Categories
Los Angeles Multifamily

Navigating Squatters’ Rights in California

There has been a lot of chatter in the market recently about Squatters. Navigating the complexities of landlord-tenant laws, especially regarding squatters, can be a daunting task for property owners in California. Squatting, while illegal in principle, presents unique legal challenges as squatters are afforded certain rights under California statutes.


How Squatters Can Gain Adverse Possession

To make a successful claim for adverse possession in California, a squatter must meet the following requirements: Occupy the property for at least five consecutive years, cultivate or improve the land or property, pay all state, county, or municipal taxes throughout their occupation (CCP § 318, 325). Often, California squatters will be required to provide evidence that they have cultivated or improved the land. This includes cultivating in an agricultural sense as well as building onto or making improvements to the property itself.

Squatters in California must also meet five general requirements:

  • Hostile possession: Occupying the property without permission
  • Actual possession: Physically residing on the property
  • Exclusive possession: Excluding all others from the property
  • Continuous possession: Residing on the property for the entire 5-year period
  • Open and Notorious Possession: Using the property openly without hiding occupancy

If these requirements are met, the squatter can file a lawsuit to claim legal ownership of the property.

What are Squatter’s Rights in California?

  • Squatters do not have any rights allowing them to legally occupy an unused residential building or land in California. Property owners can evict squatters with proper notice.

  • Adverse possession claims however allow squatters to gain legal ownership of property in California. But it requires meeting all the specific elements as mentioned above. Additionally, the squatter must pay property taxes during those 5 years to make a viable claim.

  • Sometimes property owners will allow someone to use or occupy the property with an oral “at-will” agreement. This creates a tenant “at will” arrangement without a formal lease. These tenants at will aren’t squatters with adverse possession rights since their occupancy is permitted.

With the housing crisis ongoing, more and more unhoused people are resorting to unlawful squatting in abandoned rental properties. It’s not unusual to find squatters taking up residence in foreclosed homes, buildings left vacant following evictions, development projects or rentals where tenants have moved out but the owner fails to monitor the property. It is important as a property owner to constantly monitor your property and continue to be vigilant in protecting your property rights.

Source: James L. Arrasmith

Categories
California Pet Policay Los Angeles Multifamily

California’s Push to Make Landlords Accept Pets

Residential/Apartment Rental Applications May No Longer Require Tenants to Disclose Their Pets.

The California legislature is currently deliberating on a significant bill aimed at reshaping pet policies within rental housing. The chair of the California Legislative Renters Caucus, Matt Haney (D-San Francisco) has introduced legislation that prohibits blanket pet bans in rental units in California. AB 2216 will require landlords to have reasonable reason(s) for not allowing a pet in a rental unit and only allows landlords to ask about pet ownership after a tenant’s application has been approved. If passed, this legislation would bring about substantial changes to the rental housing landscape in the state, impacting both tenants and landlords alike.

Pet Policy Reform Under AB 2216

  • The Pet Numbers in California: California has the second highest number of tenants in the country, with 17 million families and individuals renting — close to 12 million, or 70% of these renters are pet owners. Roughly 30% of available rentals in any given city are pet friendly. In San Francisco 21% of the available rentals currently on the market allow for pets. Similarly in Los Angeles, which has close to 3 million pet owning renters, only 26% of Los Angeles rentals allow for pets, according to Matt Haney, the author of the Bill.

  • Rental Applications May No Longer Require Pet Information: AB 2216 aims to prohibit blanket bans on pets in rental housing which would include eliminating inquiries about pets on rental applications. Most rental applications today include fields for prospective renters to provide information about the number, kind and breed of their pets who will be occupying the unit. The Bill would only allow landlords to ask about pet ownership after a tenant’s application has been approved.

  • Elimination of Pet Rent and Pet Deposits: The bill intends to remove additional monthly fees commonly referred to as “pet rent” and restrict landlords from collecting separate security deposits for pets. Many owners today collect an additional pet deposit ranging from $100 to as high as $1,000 and require additional monthly pet rent, mostly to hedge against the potential damage that can be incurred by pets residing in a small apartment home.

It should be noted that California residents who have dogs or other animals with an Emotional Support Animal (ESA) letter from a licensed medical professional are already entitled to live in any kind of housing with their animals, even if their landlords have a “no pets” policy.

However the lack of pet friendly housing has apparently caused more than 829,000 tenants to have pets in their units without the knowledge of their landlord. This Bill has only been proposed (not passed) as of now.

Categories
Costa Hawkins Justice for Renters Act Rent Control

The Justice for Renters Act

Rent Control will once again be on the November 2024 ballot. This time it comes in the form of The “Justice For Renters Act“ – a proposed measure in California aimed at repealing Costa-Hawkins. If passed, it would allow local governments to impose rent control on single-family homes and newer apartments, and also eliminate the state’s ban on vacancy control, allowing cities and counties to regulate rents between tenancies.


