If You Own a San Jose Multifamily Building Built Before 1990, a Big Retrofit Bill Is Coming—Here’s What You Need to Know
San Jose’s Soft Story Retrofit Ordinance: What Multifamily Property Owners Need to Know
San Jose's Soft Story Retrofit Ordinance, effective April 2026, will impose significant financial obligations on multifamily property owners. For those owning buildings built before 1990, seismic retrofitting could cost anywhere from $500,000 to $2 million for a 10-unit property. While this regulation presents challenges, it also offers an opportunity to capitalize on distressed properties that may soon be priced below market value. Let’s break down the costs, realistic returns, and value-add opportunities for investors in today’s market.
Note: The following numbers are rough estimates for example purposes and should be adjusted based on specific property conditions and market factors. We are assuming the apartment prices are low due to the property being a distressed asset, which will require significant improvements.
The Reality of Seismic Retrofitting Costs
1. The Real Cost of Seismic Retrofitting:
The upfront costs for seismic retrofitting vary, but for older soft-story buildings, expect the total cost to fall between $500,000 and $2 million. The exact cost depends on the size, condition, and complexity of the property. Here’s a rough breakdown:
Seismic Retrofit (estimated): $500,000 – $2 million
Engineering & Design Fees: $20,000 – $50,000
Permit Costs: $2,000 – $5,000
Tenant Relocation Costs (if applicable): $20,000 – $50,000 depending on the length of relocation
While the financial outlay is significant, these costs will improve your building’s seismic safety and could lead to lower insurance premiums. However, it’s important to note that the retrofit alone won’t lead to a major rent increase, especially in a rent-controlled market like San Jose.
2. Financing the Retrofit:
A construction loan can help cover the costs of seismic retrofitting, along with other planned improvements like ADUs (Accessory Dwelling Units). This allows you to spread out the financial burden and integrate seismic retrofitting into a larger value-add project.
Despite the option for financing, the upfront costs remain significant. Securing financing for these projects requires careful planning and realistic projections about long-term income and property value increases.
The Conservative Investment Approach: Cap Rates and Real Value Increase
Using a 5% cap rate, which is more typical for properties requiring seismic retrofitting or other improvements, let’s break down what happens when you retrofit a property and add ADUs.
How Cap Rate Impacts Value and Profitability:
The cap rate is used to calculate property value based on Net Operating Income (NOI). It’s calculated by dividing NOI by the cap rate.
Let’s assume you have a 10-unit property with moderate rents (note, these are low rents due to the property being a distressed asset):
1BR units (5 x $2,200/month): $11,000/month
2BR units (5 x $2,500/month): $12,500/month
Total Rent Income: $23,500/month or $282,000/year
Operating Expenses (maintenance, insurance, taxes, etc.): $86,800/year
Current Property Value (Pre-Retrofit)
Using the 5% cap rate, we can calculate the value of the property:
NOI = $282,000 - $86,800 = $195,200
Property Value = 195,200/0.05 = $3,904,000
So, before the retrofit, your building is valued at about $3.9 million based on current rents and a 5% cap rate.
Impact of Seismic Retrofit on Property Value
Let’s say you invest in seismic retrofitting and spend $1 million. What kind of return can you expect?
Post-Retrofit Property Value: Seismic retrofitting won’t dramatically increase rents but will make your property more resilient and potentially more desirable. Based on conservative assumptions, your property could see a modest increase in value due to the added safety features, reduced liability, and appeal to tenants who want to live in a seismically sound building.
Assuming a 10% increase in property value from the retrofit, we get:
New Property Value = $3,904,000 x 1.10 = $4,294,400
The $1 million retrofit adds about $390,000 in value, but it’s important to note that the real increase comes from the combination of structural safety improvements and better marketability, not a massive rent increase.
Adding ADUs: Boosting Rental Income and Property Value
To truly boost value, adding ADUs in underutilized spaces like a carport could significantly increase rental income.
ADU Income Potential:
Assume you add 2 ADUs, each generating $2,500/month.
Additional Rent: 2 x $2,500 x 12 months = $60,000/year
This additional rental income will increase your NOI, making the property more valuable.
New Post-Retrofit Property Value (with ADUs):
New Rent Income: $282,000 (original rent) + $60,000 (ADU income) = $342,000/year
New NOI: $342,000 - $100,000 (new operating expenses) = $242,000
New Property Value = 242,0000\0.05 = $4,840,000
With ADUs, you’ve now increased the property value by about $936,000, primarily through additional rental income.
The Key Challenge: Tenants Who Won’t Move
While seismic retrofitting and ADUs will add value and increase your rental income, the reality of rent control means that recovering retrofit costs will be slow if tenants are not vacating. Long-term tenants who aren’t moving out mean limited rent increases:
Rent can only increase by 5% annually under rent control, and even then, these increases may not be sufficient to recover the $1 million seismic retrofit in a timely manner.
How to Make It Work:
Gradual Rent Increases: If tenants stay, you can increase rents by 5% annually. Over time, this brings rents closer to market value, but it’s a slow process.
Wait for Vacancy: The best-case scenario might be waiting for tenants to vacate and allowing the unit to decontrol, letting you raise rents to market value. This is a long-term play and requires patience.
Conservative Investment with Gradual Returns
Seismic retrofitting combined with ADU additions provides a realistic, conservative investment strategy in a market like San Jose. It’s not a quick profit—especially in a rent-controlled environment—but over time, these improvements can provide stability, increased rental income, and property appreciation.
While the upfront costs are significant, strategic financing (such as construction loans) can make this process more manageable. If you’re a savvy investor, the 5% annual rent increase and the eventual opportunity for vacancy decontrol offer a path to long-term profitability.
This is a grounded investment: slow, but steady, with clear steps to enhance property value and secure higher returns over time.
Sources:
City of San Jose's, Soft Story Retrofit Program sanjoseca.gov
California Department of Housing and Community Development, "ADU Financing Resources" hcd.ca.gov
