Landlords Under the Gun : If Building Owners Can’t Make Repairs by Mid-July, Displaced Tenants Can Walk

As owners of some two dozen quake-damaged, large office buildings in the San Fernando Valley struggle to make repairs and reopen, many of them are racing against a deadline: July 17.

More than just the six-month anniversary of the Northridge earthquake, it marks the day when many tenants of these buildings can exercise an escape clause and walk away from their five- and 10-year leases. In some leases, landlords have even fewer than six months to fix their properties before tenants can break rental agreements.

Some owners are unlikely to meet this deadline because of delays in securing federal Small Business Administration loans, insurance payments, and construction permits and crews. But not all displaced tenants are sympathetic. Complaining about working out of boxes in their homes or tight temporary offices, some tenants say they won’t wait more than they’re required to before moving permanently elsewhere.

“It’s a waiting game to see which (building) owner comes back and when,” said Cathy Scullin, a broker at Zugsmith-Thind, a commercial real estate firm in Encino. And if they do, she asked, “Do they come back intact, or crippled because they lost their tenants?”

Neal Tenen is one of seven lawyers who shared offices at the Sherman Oaks Atrium at Magnolia and Sepulveda boulevards, before the earthquake forced them to scatter and set up makeshift offices, mostly in their homes.

Tenen says he has been a tenant at the Atrium for seven years. “It’s a super-nice building,” he said of the four-story building with hundreds of windows, many of which were shattered by the quake, and an atrium that is now obstructed by construction scaffolds. But if the 96,000-square-foot building isn’t repaired by mid-July, as required under his lease, Tenen says he may not come back.

Tenen and other lawyers are talking about buying a small office building of their own. “It’s going to be a close call” whether the owner meets the deadline, he said. “There could be a mad rush to finish.”

The owner of Sherman Oaks Atrium, Advent Realty Limited Partnership, declined to comment. But the Atrium’s leasing agent, John Sabourin of Beitler Commercial Realty Services, says the owner had earthquake insurance. The Los Angeles Department of Building and Safety estimated the Atrium’s structural damage at $500,000. Sabourin says the building was 80% occupied before the quake and will reopen in mid-June, meaning that tenants will have to return under their leases or face a possible lawsuit.

Before the 6.8-magnitude quake, tenants gave little thought to the fine print in leases called the “damage and destruction” clause. But the clause is boilerplate, and it typically gives landlords three to six months to restore their properties after a disaster, said Bill Inglis, a broker with CB Commercial Real Estate Group in Sherman Oaks. Attorneys say tenants signing new leases now want shorter time limits for landlords to make repairs.

Property owners are keenly aware of these deadlines, but their efforts to beat them are running up against delays caused by heavy demand for construction work and governmental services.

Larry Berman is waiting for an SBA loan to rebuild the Scotty Building on Ventura Boulevard in Sherman Oaks. The Scotty Building is actually two structures, totaling 74,000 square feet, that connected with each other. But one of them, a two-story structure, was burned to a crisp by a fire caused by the Northridge quake; the other, a five-story building, reopened a month ago after crews cleaned up the smoke damage.

Berman says his insurance policy covered the $3 million in damage, and his plans are to build a new two-story structure. But he says that building won’t be finished for another year. Still, Berman says he isn’t worried about reopening without tenants because he expects plenty of tenants dislocated from the quake to be in need of good office space; plus he claims that many of his tenants will return, even after a yearlong wait.

Brokers agree that office space in the Valley is tightening: The office vacancy rate dropped to less than 10% in the first quarter, from nearly 14% in the previous quarter. One big reason: 25 major office buildings in the Valley were severely damaged by the quake, according to a survey by Zugsmith-Thind. The survey didn’t count office buildings smaller than 20,000 square feet or some company-owned offices such as the Hamburger Hamlet building in Sherman Oaks--part of which was ripped apart by the quake and remains empty. The survey also didn’t include the scores of retail shops that were ravaged by the temblor.

Many other big office buildings had minor quake damage and were only closed for a few days. At the 12-story Republic Bank Building on Ventura Boulevard in Encino, for example, huge pieces of stucco cracked from its facade, making the damage look much worse than it really is. The damage was estimated at $100,000, and the building reopened two days after the quake, although cosmetic repairs are still going on.

