Future Los Angeles Multifamily Sales Onslaught/LA Retrofit Law

19 Replies

 Owners of thousands of Los Angeles wooden apartment buildings at risk of collapse in a major earthquake will begin receiving retrofit orders as early as February 2016, according to the Los Angeles Times

The LA City Council recently enacted the strictest seismic regulations in the nation that will impact an estimated 13,000 "soft-story" wood frame buildings. Seismic retrofits are estimated to cost between $60K to $250K for wood structures. Soft-story wood-framed buildings have large openings where parking is tucked underneath. 

Orders to comply are expected to be released in the next year or two. Those compliance orders will require the owners to submit a plan with permits within two years. Folks, this is going to be costly. 

I suspect this will lead to a large inventory of soft-story hitting the market within the next 2-3 years. Owners struggling with cash-flow or lacking financial reserves could be especially susceptible to selling soon.  Apartment brokers will surely be stepping up their aggressive calls to apartment owners to amp up this new ordinance to boost their commissions and listing inventory. 

It looks like there will be opportunity for investors to find lower cost multifamily properties in the next few years, albeit, with the inevitability of significant future repair costs for soft-story buildings. This new City council ordinance might be the catalyst that raises cap rates in the city of Los Angeles. It will be interesting to see if neighboring cities like Glendale, Burbank, Culver City, Pasadena and Santa Monica enact similar ordinances. 

I am wondering if other BP'ers sense opportunity in the market? How do you think it will change Cap rates? Will this lead to the exodus of mom and pop owners lack the resources to comply with these retrofit orders?

More on the LA Times story here:

http://www.latimes.com/local/lanow/la-me-ln-la-bui...

@Jason Insalaco Great post. Funny you brought it up because I was thinking about the same thing. Aside from the potential tax breaks and fee waivers for the property owners, I'd be curious to see how well received rent increases would be by tenants given the rate that rents have been rising in Los Angeles.

"City officials are looking for financial aid options — such as tax breaks or permit fee waivers — and are considering a proposal that would allow owners to pass on half the retrofit costs to tenants through rent increases."


Thanks for the article! 

It seems to boil down to this"

"Officials focused on structures built before 1978 with at least two stories and at least five units. The city's housing department provided addresses of 29,226 apartment buildings constructed before 1978."

At first blush without the aid of total units available the Los angeles area, 29,000 + or so buildings may not be as much as I thought where the Los Angeles area is concerned.

That being said, if there were ever a time to be poised to grab a 5 unit multi family building at conditions favorable, the time is coming starting February. I am curious to see all the buildings earmarked and which zip codes  they're located in. 

This could end up being the unofficial "phase 1" of this project as I'm sure there are smaller multi families out there that would need this treatment. 

I also read somewhere that Oklahoma is now ahead of California in terms of the potential  threat of earthquakes striking. 

All in all, nice post!

@Francis A.  I read that as well.  I have lived in OK for 34 years and until about 8 years ago had never been in an earthquake.  Now there is news of them hitting sometimes 2-3 times a day.  All have been relatively small though.  I doubt they will pass legislation on building requirements here.

1989 SF Earthquake is an example WHY this is necessary.

The top floor of a three story apartment building that ended up in the middle of the street in the Marina District in San Francisco.

and this will become just like the one above :sigh:

http://sf.streetsblog.org/wp-content/uploads/sites/3/2013/03/DSC_9889.jpg

What is the estimated cost per garage/ per unit?  Anyone know the general cost of this sort of retrofit (I understand it varies)

Originally posted by @Jason I.:

 Owners of thousands of Los Angeles wooden apartment buildings at risk of collapse in a major earthquake will begin receiving retrofit orders as early as February 2016, according to the Los Angeles Times

The LA City Council recently enacted the strictest seismic regulations in the nation that will impact an estimated 13,000 "soft-story" wood frame buildings. Seismic retrofits are estimated to cost between $60K to $250K for wood structures. Soft-story wood-framed buildings have large openings where parking is tucked underneath. 

Orders to comply are expected to be released in the next year or two. Those compliance orders will require the owners to submit a plan with permits within two years. Folks, this is going to be costly. 

I suspect this will lead to a large inventory of soft-story hitting the market within the next 2-3 years. Owners struggling with cash-flow or lacking financial reserves could be especially susceptible to selling soon.  Apartment brokers will surely be stepping up their aggressive calls to apartment owners to amp up this new ordinance to boost their commissions and listing inventory. 

It looks like there will be opportunity for investors to find lower cost multifamily properties in the next few years, albeit, with the inevitability of significant future repair costs for soft-story buildings. This new City council ordinance might be the catalyst that raises cap rates in the city of Los Angeles. It will be interesting to see if neighboring cities like Glendale, Burbank, Culver City, Pasadena and Santa Monica enact similar ordinances. 

I am wondering if other BP'ers sense opportunity in the market? How do you think it will change Cap rates? Will this lead to the exodus of mom and pop owners lack the resources to comply with these retrofit orders?

