Bootleg Apartments Could Be Goldmines

LOS ANGELES—Apartment owners with additional common space or with already converted 'bootleg' apartments may be sitting on goldmines, according to Robert Lopata, president and co-founder of LBPM. His property management company has been maximizing the unit count at vintage 1960s and 1970s apartment product to monetize unused space. With the dearth of apartment supply in Los Angeles, making these conversions is a benefit to both landlords and renters, and helps to increase the supply quickly. Even better, the process it fairly painless, albeit time consuming. To find out more about which units are ideal for this conversion, the conversion process and the benefits, we sat down with Lopata for an exclusive interview.

GlobeSt.com: Is there an ideal unit for conversion?

Robert Lopata: There is an ideal type of unit in an ideal type of building. In the 60s and 70s, the cost of land was inexpensive and the cost of construction was the bigger cost, so developers would not maximize the density of the property. For example, if a piece of land was zoned for 50 units, the developers at the time may have said, 'I can only afford to build 40 or 45 units,' and often times that is all they would do. Today, we go to great heroic steps to maximize the number of units that we can build. In place of those units, they would build common facilities, like rec rooms. Think of how many buildings have huge rec rooms that are never used. We see it quite frequently in the property management field. Along the way, a lot of owners have taken these large spaces and built additional walls to turn it into a one-bedroom or two-bedroom apartment, using the existing bathrooms and kitchens. That is an apartment. The reason why that is important is because you don't need to prove to anyone that that unit wasn't built to code, at least for the outer shell, and the bathrooms and kitchens have already been approved by the city. It is the use that is not approved. In that case it becomes an issue of the permitted density, and the permitted density has everything to do with the lot size and parking availability. If the building has the right measurements for more units, and standard zoning permits one unit per 800 square feet of lot, it is just a matter of getting it approved with the city. It doesn't have to be a rec room, but the key is that you cannot add square footage; you can only use existing square footage. We have been looking at this particular type of property, and it is not rare. It was pretty common for 60s and 70s construction. You show them the changes that were made after the original construction, and they may comeback and ask for new electrical outlets or ducting, or a variety of different things. But, when you are done, they check it off and you now have a legal unit.

GlobeSt.com: What is the process to convert a common space into a legal unit?

Lopata: This is a building and safety, over the counter kind of thing. We don't have to deal with the planning commission on this. It is very black-and-white with them. It either conforms to the code or it doesn't. It is kind of a cut-and-dry situation. In order to do this property, you need a land-use attorney that understands zoning to guide you through the process, and, because in most cases it requires construction, you also need a good general contractor. So, it isn't a difficult process. The time consuming part, we have found, is that not all departments of the city communicate with each other, as you can imagine. While building and safety may say it is okay, they may say you need to get it clear first. You need to go through the whole list and get everything done, and that can be bureaucratic and can take some time. However, it is all worth it when you get an extra unit and it could be worth $200,000 or $300,000. That is a pretty good pay off in the end.

GlobeSt.com: What are the benefits of going through this process?

Lopata: You can put the unit on the rental market, and a unit like that could get you anywhere from $800 to $4,000 in monthly rent. The bigger benefit, however, is the value of the building itself. If you have a 10-unit property worth $2 million and you add another unit, you have added $200,000 to the value of the property. There is a real incentive for developers to see if they can exploit that opportunity. There is another advantage, too, and that is for properties built before 1991, which was the date of the American Disabilities act, which says that you have to provide handicap access. Buildings that were built prior to 1991 are exempt from those rules.

GlobeSt.com: There is currently a huge trend toward highly amenities buildings, but in this case, you are taking amenities away. Is there a danger in negatively impacting the building's occupancy by doing that?

Lopata: I think there is a certain degree of functional obsolescence to recreation rooms, and for some buildings there is a value to having a real gym if it is built out nicely. These sorts of spaces, however, are unloved by the tenants and the only thing that you are really taking away is building storage. I don't think that is going to be an issue. Rents are going up so much that there is no relief in site, and if you believe in the economics of it, the relief is going to come from an increased supply. To the extent that the demand for those units goes down because there is more of them, it takes the pressure off of the existing tenants in terms of rent increases and new tenants. My experience in property management goes back to the late 80s, and then we were giving away months of free housing. I know what it means when there is a shortage of housing and I know what it means when there is a glut of housing. The main solution here is to provide more. I don't think the amenities that are being taken away mean as much to the apartment renting community as much as increase supply of quality housing.

GlobeSt.com: Is this something that you have started to do recently?

Lopata: This is something that we have started to do over the last couple of years. The vacancy rate has gone down to almost nothing. We used to have a pretty healthy vacancy rate of about 5%. Now, there are people on waitlists, and that is really where this has come from. We needed to find a way to get more housing available. This is a way of taking functionally obsolete space in a building and monetizing it. It isn't helping anyone as a storage room.