Overview of the Justice for Renters Act

  • Coming to CA ballots in 2024: The California Secretary of State has verified 617,000 signatures supporting the Justice for Renters Act and it has now qualified for the November 2024, general election ballot in California.
  • The Man Behind It All: This measure is being spearheaded by Michael Weinstein, head of the AIDS Healthcare Foundation, who was also the driving force behind other recent rent control measures such as Prop 10 (in 2018) and Prop 21 (in 2020). It is Weinstein’s belief that rent control should apply universally across California’s housing stock, without exemptions, and that rent caps should be determined at the local level.
  • Aiming to Upend Costa Hawkins: This measure seeks to repeal the Costa-Hawkins Rental Housing Act of 1995, which would allow local governments to impose strict rent control on newer apartments and single-family homes.
  • Vacancy Decontrol at Risk: The JFR Act would also eliminate the state’s ban on vacancy control, giving local authorities the power to regulate rents between tenancies. Currently, vacancies are decontrolled – ie vacant units may be leased at market rent upon re-rental.
  • Expansion of Rent Control: Additionally, the act would prevent the state from limiting the right of local governments to implement or expand residential rent control. Despite California’s passage of a statewide rent control law (AB 1482) in 2019, which capped rent increases for most of the state’s multifamily housing stock at 5% plus the consumer price index (or a maximum of 10%), there are continued efforts to undermine or eliminate the Costa-Hawkins Act.


Potential Impact and Opposition

  • The Act Would Dis-incentivize Improvements: The implementation of vacancy control in particular on a State and/or Local level would discourage landlords from keeping units on the market or investing in property improvements due to limited rent and revenue potential – ie Why renovate a unit if you cannot achieve market rent?
  • Continued Development Slowdown: Many real estate investors, both large and small, are already soured on California’s housing policies and believe it to be un-investable. Recent regulations such as Measure ULA have already negatively impacted new construction development, in addition to transactions $5M+. Opponents of the Justice for Renters Act argue that the measure also could significantly slow down the construction of affordable housing, further exacerbating the state’s homelessness and affordability crisis.
  • Wait and See: Previous attempts to repeal Costa-Hawkins were rejected by voters by more than 20 points, indicating substantial resistance to extreme rent control measures. However, as mentioned above, Measures such as The Mansion Tax have managed to pass indicating that voters are not adverse to imposing increased regulation on the real estate industry.
Categories
Los Angeles Renter Protections Rent Control

An Update on Los Angeles Renter Protections

As you may or may not be aware, The City of Los Angeles Declaration of Local Emergency effective on March 4, 2020, terminated this past week on February 1, 2024. The provisions apply to all residential rental units in the City of Los Angeles. Below is a breakdown:


Non-Payment of Rent
 

  • Emergency Order Expired:  The City’s local COVID emergency order expired on January 31, 2023. Beginning February 1, 2023, tenants must pay their full current monthly rent in order to avoid eviction for non-payment of rent.
     
  • Low Income Renters Have More Time:  Low-income renters with income at or below 80% of the Area Median Income (AMI) that could not pay rent due to COVID-19 financial impact continued to have protections through March 31, 2023, if they notified their landlord within 7 days of the rent due date unless extenuating circumstances existed. 


State Law on Non-Payment of Rent Eviction Protections

  • Tenants who provided their landlord with a COVID-19 Related Declaration of Financial Distress Form by the 15-Day deadline for rent owed from March 1, 2020 through August 31, 2020, cannot be evicted for non-payment of rent from that period. A landlord can pursue a court action in small claims court for this rent.
     
  • Tenants who provided their landlord with a COVID-19 Related Declaration of Financial Distress Form by the 15-Day deadline AND paid 25% of their rent to the landlord for rent owed from September 1, 2020 through September 30, 2021, cannot be evicted for non-payment of rent from that period. A landlord can pursue a court action in small claims court for this rent.


Covid-19 Rental Debt

  • Tenants who are not covered by the Declaration of Financial Distress process described above continue to have protections for unpaid COVID-19 rental debt and must pay their debt as follows in order to avoid eviction:

    – Rent owed from March 1, 2020 to September 30, 2021: Tenants must pay by August 1, 2023.

    – Rent owed from October 1, 2021 to January 31, 2023:  Tenants must pay by February 1, 2024.


RSO Rent Increase

  • Allowable Rent Increase for RSO Properties:  Annual rent increases for rental units subject to the City of Los Angeles Rent Stabilization Ordinance (RSO) are prohibited through January 31, 2024. The City Council approved a 4% rent increase for properties subject to the RSO from February 1, 2024 through June 30, 2024.
     
  • Additional Increase for Utilities Provided:  An additional 1% for gas and 1% for electric service can be added if the landlord provides the service to the tenant. State law requires landlords to provide an advance 30-day written notice for rent increases of less than 10%.

Read More from The Housing Department Website

Categories
Inland Empire Multifamily Los Angeles Multifamily Los Angeles Rent Growth

2024 LA Apartment Rent Outlook

As you may have experienced for yourself, apartment rents in Los Angeles softened in 2023 with the outlook for rent growth in LA for the coming year looking modest at best. Apartmentlist.com and CoStar recently released 2023 Los Angeles Rent Data outlining apartment rental trends for the Los Angeles Metropolitan area and Greater Southern California. Below is a breakdown:

LA Rents By the Numbers

Median Rent for Los Angeles: Median rent currently sits at $1,849/mo for a 1-BR unit while median rent for a 2-BR currently sits at $2,357/mo.

