AB 68 Accessory Dwelling Units

Investors Are Utilizing AB 68 To Add Tremendous Value to Their Multifamily Properties.

Local investors are taking advantage of California’s ADU (“Granny Flat”) Bill in a very big way.

What is California Assembly Bill 68 (AB 68)?

Passed by the California State Assembly in 2019, AB 68 legalized the widespread construction of “Granny Flats,” or Accessory Dwelling Units (ADUs), as easy-to-build affordable housing. ADUs are small, independent homes that are built alongside (or sometimes, within) an existing single- or multifamily home. In addition to traditional ADUs, AB 68 also legalized “junior” ADUs of 500 square feet or smaller, which must be built entirely within an existing home and have a functioning kitchen and bathroom.

Prior to AB 68, cities across California erected substantial barriers to their construction, including high fees, land use and permitting obstacles, and other “red tape.”

AB 68 addressed all these issues by:

  • Reducing the maximum time for approved permits from 120 days to 60
  • Eliminating local ordinances that had the effect of banning ADU construction, such as minimum lot sizes and floor area ratios
  • Eliminating the requirement that garages converted to ADUs include 1:1 replacement parking
  • Allowing by-right approval (i.e., minimal process) for both an ADU and a JADU
  • Prohibiting cities from banning short-term rentals in ministerially-approved ADUs
  • Granting the state’s Department of Housing and Community Development the authority to evaluated whether local agencies’ ADU ordinances comply with state law
  • Existing single-family properties in California have the potential for roughly 1.8 million new ADUs.
  • Roughly 85 percent of these are single-family homes where building an ADU pencils out according to current construction costs and rents; the remainder are sites ideal for both an ADU and JADU

ADUs in the Los Angeles Multifamily Market

We have recently seen numerous clients of ours utilize AB 68 for their local multifamily properties by building one or even multiple ADUs on-site, in areas such as storage rooms, laundry rooms, attics, basements, garages, and soft story parking areas (as pictured above) – or as fully detached structures.

From an income and value standpoint, it makes perfect sense for most investors. You can generate additional (and meaningful) cash flow for the property while adding tremendous value. Put very simply – if multifamily properties in your area are selling for $450,000/unit and you can build additional unit for $250,000/unit (which is about the going rate for ADU construction), why wouldn’t you?

Los Angeles Multifamily

16 Units – Just Closed Off Market | Mid-Wilshire, Los Angeles

1241 & 1247 S. Dunsmuir Avenue.
Los Angeles, CA 90019
16 Units | Just Closed

We just closed a 16 unit value-add multifamily transaction, sourced off-market, which was located on the border Mid-Wilshire and Wilshire Vista neighborhoods of Los Angeles – two of LA’s well-established yet seemingly fast-growing rental submarkets. The property was located on South Dunsmuir Avenue near San Vicente Boulevard, a quiet tree-lined side street with a mix of single-family residential, multifamily (old and new) as well as small lot sub-divisions.

I like this area for a variety of reasons. It is close to major thoroughfares such as San Vicente Boulevard, Pico, Olympic, Fairfax, La Brea and it is a straight shot into popular parts of town like Beverly Grove and West Hollywood. Additionally, the real estate in this area is as diverse as the residents who populate it. As mentioned above, the properties in the area feature everything from new construction, to 1930s Spanish Duplexes, to charming SFRs and 1960s apartment buildings – the list just goes on.

This particular property, originally constructed in 1947, consisted of all one-bedroom floor plans averaging approximately 800 square feet, situated on an R-3 zoned 17,407 SF lot. The property was held by a family operator for over 30 years who like many other LA owners were seeking to transition to a slightly more hands-off investment out-of-state via a 1031 Exchange due to the heightened regulatory environment locally.

The purchasers were attracted to the value-add potential of the property in addition to its central location and proximity to areas like Beverly Grove, Beverly Hills and West Hollywood. The property was delivered with 2 vacancies which the Purchaser plans to renovate and lease at market rent, along with other improvements to the property. The details of the transaction are below:

1241-1247 S. Dunsmuir Avenue. Los Angeles, CA 90019

$4,605,000 Final Sale Price
– 16 Units | 12,364 SF
– All one-bedroom floor plans
– Year Built 1947
– $287,812/Unit
– $372/SF
– 15.3 GRM

Additional Photos:

Los Angeles Multifamily

What $2,750,000 per unit buys you in Santa Monica – 1221 Ocean Avenue.

Douglas Emmett pays a record price for 1221 Ocean Avenue in the heart of prime Santa Monica

I don’t typically write about institutional transactions but this is what I would call a WOW price. Douglas Emmett, a firm that is very near and dear to me, paid a record-price for a multifamily asset in prime Downtown Santa Monica with the purchase of 1221 Ocean Avenue – which is certainly one of the most prestigious multifamily assets on the West Coast with unbelievable ocean views. The Seller was The Irvine Company, who had owned and operated the Class-A property for years. 1221 Ocean was one of a few assets that they own in Los Angeles – outside of their core market of Orange County.