More on the LA Times story here:

http://www.latimes.com/local/lanow/la-me-ln-la-bui...

San Francisco has already done this and I don't believe they had a flood of sales. You may see a few of these post war buildings be torn down in favor of new building, but that is always hard in LA. 

The whole requiring covered parking was a terrible zoning mistake that resulted in these ugly post war buildings with tuck in parking and unstable footings.  Thank goodness much of LA was built in the 20s before these things went everywhere.

interesting. they could probably pay for it with a loan secured in second position. I'm curious to see if owners will start selling because of this issue. thanks for raising this question

Interesting article! Thanks for bringing this up, it will definitely be a consideration when looking at Los Angeles properties. 

That's why you're not supposed to design it that way. If they are smart owners, they won't sell it, wait for the last minute to drop, maybe it wont. It's like an eviction notice, the person will get some free help from the government to fight for the eviction and stay on your property for 6 more months.

I am one of the contractors that is doing this retrofit work. Yes this is a very big deal and this will spread to all cities in California soon.  I too have heard that many owners may sell. My take on that:

1. Doesn't mean there will be good opportunities to make cash flow in rentals in So Cal just because they need to sell. In other words, I don't buy So Cal apartments now and I don't see buying do to this retrofit program. But, maybe an opportunity for others I guess.

2. New owners will have to do the retrofit in the same time frame (I believe). A sale certainly does not negate the mandatory program. So, you will have to pay an enormous amount per unit to buy AND you will have to retrofit the building.

For me the opportunity is in the engineering and construction, not the sales.

@Will F. the cost per frame can be anywhere from $25,000 to $55,000 each.  

A possible magnitude 7 earthquake is being predicted within the next 7 days in Southern Cali. I hope it doesn't happen and if it does, I hope there is very minimal damage. I can't imagine what homeowers/investors go through :/

This post has been removed.

Originally posted by @Jeff B. :

1989 SF Earthquake is an example WHY this is necessary.

The top floor of a three story apartment building that ended up in the middle of the street in the Marina District in San Francisco.

and this will become just like the one above :sigh:

 Yes but WHO should pay this cost? if mandated

There's too much of this anti gentrification stuff going around, with rent control then they force landlords to spend $100-150k on retrofitting their buildings?

https://mises.org/blog/why-special-interests-sacri...

http://www.msn.com/en-ca/news/other/wynne-liberals...

Originally posted by @Susan O. :
Originally posted by @Jeff B.:

1989 SF Earthquake is an example WHY this is necessary.

 Yes but WHO should pay this cost? if mandated

There's too much of this anti gentrification stuff going around, with rent control then they force landlords to spend $100-150k on retrofitting their buildings?

Boy, you've mixed three different subjects into the pot.  I disdain R.C. just like all landlords, but gentrification is a reaction to slumlords and filthy conditions, and that's not the same as R.C.  I made explicit efforts to stay out of R.C. areas, and thus avoided that mess.  For myself, I refuse to invest in class D c*** and pretend this is a wise investment choice.

I'm a big boy now and responsible for the consequences of my choices.  As the old knight said in Indiana Jones, "He chose poorly", and making a poor choice is not the responsibility of Sacramento nor Washington.  Just as I can chose to buy earthquake insurance or not, when/if a disaster occurs, I EAT THE CONSEQUENCES.

The application here, If I buy a building subject to the retrofit, then I'm going to take a hit one way or the other.  The program forces that hit into the immediate future, whereas I would have taken it in some unknown point it time.  Sure, it's expensive and can easily wipe-out all profits, perhaps even for years to come. Guess what?  I should have bought a better building!  I EAT MORE CONSEQUENCES.  

@Susan O. , I do agree that if they're going to mandate very expensive improvements at market prices -- with no subsidies -- out of landlords' pockets, then they should let landlords charge market rent!

@Jason Insalaco

Useful post because many investors are unaware of that ordinance. It’s good to know though that you have 7 years to perform the retrofit when you own a +2 story wood frame building and 25 years for concrete buildings.

All must have been built prior to 1978 and 1977

This combined with rent control being applied to buildings built prior to 1878 as well seems to be an attempt from the city to push owners to tear down old buildings

Originally posted by @Cedric B. :

@Jason Insalaco

Useful post because many investors are unaware of that ordinance. It’s good to know though that you have 7 years to perform the retrofit when you own a +2 story wood frame building and 25 years for concrete buildings.

All must have been built prior to 1978 and 1977

This combined with rent control being applied to buildings built prior to 1878 as well seems to be an attempt from the city to push owners to tear down old buildings

 The city doesn't want these buildings town down. They want them repaired. 

If you tear them down the city will force you to make 20% of the units that you build on the site to be rent controlled.

They don't want to lose their rent controlled housing stock. Even if that means renovating these crappy buildings.

@Logan Allec Los Angeles allows you to increase rent to help pay for the retrofit (even in rent controlled units). See the Seismic Retrofit Work Cost Recovery Program.

https://hcidla.lacity.org/seismic-retrofit

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