This week, LA Mayor Eric Garcetti formally proposed a plan to improve the City'sseismic safety and resilience by strengthening vulnerable buildingsand infrastructure most at risk during a major earthquake. The proposal mandates retrofits of all buildings that theCity has identified to be structurally weak, and also includes arecommendation to reinforce vulnerable telecommunications and watersupply systems.

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The plan, known as Resilience by Design, is LA's most ambitiousstep yet toward protecting the city against major losses in case ofthe next major earthquake. The plan targets two structurallyweak building types: requiring retrofitting within 5 years forwood-framed, soft-story multifamily buildings built prior to 1980,and within 25 years for vulnerable non-ductile reinforced concretebuildings built before that date.

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The City performed a comprehensive inventory of LA's soft-storybuildings that identified close to 15,000 buildings that fallunder the proposed ordinance. Upon approval of LA'sResilience by Design plan, owners of such buildings will benotified and required to engage an engineer to determine retrofit needs to improve structuralsafety in the applicable timeframe.

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Thinking about Financing Options

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In many ways LA's proposed plan mirrors the mandatory soft-story retrofit ordinance of SanFrancisco that went into effect last year, but LA's rule ismagnified in scale and the kinds of buildings it applies to (noother city has introduced compulsory retrofits of concretebuildings before). In San Francisco, my team has been workingwith many property owners and lenders on retrofit programsunder the ordinance. It is apparent that financing is provingto be the biggest hurdle in implementing retrofits on a broadscale.

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While property owners generally recognize the benefits andurgency of retrofitting their property, many private lenders arereluctant to finance these projects (an issue exacerbated in thecase of rent-controlled properties with limited revenue). Although there's an opportunity for lenders to increase theloan at origination or issue a second loan to cover the cost ofretrofitting, the increased expense may leave the borrower withinsufficient funds and increase the chance of loan default orforeclosure.

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Retrofits are expensive – many are upwards of tens or evenhundreds of thousands of dollars - and finding creative financingsolutions will be critical to the success of LA's seismicresilience program. Ultimately, retrofitting is likely to becheaper than obtaining earthquake insurance, and certainly cheaperthan dealing with losses caused by damage. In announcing the plan on Monday, Garcetti and histeam highlighted the plan's role in “preventing the catastrophiccollapse of LA's economy” in case of a major earthquake. Garcetti outlined some suggestions for financing options, such asbusiness tax breaks and incentives for businesses to move intonewly-retrofitted buildings, as well as a promise to help owners ofwood-frame multifamily apartment buildings get approved for loansthrough private lenders.

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One such way is the newly expanded PropertyAssessed Clean Energy (PACE) program. PACE is agovernment incentive that provides capital for seismic retrofits inaddition to energy efficiency upgrades with loan repayment terms ofup to 30 year. PACE loans are tied to the value of a property– not the credit of the borrower – with loan repayments madethrough the property's tax bills. PACE is one of the mostcost-effective, low-risk financing options available for retrofitprojects.

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Market Forces Offsetting Cost Of Retrofit

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Even before this announcement, we've retrofitted more than 50buildings in the LA area and are currently working on a160-building portfolio. These early adopters are propertyowners who are taking a proactive, staged approach to ensurepreparedness and compliance when the law does come in to play, orwho are driven by lenders that are starting to require retrofits toprovide financing for soft-story buildings.

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Market drivers will help alleviate some of the financial burdenof LA's retrofit mandate. Retrofitted, compliant buildingsare a more attractive and secure investment to lenders and propertybuyers alike. As we are seeing in SF, many lenders aredemanding or favoring lowered Probable Maximum Loss (PML) ratings achievedthrough retrofits. A reduced PML may also lead toeither reduced insurance premiums or elimination of the need forearthquake insurance, which helps offset the cost of seismic hazardthrough mitigation (retrofit).

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Resilience by Design includes a recommendation for the use of arating system to improve the evaluation and standardization ofseismic performance in buildings, which is something the US Resiliency Council (USRC) has been working todevelop. Such a rating system will help give buyers,lenders and tenants a reliable and consistent understanding of abuilding's earthquake performance, and serve as an additional drawthat secures more qualified buyers and loan approvals forretrofitted buildings.

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Based on the lag time between the announcement of SF's ordinanceand its implementation, we expect LA's mandate to become effectiveduring the first half of 2015. This leaves some time forlenders to fine tune their provisions for loans issued for retrofitprojects, and for property owners to understand the financingoptions available to ensure compliance at the lowest costpossible.

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