If you own a multifamily building in San Francisco, start saving your pennies. On April 18, the 107th anniversary of the 1906 earthquake that destroyed 80 percent of the City, Mayor Ed Lee signed into law a bill to require seismic upgrading for many thousands of local buildings.
The Mandatory Seismic Retrofit Program for Soft Story Wood Frame Buildings specifically targets wood-frame multifamily buildings built before 1978 (when building codes were adjusted) with living space for five or more units and at least two floors above a weak story (called a “soft story”), often used for parking or commercial space. San Francisco has an estimated 7,000 businesses and more than 55,000 residents in such buildings.
How will you know if your building is going to have to be retrofit? The City will notify property owners beginning in late autumn 2013; owners will have one year after that to have their properties evaluated by a licensed architect, contractor, or engineer, who will determine if retrofitting is needed. Properties deemed in need of the fixes will be classified into four different categories with phased requirements for when the work must be completed. The entire program is scheduled to last the next seven years, giving owners time to plan for the changes.
Financing might be a big question. The Associated Press cited City officials’ estimates for the fixes ranging from $60,000 to $130,000 per building. Once competition for seismic contractors’ time, labor, and materials heats up, though, those numbers could rise significantly.
Local banks have agreed to offer financial packages for owners of the buildings. One of the controversial aspects of the program, as you’d expect in San Francisco, is that owners can pass through to their tenants 100 percent of the retrofit costs (over 20 years), even for rent controlled units. The deal reportedly passed the Board of Supervisors after a deal was worked out to protect vulnerable renters, who could qualify for exemptions.
“We must protect our residents and make sure their homes are safe after a major seismic event,” Mayor Lee said. He added that the seismic retrofit program will help the City recover quickly from the next major earthquake, which could be sooner than we’d like. The City notes that some seismologists are predicting a Bay Area earthquake two to three times as strong as the 1989 Loma Prieta quake will hit within the next three decades.
Therefore the City itself is spending billions of dollars over the next decade to prepare its critical public buildings and infrastructure for the Big One. The quicker the local government is able to run smoothly and address the needs of the population after a big quake, the better. So the money the City is spending on strengthening its buildings and systems is a worthy investment, if it’s done well.
Likewise, the more buildings that are able to withstand even major quakes means there will be fewer people requiring rescue, food, and shelter. And building owners will have to spend less on post-earthquake repairs and rebuilding, when contractor availability will be at a premium.
The upgrades are mandatory, so assuming that all vulnerable buildings are included, then there isn’t a differential on resale pricing to worry about. But even if your divestment horizon is within the next seven years and you figure you can unload the retrofit duties onto the next owner, any buyer with two brain cells to rub together will know what they’re going to face and will price that into any offer they make to you for the property.
San Francisco is filled with overbearing rules and requirements that seem designed to impede rational business operations. But the Mandatory Seismic Retrofit Program for Soft Story Wood Frame Buildings appears to be sensible and forward-thinking regulation that ultimately will help tenants survive a big earthquake and will help protect owners’ investments in their commercial real estate.
And if these mandatory expenditures make you think twice about your investments in multifamily housing ownership in the City by the Bay, then perhaps you would consider investing in what’s certain to be a booming business over the next seven years: Providing seismic retrofitting services to multifamily housing owners.
For more information on this and other City earthquake preparedness plans, visit www.sfcapss.org.