March 18, 2013
Nearly 60,000 Rentals In SF Are Currently Vulnerable To Collapse
On the agenda for the Board of Supervisors Land Use and Economic Development Committee this afternoon, the proposed Mandatory Seismic Retrofit Program for wood-frame buildings with three or more stories and five or more dwelling units constructed prior to January 1, 1978, of which there are approximately 4,300 in San Francisco and at least 2,800 of which have been deemed "vulnerable" to seismic activity. The vulnerable buildings house nearly 60,000 people and 2,000 businesses.
Buildings constructed after January 1, 1978 in San Francisco are considered to have been designed to meet a life safety standard for a magnitude 7.9 quake on a nearby segment of the San Andreas Fault or similar, an event which has a two percent chance of occurring in any 50-year period.
As it stands, a magnitude 7.2 earthquake on a nearby segment of the San Andreas Fault would likely render 1,200 to 2,400 of the 2,800 vulnerable multi-unit buildings in San Francisco uninhabitable. An estimated 300 to 850 of the buildings would likely collapse.
As proposed, the Retrofit Program would roll-out over a seven year period. Opposing the Program, a number of building owners who have deemed the program "a complete travesty and unlawful control of property owners," preferring to roll the dice with their buildings' and tenants' well-being rather than "spend $100,000 on shinny new metal" to meet the life safety standard established in the 1970's.
∙ Proposed Mandatory Seismic Retrofit Program Ordinance [sfbos.org]
First Published: March 18, 2013 1:00 AM
Comments from "Plugged In" Readers
A map of these buildings would be great. Call it a free market incentive for landlords and the city to upgrade their buildings.
I'm sure not even the most surly commenters would want to see renters die under collapsed rubble.
Posted by: sf at March 18, 2013 8:53 AM
I would be all for it if the city allows an immediate 100% capital pass-through to tenants. Otherwise, I shall gamble.
Posted by: Hitman at March 18, 2013 8:56 AM
Lol! keep dreaming.
"I'll stick it to those renters! I'll watch my investment collapse right before my eyes. That'll teach em! Hahahaha!"
How much does earthquake insurance really cover, and how expensive is it?
Posted by: sf at March 18, 2013 9:12 AM
A map is available and all of the targeted buildings are listed. You can Google it.
The problem with assuming that the free market would address this issue is that most people do not understand the risk and are made complacent with the thought that Loma Prieta was "the big one".
Hitman is correct in that if the law allowed for pass-though (doesn't need to be immediate) of the cost of retrofit, then this would be a simple decision.
Posted by: Guest666 at March 18, 2013 9:28 AM
If this is a real health-and-safety issue, the city should require single family residence owners to perform the upgrades as well. All business owners, anyone with a building.
Why 5 units? Why three stories? What about two stories on a masonry foundation? Former SFH now four units built without permits?
"How much does earthquake insurance really cover, and how expensive is it?"
Precisely the kind of question a renter should not have to answer, and precisely why the owner should be allowed to pass along rent direct increases commensurate with the costs of legislated upgrades when the work is performed.
California Earthquake insurance covers a maximum of $250K per building maximum (not per unit) with a substantial deductible. You cannot buy more insurance than that per building (no company will sell it). So if your $7mm Pac Heights manse falls over, you can hope to cut a check for ($250K - $15K? deductible). It might cover the clean-up.
The last time I checked, coverage was on the order of 1.5% ($2,500) per year for a SFH.
This kind of rule will make it more expensive to live in San Francisco - if all the people want it, the costs should be born by all.
Posted by: soccermom at March 18, 2013 9:30 AM
Guest666 can you please provides link? All I am finding are liquefaction maps- looking for something that lists building per building, with addresses, thanks.
Posted by: sf at March 18, 2013 9:35 AM
There's a "rough" and "unapproved" list here from 2 months ago.
Posted by: lol at March 18, 2013 9:43 AM
Capital pass through would be a good step, but removing the unit from rent control would add a large incentive for many buildings. You could also trigger a prop-13 reassessment.