Rent Growth/Contraction: Currently Los Angeles rents are down -1.1% month-over-month from Dec 2023 to Jan 2024, and down -3.8% year-over-year when comparing 2023 as a whole to 2022. The median rent in Los Angeles fell by -1.1% over the course of December 2023, and has now decreased by a total of 3.8% over the past 12 months.

What’s Happening:

New Supply, Soft Demand: Meager growth resulted from a below-average renter demand last year of 4,800 units, in the face of over 11,000 new units added. Based on data collected by the U.S. Census Bureau between July 1, 2022, and July 1, 2023, Los Angeles County saw modest outmigration, with the population declining by 0.15%, a critical factor in recent lackluster renter activity. Vacancy ended the year at 5%. While still one of the tightest apartment markets nationally, vacancy in the metro is above its long-term average of 4.5%.

Other SoCal Areas Defy Odds: Orange County, California, leads U.S. markets at the beginning of 2024 with a nearly 4% annual increase in apartment rents. As a 2023 rebound in rental demand balanced an equal increase in new apartment supply, landlords in Orange County maintained leverage to increase rents.

2024 Forecast:

LA Lags Other SoCal Areas: The outlook for 2024 suggests that average market rents will increase by approximately 4% in Orange County, San Diego and the Inland Empire, and by a more moderate 2.8% in Los Angeles as occupancy growth increases across all markets. Furthermore, only the Inland Empire is expected to see an increase in deliveries in 2024 compared to 2023.

New Construction Starts Sluggish: Developers are initiating construction projects at a slower pace as higher capital costs have curtailed project feasibility. Across the four major Southern California markets, approximately 16,300 market rate units started construction in 2023. The pace of construction starts has decelerated for two consecutive years from a cyclical peak and record 23,200 units in 2021. As a result, weaker supply growth in the near-term combined with stronger demand could lead to tighter vacancies and stronger rent growth.

Sources: Costar. Apartmentlist.com

Categories
Cash For Keys Los Angeles Multifamily Tenant Buyouts

Los Angeles Releases Cash For Keys Data

Last week, the Los Angeles City Controller’s Office released data on the number of ‘Cash-for-Keys’ (or Tenant Buyout) agreements which have been filed with the City of Los Angeles from the years of 2019 – 2023. Buyout offers — also known as “Cash for Keys” agreements— have become a frequently used tool for landlords hoping to get tenants to leave rent-controlled apartments without going through a formal eviction process, which can take time, be costly and is governed by strict rules.

Below is a breakdown of the data released by the City of Los Angeles:

But First – Why “Cash for Keys”?
 

  • Critical to the Value-Add Model: Tenant Buyouts are nothing new to the LA Multifamily landscape.  If you have ever viewed a broker offering memorandum which lines up ‘Current’ rents vs. ‘Pro Forma’ rents, you would probably know that it is difficult to achieve “Pro Forma” rents without some strategy that resembles Cash-for-Keys.  Said differently, if you are waiting for lower paying tenants to vacate their units on their own volition, you will realize that many of these tenancies will outlive you.
     
  • The Thought Process:  Freeing up these units from their old tenancies allows investors to renovate and reposition them to achieve at or above market rents, thereby significantly increasing returns and in turn the overall value of the property.  If an investor spends $25,000 on a tenant buyout to remodel a unit and subsequently rents it out at a higher market rent, the return on cost and ultimately the value created for the property can be significant.

The Numbers
 

  • Total Cash-for-Keys Agreements:  Over the last four years, 4,869 tenant buyout agreements were filed in Los Angeles.
     
  • Average Buyout Amount: The average buyout amount was reported at approximately $24,704.
     
  • Buyout Hotspots Around Los Angeles by Zip Code:  Notable areas with the highest number of tenant buyouts include 90004 Koreatown/Mid-Wilshire (370), 90026 Echo Park (250), 90019 Mid-Wilshire (228), 90006 Koreatown/Pico-Union (198), and 90016 West Adams (163).
     
  • Highest and Lowest:  227 Tenant Buyouts were less than $5,000.  35 Tenant Buyouts were more than $100,000.  1,218 Tenant Buyouts were in the range of $20,000 – $25,000.

# of Buyouts Trending Down
 

  • Market Dynamics at Play:  Through the 4-year span there was a noticeable downward trend as far as sheer number of buyouts are concerned.  In the 2019 year, roughly 1,200 Buyouts were recorded with the city compared to 789 buyouts in 2023.  As LA Multifamily transaction volume declined 60%+ in 2023, it would be hard to ignore overall market dynamics when viewing this data.  It is also important to note that many Cash-for-Keys agreements go unrecorded and are not reported to the City.
     
  • Buyouts Get Harder as LA Rents Have Surged: While $25,000 may seem like a significant sum to most tenants paying below-market rents, many are savvy enough to realize that in today’s rental market, this sum will not get them very far – thereby making the process more difficult and costly for investors.

