A COMMUNITY LOST. HOW WILL IT FIND ITS WAY HOME?
AN EARLY AUDIT OF LAND USE, PUBLIC POLICY, AND INSURANCE CONSIDERATIONS
PART 1
Frank Evanisko 1-16-2025
On January 2, 2025 during a historic Southern CA windstorm, two fires started which will dramatically influence Los Angeles and its surrounding communities for years, perhaps decades, to come.
This paper will not serve as a recount of the circumstances which led to these fires or a debate surrounding political landscape (unless such recounts are necessary for the specific intended purpose of this paper). Rather, I will outline key concepts pertaining to applicable local and statewide zoning policy as well as certain other trends within the real estate development industry which will influence the efficiency of processing and the physical form taken by the multiple thousands of redevelopment endeavors which will ultimately be conceived, permitted (and/or entitled), and built over the next several years. There is no doubt in my mind despite economic headwinds and challenges within the insurance sector that the affected areas will be rebuilt due to the irreplaceability of their locations.
I understand that readers will have varying degrees of land use and development experience. I’ve erred towards a style of explanation hopefully digestible to those whos’ daily work is outside of the land use profession. Even those in this profession, myself included, are continuously stumped, frustrated, and overburdened by the level of bureaucratic complexity and cannot generalize every circumstance perfectly. Rather, each instance of loss will be worthy of a multitude of careful considerations involving personal goals and desires, timing and family needs, insurance implications, ability to garner additional capital infusions (debt/equity), etc.
Let me start by saying that I reserve the right to modify these predictions with time and as policy rollouts occur specific to these disasters. We are leveraging 20+ years in the niche specialization of Los Angeles land sales and development consulting to cast these early speculations though no disaster of this magnitude during my career has transpired. Despite this fact, we are confident based on our knowledge of the economic and land use drivers behind development in Los Angeles of some likely scenarios – enough to be able to provide an initial “lay of the land” if you will with a promise to revise and update these speculations as policies specific to these disasters are introduced on a piecemeal basis and as trends emerge.
Basic Zoning
I’ll start with this topic as it is reflective of one of our core technical competencies. Catastrophic loss from these fires has affected, with small exceptions which we will address later, mostly single-family home properties on residential single family zoned lots. In the Palisades, the specific most common single-family designations affected are R1-1, the R1 Variation Zones (R1V1, R1V2, R1V3, R1V4, etc.), and some lower density designations especially in more sloped locations like RE11-1, RE15-1, RE20-1, RE40-1, RA-1 (designated hillside locations will possess the “H” suffix opening up these permits to additional processes). Without belaboring the technical semantics of each of these designations in this paper, I will make a blanket statement (subject to technical confirmation for each case) that the homes/structures burned are likely replaceable (+/-) to their prior massing/size specification under the current zoning designation on each lot.
Altadena’s zoning jurisdiction is the County of Los Angeles – not the City of Los Angeles. The Catastrophic losses in Altadena affect a multitude of R-1 designations including R-1-7000 (7000 SF lot requirement) and R-1-7500 (7500 SF lot requirement), etc. etc.
While there has been some loss to commercial properties/multifamily properties, the primary loss is to structures on single family residential lots. The numbers disparity is to such a level of magnitude (many thousands of residential lots VS about 100 commercial/multifamily lots) that we will focus herein primarily on single family zoned properties (with some caveats mentioned below).
More Complex Zoning: Overlays which create added discretionary control over redevelopment
Specific Plans: Outside of a property’s zoning designation, there are many instances where an added layer of purview/review/discretion is added to the mix…this can be in the form of a specific plan overlay. In Palisades specifically there are only sparse instances of commercially zoned property (not even 100 commercial lots VS multiple thousand residential lots as mentioned) and in all these instances these parcels are within a specific plan called the Pacific Palisades Commercial Village and Neighborhoods Specific Plan. A proposed project in these specific plans will need to comply with all the guidelines within the applicable specific plan subarea. These stipulations are much more stringent and preclusive than the property’s underlying zoning designation. In most cases, the highest and best redevelopment in these areas will not benefit from the mayoral order (see below) which only pertains to proposals up to 110% of the floor area of what was lost. In most cases, even despite restrictive specific plan overlays, a newly conceived entitlement of substantially greater floor area (depending on amount of land controlled) will technically represent the highest and best re-use (subject to the property owner’s specific goals).
