Paying for Garcetti’s earthquake plan

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Today, Mayor Garcetti announced the release of a major report on earthquake safety.

The report addresses telecommunication, water systems, office buildings and, most importantly from our perspective, apartment buildings.

The issue with apartment buildings is pretty simple. The city has roughly 16,000 soft-story apartment buildings. These are buildings whose ground floor structure can give way in a quake, leading to total building failure. Obviously, when a whole building collapses, there is major risk that people with die.

The solution for these structures is pretty simple: You just build a steel frame on the ground floor to support the structure.

The downside is, of course, cost. Depending on the size of the building and some other factors, the cost of retrofitting each building is likely to be $15-60k.

The question, as with all city regulation, is: Who pays?

The simple answer is the building owner. After all, it’s his property that’s at risk.

But what about rent control? After all, the city has basically made the tenants in rent controlled buildings into long-term partners with the owner (who can’t make them leave, nor raise their rent to cover the cost of the improvement to the building).

The city has a capital improvement program for improvements to building systems where the benefit is shared across all the units. Retrofitting soft-story buildings ought to fit right into that program (no matter how absurd I think the program is).

But the problem is that the program requires the owner to front the money for repairs and then get reimbursed 50% of the cost by the tenants over a long period of time. What about owners who can’t come up with $15-60k?

You might think the city could set up a program to lend owners the money. After all, the payments on a $30k loan at 5% interest amortized over 15 years are only $236 / month, which is affordable, particularly if the tenants are contributing via the capital improvement program.

But here’s the problem: Many modern commercial loans prohibit second trust deeds (eg loans which are junior to the first mortgage). So, a city loan program would either need to be unsecured (eg not on title, and therefore nowhere near as secure as a mortgage) or else require some kind of city / state law requiring banks to allow for a second loan specifically for the purpose of covering earthquake retrofitting (which, it has to be said, would protect the bank’s collateral!).

Has the mayor’s team considered the above problem? Guess we’ll find out.

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