SF Apartment : July 2017
The Cost of Compliance
by Tom Hui
The Department of Building Inspection (DBI) has another looming deadline for approximately 1,700 building owners of five-story buildings with 5 to 14 units that fall into Tier 3 of San Francisco’s Soft Story Mandatory Seismic Retrofit Program. These owners are required to turn in permit applications and plans by September 15, 2017, per the program’s deadline.
Through this ordinance, we are improving the safety and resilience of San Francisco’s housing stock with the required retrofit of older, wood-framed, multi-family buildings with a soft-story condition before the next earthquake hits the Bay Area. While we cannot predict when the next earthquake will strike, we can work together to protect ourselves, our families and our properties by reducing the risks of soft story building collapses from the next earthquake.
At the time of writing this article, about 52% (1,825) of the owners of 3,512 properties under the Tier 3 Mandatory Retrofit Program have complied with the upcoming September 15, 2017 deadline. This is great progress, but there remain 48% (1,687) of owners who have yet to comply. While there is still time, it is important to get the process started as it involves paperwork, securing contractors and financing, and the development of a construction proposal that will ensure the building is strengthened before the next earthquake comes.
Seismic Retrofitting Costs
One important challenge that requires preparation, coordination and ample research is how to finance such an important improvement to the property without affecting the property owner’s ability to maintain and provide a habitable housing space for the tenants and families occupying the building.
The cost to seismically retrofit a building will vary widely depending upon the level of the hazard and needed seismic improvement of the building. It is currently estimated that retrofits will cost between $60,000 and $200,000, depending on the building size and the selected seismic retrofit option. The cost of the building permit is a percentage of construction costs per San Francisco Building Code, Section 110A. Also, depending on what building improvements the owner wants to make, the cost can go up considerably. The good news, however, is that there is a financing option available to San Franciscans.
While there are many banks available to offer loans to property owners, the Property Accessed Clean Energy (PACE) financing option is unique to San Francisco in that it allows not only coverage for costs for seismic retrofits, but also for energy efficiency, water conservation, and renewable energy improvements. PACE financing also is available for the additional units that multifamily property owners are permitted to add with their seismic retrofit. As the owner is required to make the seismic improvements, the coupling with efficiency improvements allows the owner an opportunity to undertake the improvement work and efficiency effort at the same time—thus allowing for greater design cohesiveness and building space-use considerations.
In 2014, San Francisco endeavored to attract an innovative partner to leverage the GreenFinancingSF mechanism available to municipal governments, and thereby to provide all-in-one financing for an environmentally improved and safer building project.
SF’s Commercial PACE Program
San Francisco is currently offering a public financing option, developed in partnership with the City Administrator’s Office, Mayor’s Office, and AllianceNRG/CounterpointeSRE, for property owners who wish to finance their seismic retrofits through the city’s GreenFinancing plan. A municipally backed bond allows property owners to tack on an additional assessed improvement line item to their property tax statement. The additional assessment of costs stays with the property over the life of financing and tenants can share in its payments—essentially amortizing the soft story retrofit costs of the building over 20 to 30 years.
Counterpointe Sustainable Real Estate provides an innovative PACE financing solution for capital improvements related to seismic, water and energy retrofits.
The team at CounterpointeSRE Program has decades of experience in commercial real estate, commercial mortgage back securities, and structured finance, making it a premier program for commercial PACE financing. Counterpointe Sustainable Real Estate is proud to partner with the city to help San Franciscans achieve an energy efficient and resilient future. To date, 400 applications have been submitted in San Francisco for seismic retrofit financing, while Los Angeles’s building owners are just beginning to apply.
Details of the PACE Financing Program
As noted above, through a Property Accessed Clean Energy (PACE) property tax assessment, the cost of the seismic improvement can be tacked on as an additional item to the property tax bill and will stay with the property until the cost is repaid. It is not a loan and does not follow the property owner. Under the SF Rent Ordinance 37.7, property owners can pass through 100% of the seismic improvement cost to tenants. They must apply to the San Francisco Rent Board to do this, and the PACE financing pass through is permitted up to 20 years. For more information of MSSP passthroughs, see page 24.
As mentioned, property owners can combine funding for seismic improvement along with energy efficiency, water conservation and renewable energy improvements. Financing can include all construction costs, including permits, design, inspections and engineering. Approval is based upon property value, not personal income score.
Applications are accepted online through CounterpointeSRE’s website, and applicants can easily process all documents and complete the process online for their application. Steps must be taken to ensure qualifications are met for the proposed project, as well as the qualification of the contractor or design professionals doing the work. Once the assessment closes and all approvals are obtained, property owners are reimbursed for their expenses and disbursements are made directly to contractors in up to four scheduled progress payments.
Advantages Over Traditional Construction Loans
- 100% financing of the project, including all soft costs such as permits, inspections and design fees. Closing costs can be capitalized.
- Fixed interest rates over the life of the assessment.
- Maturities between 5-30 years, up to the estimated useful life of the improvement.
- No balloon payments; assessments are self-amortizing; off balance sheet treatment.
- Enhances building value without ROI or other capital expenditure limitations.
- Energy efficiency improvements can deliver net positive annual cash flows in year one.
- Prepayment is not required upon sale or refinancing of the property.
- No acceleration of obligation in case of default.
- Loans secured by the property, rather than the owner’s credit standing.
- Property owners reimbursed for soft costs of construction.
- 2-4 payments directly wired to contractors and other professionals.
- Property owner keeps any applicable federal/state rebates and/or tax credits.
Visit www.counterpointesre.com/san-francisco-seismic-soft-story, email inquiry@CounterpointeSRE.com, or call (855) 431-4400 for more information.
Earthquake Retrofit Exclusion Form for Soft Story Construction
If you are completing your soft story retrofit project, please remember to submit an exclusion with the Office of the Assessor-Recorder as construction of seismic retrofitting improvements can be excluded from property tax reassessment.
In California, Earthquake Retrofit exclusion mainly includes construction of seismic retrofitting improvements or other improvements that utilize earthquake hazard mitigation technologies to an existing building. In order to benefit from this exclusion, property owners must file a completed Seismic Safety Construction Exclusion Form with the Assessor’s Office prior to, or within 30 days of, completion
This exclusion does not include other alterations, such as new plumbing, electrical or other added finishing materials, completed during seismic related work. Please keep in mind that the scope of each project varies, and the Assessor’s Office reviews each permit individually.
To learn more about earthquake retrofit exclusion or to download the exclusion form, please visit the SF Assessor’s website: http://sfassessor.org/tax-savings/exclusions/earthquake-retrofit.
DBI Director Tom Hui, S.E., C.B.O., is a registered civil and structural engineer with numerous technical certifications. He is an active member of the Structural Engineers Association of Northern California and the American Society of Civil Engineers.