Came across a listing for a renovated building yesterday that made me very scared for the potential new owner.
To be clear, this was a nicely renovated building, with brand new systems, high-quality finishes, decent taste, etc.
And the rents were pretty good – around $2500 for 2 beds with no parking, which, for the neighborhood, is close to the maximum achievable.
So, what was wrong?
Well, to get those rents, the owners put in a roof deck.
Sounds harmless, right? Lots of buildings have them. And it wasn’t too hard – this is a classic center hallway, 1920s building, so there was already a stairway up to the roof and a door. So all the current owners had to do was put down some decking material, add some furniture and – BOOM – have a great amenity for tenants.
Here’s the problem:
- Stick-and-stucco 1920s buildings are not designed to carry the weight of a real roof deck – the staircase and door are for emergency egress, not every day use
- To put a real roof deck on, you need to dramatically upgrade the structure’s ability to carry weight, which probably means dropping steel columns down through the walls, all the way to the foundation, then upgrading the foundation
- Then, you have to either replace the existing roof joists with thicker joists designed to carry real weight, or else build a new floor frame tied into the new steel columns (eg not resting on the existing structure)
- In addition, you almost certainly need to upgrade the sheer value of the building (to prevent side-to-side swaying under the new weight), which means taking off the stucco, adding a plywood wrapper to the framing, then re-stuccoing
- Finally, you need to have two means of egress from the roof (and those buildings were only designed with one)
I am 99.9% sure the owners of the building for sale did not do this, which means they have an unpermitted roof deck.
Why is that a problem?
If the Housing Department is doing a their job during SCEP inspections, they will flag the unpermitted roof deck and require the owner to return it to its previous use as a normal roof. The tenants, who are protected by rent control, will then be in a position to apply to the city for a reduction in rent, since they signed their leases under the assumption that the roof would be available to them. A $100 / month reduction across all the units in the building is real money… and would imperil the new owner’s ability to pay her mortgage.
More seriously, imagine the owner’s liability in the event someone (drunkenly?) falls off, or through, the roof deck. I guarantee the owner will not have disclosed the unpermitted nature of the deck to her insurance company, nor to her mortgage lender. If someone dies up there and it is discovered the deck was unpermitted, will the owner be covered by insurance? If there is a huge award and the owner can’t pay and the building goes into foreclosure, will the bank have a claim that the loan ought to be treated as recourse (eg hold the borrower personally liable for any losses on the loan), because of a material misrepresentation in the loan application?
Investing in multifamily real estate in Los Angeles is supposed to be relatively safe, which is why the returns are pretty low. For example, if you buy the building above, even without a mortgage, you’re looking at ~4% year if everything goes well. If you use a mortgage, it’s worse.
But, if you aren’t careful, you can end up in a situation where the upside (the 4%) is nowhere near high enough to compensate you for the downside risk (the chance of losing your downpayment, at a minimum, and possibly additional liability, depending on the insurance situation and whether a plaintiff can pierce your corporate veil).
This is a big-girl / big-boy game, and you really need to understand what kind of risk you’re taking on, even with something as (seemingly) trivial as a roof deck.