Cliff Hockley

Bluestone & Hockley Real Estate Services

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This article sums up the following important topics that directly affect the multifamily investors:

• New law (passed in last session) affecting NOAA and public health commissioned employees
• Fair housing test audits
• The mold crisis of 2012
• Window guard redux

New law passed that affects landlords

In the last session of the legislature, spring of 2012, SB 1563 was passed. This law extends certain state law protections and benefits that are already available to military service personnel. This law modifies section 90.475 of the Oregon revised statutes to add members of the commissioned corps of the National Oceanic and Atmospheric Administration (NOAA) and the United States Public Health Services (USPHS).

The members of these services now enjoy the same rights as members of military. It allows them to terminate a rental agreement upon written notice, if the tenant provides the landlord with proof of “official orders” showing that the tenant is ordered to active service outside the area for a period that will exceed 90 days

This waives any penalties, fee, charge or loss of deposit because of the termination, and confirms that the tenant belonging to one of the services (as outlined in 90.475) was not liable for any rent beyond the effective date of the rental termination.

Fair Housing

On the 25th of April 2012, Portland City Commissioner Fish, responsible for housing issues, responded back to the Rental Housing Association of Greater Portland (RHAGP) regarding the comments they made on the 2011 analysis to impediments of Fair housing report that was submitted to the federal department of Housing and Urban Development.

He commented as follows:

“I agree that our fair housing laws are complex, especially for smaller landlords who may not have access to the training and other resources that a larger property management company can provide. That is why I believe in both education and enforcement of the laws.

Your analysis of the AI focuses primarily on the audit test results we received from the Fair Housing Council of Oregon (FHCO). I agree that the testing performed by the FHCO was not of acceptable quality, and that the data is therefore unreliable. Moving forward, we will work to address these deficiencies in future tests.

Finally, I agree with you that the sign pictured on page 81 of the AI report should not have been used, particularly without a caption.”

This is a major win for RHAGP and Metro Multifamily Housing Association (MMHA) who have been working to improve the reporting results regarding fair housing and discrimination in Portland. In the 2010-2011 test, the city hired FHCO to survey apartment properties to establish if there was discrimination between the way apartment owners and managers treated prospective tenants of color vs. white prospective tenants. Their results preliminarily indicated that more than 50% of the landlords were discriminating.

Landlords who had been working for many years to erase discrimination did not believe the results and were vindicated when the Bureau of Labor and Industries (BOLI), the enforcement organization in Oregon (under contract to HUD), was unable to substantiate the results due to poor testing practices. Clearly, this testing process was not well done (see March 1, 2012 article by Steve Law in the Portland Tribune) and created a challenge for the board of directors of FHCO. In response to this challenge, on March 1, 2012, the board demoted the director of FHCO, Molloy Good, and called back former Executive, Pegge Michaels to run FHCO.

The MMHA director, Deborah Imse, and the board of directors have been working with Commissioner Fish to develop a better testing methodology.

These fair housing claims are real and fair housing laws are being enforced. In Portland, a large management company recently made headlines after BOLI cited them for having rules that prohibit children from playing in the common areas and storing toys on patios. The management company, and apartment owners, were fined $55,000 for this violation of fair housing (House rules need to be drafted for everyone and not single out any protected classes.)

The Mold Crisis of 2012

This seems to be the year of mold, it is everywhere. Newly constructed apartments are not immune. New codes in particular have created a situation where apartment units are very tightly constructed with lack of air flow. We completed a recent inspection of an apartment property that is no more than five years old. Even with new windows, humidistats, ventilation fans and venting, mold is finding home.

More troubling are older buildings which have retrofitted vinyl windows installed to reduce energy use and heating expense for the tenants. These new windows have reduced air flow, trapping humidity inside the unit and creating a breeding ground for mold. Tenants are not aware of the challenges with these new “tighter” windows and must be educated to leave doors open, crack their windows (even in winter!) and keep their ceiling fans on (even in winter) to promote air flow throughout the entire unit. If these same older units have washer and dryer, we have also had to change our approach to fall weatherization.