Click Here to View the Data Released by The City of Los Angeles

Categories
Los Angeles Multifamily

How LA Multifamily Sales Fared in 2023 vs 2022

It’s the beginning of 2024 and the numbers are in for LA Multifamily sales volume for the previous year. As many anticipated and experienced for themselves, 2023 proved to be a down year with regard to apartment sales metrics both here in Los Angeles as well as nationally. The rise in interest rates sidelined many would-be Purchasers as deals became near impossible to pencil at current prices. In addition, The Mansion Tax, which took effect in April of this past year placed inevitable downward pressure for transactions $5 Million+.

What resulted was a very wide bid-ask spread in terms of the prices that Sellers desired for their properties and the prices that Buyers were willing to pay for them – ultimately leading to sluggish transaction volume. Below is a re-cap of 2023 LA Multifamily sales metrics vs. 2022. All data is taken directly from Costar with the criteria being Multifamily Transactions 5+ Units for what Costar considers to be the LA Market (covering areas such as Los Angeles and Beverly Hills all the way to areas such as Gardena and Bellflower etc):


The Year-Over-Year LA Sales Metrics


  • Total LA Multifamily Sales Volume 2023: $5.26 Billion – Total sales volume was down roughly 62% from 2022 reported Sales Volume of $13.51 Billion.
     
  • Total LA Multifamily Number of Sale Transactions: 1,171 Transactions – Total number of transactions was down roughly 39% from 2022 reported Sale Transactions of 1,907.
     
  • Average Price Per Unit:  $280,008 –  Average Price Per Unit was down roughly 22% from the 2022 reported Average Price Per Unit of $359,610.
     
  • Average Price Per Square Foot: $334 – Average Price Per SF was down roughly 18% from the 2022 reported Average Price Per SF of $407.
     
  • Average Cap Rate: 4.7% –  Average Cap Rate was up 60 basis points from the 2022 reported Average Cap Rate of 4.1%.  (Values decline as Cap Rates Rise).

Given the metrics above, it is important to note a couple things:  The first is that Costar data (while directionally correct) should always be taken with a grain of salt.  For instance, Cap Rates are reported for maybe half of transactions that occur, and the cap rates that do get reported are not always entirely accurate.  The second is that while the report above may indicate unfavorable conditions from the previous year, we are seeing and hearing of increased optimism for 2024 given the Fed’s latest remarks with regard to interest rates.  Investors want to transact and they are sitting on record amounts of dry powder (investible capital) to do just that.  If you would like copies of the referenced Costar reports from which we pulled this data, please do not hesitate to reach out.

Categories
Legislation Los Angeles Multifamily Prop 13 Property Insurance Rent Control

The Year-End Wrap Up

2023 was an interesting year for the LA Multifamily industry to say the least.

As we bid farewell, we wanted to reflect on a few of the significant events which have impacted our industry both locally and nationally. This year we saw continued elevated interest rates, numerous legislative changes, and other major challenges faced by investors. Below is a re-cap:

A Year of Choppy Waters

  • The Problematic Interest Rate Environment Continued:  This year the Fed pushed interest rates to a 22-year high in a historically short period of time. Not since the 1980s have U.S. central bankers lifted borrowing costs in a single tightening campaign by more than 4 percentage points.  Higher borrowing rates for investors created a problematic environment as far as new acquisitions and re-financings are concerned.
     
  • Low Multifamily Sales Volume Followed:  The higher interest rate environment (along with the impact of the LA Mansion Tax) contributed to paltry investment sales volume when compared to recent years, due primarily to the elevated cost of capital.  Across the greater Los Angeles multifamily market, sales were down approximately 65% when compared to 2022.
     
  • LA Mansion Tax Remained Intact:  In October, a court ruling dismissed a challenge to Measure ULA which imposes an additional transfer tax on properties sold in LA City to fund affordable housing and address homelessness.  The tax is calculated as 4% on property sales over $5 million and 5.5% on property sales over $10 million, applied to properties located in the City of Los Angeles.  Sales volume for deals $5M+ suffered as a result.
     
  • CA Updated Their ADU Laws:  Two New CA ADU Laws were signed this year:  AB 1033 enables property owners in select cities to construct Accessory Dwelling Units (ADUs) on their property and sell them independently, similar to condominiums.  AB 976 permanently extends the ability of property owners to build rental ADUs while removing owner-occupancy requirements.
     
  • The Property Insurance Dilemma – Here to Stay:  Major Insurers, facing significant financial losses, have continued canceling existing policies (for mostly older properties) or pulling out of California entirely, which made obtaining insurance incredibly difficult and wildly more expensive for operators.  NOI, Cash flows and profitability suffered as a result.
     
  • The Rental Market Showed Signs of Softening:  If you are having trouble leasing your vacant units, you may not be alone.  During November of this year, average asking rents on a per-square-foot basis declined by 0.3% in Los Angeles. This follows 0.5% and 0.3% declines in September and October, respectively.  Compared to the same time a year ago, rents have moved sideways, up only 0.1% compared to Nov. 30, 2022.  After a low in December 2022, rental rates saw modest growth through the summer before momentum faltered.
     
  • The State and Local Regulatory Environment Persisted:  The City of Los Angeles reduced the 7% allowable increase to a 4% after four years of a city-wide rent freeze for rent-stabilized properties.  Other major regulatory bills were announced such as The Justice for Renters Act, which could eliminate the statewide ban on rent control (Costa Hawkins), and ACA 1 which may directly challenge Prop 13’s taxpayer protection by lowering the voting threshold required to pass these local special taxes and bonds.
     