Coastal Commission: Most lots in the Pacific Palisades are not subject to the Coastal Commissions quasi-judicial authority over rebuilding proposals but some affected lots are. This is another layer of required approval through the course of permitting a rebuild.
Mayor Bass’ Emergency Executive Order (1-14-25) Affecting LA City
As I write this, Mayor Bass has issued Emergency Executive Order No. 1 Return and Rebuild which will attempt to streamline permitting for rebuilding efforts if rebuilding efforts are +/- equivalent to that of what was displaced (“Clear the way to rebuild homes as they were” as the subsection of the order is called). Politically speaking, this initial position is understandable but could ultimately be counterintuitive to maximizing individual property valuations by indirectly restricting the desirability of alternative permitting measures which could potentially be more financially viable. My thought is that this form of processing favoritism (“you seek permits for what we deem acceptable, and we will streamline if you do what we like”) is not favorable to a property owner weighing the option of whether to rebuild or sell and it would be shortsighted to believe that there will not be those wanting/needing to sell. It is also shortsighted to believe that there will not be those wanting to mitigate re-investment risk by building a rental property with multiple units or ADUs with insurance proceeds while living elsewhere. Whether or not there is benefit to heeding the purported streamlining benefits outlined in the order VS exploring alternative forms of development on a residential lot will be worthy of critical assessment based on an analysis as to all lawful permitting actions that are possible, if there is measurable financial upside to exploring these alternatives on a case by case basis, and if the City is actually legitimately able to streamline their supported permitting processes by more than negligible amounts of time and anguish. For those who aren’t in the land development industry, what is considered streamlined today takes twice as long to process a permit or entitlement processing that was non-streamlined just ten years ago. Hence, the credibility of “streamlining policy” in general has taken a hit over the last several years though this disaster will warrant and likely receive an all-hands-on deck approach I will concede (at least to the best the City of LA can muster).
While at the immediate juncture the City of LA is taking a proactive initial stance to bait stakeholders into replication of essentially what was lost, there will be instances where greater density extraction on a residential lot could prove to be an alluring endeavor to owners and outside capital interesting in deploying into both Palisades and Altadena…Alternative permitting measures could also benefit a property owner who could gain from a broadened market of buyers interested in permitting actions which would yield greater unit density on the lot. One state ordinance previously embraced by the City of Los Angeles is SB9 which will allow a duplex and two ADU units on a single residential lot (it allows other similar scenarios this being one of them though on 40’ wide lots as common in certain parts of Palisades we will have to perfect viability of such options here). I can understand why Mayor Bass is trying to lure property owners away from the pursuit of this form of redevelopment option as a flood of SB9 permit applications could result in political backlash…amongst residents who fully intend to replicate what was lost and stay in the community….a mass execution of SB9 form developments on residential lots in Palisades (and Altadena, which also has the potential benefit of utilizing SB 1123) would change the face of the community very quickly…for better or worse would be up to the eye of the beholder. The Mayoral order does not preclude the use of SB9 but does not afford preferential processing treatment to those applications.
SB 1123 is not available in documented “fire zones” (Palisades) but could potentially be leveraged in Altadena and would enable up to 10 units on a vacant residential lot (1200 SF minimum area per unit). This could represent a windfall of lot yield potential to Altadena owners who are unable to pencil rebuilding the same SFR that was lost due to insurance limits but could attract additional capital with a more compelling project. Obviously, there will be greater complexity with using these state ordinances, but they could be a saving grace in situations where under-insured residents (probably a good portion of insureds due to our inflationary environment) are able to create more financially-sound rebuild endeavors for themselves and/or dramatically enhance the value of their land(s). The respective jurisdictions in our opinion should not be restricting use or favoring certain permitting actions as those efforts will serve to hinder the prospect of mass recapitalization, land values, and the number of options those who have endured loss will want to have available to them. Ultimately, it is in the best interest of residents to have as many options to rebuild on the table as possible. If the goal is to better the chances of keeping people in their properties, then they should be given the most tools to make that a reality.
