What California Real Estate Investors Should Know about Buying Apartment Buildings

Apartment buildings can be an excellent investment for California real estate investors. Factors like the size and style of the building, the type of units available, and of course, the location are all important. An apartment building owner can manage the property directly or delegate this role to a manager, but liability for breaches of a lease agreement, or for violations of California landlord-tenant law, will ultimately fall on the owner rather than the manager.

California apartment building owners’ legal obligations include making accommodations for accessibility and, under a new law that applies to new construction, providing individual water meters or submetering for each unit. Real estate investors looking into apartment buildings should be aware of the financial risks and legal obligations.

What Is an “Apartment Building” Under California Law?

The California Building Code uses the term “covered multifamily dwelling” (CMD) for apartment and condominium buildings. The two types of buildings might look very similar. The difference involves ownership. In a condominium building, each unit may have a different owner, with a homeowner association managing the common areas. With apartments, one person or business owns the entire structure and is responsible for common area maintenance. A CMD, according to the state’s definition, includes buildings with at least three apartment units or at least four condominium units.

If an investor does not plan on living in one of the units, California law may require them to employ “a manager, janitor, housekeeper, or other responsible person” who resides on the premises. This applies to any apartment building with at least 16 units.

Financing an Apartment Building

Obtaining financing for an apartment building is not much different than financing for other residential real estate, except that lenders understand that the purchase is for a business purpose. Lenders may want to consider a borrower’s experience with ownership and management of rental property. Timely loan payments will depend on regular rental income, so they will want to review the business plan for the operation of the apartment building.

Accessibility Issues in Apartment Buildings

The federal Americans with Disabilities Act (ADA) and the California Fair Employment and Housing Act (FEHA) require owners of “public accommodations” to make structural changes necessary to allow accessibility by people with qualifying disabilities. Perhaps the best-known example of this is a requirement of wheelchair ramps in buildings that are open to the public.

The ADA’s definition of “public accommodation” includes “place[s] of lodging,” but it excludes owner-occupied properties with five or fewer rooms available for rent. For apartment buildings that fall under the ADA’s definition of public accommodation, the obligation to provide accommodations for accessibility only applies to common areas, rather than the interiors of the dwellings themselves.

Under the FEHA, accessibility standards apply to both the common areas of multifamily dwellings and the interiors of the units themselves. Failing to provide reasonable accommodations in at least 10 percent of the units in an apartment building constitutes unlawful discrimination. The statute provides specific examples of accommodations, including door widths that allow passage of wheelchairs, light switches and other controls in accessible locations, and “reinforcements in bathroom walls” for tenants who need “grab bars.”

Water Metering in New California Apartment Buildings

Many, possibly most, apartment buildings in California use a single meter to measure water use, and they charge tenants for a prorated share of the water bill, or a flat monthly fee for water use. The governor signed a bill in late 2016 that requires all multi-unit residential buildings built after January 1, 2018 to install water meters in each unit, or to use submeters that measure each unit’s water usage.