The replacement cost barrier

As we seek to deploy our current pool of capital at a time of generally high prices, we are running up against the issue of replacement cost.

Here’s the problem: As a repositioner, you don’t really want to be in the position of spending more to buy and renovate a building than it would cost to build the same building from scratch.

The reasons are pretty obvious:

  1. All things being equal, you’d obviously prefer to have a brand-new, non-rent control building over an older (albeit totally-renovated) rent control building; and
  2. If someone can buy the property next door and construct an identical, brand-new, non-rent control building for less than you’re all-in for, then they should always be willing to under-price you on rents, assuming you’re both targeting the same yield.

Why is this coming up now?

It’s harder and harder to get our raw material (eg unrenovated buildings) at reasonable prices, because the market is hot. To compensate for the high prices, from a yield perspective, we can use the tricks we have developed over time to achieve high rents. But those tricks cost money, which drives up our all-in cost.

So, because I generally refuse to be all-in for materially more than replacement, we’re passing on some deals which have yields which would otherwise make them marginal “go’s”.

Another report from the front line of the zoning wars

Fund 3 investors know we’re in the process of adding a second story with two units to a duplex we bought a few months ago.

This is a pretty straight-forward operation: There is plenty of room on the lot and the zoning allows for more than two additional units.

This should be the kind of project the city loves; we’re adding housing to an area in desperate need of it.

With that in mind, I think you’ll appreciate the comments we got back from the city on our proposed plans.

Among other, less annoying changes, the city is requiring us to include a 30 sq. ft. recycling room in the property.

30 sq. ft. doesn’t sound like a lot, right? But development is a game of inches, and losing that space would probably reduce the bedroom count on one of our units from three to two, which would reduce the rent on the unit and therefore make the project less appealing from a financial perspective.

Thankfully, I believe we will find a way around this issue.

But, at a time when the city is suffering from a persistent, severe housing shortage, PERHAPS THE CITY SHOULD PRIORITIZE ADDITIONAL HOUSING OVER RECYCLING ROOMS!!!

When is a re-pipe not just a re-pipe?

When you have a building with a “slab” (as opposed to a “raised”) foundation.

With a raised foundation, there is a crawl-space under the bottom floor through which pipes run. This makes re-piping the building pretty easy.

With a slab foundation, the building sits right on a thick concrete slab in which the original plumbing is buried. To re-pipe a building like this, the first thing you have to do is get a jackhammer and break a lot of concrete.

The pictures below (taken at a seven unit project we’re renovating in Echo Park) show just how crazy this is (and why it costs so much!):





Score one for density

Today we learned that the mayor over-ruled his own planning commissioners to approve a high-rise building in K-Town.

Here’s the money-quote from the LA Times explaining the opposition to the project:

“Such a huge project would be ‘wildly inappropriate’ for the location, said Commissioner Maria Cabildo, an affordable housing developer. “I’m probably one of the biggest advocates on this commission for housing — market rate and affordable — and I just cannot in any way feel good about this project,” she said during the hearing.”

Here’s a picture of the block in question:

Screen Shot 2015-05-18 at 2.36.27 PM


Here’s a map showing it’s proximity to the metro:

Screen Shot 2015-05-18 at 2.41.17 PM


In case you don’t know K-Town, that’s a ~10 minute walk to either station.

You can’t be pro-housing and block a huge project in this neighborhood. If we’re not going to build densely in an area like this, where are we going to?

Bravo, Mayor Garcetti!