Though it's unlikely to become a widespread investment rage, some private developers and city agencies in Southern California are turning a profit by tackling what might be called "the fourplex problem," renovating entire neighborhoods in the process.
The problem is that many deteriorating neighborhoods in Los Angeles and Orange counties are composed primarily of small apartment complexes--duplexes, fourplexes and buildings of six or eight units. The complexes typically are owned by many different landlords, so the condition of the buildings can range from well-maintained to abjectly neglected, said Kathy Head, a principal at the Los Angeles office of Keyser Marston Associates Inc., a real estate consulting firm.
In effect, the fourplex problem is a byproduct of the same proliferation of small complexes that makes apartments an affordable investment for many small owners. However, there is generally a serious amount of deferred maintenance, little or no on-site property management and mainly absentee landlords in the neighborhoods in question, said Head, whose firm has worked as a consultant on such projects as Paseo Village, a neighborhood in Anaheim that was turned from multiple ownership to single ownership.
Paseo Village, the subject of a $24-million make-over in 1997, has quickly earned a reputation as a landmark example of how such renovations can turn a blighted neighborhood into what Head calls "affordable, decent, safe and sanitary housing," which is in tremendous demand because of Southern California's rising population and lack of new apartment construction.
At Paseo Village, the city worked with a private developer, Irvine-based Related Cos. of California, to buy a block of fourplexes and other small apartment buildings and put them under a single ownership and management.
The housing authority used a combination of its own funds and Anaheim Redevelopment Agency funds to acquire about 40 apartment buildings comprising 190 units, which the housing authority then leased to a partnership including the Related Cos. and the nonprofit Orange Housing Development Corp., said Bill Witte, a partner with Related. The $24 million to finance the project included an $8-million conventional loan, an $8-million loan from the housing authority to the project partnership, and $8 million that Related raised through the sale of federal tax credits.
Related demolished a few buildings, built a 3,500-square-foot community center and rehabilitated all of the remaining housing units. It converted many of the one- and two-bedroom units to two- and three-bedroom apartments because of the strong demand for family-sized apartments, Witte said, so what was initially about 190 units is now 176 units.
In addition, the city privatized the main street, Citron Street, while Related added security, more parking and open space. Paseo Village is now a gated community under one ownership with one property manager, Related. All of the units were leased to families with incomes either below 50% of the area median, which in Orange County for a family of four is about $32,000 a year, or with very low incomes--below $20,000 per year.
The creation of Paseo Village has erased a blighted neighborhood, provided affordable housing and saved the city about $400,000 a year in police and housing code enforcement costs, according to Bertha Chavoya, housing manager for the city of Anaheim.
For private companies such as Related, the main financial incentive for such work is a fee of 15% of the value of such projects paid to the developers, Witte said. But the projects are not without risk. Cost overruns can eat directly into profit.
Although the development fee is built into the project budget, "You don't just automatically get the fee by being involved," Witte said. "If you don't do your job right or costs get out of hand, you can lose all or part of the fee."
Projects like Paseo Village are also complicated and time-consuming, Witte noted. "We do a lot of urban infill work, so we're comfortable with projects like this, but they're not for everybody."
But even an experienced developer such as Related couldn't do such a project alone, Witte added, and not all blighted neighborhoods lend themselves to such recovery efforts.
"The city or some of its entities have to be your partner because of the resources required," he said. Also, Paseo Village was surrounded by relatively stable neighborhoods, as opposed to some neighborhoods--more common in Los Angeles--where blight extends for blocks and blocks. The surrounding neighborhoods are important, Witte explained, because lenders are reluctant to finance projects that lie amid square miles of blight.
Nonetheless, conversion of neighborhoods of small apartment complexes into single-ownership and uniform management is slowly gaining momentum. In Burbank, the city bought 11 buildings on West Elmwood Avenue in an area known for gang activity and renovated the apartments in a $6.5-million project that included funds for neighborhood social programs.
In Rialto, the city completed a similar project on Glenwood Avenue, a blighted neighborhood including a number of boarded-up apartment buildings. One of the best known of such projects in housing circles is a $21-million development in San Jose, where the city acquired properties in a neighborhood known as Poco Way and put them all under one ownership and management.
The process sometimes generates controversy because the overall number of units is often reduced as the buildings are reconfigured. Anaheim is facing such conflict in another project it plans that is similar to Paseo Village. The proposed Jeffrey Lynne development would consolidate 400 units behind Disneyland under one owner and manager. Related would be the private developer of the project, which has drawn criticism from opponents who say it would displace low-income residents.
Head points out, however, that state laws require such projects to pay for relocating residents either temporarily or permanently and to offer residents the opportunity to return to the neighborhood after the renovations are completed.