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Thursday, Mar 28, 2024

Soft Story = Hard Times

Many apartment owners in the San Fernando Valley are now feeling the tremors from a law passed by the Los Angeles City Council requiring costly retrofits so buildings can better withstand earthquakes. Notices recently started going out telling owners whether they are affected. That means many owners are facing construction jobs that could cost tens and possibly hundreds of thousands of dollars. Up to half the cost eventually can be passed on to renters, but owners say that in the meantime it’s a hardship for them to pay the upfront costs entirely by themselves. They are being squeezed, they say, because with most of the targeted buildings under rent control, what would be a normal way to pay for improvements – raising rent quickly – is not available to them. Insurance won’t cover the costs, and banks aren’t likely to make a loan because any repayment is limited by rent control. Cameron Eghbali owns two apartment buildings in the Valley – North Hills and Canoga Park – that require retrofits under the new law. Construction on the larger one is estimated to cost between $80,000 and $120,000, he said, and he will likely have to pay in cash upon completion. The city is limiting how much of the cost he can pass onto his tenants, he says, and in how much he can raise rents to help pay for the project because about half the units – about 15 of them – are rent-controlled. Getting a loan to pay for the project is also unlikely because the rental income falls short of lender requirements, Eghbali added. “This is a complete nightmare,” Eghbali said. “Where are we going to come up with so much cash? If they’re (the city) forcing us to come up with the cash to pay for such an expense, they should at least let us come up to market rate (for our rent-controlled units). Basically you’re under a squeeze from both sides.” Soft stories In October, the City Council passed an ordinance requiring owners of buildings with so-called soft-story construction be seismically retrofitted so tenants stay reasonably safe during earthquakes. During the 1994 Northridge earthquake, apartments collapsed and crushed cars below them. A total of 22 people died from failed structures; the purpose of retrofitting is to avoid a similar tragedy in the next big quake. The buildings targeted in the new ordinance – wood-frame construction with four or more dwelling units, parking tucked under the units and permitted before stricter building codes went into effect in 1978 – make up the majority of apartments in the Valley, according to commercial real estate brokers and engineers. Soft-story construction was popular from the 1950s into the 1970s – the era when the Valley was built out. At the time, they were seen as inexpensive, efficient and saved space. Media reports estimate about 13,500 such buildings in Los Angeles, with a heavy proportion of them in the Valley, particularly the western half. Paul Van Benschoten, a structural engineer and managing principal of Coffman Engineers Inc. in Encino, said the apartments targeted by the ordinance are referred to as soft-story because their wood support posts on the ground-floor, parking level are unable to resist the back-and-forth shaking of the ground during an earthquake, making the overall structure unstable. That can cause the units above the ground-level parking to collapse onto cars below. Some photos from the Northridge earthquake show units sheared off from the rest of the building. Tight deadlines are looming for the retrofits. Notices from the city are starting to go out to owners of suspected soft-story apartments. From that notice, owners have two years to submit structural design plans for the retrofit, three and a half years to get permits for the work, and seven years to finish it, according to the ordinance. For buildings previously retrofitted, owners have two years to submit the designs to the city for review. If an owner decides to forego the seismic work and demolish the building, he or she has two years to do that. But not all apartment owners who’ve received notices from the city may need to perform work on their buildings, said Beverly Kenworthy, executive director of the California Apartment Association Los Angeles. Members have reported that structural engineers who’ve inspected some of their buildings have found they don’t meet the city’s criteria for retrofits. “It’s the burden of the owner to show whether they need the retrofit or not, and that requires them to hire a structural engineer and submit the (engineer’s) report to the Department of Building and Safety,” Kenworthy said. Cost questions What the retrofit will cost depends on several variables, according to Van Benschoten. They include whether the original construction documents are still available that show how the building was built, what materials went into its construction, and such details as the elevation and foundation, he said. If so, it will save a lot of money from having to hire a structural engineer to survey the buildings and create drawings, Van Benschoten said. Engineers need those drawings to come up with a structural analysis and then a retrofit design, and the drawings can cost from just under $1,000 for very small buildings to upwards of $5,000-plus for large ones. All of the engineer’s work then needs to be reviewed by the city and approved, Van Benschoten said. A retrofit typically involves inserting steel frames, or I-beams, under the lowest dwelling floor and above the parking spaces. Steel columns will also be installed between the ground and the dwelling units for support. Those will be welded to concrete beams that will be installed underground to support the steel beams, Van Benschoten said. “Each one will have a fairly unique retrofit solution to the problem,” he said. “This is not generally a cookie-cutter solution. Each building will have to be looked at individually.” Typically, the work can be done without moving tenants out of their apartments, he added, but