That would work at cross purposes for SF and California's various market engineering projects, but it would likely add some incentives to get the seismic upgrading done.
Posted by: gallileo at March 18, 2013 9:44 AM
Soccermom, Click my name for the CAAPS report summary. Some quick quotes for you: "Multi-family residences, including apartments, condominiums, and Tenancy-in-Common buildings, are hit hard in all scenarios."
"They are responsible for a disproportionate percent of the losses compared to their value." and "Rental and low-income housing would be the slowest to come back."
Posted by: james at March 18, 2013 9:48 AM
In the 1989 Loma Prieta earthquake the buildings with the most damage in the Marina were apartment buildings where those with multiple garages at street level had the minimal support between garage doors to keep them from collapsing. And collapse some did dropping second and third floors down to street level and there were tenants killed. There must be hundreds of those type buildings left in San Francisco to collapse in a future quake. The miracle of Loma Prieta was it only lasted 10-15 seconds. A future quake of 30 to 60 seconds and the results will be different.
Posted by: History at March 18, 2013 9:50 AM
How much does earthquake insurance really cover, and how expensive is it?
The most prudent financial decision would be for many building owners to get together and agree not to buy insurance AND agree to oppose this legislation. That way, when the big one comes, there's enough damage to guarantee a federal bailout of owners to come our way. Too much preparation means a LOT less federal help down the road.
Posted by: anon at March 18, 2013 9:52 AM
I am for repeal of rent control and prop. 13 to help pay for this. The thing about 13 is that is has been abused much more by commercial developers than residential land owners. Does any other state have a prop. 13?
Posted by: sf at March 18, 2013 9:54 AM
The coverage of the legislation, and lord knows the legislation itself has been, to put it kindly, shallow.
The flaws in the legislation are numerous, but let's start with location. The cause of the collapses in the Marina were 1st and foremost liquefaction. The substandard fill methods used to extend SF into the Bay are to blame, along with lax building codes that did not require buildings in those zones to be designed specifically for the soils they sit atop.
Now, rather than address that issue with a sensible, targeted, subsidized, organized and reasonable approach to vulnerable buildings sitting atop fill, the city is overreaching (quel surprise!) and in its overreach has wasted an opportunity.
On the bright side, this law would open up a lot of investment opportunity for acquiring new buildings, because many owners would rather sell than deal not so much with the expense (which will be passed along to tenants one way or another) but with the hassle. Many live in other cities or are older, or are held by estates.
But make no mistake, this law and these arguments here capture perfectly how dysfunctional our city government really is.
Posted by: Stucco_Sux at March 18, 2013 10:02 AM
Guest666 is correct that most people don't properly assess the risk and hazard of quakes out here. San Francisco is one of the worst places to be after a large quake since it will be cut off from the rest of the bay area on all four sides for several days. Everyone should have a week's supply of water on hand.
The biggest quake in memory was The Medium One in '89. It caused some spectacular damage but that was limited and within the abilities of our emergency professionals. We should be bracing for at least 10X the damage of that quake in the next three decades. That one will overwhelm the fire department, public works, and everyone else tasked with putting the pieces back together.
This current push to retrofit buildings is reminiscent of the URM ordnance that resulted in the demolition of hundreds of unreinforced masonry buildings in the 1990s. I doubt that this upgrade can be done on the backs of rent controlled landlords alone, there needs to be some sort of revenue increase allowed or government support.
And it looks like TICs and their condo conversions are on the list. Hopefully the owners can agree to fund the required upgrades.
Posted by: The Milkshake of Despair at March 18, 2013 10:05 AM
@james - Good reference, thank you. The report is, of course, ripe for quote cherry-picking.
"If the earthquake occurs during the day, older concrete commercial buildings will be
responsible for the largest share of casualties."
"Single-family houses have the largest total losses in the three San Andreas fault scenarios. Many single-family homes are located in the City’s western neighborhoods, closest to the San Andreas
I think it is important and valuable to have smart people at the government level thinking about these challenges, but ultimately the report is an educated guess.