Here are the deal Metrics:

  • $330,000,000 Purchase Price
  • 120 Unit Multifamily Property
  • $2,750,000 per unit
  • $1,800 per SF
  • 98% leased at close
  • 1,500 SF Average Unit Size
  • Closed April 26, 2022
  • Purchased in the low 3% Cap range
  • DE plans to continue to significantly upgrade units and common areas

The deal was purchased via a new Joint Venture managed by Douglas Emmett in which they own a 55% interest. The property is a nice addition to the vast portfolio of Class-A office buildings which they own in the area, in addition to their sister multifamily assets also in Santa Monica – The Shores and Pacific Plaza. Congrats to my friends over at DE on this incredible acquisition!

SB 721

CA Multifamily Regulations Back Again. This Time it’s SB 721

SB 721 is the California State Balcony Inspection Law

SB 721 (Chapter 445, Stats. 2018) was signed by Governor Brown in response to the 2015 Berkeley balcony collapse. While some local governments already impose a local inspection program, this California law requires inspection of specific balconies throughout the State of California. Here’s what you need to know:

What Buildings Must be Inspected?

Buildings with 3 or more units that have:

  • Balconies, decks, porches, stairways, walkways, and entry structures that extend beyond exterior walls of the building and that rely in whole or in substantial part on wood or wood-based products for structural support or stability; and
  • A walking surface that is elevated more than 6 feet above the ground level; and
  • Balconies designed for human occupancy or use.

Buildings that are proposed for conversion to condominiums to be sold to the public after January 1, 2019, must be inspected prior to the first close of escrow.

When Must the Buildings be Inspected?

Inspections of the balconies, decks, porches, stairways, walkways, and entries as described above must be inspected by January 1, 2025, with certain exceptions, and requires subsequent inspections every 6 years. The inspection of buildings for which a building permit application has been submitted on or after January 1, 2019, shall occur no later than 6 years following issuance of a certificate of occupancy from the local jurisdiction and shall otherwise comply with the provisions of this law.

If the property was inspected within 3 years prior to January 1, 2019, by an inspector as described in the law and a report of that inspector was issued stating that the exterior elevated elements and associated waterproofing elements are in proper working condition and do not pose a threat to the health and safety of the public, no new inspection shall be required until January 1, 2025.

Who Can Perform the Inspections?

  • Licensed civil or structural engineer,
  • General Contractor holding any or all A, B, or C-5 Licenses issued by the Contractors State License Board;
  • Individuals certified as a building inspector or building official, as specified; (these individuals cannot be employed by the local jurisdiction while performing these inspections).

What Must the Inspection Cover?

The inspection required by this law must, at a minimum, include:

  • Identification of each exterior elevated element or associated waterproofing elements that, if found to be defective, decayed, or deteriorated to the extent that it does not meet its load requirements, would, in the opinion of the inspector, constitute a threat to the health or safety of the occupants.
  • “Associated waterproofing elements” are defined to mean flashings, membranes, coatings, and sealants that protect the load-bearing components of exterior elevated elements from exposure to water and the elements.
  • Assessments of elevated elements using methods allowing for evaluation of their performance by direct visual examination or comparable means of evaluating their performance. For purposes of this section, a sample of at least 15 percent of each type of exterior elevated element shall be inspected.
  • The evaluation and assessment shall address each of the following as of the date of the evaluation:
    • The current condition of the exterior elevated elements.
    • Expectations of future performance and projected service life.
    • Recommendations for any further inspection necessary.
    • Recommendations of any necessary repair or replacement.
Inland Empire Multifamily

The Case for the Inland Empire

Rent Spikes and strong market fundamentals in the IE are fueling strong multifamily sales velocity.

1) Inland Empire Market Fundamentals Are STRONG

  • The Inland Empire multifamily market concluded a year of rapid improvement in 2021 with additional strengthening in the fourth quarter. Vacancy tightened and rents rose. The improving market fundamentals fueled accelerating investment activity and steep
    per-unit price appreciation.
  • Multifamily vacancies tightened in 2021 to around 3%

  • Asking rents reached a record high during the fourth quarter 2021 averaging $1,729/month which represents roughly an 18% year-over-year increase

  • The investment market strengthened throughout 2021 with cap rate compression fueled by investor demand.

2) Inland Empire Employment Numbers Continue to Grow

  • There is incredibly strong rent growth in the Inland Empire with more than 65,000 jobs added in 2021 representing an increase of over 4% from the prior year.

  • Many of the jobs added were in the trade, transportation and utilities sector. The IE continues to be one of the best-performing industrial hubs in the nation.

  • Employers are expected to expand payrolls by nearly 3% in the coming year, adding approximately 46,000 jobs.

3) New Multifamily Developments are on the Way

  • Close to 4,000 multifamily units were earmarked as ‘under construction’ at year end 2021 which was triple the amount at the same time in 2020.

  • Permitting spiked during the final quarter of 2021 as developers permits for more than 1,700 multifamily units in the final few months of 2021.