Bottom Fishers Casting for Bargain Apartments : Earthquake: The Northridge temblor dealt a blow to the already shaky market in multifamily buildings. That’s bad news for many owners, but good news for rehab specialists.
The ad said a “red tag special,” but the 77-unit Studio City apartment hardly looked inviting. A wing of the horseshoe-shaped complex had collapsed as a result of the Northridge earthquake. The rest of the structure was crooked, leaning six inches north, and two swimming pools contained cracked stucco, tattered clothes, broken furniture and glass.
But to rehab specialist Ron Bien, it looked like a bargain. Four years ago, the apartment was appraised at $5 million. The current owner, burdened by a big mortgage and not covered by earthquake insurance, agreed to sell it to Bien for $1.35 million. After the deal closes in July, Bien plans to repair the building, spruce it up with new archways and landscaping, and reopen it by winter.
“If done properly, the returns will be substantial,” said Bien, who owns RB Companies Inc., a Woodland Hills general contracting and real estate investment firm.
Bottom fishers like Bien are finding bargain-basement prices for quake-ravaged apartments. “For the buyers, it’s utopia now,” said Bernard Haddigan, a managing director at the Marcus & Millichap brokerage in Encino, which specializes in apartment buildings. And for the previous apartment owners or sellers? “It’s Armageddon,” he said.
One of Haddigan’s co-workers, broker Al Mozafar, recently listed a 16-unit apartment in Sherman Oaks that was badly damaged by the quake. It sold within a week to a Los Angeles contractor who paid $387,500--less than half the appraised value a couple of years ago. “He got an excellent price,” Mozafar said.
Even before the Jan. 17 quake, apartment owners in the San Fernando Valley were struggling. Last year a surging total of apartment foreclosures--caused by double-digit vacancy rates, declining rents and the local recession--drove apartment values down to 1986 levels.
Valley apartment building sale prices have been falling 1% a month since mid-1990. On average, buyers paid $35,586 per apartment unit in the Valley last year, down 47% from $66,599 in 1990, according to Commercial Property Information Services in San Diego. Hardest hit have been apartments in North Hollywood, Van Nuys and Panorama City. Of the 444 apartment buildings sold in the Valley last year, about half were bank repossessions, COMPS said.
After the earthquake, inspectors from the Los Angeles Department of Building and Safety posted red (unsafe) and yellow (limited entry) tags on more than 500 apartment buildings in the Valley. Brokers said many of these will wind up in foreclosure, probably in the fall, since it takes several months for lenders to seize properties.
“Hundreds of apartment owners are at the point of determining whether they have the staying power to hold on,” said Bruce Hanes, owner of Hanes Investment Realty Inc., a Westlake Village commercial brokerage. Hanes, a 20-year broker in the region, is more pessimistic than most. He doesn’t see apartment building prices in the Valley climbing out of the cellar until 1999.
One big apartment lender in the Valley, Glendale-based Fidelity Federal Bank, already saw an increase of $175 million in first-quarter loan delinquencies--nearly all of it from apartment owners--as a result of the earthquake.
Another problem is that only a fraction of apartments in the Valley were insured for earthquakes, analysts said. So apartment owners are finding it tough to get private or government loans for repairs because they have little or no equity in their properties.
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Adding to owners’ woes, voters last week rejected a state bond measure that would have enabled landlords without quake insurance to get special loans.
“The earthquake has just pushed a lot of people over the brink,” said James Boyle, a senior executive vice president at Coast Federal Bank of Los Angeles, which has about $200 million of outstanding loans to Valley apartment owners. Coast is trying to work out a solution with struggling borrowers, Boyle said, but “some apartment owners just can’t or won’t do it.”
Crawford Meeks, owner of a 16-unit apartment in Van Nuys, sees no way out of his situation. Meeks’ uninsured apartment had minor quake damage, but the bigger problem is his huge debt. Four years ago, the former Hughes engineer put a $280,000 down payment on the property, then valued at $1.1 million. Two weeks ago, the same property was appraised at $425,000, Meeks said.