Renters should be able to expect to live in a safe building, and landlords should be able to expect to charge a fair price for that safe space. I am in the "Do away with Prop 13 camp (but create a smarter system to re-price assessed values)."
On this site there seems to be this notion that it only benefits landlords when in fact Prop 13 was motivated by the same forces that produced rent control. In most of the state where voters own their own homes, Prop 13 was a response to 70's inflation that led to nice little old ladies being unable to afford property taxes on homes they owned free and clear for decades.
Posted by: soccermom at March 18, 2013 10:13 AM
Remember, it is not just the buildings but the soil underneath. This effort should really start by focusing on the soft story buildings built over poor soil conditions. That is where the biggest bang for the buck would be.
Posted by: soiled at March 18, 2013 10:21 AM
Landlords already have rights to capital improvement passthroughs, so inability to pass the cost of doing this onto tenants is not a valid reason why this work wasn't done before.
It's true that tenants can challenge a passthrough, but the grounds for doing so (the work was not performed or is excessively luxurious) should not be an impediment here, and capital improvements are generally not challenged.
There is no rational reason why rent control would discourage or prohibit capital improvements, as these improvements are a relatively painless way for owners to raise rents even in a rent controlled unit.
This is all about irrationality and market failures, which is why we have rent control despite the market utopians.
In nations with weak building code regulations, earthquakes kill a lot of people. In nations with poor banking regulation, there are more banking crises.
The market has never been able to fairly price or handle tail risks, and owner neglect of real estate is very common, whether they are landlords or not. Many SFHs are in a dilapidated state.
Posted by: Robert at March 18, 2013 10:30 AM
From SF Rent Board
"For seismic work that is required by law (and other work required by laws enacted after November 14, 2002), 100% of the capital improvement cost may be passed through to the tenants, regardless of the number of units in the property. Such increases are subject to an annual limitation of $30.00 or 10% of the tenant's petition base rent, whichever is greater. The amortization period for this work is 20 years."
Posted by: Helmut at March 18, 2013 10:51 AM
Earthquake insurance is not limited to $250k, I think you are confusing this with flood insurance. However, it is subject to hefty deductibles, and limits on replacement cost and personal items that make it relatively unattractive.
Posted by: Guest666 at March 18, 2013 11:02 AM
@Guest - Thank you. I was thinking of flood insurance.
Posted by: soccermom at March 18, 2013 12:04 PM
"$30.00 or 10% of the tenant's petition base rent, whichever is greater"
big whoop - for $2000 base rent you get to raise it $200 to $2200
So for a $500,000 seismic job on a 5 unit building, it will be recouped.... NEVER
I'd rather spend the difference on insurance. The best thing that could happen is destruction, then I can start over.
Posted by: Hitman at March 18, 2013 12:09 PM
If a 5 unit building needs $500,000 in seismic work maybe you should just tear it down.
Most buildings in the 10-20 unit range will need 50K to 100K in work, some really bad ones more, some better built ones less.
And if you can raise a tenants rent $200 a month, that is a huge amount...$2,400 a year for 10 years times however many people in the building. That is actually great.
Posted by: Helmut at March 18, 2013 12:24 PM
If the capital pass-through must be amortized over 20 years then many landlords will need to get a construction loan. Can they also pass-through their financing costs?
Posted by: The Milkshake of Despair at March 18, 2013 12:29 PM
Some landlords might need a construction loan, not sure about "many". You can also pay cash or use a line of credit..nevertheless I do not know if interest can be counted as a cost but I would suspect that the answer is no.
But I believe you can deduct the expense, so that would offset the financing expenses. Check your accountant/lawyer on that though.
Posted by: Helmut at March 18, 2013 12:34 PM
Isn't fire the biggest risk to life and property following an earthquake?
Why doesn't San Francisco require automatic shutoff valves on every gas meter?
