Being a landlord and adding value to your portfolio is enjoyable most of the times, there’s nothing like getting hit with a Mandatory Retrofit notice from the City to make you re-evaluate your investment decisions. Just ask any of our friends that own in San Francisco or Berkeley.
Soft-story ordinances will be passed in municipalities along the West Coast in the coming years. Increasingly some owners are concerned with the costs, resources, and work that will be associated with undergoing retrofits of their apartment buildings that show up on soft-story inventory lists. Particularly in rent control cities, there is evidence that some owners lack the capital or the commitment to undergo these improvements. In a later article, we will discuss the pass through programs that make it possible to maintain the profitability of buildings. Today we will examine how a seismic retrofit may actually raise the value of your investment property.
When apartment sellers in San Francisco and Berkeley choose to sell rather comply with soft-story requirements, buyers will generally ask for a credit for retrofit costs. Owners of soft-story buildings are also required to disclose to buyers that the building is on the soft-story list. The costs and resources will be likely be brought up during the negotiation of the purchase contract and the due diligence period.
In cities such as Oakland, Alameda, and San Leandro where mandatory soft-story ordinances are not in place, some buyers will negotiate for a credit. In a recent deal in which I represented the buyer, we successfully negotiated a significant reduction on the purchase price to retrofit a twelve unit building with four garages on the ground level. A soft-story building that is already retrofitted may have raised the overall marketability of this asset.
As apartment owners, our goal is to serve and provide our residents with a safe environment. The survivability of a building is critical to making tenants feel secure. Tenants that feel secure are more likely to remain in the building resulting in less management.
Owners in San Francisco who fail to comply may be forced to post signs on their property that notify that the building is in violation of earthquake safety requirements. Even in today’s absurd rental market, a “red tagged” building may have difficulty getting leased-up on turnover.
Most structures may seem “safe” until they’re not. We can refer back to the Oakland Ghost Ship fire of 2016. You’re going to be extremely interested in safety and building codes after lives are endangered on your property.
Landlords can lose massive amounts of money if it can be proven they were aware a building required structural work, but did nothing to remedy the problem. Insurance coverage does not over litigation against negligence. A seismic retrofit done correctly lets landlords sleep better at night.
Soft-story retrofits can also save money over the long run by reducing earthquake coverage. It’s hard to forecast insurance premiums for coverage after earthquakes occur in your area and lives are lost. Rates can easily spike five times the current rate.
There’s a shortage of skilled construction labor in the Bay Area. Retrofits done today can cost double the price paid five years ago. This is a result of demand, wage increases, and the rising cost of materials. A retrofit job done today before major East Bay cities pass mandatory soft-story laws can save you money.