A seismic mess
By Paul Morantz
An earthquake shook Los Angeles in late 2015.
It wasn’t the seismic kind that causes buildings to shake; this was a political upheaval that shook the confidence of middle-class investors who put their retirement funds into apartment buildings built prior to 1978 and trusted that state and local lawmakers would never do anything to jeopardize their investments. But hey, this is Los Angeles, the city that drove Hollywood out of Hollywood. They should have known better.
So, on Oct. 13, 2015, the L.A. City Council passed Ordinance 183893, requiring that owners reinforce apartment buildings constructed before 1978 and built over parking spaces or other, similar open space that makes them vulnerable to collapse during an earthquake. Apartments built over other units–regardless of any safety issues—were exempted from this city command.
The expensive retrofits(estimated at $60,000 to $130,000) for the 13,500 buildings the city identified as most vulnerable, will spark a mini-boom for contractors, but drain profits from building owners already suffering under the city’s inane rent-control laws, which allow renters to turn their units into legacies to be handed down to family members. In this environment, an owner can go decades without getting his unit back or being able to impose reasonable rent increases that match the current market. Meanwhile, costs continue to rise.
By shrinking, or in many cases, eliminating the profits necessary for upkeep, the city has jeopardized the livelihoods of these long-time property owners and driven many of them out of state. As an owner of such properties, I have received a number of cold calls from real estate companies asking if I wanted their help in shedding my buildings so I could leave Los Angeles.
Let’s be clear: I’m not saying these repairs aren’t necessary to protect owners and tenants alike, I’m just saying the costs should be shared by everyone. So what’s a landlord to do? I’m glad you asked. I’ve been thinking a lot recently about how to create some leverage for apartment owners reeling from the feeding frenzy the retrofit statute unleashed and I’ve got a plan.
First, some background:
Los Angeles has never been particularly friendly to real estate investors. It’s one of only a handful of cities in the country that have rent control laws. Besides the obvious problem of being unable to keep up with rising costs, these laws make it nearly impossible to evict non-payers timely and even finance tenant stonewalling. By contrast, renters seeking to contest an eviction notice in Nevada must deposit the back rent with the court or leave immediately.
After passing the retrofit statute, the city further squeezed owners by making no steps to ehlp finace or demand tax credits. You can’t even deduct. Further tenant might be able to leave, pass go and collect $19,000 a unit. The City brags limiting we can partial recoup through rent hikes to $38 a month per unit for ten years—a drop of nearly 50%. But what tenant is going to pay that plis 3% for privileged of apartment upstairs but retrofitted. And why they alone pay. And the 3% pales in comparison to the approximate 200% increases over the recent years imposed by painters, electricians, plumbers and material suppliers, let alone inflation.
Things never should have gotten this far. The government had earthquake damage studies done in 1971 and 1994, yet didn’t seek retrofits for decades, while investors relied on existing building codes and tenants risked occupying these allegedly unsafe buildings. And now, facing much more expensive repairs, the government hasn’t offered to cushion the blow with cost caps, tax breaks or subsidized loans. It will be several years before many owners are in the black again, and many will wind up retired and disabled without income. And if the property owners can’t get the repairs done in seven years, the city says it will huff and puff and blow their buildings down.
The city should have also found some way to control the contractors feeding at this public trough. Many of the contracts being presented to apartment owners include outrageous terms that should be disallowed, such as demanding that the property owner pay for insurance and any legal costs. Moreover, is this not a Federal or state issue as well? Do earthquakes start and stop at the Los Angeles border? The San Andreas Fault crosses multiple states; doesn’t that suggest federal taxpayers have the most to lose from these disasters? Many of the buildings now facing expensive repairs were not only previously approved by the government but encouraged to increase the supply of housing.
Since taxpayers would certainly benefit from safer housing, why didn’t our city representatives and those who allegedly negotiated for the owners hold out for federal and state tax deductions for fixing the government’s own permitting errors. As part of its permitting process, why didn’t the state insist that insurance companies help fund the repairs, a cost they could then spread among their much wider body of customers?
Added, the City is now giving trash pick-up companies exclusive areas. Without competitors cost could quadruple or more. It is said there will be price controls.If so, why were they not provided to retrofit companies getting this boom business?
