industry to Play its Part
John Walsh, Jung Hyun Choi
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In September, California passed Senate Bill 9 (SB 9), which eased the state’s restrictive zoning laws and opened the door for an influx of low-density infill housing construction. The bill allows single-family homeowners to subdivide their lots in two and build up to four units. In the face of a lingering housing affordability crisis driven by historically insufficient supply, this newly legal housing could be a crucial tool for expanding California’s housing stock.

However, lifting legal roadblocks alone will not guarantee an influx of additional or affordable housing. Homeowners and small developers need access to the financing necessary to build new infill housing, which is more affordable on average than single-family homes. But loans for the building and purchase of infill housing lack standardization, and banks are reluctant to finance them.

To further understand this issue, the Urban Institute convened industry experts to explore the financing challenges associated with constructing infill housing. The experts agreed that financing systems in the status quo pose a barrier and that more capital (and equitably distributed capital) is needed to build new housing and reduce the racial wealth gap.

Financing options for infill housing are sparse

The main challenge in financing low-density infill housing construction is the lack of available loan products. Unlike the traditional 30-year single-family mortgage, capital for financing infill housing is sparse, banks are reluctant to participate, and the secondary market does not fully satisfy growing demand. Because of this, homeowners often seek several financing options to fully cover construction and operating costs. Currently, the five financing mechanisms for low-density infill housing are

  1. cash savings or other liquid assets including family support,
  2. home equity lines of credit,
  3. cash-out refinancing,
  4. renovation loans, and
  5. construction loans.

Compared with home purchase loans, the denial rate for cash-out refinances, home equity lines of credit, and renovation loans are significantly higher.  And wealthy borrowers with high property values have greater advantage accessing capital through these options.

The Federal Housing Administration’s 203 program and government-sponsored enterprises provide renovation loans, but those sources often limit the amount that can be borrowed and have high denial rates.

Horizontal bar chart comparing the denial rates of four loan products; Renovation loans at 45.6 percent; Home equity lines of credit (HELOC) at 41.3 percent; Cash-out refinancing at 18.4 percent; and Home Purchase loans at 6.3 percent.

Construction loans face similar problems. They typically have higher interest rates and shorter terms than other forms of capital, and lenders are reluctant to make these loans because they bear the cost of overruns or poor outcomes. And in most cases, these loans require the lender to hire a separate construction professional to oversee construction, which makes the process more complicated and expensive. 

Valuation and construction risks increase financing barriers

Issues related to rental income and appraisal also create financing challenges. Existing financing options do not consider the potential rental income that infill housing can generate, which limits the amount the homeowners or the developer can borrow. Owners also use low-density infill housing for different purposes (such as renting it out, using it as a home office, or providing supportive housing for family members), which makes estimating rental income even more difficult.

Excluding rental income increases a borrower’s debt-to-income ratio, which is the most frequently mentioned characteristic linked to denial. Further, accurately appraising the added value to the existing property from new construction is difficult. Therefore, this value is not incorporated when underwriting the loan for construction, which limits the total loan amount that can be borrowed.

Households and developers of color are at a disadvantage for building new infill housing

Because the housing shortage affects communities of color most acutely, it is important to consider how financing limitations differ for households of color.

Structural racism embedded in the housing system fuels credit disparities in the form of lower credit scores, higher debt-to-income ratios, and smaller down payments, making credit less accessible to households of color. And because of decades of racist housing policies and practices, homeowners of color have less net wealth and fewer liquid assets than white homeowners, further limiting access to the capital for needed for constructing low-density infill housing.

In Los Angeles, for example, evidence shows that households of color were denied mortgage lending for both one-unit and two- to four-unit homes and for renovation loans more frequently than their white counterparts.

Denial Rates in the City of Los Angeles by Race or Ethnicity and Select Mortgage Types


1-4 units

1 unit

2-4  units

Home Improvement



9.6% 15.2% 46.7%



15.0% 24.7% 50.7%




18.5% 57.4%






Source: 2018-2020 HMDA Data


Developers of color also face unique financing challenges. Infill projects lack standardization and present greater construction risk, which increases risk for developers, especially small, self-funded operations, both of which are predominate characteristics of firms  owned by Black and Latinx proprietors. For developers of color, lower levels of capital on average also raise the risk of a failed project resulting in financial ruin.

To increase supply, the market needs more capital that’s equitably allocated

Currently, not enough capital exists to finance the amount of low-density infill housing needed to build supply, because banks are reluctant to enter the market. Susan Brown, a consultant at CoreSGB, suggested the following solutions to increase capital in this space:

  • Simplify permitting and monitoring processes to lower costs.
  • Incentivize lenders to expand lending to low-income communities and communities of color through the Community Reinvestment Act.
  • Expand government programs incorporate future revenues into underwriting.
  • Consider renovation and construction financing only with a general contractor, without relying on consultants to lower the oversight costs.

But above all, more financing options are needed. Our analysis shows that without adequate financing options for all—not just for the wealthy—the construction of low-density infill housings from the passage of SB 9 could potentially increase racial wealth gaps.

To address this, lending from community development financial institutions could target census tracts with predominantly residents of color and provide low-cost financial vehicles by guaranteeing risks during the construction period.

Providing more vouchers and simplifying the voucher application and acceptance process to generate stable rental incomes in these neighborhoods could also allow more funding to flow toward homeowners of color. For example, Pavlin Buchukov, a senior loan officer at Genesis LA, explained how his firm’s involvement in an accessory dwelling unit (ADU) pilot program lowered the risk for lenders during the construction period. In partnership with the Self-Help Credit Union, Genesis provided a loan guarantee during the construction period with the stipulation that the ADU would be rented to a Section 8 voucher holder for five years.

Further, public/private programs could be designed and implemented specifically to provide working capital, loan guarantees, and flexible underwritings for developers of color. Lawrence Hammond of the New York City–based CDFI Community Preservation Corporation, which supports small Black- and Latinx-owned developers, also stressed the importance of providing small developers with technical assistance, such as low-cost housing consultants, “value-add” products like lines of credit, and predevelopment capital.

It’s clear the political will exists to infill California’s housing stock. Additional policy interventions and financing mechanisms can help ensure SB 9 fulfills its potential of housing more Californians, especially in communities of color that have been left behind for far too long.

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Research Areas Housing finance
Policy Centers Housing Finance Policy Center
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