This would save lives and cost less than $100 per meter.
Posted by: bgelldawg at March 18, 2013 12:38 PM
Yes fire is expected to be the biggest cause of damage after a big quake. Auto gas shutoff is a good idea though it doesn't remedy all ignition sources. It mainly prevents creation of a huge broken pipe blowtorch. If you shut off gas at the meter, there's still plenty of pressure in the house's pipes to continue to fuel pilot lights on toppled hot water heaters for a while, maybe long enough to start a fire.
Posted by: The Milkshake of Despair at March 18, 2013 1:06 PM
Regarding the passthru: I could be wrong, but I believe it's 10% increase per year, up to an amount that will get you the 20 year amortization, so you are not just limited to a single increase.
Regarding tearing down a building, you basically can't in SF for several reasons:
Tearing down and rebuilding would eliminate the building as a rent controlled property, so there are rules making it very difficult to tear down multiple unit buildings.
You would have to displace all the tenants, no easy task, and often quite expensive for the landlord.
Many buildings are in areas where permitting would now require a much smaller building.
Building a 5 unit building would cost way more the $500K so it makes little financial sense to rebuild.
Posted by: lyqwyd at March 18, 2013 2:27 PM
No, it's 10%. You do get to charge for interest though, but you never get to charge more than the initial 10%.. you just get to charge it for longer.
And if it's less than 10% (spread out over 20 years) then you don't even get to charge the 10%.
So, if you did a $50000 capital improvement that amortized over 20 years, and you had 2 tenants, you could charge them $50000 divided by 2 tenants divided by 240 months plus interest. So somewhere a little more than $100 a month each.
Not exactly a huge return on that $50000
Posted by: R at March 18, 2013 3:18 PM
Why stop with seismic? Fire is a risk; why not require sprinkler retrofit? Electric shock is a risk; why not require electrical retrofit? Boiler explosions are a risk; why not require HVAC upgrades? Lead paint is a risk; why not require full abatement? Obesity is a risk; why not ban sugary sodas? (oops; that's absurd).
Posted by: Rome is Burning at March 18, 2013 3:49 PM
Thanks R, I stand corrected. It also looks like the tenant also has the option of only paying for 50% of their share of the capital improvements on buildings with 6 or more units, so seems like the existing laws are not nearly sufficient to make it worthwhile, from a purely financial point, for a landlord.
Posted by: lyqwyd at March 18, 2013 4:23 PM
Rome is Burning - The difference is that a quake will strike all properties simultaneously. Those other damage events are distributed across time. When a single event causes widespread damage it overloads the city's ability to respond.
Since it is impractical to staff up the FD, PD, EMTs, etc. to the level required to fully respond to the Big One the next best thing is to retrofit to limit the damage.
We should also learn a little about fire prevention/suppression and first aid ourselves. Make an evac plan with your family. Don't expect any professional help in the first week, we will be on our own. What would you do if your spouse received a severe head injury in the quake? The answer cannot be "call 911". Plan, organize, stock up, and educate yourself now.
Posted by: The Milkshake of Despair at March 18, 2013 4:41 PM
The most effective seismic retrofitting we could undertake would be to return the landfill areas to the Bay. Should be a popular solution here on SS, what with all the hatred of the architecture in Mission Bay and the people in the Marina. Plus, no more arguing over which pier to put the Warriors arena on.
Posted by: formidable doer of the nasty at March 18, 2013 5:25 PM
I have also heard from independent property inspectors and contractors that many of the severly damaged buildings in the Marina had pretty significant termite and dry rot damage to wood structural framing. Something all buildings in the Bay area are susceptible to.
Regarding landlords renting a "safe" building. Very hard to set a standard. Like a safe neighborhood. ??? Want a safe building, try newer non rent controlled large steel frame apartment buildings.
Posted by: realtor at March 18, 2013 8:08 PM
Hmmm... What happens if I don't have the cash and can't get a loan cause my place is a TIC?
