Wednesday, July 14, 2004

Prime real estate plagued by vacancy

By Carol Lloyd
Inman News
Consumer Real Estate News

The building has been empty for years. Now the windows are boarded up, the facade is peeling and the neighbors are talking.

Crime, drugs, death, madness? How can something this valuable, tangible and costly fall through the economic cracks? Shouldn't there be a law against leaving a perfectly livable or usable space uninhabited year after year?

Whether it's a forgotten warehouse, a burned-out home or a vacant storefront, unused properties languish in every big city and podunk town in America. In some areas where property is relatively cheap and the economic activity extremely slow, it's a shame, but it's also quite understandable. After all, in these places, it may be very difficult to find tenants or buyers, while the cost of keeping the property empty may be negligible.

But in the San Francisco Bay Area, where urban lots are among the most expensive in the nation, it's weird to see houses and commercial buildings just sit around like so many architectural cadavers. Unused properties still cost money: Most are mortgaged, and all have property taxes. Why would property owners keep a piece of property year in and year out that was losing them money?

"There are all kinds of reasons," said Arthur Goldman, a commercial real estate broker with Ritchie Commercial in Oakland, Calif. "Sometimes the building needs more work than the owner can afford." He offers an example of the Bermuda Building, a recently demolished commercial property in Oakland that suffered severe earthquake damage in 1989 and was known to have asbestos. After it stood empty for a decade, the city and the owner finally brokered a deal in which Oakland wound up owning the building and doing the demolition, then selling the lot to developer Ted Dang for $1.

"It would have cost the owner more to demolish the building and do the necessary asbestos abatement than the whole value of the property," Goldman said. "So there are all these questions about who is responsible: What's the responsibility of the city? What's the responsibility of the owner?"

Sometimes, Goldman said, the price of using the building is so costly that owners simply chose to walk away: "They may be heavily in debt. They bought at the market peak, and now that the market has dropped, they can't see how they can renovate the building and find tenants, so they go into foreclosure." With the dot-com crash and the subsequent rise in office vacancy, Goldman said, such foreclosures are almost surely going to become more common.

Other times, the building simply falls into an existential bureaucratic maw. Goldman recalls one building in San Francisco owned by a very elderly people who had no money to renovate it to bring it up to code. "The couple died, and then there were problems with their estate, then there was a foreclosure," he said. "All this stuff can take years to work out."

Although, when viewed from an outsider's perspective, this strategy seems insane, property owners often calculate that they can make more money in the long run by losing money in the short run. According to Goldman, many storefronts sit empty because the owners have some vague plans to sell the building and don't want to endanger their chances of selling by passing out long-term leases. "They'll usually rent the place month to month," Goldman said, "but most commercial tenants don't want to take the chance of a month-to-month lease."

Mark Tarses, a landlord and a member of the Berkeley Property Owners Association, said owners of residential property engage in a similar risk-assessment process when they leave their buildings empty. "In Berkeley (Calif.), a lot of property owners choose not to rent their places because of rent control and the sheer number of regulations that effect landlords," Tarses said. "A lot of small-property owners are older, and security and comfort is more important than maximizing profit. Basically, they're afraid."

As evidence of this trend toward leaving units off the market, Tarses points to the 20 percent decline in the number of apartments registered with the Berkeley Rent Board since 1980. As an example, Tarses tells the story of a Berkeley professor who owned and lived in a small apartment building and chose to leave his apartment vacant rather than rent it out when he went away on sabbatical. "He knew when he got home, he might not be able to get it back," Tarses said. "Even in the case of single-family homes, it's sometimes taken years for people to move back into their houses."

The argument that tenant-friendly rent ordinances have a deleterious effect on the rental stock is part and parcel of the bitter battle between tenant advocates and property owners in the San Francisco Bay Area. Tenants often argue that property owners like Tarses exaggerate such claims. In any case, such owner nightmares are one reason units sometimes remain uninhabited.

Another cause, Tarses said, is that preservation laws and landmark boards have become ever more active in designating property as "historical." "They designated the Top Dog on Durant a historic building," he said with a laugh. "There are corrugated steel buildings that are rusting through that the owners are not allowed to demolish."

For years, I've been getting little queries from frustrated homeowners about deserted houses or commercial buildings in their neighborhood. Since buildings take work and care and money, neglected buildings end up looking like forlorn pets, abysmally treated by their owners. "Can you find out what's going on with it?" the neighbors ask about a particular property. "It's such an eyesore."

