SF Apartment : July 2017

FEATURE

Seismic Savings

by W. Charles Perry

To a casual observer, before-and-after photographs of a seismically retrofitted building may appear to be identical. To a sharp-eyed landlord, a post-retrofit building could be generating rent from new parking spaces. An original building I worked on was designed for six horse-drawn carriages with doors too narrow to be used for cars. As part of the retrofit, the garage door openings were enlarged. Because this was part of a retrofit, SF Planning waived the review process associated with façade changes. Best of all, the cost of the retrofit is being passed through to the tenants. The additional rent for parking goes into the landlord’s pocket.

For example, current parking space rental rates in San Francisco vary from $200 to $400 per month depending on location. Imagine an additional $1600 per month from previously unused space. It is like renting a studio apartment without the effort of having a tenant.

Tenant-Paid Utilities from New Gas Furnaces

Owners of buildings heated by steam boilers pay all the heating bills for their tenants. In San Francisco, this can be a year-round expense. The radiators in each apartment are forever leaking water and damaging hardwood floors, and tenants are forever complaining about the radiators not working. By the end of the winter, maintenance bills can add up to a small fortune. Consider ending this financial bleed during your seismic retrofit.

Seismic retrofits often require relocating boilers and steam pipes, which can be incredibly expensive and often costs more than replacing the boiler with a new gas furnace. The relocation cost is charged to the retrofit, and the difference in cost is a regular capital improvement. And best of all, your tenants are now responsible for their own gas and heat use.

For example, I recently worked on a six-unit building heated by an old steam boiler. To move the boiler before the retrofit and then return it afterward would cost a staggering $22,000, while simply replacing the old steam boiler with a new steam boiler would cost $4,000 less at $18,000. Instead, the property owner decided to dispose of the steam boiler, steam piping, and radiators; fix the damaged hardwood floors beneath the radiators; repaint the walls around where the furnace had been sitting; and install six new wall heaters, flues, and thermostats in each unit. The total cost came to $40,000, with the cost of the new heating system coming in at around $22,000. The owner had been paying about $10,000 per year in heating and hot water bills for the six units. Of the six units, two were occupied by long-term tenants for whom heating and hot water were a part of the lease, so the owner was able to add independent gas service to four units, saving the owner $4,000 per year—roughly a five-year payback.

Upgrade Ground Level for Storage

Does your building have a groundwater intrusion problem? Do you have a brick foundation? Are you on liquefiable soil? Are you missing fire-rated finished wall surfaces? Do you have an unused cellar, basement, or archaic mechanical room? Do you have low ceiling heights?

All of this can be fixed during your seismic retrofit. For a typical five to fifteen-unit building, you can gain 1,000 to 3,000 square feet of usable space. You might be tempted to hire an engineer who promises the cheapest possible retrofit that squeaks past the SF Soft Story Retrofit Ordinance. Reconsider the value of clean, dry, extra usable square footage that meets habitability requirements: additional parking; additional storage; a future accessory dwelling unit; improved access to your backyard. Imagine the extra rent from a small storage closet for each tenant. Again, it’s like renting an additional apartment without the effort of a having another tenant.

For example, another building I worked on was situated on top of an ancient stream bed that was backfilled in the early 1900s. Every winter water flowed beneath the building. This made the space functionally useless. When retrofitting the building, the water had to be controlled to maintain the integrity of the foundations against failure in an earthquake (which is stronger: a foundation on mud or a foundation on dry clay?). Controlling the water and strengthening the foundation created a clean dry basement that could be used for storage (or a future ADU). The work had to be done as part of the retrofit, therefore the cost is passed through to the tenants.

Storage space rents for $2.00 to $3.00 per square foot. One thousand square feet of storage can generate $2,000 to $3,000 per month in income.

Accessory Dwelling Units

Imagine adding a unit to your apartment building without having to add parking or comply with the myriad of SF Planning and Zoning requirements. Imagine eliminating parking, storage, and laundry services with the approval of SF Planning and Zoning. This is all possible now in exchange for seismically retrofitting your building. Hey, maybe you can even add two units.

Obviously, or perhaps not so obviously, adding an accessory dwelling unit (ADU) requires planning. The seismic retrofit must be designed around the future ADU, because the retrofit will be complete before your ADU plans are approved. Careful design integration is required to avoid doubling up on work. Designing an ADU requires a design team that understands all aspects of site, architectural, structural, mechanical, electrical, plumbing, fire protection, energy efficiency, and green construction design of historical and archaic buildings in San Francisco. With careful design and planning, rent collected from your ADU can repay your investment in less than 10 years, while also increasing the value of your building.

For example, a property owner planned to add one 2-bedroom apartment and one 1-bedroom apartment in his building. The bid for these two ADUs was $320,000. Comparable one-bedroom apartments in the neighborhood were renting for $3,000 per month and comparable two-bedroom apartments were renting for $4,000 per month; the combined annual income of the two new units would be $84,000.

Assuming a discount rate of 5%, this returns the investment in four years. Assuming cost increases during construction and rent decreases in the future, you can reasonably anticipate payback in five years.

Upgraded Commercial Space

If you have a commercial space that hasn’t been remodeled since the Hoover Administration, you will probably have to functionally gut the space during a seismic retrofit. The city now requires accessible entrances and restrooms. If this sounds like your building, take the time to redesign the space to meet today’s market demands. A skilled multi-discipline design team can design the retrofit around the commercial space, and time construction around tenant move-out and move-in. Imagine trading a $2.50 per square foot per month mom-and-pop tenant for a $5.00 per square foot per month tech startup tenant. Trade your below market rent for upscale rent and pass the cost through to your tenants.

In Closing

Property owners have an opportunity to profit from a seismic retrofit. Take fair advantage of the circumstances by choosing the best possible retrofit instead of the cheapest possible retrofit. Remember that the cost of the retrofit can reduce annual expenses through capital improvements; 100% of the retrofit costs can be passed through to tenants over 20 years; and 50% of costs associated with capital improvements can be passed through to tenants over 10 years. Hire a skilled multi-discipline design team to guide you through the process, help you minimize costs, and save lives and protect San Francisco housing stock while doing so. It’s a win-win.

W. Charles Perry is the principal of W. Charles Perry & Associates, an internet-based design firm that specializes in architectural engineering and construction management in the San Francisco Bay Area. Started in 1989, it came to life in the aftermath of the Loma Prieta earthquake and has been helping its clients since then prepare for the next big one. Its team of architects, engineers, interior designer, project manager, draftspersons, and sales manager can serve your every need in the multi-family housing market.