If a unit is built on slab, whether old or new construction, the concrete floor can also create a significantly higher humidity level within the unit. Placing foam insulating blocks over a foundation crawlspace containing dryer vents, which may have holes or become disconnected, can also create a serious mold problem.

Window Guards Redux

In the last week, with the sudden 80 degree weather, there were reports of small children falling from second story windows at two local apartment buildings. Apartment owners can expect another surge of legislation requiring window guards on all second story or higher windows. In the meantime, all tenants renting from Bluestone & Hockley are specifically advised of the dangers of children falling from second story in the “Safety Addendum” we issue to all of our tenants.

When asked how he came up with this idea, Mitchell said, “To me, it doesn’t make sense to use good drinking water to water your lawn or garden.” He added, “If this experiment succeeds, I will encourage all the residents to participate. This could keep our water usage down during the summer.”

Bluestone & Hockley is a strong supporter of green initiatives and encourage our staff to participate in programs that promote these efforts. To read more about our green initiatives, visit Blue Knows Green section.

Sale

Dawk LLC has purchased an industrial office building for $1,650,000 at 1801 SE Commerce Ave in Battleground, WA from Tenant Telemark, LLC. Kevin Wingate-Pearse of Sperry Van Ness | Bluestone & Hockley brokered the transactions.

Lease

Adroit Dental Inc has leased 2,500 sq ft of medical office  space at 5493 Amy St in West Linn, OR from Merina & Co. Adonay Solleiro of Sperry Van Ness | Bluestone & Hockley represented the tenant and Jorie Girod from Prudential NW represented the landlord.

Lease

Night Flight, LLC has leased 3,200 sq ft of office space at 215 SE Pine Ave in Portland, OR from Pine Street Studios, LLC. Steve Hagan of Sperry Van Ness | Bluestone & Hockley brokered the transaction.

The panel reported the Portland economy is slowly improving and there are a number of smaller close in projects currently under construction. They also mentioned that the rents as well as apartment pricing is on the rise for most Portland neighborhoods. On the other hand, East County and Suburban markets continue to struggle with higher vacancy and more concessions. According to the speakers, this will continue if gas prices remain high.

• What are the fiduciary responsibilities and consequences of failing to act of a Board? How does one meet these obligations?
• How to make and communicate decisions to members that are well received?
• What are the insurance and legal liability related issues faced by Boards? Learn how to mitigate them.
• How board members get into trouble?
• Policies and procedures to safeguard the association, board members, and managers.

Pamela has been working with Bluestone & Hockley since 2001 and is a Certified Manager of Community Associations (CMCA). As a homeowner association member for 13 years, Pam brings added insight to her position. Her strong background in business administration, project management, contract negotiations, and customer service make her an integral part of our Community Association Department.

Tom Sjostrom, Vice President

Bluestone & Hockley Real Estate Services

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Michael Goldfarb wanted to buy a building for his growing software development company.  The Small Business Administration (SBA) financing terms (at 10% down) were incredible and he knew that the monthly payments of purchasing a 5,000 sq ft building with the current 4% interest rates would be better than paying rent. He called up his broker, C.A.  Hockley, and said “Let’s go find a building.”

They found the perfect building, with 20 parking spaces, close to the downtown, bus and street car lines. It was perfect!  This brick faced edifice was built in 1924 by a name brand architect and had great character. Known as The Roman Building, this building was architecturally one of a kind, with marble columns holding up the front cantilevered roof, high ceilings, large windows and view of the river.

Michael was enthralled.   C.A. told him “Let’s see how our due diligence goes.”  Michael asked “What is due diligence?”

Due Diligence:

Michael and C.A. walked through the building after the offer was accepted. Michael was agog with emotions; his heart beating with anticipation. C.A. indicated that it was time to hire the experts.