LOS ANGELES—Apartment owners with additional common space or with already converted 'bootleg' apartments may be sitting on goldmines, according to Robert Lopata, president and co-founder of LBPM. His property management company has been maximizing the unit count at vintage 1960s and 1970s apartment product to monetize unused space. With the dearth of apartment supply in Los Angeles, making these conversions is a benefit to both landlords and renters, and helps to increase the supply quickly. Even better, the process it fairly painless, albeit time consuming. To find out more about which units are ideal for this conversion, the conversion process and the benefits, we sat down with Lopata for an exclusive interview.

GlobeSt.com: Is there an ideal unit for conversion?

Robert Lopata: There is an ideal type of unit in an ideal type of building. In the 60s and 70s, the cost of land was inexpensive and the cost of construction was the bigger cost, so developers would not maximize the density of the property. For example, if a piece of land was zoned for 50 units, the developers at the time may have said, 'I can only afford to build 40 or 45 units,' and often times that is all they would do. Today, we go to great heroic steps to maximize the number of units that we can build. In place of those units, they would build common facilities, like rec rooms. Think of how many buildings have huge rec rooms that are never used. We see it quite frequently in the property management field. Along the way, a lot of owners have taken these large spaces and built additional walls to turn it into a one-bedroom or two-bedroom apartment, using the existing bathrooms and kitchens. That is an apartment. The reason why that is important is because you don't need to prove to anyone that that unit wasn't built to code, at least for the outer shell, and the bathrooms and kitchens have already been approved by the city. It is the use that is not approved. In that case it becomes an issue of the permitted density, and the permitted density has everything to do with the lot size and parking availability. If the building has the right measurements for more units, and standard zoning permits one unit per 800 square feet of lot, it is just a matter of getting it approved with the city. It doesn't have to be a rec room, but the key is that you cannot add square footage; you can only use existing square footage. We have been looking at this particular type of property, and it is not rare. It was pretty common for 60s and 70s construction. You show them the changes that were made after the original construction, and they may comeback and ask for new electrical outlets or ducting, or a variety of different things. But, when you are done, they check it off and you now have a legal unit.

GlobeSt.com: What is the process to convert a common space into a legal unit?

Lopata: This is a building and safety, over the counter kind of thing. We don't have to deal with the planning commission on this. It is very black-and-white with them. It either conforms to the code or it doesn't. It is kind of a cut-and-dry situation. In order to do this property, you need a land-use attorney that understands zoning to guide you through the process, and, because in most cases it requires construction, you also need a good general contractor. So, it isn't a difficult process. The time consuming part, we have found, is that not all departments of the city communicate with each other, as you can imagine. While building and safety may say it is okay, they may say you need to get it clear first. You need to go through the whole list and get everything done, and that can be bureaucratic and can take some time. However, it is all worth it when you get an extra unit and it could be worth $200,000 or $300,000. That is a pretty good pay off in the end.

GlobeSt.com: What are the benefits of going through this process?

Lopata: You can put the unit on the rental market, and a unit like that could get you anywhere from $800 to $4,000 in monthly rent. The bigger benefit, however, is the value of the building itself. If you have a 10-unit property worth $2 million and you add another unit, you have added $200,000 to the value of the property. There is a real incentive for developers to see if they can exploit that opportunity. There is another advantage, too, and that is for properties built before 1991, which was the date of the American Disabilities act, which says that you have to provide handicap access. Buildings that were built prior to 1991 are exempt from those rules.

GlobeSt.com: There is currently a huge trend toward highly amenities buildings, but in this case, you are taking amenities away. Is there a danger in negatively impacting the building's occupancy by doing that?

Lopata: I think there is a certain degree of functional obsolescence to recreation rooms, and for some buildings there is a value to having a real gym if it is built out nicely. These sorts of spaces, however, are unloved by the tenants and the only thing that you are really taking away is building storage. I don't think that is going to be an issue. Rents are going up so much that there is no relief in site, and if you believe in the economics of it, the relief is going to come from an increased supply. To the extent that the demand for those units goes down because there is more of them, it takes the pressure off of the existing tenants in terms of rent increases and new tenants. My experience in property management goes back to the late 80s, and then we were giving away months of free housing. I know what it means when there is a shortage of housing and I know what it means when there is a glut of housing. The main solution here is to provide more. I don't think the amenities that are being taken away mean as much to the apartment renting community as much as increase supply of quality housing.

GlobeSt.com: Is this something that you have started to do recently?

Lopata: This is something that we have started to do over the last couple of years. The vacancy rate has gone down to almost nothing. We used to have a pretty healthy vacancy rate of about 5%. Now, there are people on waitlists, and that is really where this has come from. We needed to find a way to get more housing available. This is a way of taking functionally obsolete space in a building and monetizing it. It isn't helping anyone as a storage room.