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Southland Developers Work on Complex Problem

As companies and municipal agencies buy and consolidate small apartment buildings, blighted neighborhoods are being renovated.

July 13, 1999|BOB HOWARD | SPECIAL TO THE TIMES

Though it's unlikely to become a widespread investment rage, some private developers and city agencies in Southern California are turning a profit by tackling what might be called "the fourplex problem," renovating entire neighborhoods in the process.

The problem is that many deteriorating neighborhoods in Los Angeles and Orange counties are composed primarily of small apartment complexes--duplexes, fourplexes and buildings of six or eight units. The complexes typically are owned by many different landlords, so the condition of the buildings can range from well-maintained to abjectly neglected, said Kathy Head, a principal at the Los Angeles office of Keyser Marston Associates Inc., a real estate consulting firm.

In effect, the fourplex problem is a byproduct of the same proliferation of small complexes that makes apartments an affordable investment for many small owners. However, there is generally a serious amount of deferred maintenance, little or no on-site property management and mainly absentee landlords in the neighborhoods in question, said Head, whose firm has worked as a consultant on such projects as Paseo Village, a neighborhood in Anaheim that was turned from multiple ownership to single ownership.

Paseo Village, the subject of a $24-million make-over in 1997, has quickly earned a reputation as a landmark example of how such renovations can turn a blighted neighborhood into what Head calls "affordable, decent, safe and sanitary housing," which is in tremendous demand because of Southern California's rising population and lack of new apartment construction.

At Paseo Village, the city worked with a private developer, Irvine-based Related Cos. of California, to buy a block of fourplexes and other small apartment buildings and put them under a single ownership and management.

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The housing authority used a combination of its own funds and Anaheim Redevelopment Agency funds to acquire about 40 apartment buildings comprising 190 units, which the housing authority then leased to a partnership including the Related Cos. and the nonprofit Orange Housing Development Corp., said Bill Witte, a partner with Related. The $24 million to finance the project included an $8-million conventional loan, an $8-million loan from the housing authority to the project partnership, and $8 million that Related raised through the sale of federal tax credits.

Related demolished a few buildings, built a 3,500-square-foot community center and rehabilitated all of the remaining housing units. It converted many of the one- and two-bedroom units to two- and three-bedroom apartments because of the strong demand for family-sized apartments, Witte said, so what was initially about 190 units is now 176 units.

In addition, the city privatized the main street, Citron Street, while Related added security, more parking and open space. Paseo Village is now a gated community under one ownership with one property manager, Related. All of the units were leased to families with incomes either below 50% of the area median, which in Orange County for a family of four is about $32,000 a year, or with very low incomes--below $20,000 per year.

The creation of Paseo Village has erased a blighted neighborhood, provided affordable housing and saved the city about $400,000 a year in police and housing code enforcement costs, according to Bertha Chavoya, housing manager for the city of Anaheim.

For private companies such as Related, the main financial incentive for such work is a fee of 15% of the value of such projects paid to the developers, Witte said. But the projects are not without risk. Cost overruns can eat directly into profit.

Although the development fee is built into the project budget, "You don't just automatically get the fee by being involved," Witte said. "If you don't do your job right or costs get out of hand, you can lose all or part of the fee."

Projects like Paseo Village are also complicated and time-consuming, Witte noted. "We do a lot of urban infill work, so we're comfortable with projects like this, but they're not for everybody."

But even an experienced developer such as Related couldn't do such a project alone, Witte added, and not all blighted neighborhoods lend themselves to such recovery efforts.

"The city or some of its entities have to be your partner because of the resources required," he said. Also, Paseo Village was surrounded by relatively stable neighborhoods, as opposed to some neighborhoods--more common in Los Angeles--where blight extends for blocks and blocks. The surrounding neighborhoods are important, Witte explained, because lenders are reluctant to finance projects that lie amid square miles of blight.

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