The process started:

• First, a structural engineer was called to inspect the property.   He pointed out that the building was likely not up to current structural code or earthquake standards, but without a destructive test he could not   confirm the construction methodology.  He needed to rip out some sheet rock to view the structural components.

• Next, the HVAC (Heating Ventilating and Air Conditioning) technician came out.  He reported that the HVAC system was almost 60 years old, was wrapped in asbestos material and it would be impossible to find replacement parts. He also indicated that the heat in the building had originally been sawdust/wood, was later converted to coal and the furnace was now an oil burner and the oil tank was buried in the basement floor.  Air conditioning was nonexistent; well, that is if you excluded the 50 year old abandoned swamp cooler located in the attic crawl space.  There was also a question if the tank had leaked, given its age. The HVAC team suggested that Michael should get a pressure test performed on the tank.
• The surveyor was called (Michael had asked for an ALTA title insurance policy).  The surveyor surveyed the site and discovered part of the building was located on city property.

Despite the expensive news, Michael was still hopeful so they continued with the due diligence.

• Next they brought in a building inspector to inspect the building for dry rot, pests and basic building operation. He found extensive dry-rot, carpenter ants and galvanized iron water lines that were leaking (nope, no copper lines!).  His 8 ½ X 11 color pictures also showed mildew, mold and nuts left by the squirrels in the attic area. The brick siding and chimney needed to be tuck pointed and sealed to keep the elements, rain and wind out.  The window frames were rotten to the core.  The window sashes were worn out and the windows were held open with wood scraps. He also noted that the lighting system in the building was very old and might not comply with current codes. On the way out, he suggested that Michael should get the sewer line inspected. Michael did that and discovered that the sewer lines from 1924 were still in place.  Those original tile lines had been destroyed by the roots of the 90 year old trees.  It was a miracle that the sewage still drained.The inspector also pointed out that the building bathrooms were not ADA ( Americans with Disability Act) compliant (they were very small bathrooms, added as an afterthought.) In addition, the entry way to the building wasn’t ADA compliant either. There was no wheelchair ramp for handicap access to the building.  He said that there were no ADA parking spaces which are required by law.

• The building inspector also mentioned the parking lot in his report.  He reported that not only the ADA parking spaces were missing, but the parking lot was in major need of an asphalt overlay, seal coating and striping.   He also mentioned that the drain in the parking lot was attached to a drywell which was illegal in that part of town. All parking lot drains needed to be connected to storm sewer lines, retrofitted with special filtering systems.

• The inspector called out for a roofing inspector in his report. The roofing inspector looked at the roof and gave it a 20 year certification (It was made out of Franvisa Spanish black slate and as solid as a rock.)

• Because the building was a two-story, it also had a fire escape. Due to the age of the building there was no sprinkler system though. Unfortunately, the fire escape had been red tagged by the Fire Marshall, because the landing had not been painted and had rusted out.

• Finally, they called an inspector for the elevator and found out that it too was not up to code and most likely needed replacement.

Faced with the long and expensive laundry list of needed repairs Michael was no longer in love with The Roman Building. He turned to C.A. after the last inspection and said, “O.K. I give up.  Can we find a more modern building that does not have as many warts?”

Black Cloud With a Silver  Lining: The other side of the story

It’s too bad that Mr. Goldfarb gave up on The Roman Building.  It sounded like the perfect building for him, having location, easy access, parking and a classic design.  Mr. Goldfarb needs to be reminded that in real estate, location is everything and for the right location many investors and many companies have dug through apparent warts of an old building to produce a gem with value that far exceeded their initial investment and necessary improvements. Unfortunately, it sounds like Mr. Goldfarb’s dream building hasn’t been occupied for 50 of the ninety or so years the building has been around.

When an old building is acquired there are always a number of issues that arise with that building’s condition.  But first, a prospective purchaser has to ask “What will the building be used for?” And, another equally important question is “What can be done to mitigate upgrade costs?” If the building, because of its condition, is being acquired at a low cost per square foot, and the cost per square foot to upgrade can be estimated, then it is easy to decide if acquiring the building should proceed.