Posted by: screwd? at March 18, 2013 10:18 PM
^ which is why they always say that TICs are not for everyone.
You should go into a TIC only if you can cushion the possible hits that can come your way (which is also true with any kind of ownership, but more so with TICs). This means being decently liquid in the first place.
In general TICs can be great when you're financially very sound. 1) you can choose not to borrow as much as the standard home-ower. 2) because of the cheaper purchase price and lower mortgage liability of #1, your interest costs will be lower than condo owners, even with the higher interest rates. You'll have lower property taxes as well. And then you can repay yourself with these savings, and for instance build up a rainy day fund.
Play it right, you win.
Posted by: lol at March 18, 2013 10:51 PM
Milkshake: I get your point but if this is a "public" good (i.e., don't stress City emergency services), then why are building owners singled out for the cost? If "we're all in this together" then what better use for taxpayer money then retrofits? This is a huge cost for small property owners (and possibly their tenants). When you attach six figures to the term "mandatory", that's not fair.
Posted by: Rome is Burning at March 19, 2013 9:38 AM
Predictably, tenant advocates do not like the passthrough one bit:
Even some at the City are questioning the benefits for tenants:
According to City Controller’s Office chief economist Ted Egan, tenants could be paying an additional $38 to $79 per month in rent.
“While retrofitting clearly makes buildings safer for tenants, it is not known if the additional level of safety is worth the additional cost to tenants,” Egan said in his report presented Monday to the board’s Land Use and Economic Development Committee.
Egan said while the benefits for tenants are unclear, property owners’ building values would increase and The City itself would have reduced response costs during an earthquake.
The perfect accountant's response. As if having more chances at surviving was not a benefit!
Posted by: lol at March 19, 2013 10:15 AM
Rome is Burning - I agree that these costs shouldn't be on the shoulders of landlords alone. They should be able to pass the costs through to their tenants.
The city should ensure that the terms don't cause building owners to go broke. Either offer low cost loans or extend the deadline.
The good is not only a public good. Building owners have an interest in protecting their investment.
Posted by: The Milkshake of Despair at March 19, 2013 10:17 AM
Property owners should be required to upgrade and pay for the seismic retrofits.
And owners should pass thru the appropriate and legal costs to the renters and the renters should be required to pay for the pass-thru costs.
Posted by: futurist at March 19, 2013 4:38 PM
Pass legislation to fully disclose in bold prints in Rental Agreements and ads that the building is NOT seismically upgraded and vulnerable to collapse. That way landlords either upgrade or may need to lower rent as it will attract fewer buyers.
Posted by: Lax2sea4 at March 20, 2013 7:04 AM
Tenant advocates could be very wrong to try and have their cake (safer homes) and eat it too (no pass through).
Let's say you have a landlord with a 3-unit building. His long term tenants are paying 50% of market price. This means he's probably not getting much cash from his property. The city suddenly mandates him to perform a retrofit with no pass throughs to tenants. Say the amount is 200K for the building (very theoretical). He will NEVER see these 200K back in the current context. And he'll bleed more money as he has to keep the under-paying tenants at the same rate after the retrofit. There's no real up side for the landlord. Only a huge downside on top of an already bad situation.
The key here is that landlords either have the funds to finance the retrofit or they have not. In many cases they'll have to borrow the funds and file a loan application at the bank, which in turn will look at the landlords expenses and incomes. That could prove tricky for landlords stuck with low-rent tenants with too little cash flow.
If you have to borrow money, it'd be better to do it in the context of a full blown remodel.
What I would do in that case is Ellis the whole building, do the retrofit and do a full blown remodel at the same time. Then sell the units as high quality TICs and probably get the retrofit money back.
The incentives are there, a mandatory (and needed) retrofit could be the tipping point for many landlords.
Posted by: lol at March 20, 2013 12:03 PM
The proposed rule is for the following:
"wood-frame buildings with three or more stories and five or more dwelling units constructed prior to January 1, 1978..."
Posted by: Helmut at March 20, 2013 2:33 PM