Oh, by the way, there’s one other teensy problem with all this craziness–most of the retrofit contractors I have spoken to don’t believe this will work. They believe it will only buy some time. What happens when tenants are told the retrofits may or may not work and that their building may now need metal frames added? Do all tenants in a pre-1978 building have to pay the increased rent or just those who live over the the parking garage? Will they be okay with shouldering the burden for decades of government neglect? If the answers to these questions aren’t satisfactory, it could trigger a mass exodus of renters, plunging building owners into an even deeper financial abyss.
For building owners looking for support and guidance, and some hard-nosed negotiating, there’s always the Apartment Association of Greater Los Angeles (AAGLA), which claims in its magazine that helping property owners deal with government entities through advocacy and grassroots involvement “is in our DNA.” Further, its current president, Joe Patel has boasted that 50% of members’ fees are spent on the “hard work of representing your interests before the city council or board of supervisors, the state legislature and the Federal Government.”
Based on the morass we now find ourselves in, that doesn’t appear to be money well spent. I’ve been member for years of AOA and the magazine offers excellent information on most issues, but frankly, AAGLA has been largely silent on this.
It did, however, recommend Optimum to members seeking a contractor for retrofit work. The article said members would get a discount. So I joined AAGLA, also. Optimum, after inspecting my two buildings, wouldn’t provide me with an estimate. Without one, I said, how could I know I was actually getting a discount? I was told the discount was in the engineering fee– a $2,000 reduction. But I never even got an estimate on the engineering fee. Six months later, they told me the engineering fee was $7,5000. I replied that was one of the highest quotes I received. I was then told they didn’t know I was an AAGLA member, so the charge would be $5,500 (my membership information was provided in my initial call). Other contactors offered engineering for as low as $4,500—without the supposed discount.
When I complained about this to AAGLA, I received a return call from a representative, who said he had two Optimum representatives in his office. AAGLA was teaming with Optimum. Further, he said AAGLA recommended the contractor because it was “the best.” I said there were many firms that could do the job competently and they all offered estimates. The Optimum reps promised to send me an estimate, but never did.
I have since found many suitable companies whose estimates are well below what others are offering. I even found two companies that promised to pay all the fees and guarantee a price, no matter what the city does; because of their experience they believe they know what’s going to be required. But somehow Optimum—AAGLA’s Star child– can’t even make an estimate let alone a guarantee.
Interestingly enough, I have received a number of invitations lately from AAGLA to attend a series of association-sponsored seminars around the city on the retrofit law. AAGLA sends these postcards with their name and Optimum solely on it and bombards with tape recorded telephone messages from AAGLA to attend. The lone contractor represented at these workshops: Optimum. I left a message with AAGLA that I’d be interested in speaking about my experiences at the seminar; the call was never returned. So I called Optimum, asking a representative if he didn’t think the AAGLA members should hear about these other companies that are offering to pay fees and guarantee their quoted price. He didn’t respond other than calling me a “real smart guy.” I don’t think he meant it. Finally, I called AAGLA back and asked if it benefitted financially from its endorsement of Optimum. The woman I talked to said “absolutely,” although she didn’t know the details of the arrangement.
So here is what I can do for you that AAGLA representatives haven’t. I have spoken to many companies and gotten many estimates. I can recommend two companies whose bids have been lower than others, who may guarantee their price and who take care of everything, including all fees. Further, their contracts don’t include those onerous clauses about not knowing the real cost until they start or requiring the customer to pay insurance and legal costs.
What’s more, I know several companies that will offer discounts to everyone based on how many sign up. I can be contacted at the telephone number below if you are interested in joining forces with me. The only compensation I will get from this is the same discount opppurtunity everyone else gets. The more customers, the higher the discount.
If you have already hired Optimum, I strongly suggest you get someone knowledgeable to review your contract to determine if you can use another contractor after the engineering report. I’m not suggesting in any way that Optimum won’t do a stellar job for you. I’m just saying you should shop around; it might not be the best deal available to you. We have a financial crisis here and we have to band together if we’re going to survive. It would be great if our political and association representatives would do this for us, but they aren’t. Nevertheless, we can create bargaining power through leverage. After all, these companies all want a piece of the approximately 13,500 slices of cake out there. Work together, and we can bring the prices down.
Now that’s an Optimum idea.
For further info, contact:
Paul Morantz, Esq.
NOTE: Association of Arpartments owners (AOA) declined to run this story because Optimum buys ad space in their magazine.