Quick answer
Several California cities, including Los Angeles, San Francisco, Oakland and Berkeley, require retrofits of certain wood-frame apartment buildings with a soft or weak ground story. If a building is on a city list, lenders want the completion sign-off, or a clear scope, cost estimate and deadline if the work is still open. State law also requires periodic inspection of balconies and walkways on buildings with three or more units.
What a soft-story building is
A soft-story building has a ground floor that is much weaker or more flexible than the floors above, usually because it is open for parking, has large storefront windows or has few interior walls. The classic California example is a two- or three-story wood-frame apartment building with tuck-under parking, where the units sit on posts above the carports.
In strong earthquakes, those ground floors can fail. After damage in past California earthquakes, several cities adopted programs that require owners of certain buildings to strengthen the ground story, usually with steel frames, plywood shear walls or new foundations.
Which cities have mandatory programs
Mandatory programs exist in Los Angeles, San Francisco, Oakland, Berkeley, and a number of other California cities. Each city defines which buildings are covered, usually by construction type, number of units, number of stories and the date the building was permitted. Each sets its own deadlines for screening, plans, permits and completion.
Most covered owners in the earliest programs have finished the work. Even so, buildings still come to market with open orders, partial work or missing sign-off, and those details matter to lenders.
What lenders ask for
Lenders treat retrofit status as part of building condition. Expect one of these requests.
- Completed: the city’s certificate of compliance or permit final, and the plans that were approved.
- In progress: the permit, the contractor agreement, the remaining scope and cost, and the deadline.
- Not started: the city order, an engineer’s scope and cost estimate, and the deadline.
- Not covered: confirmation from the city list or the engineer that the building is not subject to the program.
Some lenders will finance a building with open retrofit work if the cost is reasonable and the deadline is far enough away, sometimes with funds held back at closing. Others will want the work finished first. Program rules vary, which is why we check before ordering an appraisal.
Balcony and walkway inspections
A separate state law requires periodic inspection of exterior elevated elements, such as balconies, decks, stairways and walkways, on multifamily buildings with three or more units. The inspection has to be done by a qualified professional, and repairs may be required based on the findings.
For a 5-10 unit building, have the latest inspection report ready. If repairs were recommended, show what was done. Buyers should ask for the report during due diligence.
Retrofit costs and the coverage math
Retrofit work is a capital cost, not an operating expense, so it does not usually appear in the monthly coverage ratio. It still affects the loan. A buyer who must fund a retrofit soon after closing needs more cash, and a lender may require reserves or a holdback. On a refinance, a completed retrofit can support value and make insurance easier to place.
Retrofit work may also affect insurance. Some carriers price a retrofitted building more favorably, while others focus on other factors. Ask the insurance agent how the retrofit is treated.
Due diligence steps
If you are buying or refinancing an older wood-frame 5-10 unit building in California, take these steps early.
- Check the city’s soft-story list or ask the building department about the address.
- Get the permit history, including the retrofit permit and final.
- Ask for the balcony and walkway inspection report.
- If work is open, get an engineer’s scope and a contractor’s bid.
- Tell your insurance agent the retrofit status when requesting a quote.
How retrofit status shows up in the appraisal and insurance
Appraisers note retrofit status as part of the building’s condition. A completed retrofit with permits and sign-off usually reads as a building that has dealt with a known issue. An open order reads as a near-term capital cost, and the appraiser may account for it when comparing the building with recent sales of similar buildings that have finished the work.
Insurers ask about retrofit status too, and some will not quote earthquake coverage until the work is complete. Even if you do not plan to carry earthquake coverage, a carrier’s questions about the ground story, the foundation and the building’s age can affect the hazard quote. Gather the retrofit plans, permit final and engineer’s letter before you request quotes, so the agent can present the building accurately.
Frequently asked questions
Can I buy a building that has not finished its soft-story retrofit?
Sometimes. Some lenders will finance it with a clear scope, cost and deadline, occasionally with funds held back at closing. Others want the work done first.
Does a soft-story retrofit increase my property taxes?
California has an exclusion for qualifying seismic retrofit improvements, so the work may not increase the assessed value. Confirm with the county assessor.
Do lenders ask about balcony inspections?
They can, and insurers often do. Have the most recent report for buildings with three or more units and records of any repairs.