Meeks, 62, was turned down by his lender for a reduction in his mortgage principal, and now his building is in foreclosure proceedings. “I’m just a guy trying to build a little security for retirement,” Meeks said, his voice wavering.
But trouble for some is opportunity for others--especially for contractors and developers who have the cash to buy now, fix up properties and wait for things to get better. In effect, they are betting that the apartment market has finally hit bottom.
It was just one week after the quake when Bien, the rehab specialist, spotted the dilapidated roof line of the Studio City apartment complex from his truck on the Hollywood Freeway. Bien got the address and tracked down the owner through title records.
Bien, 44, knew he wanted it on his first walk through the property. Despite the building’s horrific appearance, Bien found that the 77 units inside were basically sound. On a recent afternoon he showed a visitor a second-floor apartment with crack-free walls and undamaged bathroom tiles. “You can move into this,” he said. Bien also liked the property’s location--near a highway, across the street from a church and surrounded by a park.
Ed Delava, finance director with ACF Property Management in Sherman Oaks, brokered the sale of the Studio City property for the owner. Delava ran ads in national and local newspapers listing the building for $1.3 million. In two weeks, Delava said, more than 100 people inquired, mostly Mom-and-Pop contractors in Los Angeles, but calls also came from big developers and syndicates from all over the West Coast.
Delava received a dozen offers, but Bien will get the building for $1.35 million, and the lender agreed to write off $2 million on the loan, enabling the current owner to walk away without a scar on his credit rating.
Although city inspectors estimated repairs for the Studio City apartment building at $4 million, Bien figures he can rebuild the place for $1.5 million. Bien has been rehabbing apartments for 20 years.
With seven employees, Bien does some construction work and subcontracts out the rest. Using steel beams and hydraulic jacks, he has even lifted apartment buildings to reposition and transport them. In 1979, Bien bought a 5,000-square-foot redwood house in Northridge, then hauled it, in four sections, to a knoll in Calabasas. He rehabbed the place and now lives there.
“I think it would scare the typical contractor,” Bien said of the run-down Studio City apartment complex. “But to me, it isn’t a big deal. I’ve moved buildings across town. This building only moved six inches.”
Bien owns and manages two dozen apartment buildings in Los Angeles, mostly in the inner city. Now Bien is shopping to buy an additional half-dozen quake-damaged properties and seeking a partner to help him finance the deals. “Opportunities are there,” he said.
Bottom fishers like Bien aren’t betting on apartment values climbing anytime soon. Instead, they’re buying apartments largely for the cash flow. Some brokers say that excluding debt payments, the cash flow on an apartment investment today can reach 15% to 20%.
“The returns are phenomenal,” claimed Melinda Russell, an apartment specialist at Zugsmith-Thind in Encino, a commercial real estate brokerage. Last year Russell sold 22 apartment buildings, double her sales in 1992, and every one was a bank repossession. “There are people out there scavenging because they think they can fix it cheap,” Russell said. “If they buy low enough, they can undercut their neighbor’s rent.”
That possibility is another worry for current apartment owners. Valley rents are already down in some areas as much as 40% from 1990. And competition for tenants has been fierce, due to high unemployment that has forced people to relocate out of state, move back in with their parents or double up. In recent years the vacancy rate of the Valley’s apartment market has averaged in the low teens, brokers say.
With thousands of apartment units in the region lost in the quake, many expected intact Valley apartments to fill up. But that hasn’t happened, said Boyle, the Coast Federal Bank executive. Instead, tenants have fled to Calabasas, Thousand Oaks and other areas less affected by the quake.
“The recent memory is still there, so those people won’t be moving back” to the Valley, Boyle said. As a result, when quake-damaged properties like Bien’s reopen later this year, he said, they will help keep Valley apartment rents low and vacancy rates high. “I don’t see much change in the foreseeable future.”