The professional doing due diligence has a responsibility to report issues to his client.  Some are better than others at doing so, but painting a clear picture of the condition of the building is important.  The consultant is always going to say that the building isn’t up to current code. Codes change all of the time. A new state code went into effect on April 1, 2012 through the adoption by Oregon of the latest International Codes Council code. I would say that hardly any buildings are now up to current code.  The question is not if a building is up to current code, but rather if it is required to be up to code?  Just because codes have changed doesn’t mean that everything in current code has to be implemented into existing buildings.  So, let’s look at some of the specific items reported to Mr. Goldfarb:

• Structural problems – Mr. Goldfarb should ask the engineer to make a worst case estimate of costs to     mitigate based on what he does know about the building.  Also, what’s so bad about destructive investigation given the permanent nature of a building acquisition? The damage can be repaired.

• The issues surrounding the HVAC sound far worse then they likely are.  Especially since Mr. Goldfarb wants to air condition the space.  A new heat pump system will provide everything Mr. Goldfarb needs and reduce his operating expenses at the same time.  Asbestos can be managed in place and immediate mitigation is not required.  The oil tank may not be leaking and can be decommissioned in place.  One thing though, is that proper testing will involve drilling for soil samples near the tank, just in case.

• If the building had been continuously occupied, it is probable that many of the building systems would have been upgraded.  As power use has increased, so has the demand for wiring systems.  Most systems have been upgraded in that period of time.  Likewise the plumbing systems have usually been upgraded.  Did the inspector notice if water pipe deterioration was being controlled through any means?

• As you do renovations of a building, many small problems get mitigated in the process.  For instance, if Mr. Goldfarb is going to place his company in the building, he certainly wants to do the things that will make him and his company proud of the place from which they conduct the business.  That involves repairs of all kinds of things like the roof, siding, windows (using a PDC storefront grant), lighting upgrades (using an Oregon Energy Alliance grant), interior and exterior paint and dry rot.  It is the perfect time to make those repairs so you aren’t making them later instead of running the business.

• ADA is a big issue but it has become common for folks to expect that level of condition.  When Mr. Goldfarb goes for a construction permit to remodel the space, that is take out all of the cubby hole offices, he will be required to spend 25% of his budget on ADA improvements.  That’s all.  That will most likely get him the   necessary restrooms and a ramp.

• The parking lot may need to be resurfaced but there are ways to mitigate that cost as well.  For instance, cutting out bad spots and patching them and then slurry coating the entire lot may be a really good solution for a third of the cost of a new lot.  Once the lot is redone, it is easy to install the minimum required ADA parking space.  The drains can be dealt with by installing approved filter units directly into the catch basins and servicing them according to a regular schedule.

• The fire escape problem is challenging in some ways and not in others.  I suggest that if Mr. Goldfarb likes this location for his company so much, he should consider adding an interior stairway for exiting, thereby eliminating the need for an exterior escape, especially if he is going to remodel the building anyway.  In long term, he will save money by doing so.

• Elevators are never up to code.  The important thing is that it be on a regular service contract, be licensed and all repairs have been done.  Even when an elevator has outlived its useful life, there is a lot that can be done to improve it and make it fully serviceable again, without installing a new one.  With elevators you have to understand what the real problems are versus the purely surface look of them.  You can put an elevator in great operating condition without touching what people see, the cabs.

Also, I’d take a long hard look at the roof.  That slate roof may be the source of some of the dry rot.  At the very least it probably needs cleaning.

It is truly unfortunate that no one used the building for the last fifty years but Mr. Goldfarb can have a beauty for substantially less than it would cost to have a more modern building in a great central city location that meets all of the codes.  I’d like to have a chance to work with Mr. Goldfarb to relight the flame of eager anticipation in him.

Lease

Carmen Matos has leased 2,100 sq ft of retail space at 17302 NE Halsey St in Portland, OR from MAR 2. Tom Sjostrom of Sperry Van Ness | Bluestone & Hockley brokered the transaction.