So, recently, I began following up on such buildings, trying to discern any patterns that turn valuable, often-desirable properties into derelicts. Here are thumbnail sketches of a few of the unused-building tales I've collected:

Garage for the Ultra Rich:

Located in a residential neighborhood, surrounded by single-family homes and duplexes, a forgotten tannery on York Street between 25th and 26th streets in San Francisco has been boarded up and essentially unused for years. My friend, who lived behind it, decided it would be the perfect purchase for a theatre/school/social experiment. He contacted the title company that had handled the previous purchase, and it offered to pass along a letter to the owner inquiring whether he might be interested in selling. The owner declined, explaining that it was where he kept his collection of old cars.

Sometimes, it seems, that financial motivation has little influence when it comes to keeping your fleet of vintage automobiles dust free.

A Godly Project Waiting for Angels:

On the 1600 block of Stuart Street, in a rapidly changing south Berkeley neighborhood, a residential building has stood empty for more than five years. On an otherwise sweet street of single-family homes, its boarded-up windows and "No trespassing" signs seem ominous and a little perplexing. "I heard it was a crack house," wrote one reader about the building. "But now it's just been sitting there empty for years." It turns out that the building is owned by its next-door neighbor, the McGee Avenue Baptist Church, which once rented out the single-family home, a property that had been hacked into several code-violating apartments. The pastor, D. Mark Wilson, said that the church wanted to get out of the residential-property business and that it needed to bring the building up to code. Now, he said, there are plans to turn the building into a center for the church's social-services programs, like feeding the homeless and helping young people. How or when might that happen? Wilson is vague: "Well, if anybody comes to us with the energy, we would be happy to work with them. You need a team of people to do something like this."

Does the church need capital, or is it just initiative to do the project that is lacking? "A little bit of both, I guess," Wilson said. "But if anyone wants to join up with us, we're interested in working with others."

Why wouldn't the church sell it? Once buildings are owned by a community, it's easy for them to languish in the netherworld of differing opinions. According to some of the neighbors, church leaders have had not always agreed about what the fate of the building should be, so it remains in a fateless state.

So Clean It's Toxic!:

A dry-cleaning business on 24th Street in San Francisco's Mission District closed several years ago, and, since then, the building has gathered dust as storefronts all around it have been renovated into new restaurants, businesses and bars. Broker Arthur Goldman said gas stations and dry cleaners are two types of businesses that are most likely to become toxic-cleanup sites. "That's why you see a lot of old gas stations that stop selling gas but just become car garages," he adds. "The same thing happens with dry cleaners."

A spokesperson for the Jackson Group Property Management, the company that manages the property, said the business wasn't informed about any code violations or toxic issues regarding the lot, but she said that there are no plans to rent the building in the future. "It's just a vacancy," said Nicole Castaneda, an assistant property manager. "It's a matter of convenience."

I wasn't able to get ahold of the building owner before press time, but, in general, dry cleaners often stand empty for years before the owner or an incoming tenant has deep enough pockets to do the necessary cleanup to bring the building up to code.

Government Ex Machina:

Once a local bank branch, a corner storefront on Park Street in Alameda, Calif., had been rented to a check-cashing joint and a retail chain called Cigarettes for Cheaper. The tenant had received a business license from the city and had already signed the lease when the community got wind of the plans and people lobbied city hall to put the kibosh on the project. (Local activists contend that Park Street should have more nice restaurants and shops and family-friendly businesses, and that a check-cashing office is not part of the plan.) The city was able to stop the project, but only after a lawsuit and an expensive settlement that required the city to pay the rent to the owner for the full five-year lease. Since then, the city has tried to sublet the place, but, because its leases now ask tenants to indemnify the city against possible lawsuits, most tenants cannot afford the cost.

"It's a case of the city being able to stop bad development but not being able to encourage good development," said James Silva, co-owner of Silva Books on Park Street, who recently withdrew a proposal to rent the space. "It wouldn't have been possible for us to make it work. The lease was triple net lease – meaning we would have had to pay mortgage, property insurance and property taxes. It's not feasible for most small businesses."

Are there any patterns behind what makes buildings fall into the abyss? "Every property is different, and every owner is different," said Arthur Goldman. Indeed, the tales behind such buildings are as multifarious as our species' neurosis. At times, they are the visible manifestations of the dark side of living on Earth – where things fall apart, death arrives unexpected, goodwill crumbles in internecine warfare, governments meddle and muddle, and profits go to those who are willing to hold out for a market peak.

So, whenever you walk by a boarded-up building and wonder, "What's the story there?" just let your imagination wander.

2 Comments:

At 12:48 PM, Anonymous Anonymous said...

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At 10:52 PM, Anonymous safety said...

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