The Critical Questions and Answers that Could Help You Prevent Your Own Disaster.
Last year’s warehouse fire in the “Ghost Ship” building in Oakland, California, has been called the nation’s deadliest structure fire in more than 14 years. The fire was a three-alarm fire, requiring 52 firefighters to bring it under control. The fire caused 36 fatalities and building losses of more than $1 million (residents’ belongings excluded). The Oakland Fire Department’s 50-page Origin and Cause Report (O&C) makes it painfully clear how the 36 people who perished in the fire that night had little chance of escaping the blaze.
The O&C details many fire hazards within the building and includes a thorough description of the building pre- and post-fire, statements from residents, and survivor’s accounts of their escape. We make no judgements of fault here, but examine a few key circumstances revealed in the O&C as they pertain to your real estate investing practices.
These five critical questions and takeaways could help you prevent a tragedy at one of your own properties.
QUESTION 1 Is it OK for my family member to manage my property?
The listed owner of the Ghost Ship building, Chor Nar Siu Ng, allowed her son, Kai Ng, to manage the property. Kai Ng stated his family had owned the warehouse and the adjoining structures for about 25 years. His understanding of the building’s use was that it was used for “several artists… working and hanging out.” The O&C mentions Ng hadn’t seen the inside of the property in over a year-and-a-half and claimed to be unaware their tenant, Derrick Ion Almena and other artists were living in the property.
Take-Away #1: A lack of regular site visits can allow a hazardous or illegal condition to worsen.
The real problem here is the absenteeism. The condition of a property can change literally overnight, so having a regular schedule for maintenance is crucial in preventing losses. Care may be best left to a professional property manager, but you must vet anyone you hire and keep in touch after after hiring.
QUESTION 2 How many or what type of maintenance requests are reasonable?
According to the O&C, Ng stated he had made electrical upgrades to the building six months before Almena started his tenancy. Ng allegedly spent around $30,000 and said he was unaware of any electrical problems. However, both Almena and the Ghost Ship’s “co-captain,” Max Harris, insisted they had contacted Ng with repeated concerns about the building’s electrical system. Almena reportedly informed Ng the electricity to the arts collective and adjoining businesses were “in dire need of a total and immediate upgrade.” Harris told the investigative team “the breaker and the fuses ‘popped’ a few days prior to the fire.”
The O&C documents the building’s power as coming from the breaker box of the body shop next door. Multiple residents stated the power would regularly go out in the building. A winding labyrinth of extension cords powered lighting and appliances, including refrigerators and power tools. When asked where the fire originated, the residents described an overhead light that was just “always on.”
Take-Away #2: Unresolved maintenance concerns can lead tenants to devise their own repair solutions.
If you do not maintain the property, your tenants may attempt to do it for you. Without your oversight, tenants may unknowingly create a hazardous situation for which you could become liable. If you or your property manager respond in a timely fashion to maintenance requests, you are less likely to have a tenant “band-aid” a solution. One maintenance call could keep someone from being seriously or even fatally injured. Make sure your tenant knows a maintenance call is welcome and expected if they find an unsafe condition, and always investigate the issue in a timely manner.
QUESTION 3 If my tenant makes a terrible decision, am I protected?
Almena sublet the property to the 25 artist residents illegally. The warehouse was not zoned as a residence or permitted for the activities occurring there. According to Fire Engineering, Almena and Harris repeatedly told police officers that no one lived in the building for three years prior to the fire.
Almena and Harris, the Ghost Ship’s “creative director,” regularly rented space to promoters and musical acts and charged admission to shows without the proper permits. Many who died in the fire were trapped on the second floor where a dance party was being held that evening.
The two have been charged with 36 counts of involuntary manslaughter for the residents’ deaths and face up to 39 years in prison. So far, the Ghost Ship’s owner has not been charged regarding the fire, but lawyers representing the families of victims are suing Almena, Harris, Ng and others for wrongful death.
Take-Away #3: If you are the owner of the property or the property is in your care, the activity which occurs there, good or bad, may be attributed to you.
If you don’t keep yourself informed of the activities occurring at your property through scheduled (or unscheduled, if possible) visits to your property, you open yourself up to risk caused by someone else’s illegal behavior. Staying connected will keep you abreast of any hazardous conditions and build good rapport to encourage your best tenants to stay. Be sure to follow local laws regarding any advance notice you must give your tenant before a visit.
QUESTION 4 Does subletting affect my insurance coverage?
Though the building was insured by a large, reputable company, it is questionable if the insurance company will pay the losses given the building was being used for a purpose that the insurer likely did not intend. In this case, a commercial building was being used for a residential use. Furthermore, none of the Ghost Ship residents were on the lease, only Almena.
Take-Away #4: A building insured for a different use than the actual use at the time of loss may equal no insurance.
One of your responsibilities on the insurance contract is keeping the insurance company informed of any changes to occupancy. The insurer makes a promise to pay based on the risk as described on the application. Occupancy changes may warrant rate changes to account for increased or decreased risk, and changing the way you use the property may open you up to additional risk that can be best insured on a different type of policy. Intentional misrepresentation of material information on an application for coverage may constitute an act of fraud. Make sure your agent has a detailed description of the building and its use. Inform them of any changes immediately.
Remember, subletting further reduces the control you have over who is in your property, potentially allowing for activities that are normally prohibited in your lease or are simply illegal. Furthermore, subletting can open your tenant up to exposures and responsibilities they may not be insured for either.
QUESTION 5 What if my building is not up to code and someone gets hurt?
The O&C describes the 9,880-square-foot Ghost Ship as being filled floor-to-ceiling with makeshift spaces, pianos, and even small travel campers and RVs. The non-traditional configuration made the fire’s fuel load excessively high and created thick smoke. There were only had three exit doors and two staircases leading down from the second floor, neither of which exited the building. Worse, one of the staircases was blocked off by the DJ booth during a concert being held on the second floor that night. The building lacked sprinklers or any other automatic fire suppression system.
Though the warehouse was located just one block from the nearest fire station, the crowded, maze-like conditions of the building made it so those attending the concert on the second floor could not exit the building in time. All 36 residents who died in the fire were killed by smoke inhalation.
Take-Away #5: A building not up to code can have deadly, long-term consequences.
If a building is not up to current code standards, it increases the risk of injury to occupants and anyone else who may enter the property. Are you allowing a “make-shift” repair because you want to avoid the expense associated with repairing it correctly? Is your tenant using your space in a manner that violates the current municipal code? Educate yourself on your local codes and always hire licensed and insured contractors who won’t compromise when it comes to doing things the right way.
Injuries occurring to anyone on your property can have consequences that can last long into the future. You may not just have expenses from the day of an incident, but the repercussions can damage your professional and personal life far into the future.
Want the good news? Events like the Ghost Ship fire don’t have to happen to you.
There are many wonderful resources available to you, from your local law enforcement, the National Fire Protection Association, some really great investor forums out there, and your own insurance company’s website. Stay up to date on the latest policy changes and get tips for avoiding preventable losses so you can keep your real estate investing humming right along.