parking may be disrupted. Total project costs will also vary greatly depending on issues such as how many units are atop parking and how many buildings have the tucked-under construction, Van Benschoten said. But he estimated very small and simple total projects – four affected units – could cost as low as $25,000, while a building with 40 affected units could exceed $100,000 or even $150,000. Retrofits involving 100 to 200 units could cost more than $200,000, Van Benschoten said. One big issue for apartment owners involves buildings that are rent-controlled. Kenworthy, the apartment association’s director, said nearly 100 percent of those buildings targeted for retrofitting are rent-controlled because historically both rent control and the change in construction standards took effect at around the same time, in 1978. Unlike for other improvements, for which the city allows apartment owners to pass on all the costs to rent-controlled tenants over a period of time but with a monthly cap, the city council is letting owners pass through only 50 percent of the retrofit costs to tenants, Kenworthy said. Owners are allowed to pass those costs on over a 10-year period but assess tenants only $38 a month. So consider, for example, a small, four-unit apartment building that required a modest $25,000 retrofit. A loan for that amount at 10 percent for 10 years would call for a monthly payment of $330. But the apartment owner would get only $152 a month extra from the four tenants paying $38 in pass-through. “The pass-through cost isn’t enough to convince lenders to give them that (construction) loan,” Kenworthy said. “That’s been a huge concern to us.” Additionally, pass-through costs don’t apply to new tenants paying market rates, Kenworthy said, and landlords can’t pass-through the cost to tenants until the work is finished. However, they can start preparing the pass-through application while construction work is ongoing. The city council is promising to move quickly on permit requests relating to the retrofits and other related issues, Kenworthy said. Market destabilization For commercial real estate brokers, the hot apartment market is feeling the impact of the retrofitting ordinance as buyers turn from the older buildings to newer ones. That could potentially hurt owners of buildings in need of retrofits who were hoping to sell them rather than fund the required renovations. If they are able to sell, they will likely have to take a discounted price. Many of the owners of Valley apartment buildings are small mom-and-pop investors or family trusts that inherited smaller buildings, such as a 10-unit complex, as relatives passed away. Edward Ring, chief executive of New Standard Equities Inc. in Encino, which invests in real estate but also handles property management including apartments, said he guesses about 65 percent of the affected buildings are owned by smaller, non-professional investors, including individuals and family trusts. “They need the cash flow – and there are all different economic situations for folks out there,” Ring said. “That’s kind of the problem. If everything was owned by big apartment dealers, they would retrofit everything, but generally speaking, these things are owned by mom and pops – little old ladies or people that inherited the buildings. Not all those people can necessarily afford a couple of hundred thousand dollars for a retrofit.” As an owner of an apartment building, Ring said he has mixed feelings about the new law. “Retrofitting is prudent, and proper owners should be compelled to do it, and I think in general it’s a good thing,” he said. “The only problem is how it gets paid for and who pays for it – that’s the crux of the matter.” Ring doesn’t feel it’s fair for residents to have to pay for something to be made safer for them, he said. “But I’m also of the mindset it’s a bit unfair to put all on the shoulders of landlords. These apartment buildings are very, very, labor intensive. They don’t always make people rich, and sometimes they can make them bankrupt.” He suggests that the city should exempt buildings that need retrofits from rent control. If that raised a building’s property value, the owner could get a better loan to fund the construction, Ring said. Eghbali, the rent-controlled apartment owner, also suggested an exemption from rent control for affected buildings. In his case, that could raise his monthly rents to $1,400 versus the $875 several are paying now, he said. However, that could lead to a loss of tenants, Ring noted. Ash Joshi, president of commercial real estate brokerage Capital Realty Solutions Inc. also in Encino, received an estimate for between $50,000 and $80,000 to retrofit his West L.A. apartment building. He said there are other ways to help apartment owners, such as low-interest loans offered by the cities or the state. “That could be almost like disaster relief, so if they could lend money at no or very low interest rates, this would be something that makes it a win-win for everybody,” he explained. Also, legislators are trying to soften the retrofit hit for building owners. Assemblymember Adrin Nazarian (D-Sherman Oaks) has re-introduced a bill that would provide a 30 percent tax credit of retrofit costs, capped at $12 million annually, after a similar bill was vetoed by Gov. Jerry Brown last session. Assemblymember David Chiu (D-San Francisco) introduced a bill for a state-based grant program to help pay for retrofits of five to 10 low-income units. Both bills are still in committees. Meanwhile, the retrofit question continues to impact buy-and-sell decisions in the red-hot apartment market. Ring said he’s owned one building for five years and put about $300,000 of improvements into it. About four units will likely need to be retrofitted, he added, and he may end up just selling it rather than deal with another project. “If most of these things come on the market and they’re not done, then everybody will have to factor it in, and then the price will drop,” Ring said.

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