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In Sherman Oaks, 12 major office buildings were severely damaged, representing a total of 950,000 square feet--or more than a third of the entire office space in Sherman Oaks. One of these buildings has been razed, but the rest are expected to be repaired.

One high-rise that beat the six-month deadline was the Tower, a 13-story building on Ventura Boulevard in Sherman Oaks. But it took more than $1 million in insurance money and 200 construction workers laboring around the clock to get the building reopened in late March.

The 160,500-square-foot Tower is one of seven office buildings in the Valley owned by pension funds that are managed by TCW Realty Advisors in Los Angeles. On Jan. 17, the Tower was trashed: Water pipes burst, doors jammed, partitions collapsed and many deep cracks ran along the building’s shear walls like lines on the palm of a hand.

“We had 15 file cabinets at 1,500 pounds apiece that bounced 20 feet like a sack of potatoes,” said Bruce Frasco, general manager at Beitler Commercial Real Estate Services, one of the Tower’s major tenants.

Cindy Leuty, who manages the Tower building for TCW, said it cost several million dollars to complete the repairs. TCW manages dozens of buildings nationwide, and that gave it an edge in hustling up contractors, she said. Seismic engineers were at the Tower a few hours after the quake, and TCW had quick access to specialists who applied epoxy, a super glue used to fill cracks in concrete walls, which has been in heavy demand lately.

Leuty said the Tower had to hurry because offices were leased at $1.75 to $1.90 per square foot, so the building was losing about $275,000 a month in rent. The Tower was 95% occupied before the quake, but it isn’t clear how many tenants will return. Leuty said tenants are coming back slowly, but some businesses that were struggling before the quake will probably never return. “I don’t think we really know for sure,” she said.

Tower tenants like Beitler, which had squeezed workers in cramped offices in Encino for two months, say they are glad to be back at the Tower. So are nearby retailers, who have lost customers who worked in the Tower building.

“We are very, very hurt,” said Pam Chinvaraj, a longtime waitress at the Aajak Thai restaurant, which counted on workers at the Tower a few steps away for much of its lunch business. “We’re really happy they’re coming back.”

But many businesses that were tenants of quake-damaged buildings remain in limbo. “We’re still working out of boxes,” lamented Irv Kornblum, whose accounting firm has moved twice since the AIC Plaza in Sherman Oaks was hit by the quake. “We lost two weeks time just unloading and loading boxes,” he said. And this during the busy tax-preparing season.

Kornblum says his firm has 2 1/2 years left on a five-year lease at the AIC Plaza and one month left on a three-month lease for his current office in North Hollywood. “I’m not really sure where we’ll end up,” he said, adding with a tinge of resentment that the six-month clause in his lease is a “stingy point” and too long.

Don Parker, whose American Insurance Consultants Inc. owns the AIC Plaza, says his 80,000-square-foot building will be ready by June 1. Parker said he has no debt on the building, but would not say how much damage his building sustained or whether he had earthquake insurance. City Building and Safety Department officials put the repair estimate at AIC Plaza at about $1 million.

“Everybody will be coming back,” Parker said, adding tersely that it was costing him a “small fortune” to make repairs and that the rebuilding process has been like a long visit to the dentist’s office.

Some quake-damaged buildings appear unlikely to reopen by mid-July, including two side-by-side properties at Van Nuys and Chandler boulevards known as Sherman Oaks Center I and II. Tenants say one of the owners of the pair of buildings, Irving Ackert, has said the offices will be repaired, but they said it was unclear when.

Ackert didn’t return telephone calls. But there were no signs of construction work last week. Inside the building’s dark hallway, a dozen browning newspapers dated Jan. 18, the day after the quake, were still strewn on the floor. And posted on the doors of the two buildings were red inspection cards from the city’s building inspectors, meaning that both buildings are unsafe to enter, along with several signs taped by former tenants with their new addresses.

One of the signs belonged to the Democratic Party Office of the San Fernando Valley, which set up in a storefront on the second floor of a Van Nuys strip mall. Alan Zimmerman, the office manager, wants to move back to Sherman Oaks Center, where he had twice as much space. “For now, we’re OK,” he said. “But I’m getting nervous because of the campaigns coming up. We’ll need a lot more space.”

Patience has worn out for another tenant in the Sherman Oaks Center building, Mark Stevens Construction. Manager Christina Tomczak said the company, now working out of a cramped guest house, is searching for a permanent location. “We can’t wait around not knowing,” she said.