Finishing up another one

We’re just finishing a 6 unit deal in an area where we’ve done a ton of business, and thought you guys would like to see pics.

The ads went up this past Monday (so, seven days ago) and already 5 of the 6 units are spoken for.

Think the unlevered yield on this one is going to be ~7.5% / year… and we bought it last summer.

That’s a home run.

Help support more housing along the Expo Line

Am writing today with a request: That you click the link below and add your name to the long list of people and organizations in favor of adding more housing along the Expo Line in LA.

Here’s the link.

Regular readers know that LA’s housing crisis is basically the result of terrible land-use planning. We have plenty of land to build enough housing to meet the demand… but we stupidly reserve vast swathes of it for single family homes.

The results are predictable: High housing prices, sprawl, and lower property taxes per square mile, resulting in less revenue to maintain infrastructure like roads and water pipes.

Fortunately, there is a solution: Mass transit (to take cars off the road), coupled with much higher allowable housing densities near transit stops (to increase housing supply).

The two are mutually reinforcing:

  1. Each new line / stop makes the whole system exponentially more useful for everyone who lives and works close enough to stations to use it; and
  2. The more people who live and work close to stations, the more riders there will be, raising revenue and demand for yet more investment

In short, we can create a virtuous cycle that helps to solve our housing crisis.

The problem? We still have a bunch of hold-outs who are trying every trick in the book to block changes to the zoning code that would allow for more density. And so Abundant Housing LA, a group dedicated to addressing these issues, is asking for our help in pressuring these hold-outs to allow for more housing to be built where it will do the most good – right near the stations of the new Expo Line.

Won’t you join in?

Finishing up a five unit

Just finished a cool five unit building in an area we know really, really well. It’s actually the third building we’ve done on the same block!

To be honest, we knew this deal was a great one the moment we got it under contract… it was so good that the broker tried to chase us out of the deal during escrow (presumably because he had so many other buyers willing to pay more).

It’s one thing to go under contract on a deal that feels like a home-run on the numbers. It’s another to actually execute.

In this instance, Jon had to wrestle with structures that were were built prior to the imposition in LA of recognizably modern building codes in the 1920s. This means designing around an asymmetric building, which meant that all the units had to be unique.

That meant more work for him… but I the units came out pretty well, though, right?

(Note: Unlike a bunch of buildings I’ve seen lately, these ceilings were done with permits… which requires a whole bunch of specialized engineering, structural and roof work.)

A really scary roof deck

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.

Building a brand by accident

Without quite meaning to, Adaptive has built a brand.

How do I know?

Well, I get email messages like this:

“I am reaching out to make contact as I have come across a few of your listings and think they are right up the lane I am looking for for my upcoming move to Los Angeles. I’ll be relocating from NYC at the end of June and would be looking for a move-in date of July or August 1. “

We didn’t mean to do this… you can tell from our crappy website, which hasn’t been updated since we started the company six years ago.

What happened?

We have a design philosophy that is clearly evident in all of our projects – simple, modern, clean, timeless. It’s not for everyone, but it REALLY appeals to a specific group of relatively affluent prospective tenants who are willing to pay for it.

These prospective tenants browse online and keep finding our listings (because we manage hundreds of similarly renovated units). Eventually, they realize all the units they like come from one company, then they reach out, hoping to get first dibs.

Over time, what began as a one-every-few-months trickle of emails has grown into a multiple-per-week stream, adding meaningfully to our marketing efforts.

Just think what we could do if we ever got around to making a cool website…