This article was posted on Wednesday, Jul 01, 2015

As building owners move forward with implementing the Mandatory Soft Story Retrofit (MSSR) program, there may be some confusion about the financing programs and pass-through allowances available for the costs of complying with the program.

The MSSR program applies to wood-framed buildings built before 1978 with at least two stories over a garage, retail space, or above-grade basement and with five or more units. Buildings of four units or less may consider doing a soft-story retrofit voluntarily but the ability to finance and pass through the costs to your tenants will be limited. 

The City has chosen the Alliance NRG Program to offer financing for improvements related to the MSSR program through the state’s Property Assessed Clean Energy (PACE) program.

The Alliance NRG Program is offered by a team consisting of Deutsche Bank, Leidos Engineering, and CounterPointe Energy Solutions, and allows property owners to use PACE financing for all types of seismic retrofit projects, energy efficiency improvements, renewable energy generation, electric vehicle charging stations, and water conservation.

So in addition to doing your mandatory soft-story retrofit, you may want to consider some of these other improvements that can be rolled into your PACE loan. They are currently quoting rates from 5% to 8.25%, depending on the length of the loan repayment (5-30 years—shorter gets the lower rates), but you end up paying much less overall for these loans than for a regular refinance because they are just for the amount of the retrofits. Whether this interest is tax-deductible is a question for your tax advisor.

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The PACE loans are based primarily on the equity in your property, not on your borrowing capacity, and payments are made through your property tax bill. Your property must be free of any tax or bankruptcy liens, the cost of the seismic work plus your mortgage may not exceed 100% of the appraised value of your property, and you cannot have had a late payment on your mortgage in the previous 12 months. PACE loans

will finance 100% of the costs, including up-front costs such as engineering, design, or an earthquake sensitivity analysis costs. You can find more information and an online application at by calling (855) 431-4400 (property owners only) or emailing [email protected]  

Other Available Financing Options

In addition to the public financing option, other banks are offering financing through regular mortgages and equity lines of credit. Rates vary depending on the borrower,

equity in the property, and the length of repayment term, so it’s not possible to provide exact rates for any of these options, but rates range from 3.75% to 8.25% plus points up front, and can be for just the amount of the retrofit or a full refinance.

Wells Fargo Bank, First Republic Bank, and the SF Fire Credit Union have informed us that they are lending through their regular financing programs to provide funds for the retrofit program. Wells Fargo will provide an increased 1st mortgage if there is

an existing loan over $1 million, or a second mortgage if the existing 1st is under $1 million. First Republic lends on a case-by-case basis depending on the borrower’s relationship with the bank. They structure a loan-to-value amount, and do a holdback of funds. Rates at both lenders range from high 3% to 5% depending on terms and relationship. The SF Fire Credit Union has given some property owners Home Equity Lines of Credit (HELOCs) and revolving credit lines to fund retrofit costs. They did not quote rates, as each loan is unique depending on collateral, existing debt, loan-to-value, etc. 

Passing Costs Through to Tenants

Once you’ve completed the retrofit project, the Rent Board rules allow you to file a special petition to pass through 100% of your costs to your tenants because the improvements are mandatory. Pass-through costs are amortized over 20 years, so if you spend $50,000, you will be able to pass through $2,500 per year. If you have five units, that would be $41.67 per unit per month for 20 years. If a tenant moves out and you

increase the rent to the market value, that unit no longer contributes to the pass-through payoff. In addition, the amount that each tenant must pay is limited to $30 per month or the monthly amount as calculated up to 10% of their base rent. Tenants may file for relief from the Capital Improvement Pass-through (CIP) if it causes a financial hardship. This is

standard for all CIPs, and applies if all adults in the household are on public assistance, household income and assets are too low, or there are exceptional circumstances such as excessive medical bills. The exemption can result in relief from payments for a limited time or a reduced payment. The number of years they have to pay is extended to recover their share. 

Are Smaller at-Risk Buildings Next?

So far, the City has not indicated whether it will make seismic retrofitting mandatory for smaller buildings (four units or less). If you want to do a seismic retrofit on a voluntary basis, PACE funding is not currently available. But more importantly, unless the City makes retrofitting mandatory for smaller buildings, you will only be able to pass through only 50% of your costs, as is the case with any other CIP.

It is important to weigh the risks of earthquake damage to your building versus waiting until the City does make this kind of retrofitting mandatory for smaller buildings—if ever. A good structural engineer can help you assess your building and tell you whether

there are cost-effective ways to improve its integrity. It’s worth the price of an engineering inspection to know how your building will fare in an earthquake! 

Deborah Lopez has been a top-producing Realtor in San Francisco for more than 35 years. She can be reached for free consultations on any real estate issue at (415) 738-7084 or [email protected]. Reprinted with permission of the Small Property Owners of San Francisco Institute (SPOSFI) News.  For more information on becoming a member of SPOSFI or to send a tax-deductible donation, please visit their website at or call (415) 647-2419.