Mean Streets, Sweet Profits
Investors hoping to profit by owning apartment buildings are venturing into some of Southern California’s meanest streets to rehabilitate neglected properties, including one complex involved in the Los Angeles Police Department’s Rampart Division scandal.
Despite the economic slump, these investors say, demand remains high for apartments that working-class renters can afford, especially in many parts of the Southland where primarily Latino populations have outgrown the housing supply.
This demand often is greatest in neighborhoods near downtown Los Angeles and in parts of the San Fernando Valley and Orange County that have reputations for drugs, gangs and crime.
Many investors avoid these neighborhoods, but some are finding profits there--without public subsidy--by following one of the oldest strategies in apartment investing: Buy a neglected building, renovate it, and raise below-market rents to market levels.
Such investors are most often individuals and small groups, but they include at least one sizable company, Beverly Hills-based Kennedy-Wilson Inc., which has been a joint-venture partner with Los Angeles-based Hanover Financial Co. in nine apartment renovation projects in Los Angeles and Orange counties.
Typical of the Kennedy- Wilson/Hanover deals is a 253-unit project in Panorama City that the partners bought for about $10 million in 2001, spent $1.4 million renovating, then sold a year later for slightly less than $14 million.
The partners were able to sell the property at a profit because rents were boosted from an average of $500 before the renovation to $625 at the time of the sale, said Robert Hart, a senior vice president at Kennedy-Wilson. He said rents would continue to climb as tenants turn over.
Panorama City still is considered by many to have a crime problem, Hart said, but Kennedy-Wilson and Hanover viewed the project as a good investment because the neighborhood has been improving.
“We recognized that there is a large market of people who would like to live in a nicer place if it were available,” he said.
Kennedy-Wilson and Hanover have rehabilitated and sold several apartment projects in San Fernando Valley neighborhoods, and the two companies recently began new projects there and in Santa Ana.
“We believe there is a lot of unrehabilitated property that people will pay a little bit more rent for if it is renovated,” Hart said.
One of the worst properties to be renovated in recent years is a 94-unit apartment complex at 1209 S. Lake St. in Los Angeles.
It gained notoriety as the building where former LAPD Officer Rafael A. Perez claimed he and another officer shot an unarmed man in late 1996 and planted a weapon on the victim, Javier Francisco Ovando, who was paralyzed by the shooting. The other officer, Nino Durden, pleaded guilty to framing Ovando, who later won a $15-million settlement in connection with the shooting.
The Lake Street complex is clean, neat and filled with renters today, including half a dozen Latino women who were washing clothes in the building’s brightly lighted laundry room when owner Ted Kolchier led a reporter on a tour of the property.
But 1209 S. Lake was in wretched shape when Kolchier and partner Roman Celusta took it over in 1997, said Kolchier, who got into the apartment renovation business more by chance than by choice.
The pair operate Woodland Hills-based Track Mortgage, which held a loan on the Lake Street property and foreclosed in early 1997 after the borrower stopped making payments.
The apartment house was empty except for about 20 squatters who weren’t paying rent, Kolchier said. The building was waterlogged because vandals had cut fourth-floor fire hoses, flooding the complex, which was a hangout for the 18th Street Gang. Doors were ripped out, walls were smashed, carpets were torn up, and graffiti was everywhere.
“The building was pretty much destroyed inside, so we knew nobody else would want it,” Kolchier said. “The only way we could recoup any of our original investment was to do a complete renovation.”
Kolchier said he and Celusta spent about $2 million, gutting the complex and replacing the plumbing and electrical systems, installing new kitchen and bathroom fixtures and appliances, and making other repairs.
Once the renovation was completed, Kolchier said, tenants quickly filled the building at rents ranging from $375 to $575 a month for its 94 bachelor and studio units.
Kolchier still had problems at the building, however, because gangs and crime spilled over from a nearby apartment house at 1200 S. Hoover St. that was almost as much a mess as the Lake Street complex--so he bought that 67-unit building and renovated it.
During the renovations of both buildings he worked closely with police to make the properties safe.
“We realized that we would have to improve the whole neighborhood,” he said.
Kolchier and Celusta now own a dozen apartment complexes where renovations have been completed or are underway, including a 54-unit building at 2121 W. 11th St. around the corner from the Lake Street and Hoover Street properties.
“When we bought the 11th Street building, we had to have armed guards on the door 24 hours a day for the first month” to keep out drug dealers and gang activity, Kolchier said. “We were calling narcotics officers every couple of hours to take drugs and paraphernalia out of the place as we were doing the rehab.”
The 11th Street building, like several others Kolchier has rehabilitated, is a 1920s-era apartment complex that stands out from most of the drab, neglected neighboring structures.
Like Hart at Kennedy-Wilson, Kolchier said apartment renovations in rough neighborhoods demonstrate the huge demand for decent housing by the region’s large and growing working-class Latino population.
Increasing the number and quality of affordable apartments for blue-collar and entry-level white-collar workers is one of the biggest challenges facing Southern California, said Stephen Cauley, associate director of UCLA’s Ziman Real Estate Center, who said a large portion of the region’s growing Latino population “will never be able to afford a house in the Los Angeles area.”
Hart’s and Kolchier’s projects were financed entirely with private funds and without government subsidies.
Investors generally prefer to finance rehabilitation projects privately if they can, said Laurie Lustig-Bower of CB Richard Ellis, who brokered the recent sale of the Panorama City apartments. Government funding programs typically involve complex and time-consuming paperwork that can delay and complicate deals.
Housing experts such as Cauley say affordable apartments will remain in short supply in Southern California for a long time because little vacant land is available for building moderately priced units. Even where it is available, land and construction costs often are too high to make new construction profitable.
