The world is constantly remaking itself as impossibly huge tectonic plates slide outside of our perception, just beneath our feet, groaning slowly through unimaginable eons. An earthquake is what happens when this slow change instantly becomes very fast. All of a sudden, the world is remade, and is different in ways both subtle and overt. It’s the same way with regulations: there are slow changes, and then there are fast ones that have a huge impact on your business.
All California municipalities must balance the very realistic need for strong earthquake protection with the financial toll that retrofitting would impose on both city and personal budgets. With rising insurance costs, and a better understanding of the very real human costs, more and more cities have been trending toward the former. On October 9, The Los Angeles Times reported that the Los Angeles City Council signed into effect the nation’s toughest earthquake laws to date.[1. Los Angeles Times, “Los Angeles Will Have the Nation’s Toughest Earthquake Safety Rules,” http://www.latimes.com/local/lanow/la-me-ln-earthquake-retrofit-20151009-story.html] These laws are designed to reinforce wooden apartment complexes built atop carports and brittle concrete buildings in which over 65 people have perished in past L.A. earthquakes. The laws are strict, and it is estimated that 15,000 buildings will require renovation. This may just be the drought-quenching rain California real estate investors have been looking for.
Retrofit Deadlines and Potential Costs
I think we can all hear the horrified shrieks of income property owners everywhere; after all, they’ve fought City Hall on this retrofitting for two decades. Under the new law, owners must retrofit the wooden apartment complexes (of which the city has already identified 13,500 in need of this upgrade) within seven years, and the concrete buildings (1,500 of which have been identified) within 25 years. What’s worse for property owners? The city expects them to foot the bill, which is estimated to range from $60,000 to $130,000 for the wooden apartments and millions of dollars for the concrete building rehabs.
Naturally, everyone is concerned as to how the repairs will be financed. Current law allows landlords to raise rents $75 per month to pay for earthquake retrofit, but both the city and the landlords agree that renters cannot afford that much of an increase at this time. The Housing Department has put on the table a suggestion that the renters and the owners split the $75, thereby only increasing monthly rents by $37.50, a much pleasanter pill to swallow.
What Does This Mean For You?
Concrete retrofitting is no small – or unimportant – task. If the buildings don’t have enough steel reinforcement, chunks of concrete fall from the support columns during an earthquake, which causes building collapse. Owners must hire professionals to conduct structural studies to determine if their concrete buildings have enough steel reinforcement. The price tag for such studies? As much as $100,000.
Buildings without enough steel will require additional structural engineering assessment, and then angled steel beams must be installed directly into existing columns or new concrete walls added to the existing structure to better support the concrete and meet the new earthquake retrofitting standards. The cost to building owners for this? Upward of $1 million.
This suggests that wooden apartment complexes are a better option for real estate investors, as the retrofitting requires less work and expense to stabilize the wood. The city will be issuing letters to owners who must retrofit prior to year-end, and the larger apartment buildings will be the priority. Many of these buildings are found along what some call the “Hollywood Fault Line,” which includes Downtown L.A. and surrounding areas. Of course, the San Fernando Valley took the brunt of the damages seen during Sylmar’s 1971 and Northridge’s 1994 shakers, and this area is another where retrofitting is likely to be in demand.
Chances are, you will be able to find a few owners interested in selling their apartment complexes rather than paying for the retrofit. Some of these complexes are in hot L.A. neighborhoods that have been in the midst of urban revitalization over the last 10 years, including Echo Park, East Hollywood, Koreatown, West Adams, and Downtown. Foreign investors are leaning away from California real estate, so this gives you more instantaneous income property, because the city believes a majority of the properties will be able to allow the tenants to stay in their apartments during the upgrades. This is a fantastic opportunity, provided that you have the means to purchase the buildings and make the changes. Luckily, that can be the easiest part of the puzzle.
Finance Your Investments
You decide which buildings you want to purchase, and you work with your contractor to come up with retrofit bids. You have everything in order, so you contact Socotra Capital to secure a residential rehab or buy-and-hold loan—instant cash with easy qualification. You purchase the property and turn it into a paying investment. Boom! Done, and everyone is happy and a lot safer in the event of major earthquake.
These new laws bring tons of residential rental property to the forefront for investors looking to bail out property owners who cannot afford the retrofitting. All you need to do is pair with experienced lenders that will work directly with you to figure out the best financing and terms for each of your projects. Socotra Capital is that lender.