Insurance Executive Sees Problems, Opportunities in L.A.’s Earthquake Law

By | December 7, 2015

Who’s going to pay?

It’s a big question in front of landlords of thousands of Los Angeles properties early next year.

When the Los Angeles City Council unanimously voted in October for new earthquake retrofit regulations it put in play a mandate to retrofit an estimated 15,000 buildings to better withstand violent shaking. The affected properties include nonductile concrete buildings, not including detached single-family homes or duplexes built before 1977, and wood-frame apartment complexes built on top of carports.

Property owners will have seven years to fix wood apartments and 25 years to fix concrete buildings under the new ordinance.

But the L.A. City Council in voting to improve safety in a seismically dangerous area has yet to address the big question. The ordinance doesn’t include funding sources other than an existing provision in place that enables landlords to increase monthly rents by up to $75 to cover the costs.

That’s not much and it would take a long time for landlords to recoup the very expensive cost for retrofitting, said Michael Brown, vice president and property department manager with Golden Bear Insurance Co. in Stockton, Calif.

The primary question Brown is raising: who is going to pay?

“That may be the $64,000 question,” he said.

The retrofit program officially kicks off in February when the city begins mailing out retrofit orders to landlords. Landlords will have one year to submit plans to either retrofit or demolish the structure. They can forego either of those scenarios if they can prove retrofitting is unnecessary.

Building owners then have two years to get permits and seven years to complete the retrofits, which on wooden structures are estimated to cost $60,000 to $130,000.

The ordinance is based on a 2014 report ordered by L.A. Mayor Eric Garcetti. The report involved famed U.S. Geological Survey seismologist Lucy Jones. Jones has long worked to call attention to the seismic dangers posed by L.A.’s numerous wood frame buildings.

It’s being hailed as one of the nation’s most sweeping earthquake safety ordinances, but L.A. isn’t the first local government to take such measures to improve earthquake safety.

In 2013 San Francisco Mayor Ed Lee signed into law the Mandatory Soft Story Retrofit Ordinance. That law requires most San Francisco multifamily soft-story buildings to be retrofitted with few exceptions.

It’s estimated that more than 5,000 San Francisco buildings are required to participate in the program. More than 500 buildings have filed for or been issued a permit and more than 120 owners have completed their required retrofit, according to information from the city’s Earthquake Implementation Program.

A Community Action Plan for Seismic Safety analysis estimates these retrofits will cost between $60,000 and $130,000 depending on the building size.

All work within the scope of that ordinance is subject to a pass-through provision that allows landlords to pass along up to $75 a month to tenants to cover the costs. However, tenants facing hardship may use an appeal process for pass-throughs.

The city is offering a public financing option through AllianceNRG/Deutche Bank for property owners wishing to finance both mandatory and voluntary seismic retrofits. This program allows San Francisco building owners to finance 100 percent of the required earthquake retrofit work over 20 to 30 years to be repaid through an additional assessment on their property tax bills.

Like San Francisco, L.A. is allowing building owners to increase monthly rents by up to $75 to pay for retrofits.

But Brown believes much more than that is needed. And he expects L.A. to follow in the footsteps of San Francisco – eventually.

“My expectation is that a similar program will emerge for Los Angeles, but it might have been nice if they identified one and maybe started that process before passing the ordinance,” Brown said.

He believes allowing landlords to increase rent up to $75 a month per unit to pay for earthquake retrofitting will prove too slow an income stream for landlords struggling to pay the costs, and that it could be rough on some renters.

“It’d take a long time to pay off a major earthquake retrofit by that small an amount of increase per unit,” Brown said. “If you look at it from the other perspective, a family that’s already living paycheck to paycheck and sees a $75 increase in their rent every month will be disproportionately impacted. Los Angeles already has a fairly high cost of living, and this is just going to make it a little bit worse.”

A second option for the property owners who don’t want to or can’t afford to do the seismic retrofitting is to demolish the building and start over or sell the property off.

Brown thinks this avenue may prove attractive to some landlords.

“Depending entirely on the neighborhoods that these buildings are in, it’s entirely possible that you could demolish the building and either sell the vacant land for development or redevelop it yourself into something that would generate more revenue that the older, noncompliant building did,” Brown said. “In either case, the tenants in these older buildings are going to see both a reduction in the available number of units and an increase in the monthly rents, almost certainly.”

Brown acknowledged the ordinance addresses a life safety issue, particularly for residential buildings.

“The problem I have is the way they’ve gone about it,” he said. “They’ve identified the problem. They’ve established a set of rules and guidelines for the property owners to comply with the new ordinance and make their buildings safer, but they’ve done so without providing an easy and reasonable means of funding all this extra work.”

Brown sees an opportunity for agents and brokers, who don’t mind taking a little time to bone up on the new ordinance and figuring out what it means for their clients.

“I think we’re going to see a flood of building owners contacting their insurance agents, looking for information on what are the exposures here that I have to deal with,” Brown said. “The average investment property owner probably doesn’t know a whole lot about the additional insurance exposures that would come from having major seismic retrofits done.”

Brown called this “value added relationship building” with current clients, as well as the potential to seek out new clients who may suddenly have builder’s risk exposures they’re probably not used to.

“It’s a great opportunity for insurance professionals to step forward, take people by the hand, and help guide them through a fairly complicated process,” he said. “The bottom line is there’s going to be roughly 15,000 buildings in the city of Los Angeles that are going to either be seismically retrofitted or demolished in just the next few years. That suggests to me that planning departments and building inspecting departments in the city of Los Angeles are going to be overwhelmed.”


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