Sometimes you will see Los Angeles Income Properties listed for sale that advertise having “non conforming unit(s)”.
Investors often ask me, what is a non conforming unit? Non Conforming is a very nice way of saying that the rental unit is illegal and that the number of actual rental units for the apartment building is more than the number of permitted units according to the property’s Certificate of Occupancy.
Take for the example the property above, 1415 Rexford Drive. It has only (1) Certificate of Occupancy recorded with the city of Los Angeles and that CofO says it’s a legal 10 unit apartment building.
The Certificate of Occupancy for a property can be obtained the same day in person at the Records Department at one of LABDS office Locations.
Be forewarned that pulling permits will take you half a day and there will be a small printing fee. You can also order a permit report for $60 but it may take 3-4 days. The best way to check on your own is to log onto http://www.zimas.lacity.org/ and follow these three steps:
STEP 1: Type in Property Address and Click Go
STEP 2: Click the Assessor Tab
Step 3: Review the Number of Units (this is the number of permitted units the property has)
With 1415 S Rexford it is pretty easy to spot the non conforming unit, it is probably the 0Br/1Ba studio unit being rented out for $700/mo. My guess is this building was originally built with a rec room that the owner illegally converted into a studio unit at some point. Non conforming rental units cannot be registered with LAHD, and you are not allowed to collect rent from them. In addition, if LAHD finds out about the non conforming unit they can require the owner to restore the non conforming unit back to its original use or retroactively permit it, which may or may not be possible with Today’s strict building code (the current owner probably tried to permit the non conforming unit but discovered after visiting the building department that the number of parking spaces required or Max Dwellings units made it impossible to permit).
The Los Angeles Housing Department and the Los Angeles Building Department enforce building codes. They don’t have many resources available for enforcement so they aren’t actively looking for violations. There are two main ways non conforming units are commonly cited- tenant complaints to LAHD and the city of Los Angeles’ SCEP inspections. The city of Los Angeles inspects every registered rental unit every 3 years. You can check if the Los Angeles Building Department has already flagged a non conforming unit on their website:
And you can also check the LAHD website to see if they have and code violations on file:
Step 2: Click Prop Info/Complaints
Step 3: Click Property Profile
And you can search by address and review any complaints, violations and information from there.
Apartment Building located in the City of Los Angeles are at especially high risk of having their non conforming units cited because of SCEP. Someone purchased 1415 Rexford drive for full list price, and put 50% down. With the non conforming rental income included the property produces a minuscule 0.2% cash on cash for $4,000 cash flow on $2,180,000 invested. If you lost the $700/mo from the studio because LAHD demanded you to restore it to a rec room, your cash flow would turn to a negative -$4,000 per year instead. In this instance, since whoever bought this building was probably an institutional investor or a trust, with a 30 year hold plan, they can make a break even investment like this work and won’t be sensitive to slightly negative cash flow.
Keep in mind that all your profits as an investor in multifamily apartment buildings comes with your last 10% of occupancy after all the expenses, debt service, and maintenance are paid off. Losing the income from a non conforming could change an income property investment from a great deal, to a bad one. There is no guarantee that two years after you own the building, your regular SCEP inspection occurs and the LA city Housing Department inspector tells you that you cannot rent the non conforming unit. Now the cashflow for the non conforming unit is gone and in addition you will need to pay the tenant living there relocation assistance of $10,000 to $20,000 and construction expense. Without the non conforming unit income you either won’t be getting the return you wanted or you might even become negative cash flow!
I recommend to discount non conforming units in the city of Los Angeles to no value.
The County of Los Angeles, is a bit different, because they do not have SCEP inspections, so its a bit easier to get away with a non conforming unit. I still don’t recommend you rely on income from a non conforming unit that can be taken away to base your purchase decision on- the safest and most conservative way to value non conforming unit income is to assume zero income.