  • Utility Costs Surged: Nearly everyone (on both the tenant and landlord side) has seen or felt an increase in utility costs.  SoCalGas bills up at the onset of the year were up nearly 3x before normalizing towards the middle of the year.  LADWP was not far behind with rate adjustments on water usage, impacting residential customers and leading to higher bills.

As we conclude this year-end wrap-up, it is evident that the LA real estate landscape has faced a myriad of challenges in 2023. Simply put, it has not been an easy year.  From legislative changes and legal battles to market dynamics and elevated interest rates, property owners and landlords have certainly navigated complex terrain. Looking ahead, many believe that we have experienced a bottoming-out and that 2024 looks promising, all things considered.  

Categories
Los Angeles Multifamily Property Insurance Rent Control

Informal Poll Reveals 3 Big Issues Faced by LA Apartment Owners

The Los Angeles real estate market is without a doubt experiencing seismic shifts that directly impact landlords. In our daily calls, we informally polled owners on the major headwinds they are facing in today’s environment. In no specific words, here is what they had to say:


Property Insurance

“My Property Insurance Was Not Renewed”: Perhaps the most common issue LA multifamily owners are facing currently is retaining and obtaining property insurance. Every week, we are hearing multiple accounts of owners whose insurance policies have not been renewed due to the age of their building – despite having not ever filed a claim.

“My Insurance Premium is Now 3x Last Year’s Amount”: It is no secret that insurers, facing financial losses, are cancelling existing policies with many exiting the California market entirely – making it more expensive to operate investment properties which can majorly effect a building’s Net Operating Income. Annual insurance premiums are on the rise, with many owners large and small reporting increases of 2x and even 3x their previous annual insurance premiums.


Rental Market Softening

“My Vacant Units Are Sitting”: Another issue permeating the LA market is the overall softness of the rental market. Some owners chalk it up to time of year, while others cite new supply and the overall economic climate as the rationale. Overall it seems as if owners are experiencing much fewer inquiries, tours and applications at the moment with vacant units sitting on the market for weeks and even months. Many have dropped asking rates and offered major concessions as incentives.

“There Is a Lot of Competition”: If you believe that the freshly-constructed building(s) down the street effect your rents, you may be correct. Over 11,000 market-rate units have been completed so far in 2023. These units are not being absorbed as fast as prior years. Apartment vacancy, currently at 4.9%, is up from 4.4% at the start of this year. Some of these properties are offering significant concessions such as eight weeks of free rent on a newly-signed, 16-month lease in certain locations.


Rent Control and Regulatory Environment

“The 4% Rent Increase Is Not Fair After 4 Years of No Increases”: It should be evident by now that the City of Los Angeles has zero issues placing additional burdens on landlords both large and small. As you may well know, LA City Council members approved allowable rent increases of 4% effective February 2024, after almost 4 years of no increases. Adding insult to injury, the aggregate back rent owed to Los Angeles property owners since the onset of the pandemic is estimated to be in the Billions.

“The Justice for What Act?”: Maybe you have heard, maybe you haven’t. There is yet another rent control measure hitting November Ballots this year (The Justice for Renters Act) which may have serious implications for property owners. This act could eliminate the California statewide ban on rent control (Costa Hawkins) allowing for the local government to help renters stabilize their rent and prevent higher increases year after year.

As indicated above, LA Landlords have much on their minds, facing a complex and evolving environment marked by a softening rental market, insurance challenges, and changing regulatory policies. Navigating these issues requires strategic planning and adaptability as property owners work to ensure the viability and profitability of their investments in the face of ongoing challenges. As always, we are here to be a resource for you. Please do not hesitate to reach out.

Categories
Los Angeles Multifamily Property Insurance

Insurance for Apartment Buildings is a Huge Problem

Over the past few months, many of our Los Angeles Apartment Owner clients have reported receiving notices of non-renewals from their insurance companies.

What’s Happening?

  • The cost of insurance is out of control and many carriers such as Allstate and State Farm have stopped writing policies entirely in California.

  • Over the next few months one of the largest writers of apartments have started to send out non-renewal notices for apartments that were built prior to 1990.

  • Many of our clients have reported recent annual insurance premiums as being 2x and even 3x the year prior.

What it Means?

  • This is yet another blow for Los Angeles Apartment owners who have faced tremendous headwinds in the business over the past few years since the onset of the Pandemic.

  • As expenses (such as maintenance and insurance) continue to rise exponentially, and with rent revenues staying fixed for the past few years, the apartment business has become less profitable from a Net Operating Income (NOI) and cash flow standpoint.


Long Term Owners Weigh Their Options

  • The sheer volume of seemingly long term owners that I speak with on a daily basis who are now considering selling their properties is astounding. Many of them cite that the business no longer makes sense to them any more.