As a general statement regarding governmental policymaking in response to these disasters (I stated this would not be a politically twinged paper, so I’ll be brief), we firmly believe that policymaking limiting or controlling the ability of property owners to unilaterally explore various lawful permitting concepts and transactions of land is not conducive to their best interest. Governmental interventions should widen ones’ land use rights and permitting options and not restrict them. Unfortunately, this does not appear to be the knee-jerk reaction by local and State level policy makers immediately post-disaster.
The Money Factor
Our immediate focus upon the realization of the devastation of these fires was to understand with greater clarity the current insurance industry standards and the laws pertaining to residential property insurance policies. We anticipate that within the first weeks, steps will be made by those affected to begin the process of filing claims using either a representative adjuster, attorney, or directly with the applicable insurance carrier. The “beginning steps” will be to learn each respective carrier’s protocol for filing such a claim. Insurance companies may take early proactive steps to offer payouts to the full insured amount in lieu of lengthy negotiations by the insureds to extract greater payout levels (building cost upgrade coverage), Additional Living Expenses (ALE), etc. These decisions should be weighed against realistic cost expectations to rebuild to a certain desired specification and live elsewhere for a 2–4-year period. We believe based on our current understanding of construction costs and an impending dramatic increase in labor demand for this rebuilding effort that, just as rents have immediately risen in the surrounding areas, that construction costs will continue to inflate. We’ve been provided ranges of all inclusive (hard + soft cost) factors to replace an equivalently appointed 3500 SF modern farmhouse (as common in the Alphabet streets of Palisades) and all-inclusive cost to construct of about $550-$800 PSF. If using this factor, the rebuild will range $1,925,000 - $2,800,000 the Palisades depending on finish quality and each property owners’ relationship to their selected contractor in addition to other market forces. Decisions once clarity on construction costs are internalized by each insured will be highly influenced by the insured’s policy limits and alternative options. The ability to negotiate with existing lenders, borrow additional debt, etc. will all be influential factors as well as relationships within the contracting industry. This is a dynamic decision-making process that will yield differing results unique to each owner experiencing catastrophic loss.
Land Value Dynamics
Uncertainty pertaining to localized and federal policy efforts, insurance markets, and knowledge of possible alternative permitting scenarios would ideally be settled (at the very least) before a decision to sell is codified. Clarity on these aspects will provide land buyers with reduced perceptions of risk surrounding these factors. The less risk perceived the more that will be paid and with less contingencies to purchase. Those who enter the market first will have an influential role in “setting the land comp” for the street/block/subdivision. We believe sellers will have a sense of a certain responsibility to other owners within their respective communities to protect land valuations. Multiple lots sold concurrently could fetch greater values from lower margin “merchant style” builders. This is one potential dynamic. There will be dozens of critical dynamics to consider and many of which have not yet emerged. From my experience over the last week, the local real estate industry at large has been deliberating many of the points I have written about here. Unlike the fires that occurred in Paradise, CA in 2017, both Palisades and Altadena are extremely in demand urban residential environments. As devastating as these events have been, there will be a certain solace that the land holds tremendous value and that this value can be influenced positively with certain preparations and knowledge of the factors unique both to land sales (as opposed to other forms of real estate sales) and to the specific affected communities.
Los Angeles has been experiencing certain growing pains since well before these disasters…e.g. whether to embrace Manhattanization or to squelch growth is a continuous cultural tug of war here between constituencies. This tug of war will be exasperated by the varying decisions landowners will make in how to re-permit on their properties. Coupled with a general somber vibe pertaining to LA’s overall outlook as the nation’s once-most-clearly-prominent city, there is no way to sugarcoat LA’s current plight and the impending challenges faced by Angelenos. Each personal situation pertaining to these disasters will be delt with individually and overarching trends will emerge only in time.
Frank Evanisko is the founder of Evanisko Realty & Investment, Inc.