  • The silver lining for longer term Los Angeles owners is that many of them have little to no debt on their properties, in addition to having a very low property tax basis thanks to Prop 13. In other words, most folks’ backs are not against the wall.
Categories
Los Angeles Multifamily Rent Control

LA County’s New $46 Million Rent Relief Program

The Los Angeles County Department of Consumer and Business Affairs (DCBA) has launched the LA County Rent Relief Program, a program offering over $46 million to assist landlords during the ongoing pandemic. This program apparently excludes properties located in the City of Los Angeles. Below is a breakdown:

The Details

  • Geared Towards “Mom and Pop” Owners: With a focus on aiding small landlords who own 1 to 4 rental units, the Program aims to reduce tenant evictions due to rent arrears and ensure continuity of housing in the community.
     
  • How it Will Work: Starting mid-December, landlords can apply for the LA County Rent Relief Program by visiting the portal here. Applicants will receive free multilingual technical support from community partners to guide them through the application process and assist with gathering necessary documentation. 
     
  • How The Funds Will be Allocated: Funds will be allocated to qualified applicants across diverse cities and unincorporated areas of Los Angeles County, excluding the City of Los Angeles.  Priority will be given to those showing the greatest need, guided by criteria including properties located in high-need areas as identified by the LA County Equity Explorer Tool, and income levels at or below 80% of the LA County Area Median Income (AMI).

Issues from Past Rent Relief Efforts

  • Rent Assistance Falls Short: The LA County $46 Million Rent Relief Program comes on the heels of the Emergency Renters Assistance Program put out by the City of Los Angeles in October of this year which allocated $18.4 Million to landlords.  Prior to that was California’s “Housing is Key” program, a $5 billion fund set up during the pandemic also to help struggling tenants.
     
  • Partial Payments and Missing Funds:  Through these past programs, many property owners have reported receiving only partial amounts of their approved rent relief credit, with others reporting that they received nothing.  Los Angeles area landlords are owed more than $1 billion in back rent from the pandemic, according to data compiled by National Equity Atlas.  
Categories
Costa Mesa Rent Control

Cities in Orange County Taking Steps Towards Rent Control

The City of Costa Mesa joins Santa Ana in taking measures to protect renters in Orange County.

  • Tenant Protections Continue to Push into Orange County: An urgency ordinance approved this past Tuesday (11/7/23) by the Costa Mesa City Council aims to protect rental tenants (which is estimated to comprise 60% of the city’s population) who face no-fault evictions, ie evictions through no fault of their own.
     
  • Relocation Assistance: The new law, which takes effect immediately, aims to widens the safety net for tenants whose landlords have asked them to vacate to accommodate substantial renovations, the sale of a property or to provide housing for landlords or their family members. The ordinance mandates landlords to send paper notices to both the city and property owner.
     
  • What Happens Next: This procedural change may lead to legal challenges by tenant attorneys. Landlords might face administrative hurdles, such as using certified mail or filing California Public Records Act requests, to prove city notice receipt.

Source: LA Times

Categories
Los Angeles Multifamily Rent Control

Update to Los Angeles Allowable Rent Increase for 2024

The Los Angeles City Council’s housing and homelessness committee passed an amended motion Wednesday to lower rent increases from 7% to 4%.

  • Councilmember Hugo Soto-Martinez originally suggested a six-month extension of a pandemic-era ban on rent increases which would have pushed the effective date of allowable rent increases for RSO properties from February 1, 2024 to August 1, 2024.

  • Soto-Martinez’s motion called for a continued pause on rent increases for units covered by the 1979 Rent Stabilization Ordinance, which limits the allowable rent increase for units built on or before Oct. 1, 1978. Under the ordinance, rent increases are tied to the Consumer Price Index – a measure of inflation – and have historically been in the 3-4% range with a cap at 8%.

  • Instead, the committee passed an amended motion for lower rent increases from 7% to 4%, rather than delaying or completely banning increases. If passed by the entire city council, the amended motion would go into effect in February 2024.
Categories
Mansion Tax

Measure ULA Lawsuit Dismissed. LA Mansion Tax Here to Stay.

For now, it looks as if LA’s “Mansion Tax” (aka Measure ULA) is here to stay. This week, a court ruling dismissed a challenge to Measure ULA which imposes an additional transfer tax on properties sold in the city to fund affordable housing and address homelessness.

To recap, the Measure ULA tax is calculated as 4% on property sales over $5 million and 5.5% on property sales over $10 million. Los Angeles County Superior Court Judge Barbara Scheper issued a tentative ruling that dismissed the challenge on Monday after hearing arguments from both parties.

Exemptions to the Mansion Tax

While the Mansion Tax is here to stay for now, it is important to note a few exemptions to this tax which exists for transfers to non-profit or government entities.  According to the City, the Measure ULA Tax will be not be applicable on documents that convey real property within the City of Los Angeles if the transferee is described as a Qualified Affordable Housing Organization including:

  • Non-profit entities 501(c)(3) with a history of affordable housing development or property management experience.
     
  • Community Land Trusts and Limited-Equity Housing Cooperatives with a similar history.
     
  • Limited partnerships or limited liability companies where a recognized 501(c)(3) nonprofit corporation, community land trust, or limited-equity housing cooperative is a general partner or managing member, and has a history of affordable housing development or property management experience.
     
  • 501(c)(3) entities with IRS designation for at least 10 years and assets under $1 billion.
     
  • Government entities at federal, state, or local levels.

What’s Next?

  • Sluggish Sales in the $5M+ Space: Market dynamics aside, the Mansion Tax has become a considerable motivation for owners of $5M+ properties to hold rather than sell.  As of August, the transfer tax has generated $82 million from 144 transactions.  An interesting conundrum exists when a $5,100,000 sale nets the same sale proceeds as a $4,900,000 sale, as it does with ULA in effect.
     
  • Expect an Appeal:  Attorneys for the Howard Jarvis Taxpayers Association and Newcastle, who initially filed the lawsuit, have indicated that they plan to appeal the decision although the timing of the appeal is unknown as of now.
Categories
Accessory Dwelling Units

California Updates ADU Laws with AB 1033 and AB 976

Assembly Bill 1033 (AB 1033) and Assembly Bill 976 (AB 976) which were both signed by Governor Newsom this week, may have substantial implications for Accessory Dwelling Units (ADUs), also known as “granny flats” throughout the state of California. Here’s a breakdown of the key provisions in these bills:


AB 1033 – ADUs Sold Separately

  • What it Does:  AB 1033 enables property owners in select cities to construct ADUs on their property and sell them independently, akin to condominiums.
     
  • The Workings: Owners building ADUs must notify local utilities about the creation and separate conveyance of these units.  A homeowners association must be established to manage the maintenance costs of shared spaces and the property’s exterior.  Property taxes for the primary residence and the ADU will be billed separately.
     
  • The Goal: AB 1033 could increase what some refer to as gentle density in many cities – ie the development of single-family type units (e.g., ADUs, duplexes, etc.) within single-family zoned neighborhoods. Gentle density helps maintain the residential façade and aura of neighborhoods while assisting in the offsetting of the growing housing crisis.  The passing of AB 1033 could additionally provide more affordable for-sale housing opportunities for low-mid income first-time homeowners.


AB 976 – Removes Owner-Occupancy Requirement

  • What it Does:  AB 976 will permanently extend the ability of property owners to build rental accessory dwelling units (ADUs) in addition to removing any owner-occupancy requirements.
     
  • The Workings:  The Bill removes owner-occupancy requirements that prohibited ADU construction unless the owner lived in either the main house, or the ADU.  When owner-occupancy requirements were temporarily removed in 2017, ADU construction grew massively, resulting in thousands of new rental homes across California.
     
  • The Goal:  This change allows ADUs to be used strictly for rental purposes, with the goal of expanding the rental housing market in California.  Additionally, removing owner-occupancy requirements could facilitate the process for owners to use loans or their home equity to add ADUs to their existing properties.

In Closing

  • These legislative changes have the potential to substantially impact the housing landscape in California. While some critics argue that these laws may curtail the regulatory authority of local jurisdictions, proponents view them as critical for increasing housing supply and affordability.

  • These laws aim to facilitate more accessible and cost-effective housing options for a wide spectrum of residents, from retirees looking to augment their income to young families aspiring to acquire their first home. With the passing of these two bills, California is slowly but surely taking steps toward addressing its housing challenges to foster a more promising future for its residents.
Categories
Los Angeles Multifamily Rent Control

California is Capping Security Deposits with AB 12

This past week, Governor Gavin Newsom signed Assembly Bill 12 into law. This legislation places limits on the amount of security deposits that landlords can require from tenants. This change is set to affect the rental landscape in California, particularly in higher-cost areas.

The Details of AB12

  • Effective as of July 1, 2024:  The California State Law will go into effect as of July 1, 2024.
     
  • The New Security Deposit Limit:  Assembly Bill 12 restricts landlords from requiring security deposits exceeding one month’s rent.
     
  • Traditional Landlord Protections Still Remain:  Landlords retain the ability to seek damages from tenants who cause property damage exceeding the security deposit amount.
     
  • Exemptions from AB12:  Small landlords owning only two properties with a maximum of four units are exempt from AB12.
     
  • Other States With Security Deposit Limits:  California will become the 12th state to also have capped security deposits to one month’s rent.  A few others include New York, Delaware, Rhode Island, and Massachusetts.

Unintended Consequences:

  • Marginal Applicants Be Damned:  Legislators create tenant protection legislation which in many ways ends up hurting the very people they are designed to protect. For instance, Rent Control restricts supply and makes housing less affordable for anyone looking for an apartment, or looking to move.  Three year eviction moratoriums cause landlords to review tenant applications with a heightened level of scrutiny because should the tenancy should go south, there would be little to no recourse for the landlord.  AB 12 will likely do much of the same – make it harder for landlords to take chances on leasing an apartment to an otherwise marginal applicant.
Categories
Los Angeles Multifamily

Q3 2023 Los Angles Multifamily Sales Snapshot

With now 3 quarters of 2023 behind us, the Los Angeles multifamily market continues to manifest shifting dynamics based on the metrics indicated below taken from the past 3 months of this year.

The historically low interest rates experienced over the past decade which fueled a surge in real estate investment activity, allowed for increased transaction volume and heightened demand. However, as interest rates have continued to climb, the effects have been felt both locally and nationally – creating downward pressure on sales volume. Below is a snapshot report of Multifamily sales for transactions 5+ units, closed in Q3 2023, located in Los Angeles County. All data is aggregated from Costar.

LA County Apartment Sales Q3 2023
By the Numbers

286

# of LA County Multifamily Sales in Q3 2023
Down from 395 in Q3 2022 representing a 27.59% decline in number of sales.

$1.1 Billion

Total LA County Multifamily Sales Volume in Q3 2023
Down from $2.8 Billion in Q3 2022 representing a 60.71% decline in total deal volume.

$277,427

Average LA County Multifamily Price per Unit in Q3 2023
Down from $355,308 in Q3 2022 representing a 21.92% decline in average Price per Unit.

4.7%

Average LA County Apartment Sale Cap Rate in Q3 2023
Up from 4.3% in Q3 2022 representing a 40 basis point increase in Cap Rate metrics.



Looking forward:

  • The market shapshot above leaves little doubt that the LA multifamily market continues to face headwinds.  The ‘bid-ask’ spread (ie the price Sellers want versus the price that Buyers are willing to pay) remains wide. 

  • While many sellers are still seeking yesterday’s pricing, most buyers now require a discount in order to achieve targeted investment returns.

  • With the cost of debt rising and fewer banks lending in the market, cash deals remain king – with requests for seller-financed transactions also on the rise.
     
  • The LA Mansion tax continues to be a major source of concern for Sellers seeking to transact on deals $5+ Million, and will likely continue to suppress sales activity in the near term as owners have to bake in this additional closing expense.
      
  • Sales volume notwithstanding, there continues to be demand for multifamily property acquisitions.  As those in the market adjust their strategies to accommodate the changing landscape, new opportunities may arise.  Stay tuned.
Categories
Los Angeles Multifamily

The Difference between ‘Bachelor’, ‘Studio’ and ‘Single’ Units

Apartment units labeled as ‘Studios’, ‘Bachelors’ or ‘Singles’ are not created equal – at least not in the City of Los Angeles. Many use these three classifications interchangeably, however they are in fact very different as noted below:

I bring this up because as I said above, some folks use these terms interchangeably when they are in fact different. When we market a property, we always make sure the owner specifies which type of unit we are dealing with, particularly because a ‘single’ or a ‘studio’ unit can almost certainly achieve more favorable rent than a ‘bachelor.’

Categories
Cost Recovery Programs Los Angeles Multifamily

The Cost Recovery Programs Available to LA Landlords

As LA apartment rental income has remained fixed for the past three years and with property expenses on the rise, it is important to note a few Cost Recovery Programs available for landlords in the City of Los Angeles. There are six programs that allow owners to recover the cost of improvements to their rental properties from their tenants depending on the circumstances and nature of the improvement. In addition, the Just & Reasonable Program is a rent adjustment program that provides a mechanism to provide relief from rent increase restrictions. Each item below provides program information:

  • Capital Improvement Program:  The Capital Improvement Program splits the cost of approvable expenditures 50/50 between the landlord and all tenants benefiting from the improvement.  Eligible improvements include the complete exterior painting of the building, landscaping, flooring, fixtures, doors, windows, fences, security items, meter conversions, major appliances, screens, window coverings, etc.  Read More Here
     
  • Seismic Retrofit:  The Seismic Retrofit Work Cost Recovery Program and allows for a temporary rent surcharge to tenants based on: 1) A pass-through of up to 50% of total seismic retrofit costs divided equally among all rental units, if approved by LAHD and 2) A maximum rent increase of $38 per month for 120 months.  Read More Here
     
  • Rehabilitation Work:  Eligible improvements include work mandated by a federal, state or local agency through the Health, Safety or Building Codes, or, due to the repair of damage caused by a natural disaster, e.g. fire, flood, or earthquake.  Read More Here
     
  • Primary Renovation:  Landlords wanting to take advantage of the Primary Renovation Cost Recovery program must first complete the requirements for the Tenant Habitability Program. Once the work has been completed, an application can be prepared for a Primary Renovation project.  Read More Here
     
  • Just and Reasonable Adjustment:  The Just & Reasonable Program is a mechanism to obtain a fair return on the landlord’s investment in rental property. It compares the Net Income from the first year for which records are available with the Net Income in the Current Year.   If the business is currently unprofitable compared with its first year of operation, a permanent rent increase adjusted for inflation may be permitted to be added to the rent to improve the property’s profitability and permit a fair return on the owner’s investment.  Read More Here
     
  • Replacing Smoke Detectors:  The Rent Stabilization Ordinance (RSO) allows landlords to recover the purchase price and installation costs of smoke detectors in each unit and on the property at the rate of $3.00 per month for permanent electric smoke or combination smoke/carbon monoxide detectors. This is the only self-help cost recovery program a landlord can use without approval of the Department.   Read More Here
Categories
Costa Hawkins Prop 13 Rent Control

Justice for Renters Act & ACA 1 – A Duel Threat to CA Properties

Assembly Constitutional Amendment 1 (aka ACA 1) and The Justice for Renters Act Seek to Undermine Prop 13 & Costa Hawkins

It is widely believed that the local Los Angeles (and California) rental real estate markets have long been propped up by two major pillars: Prop 13 and Costa-Hawkins. Simply put, your lower property taxes are protected by Prop 13 and your ability to raise rents to market when a unit becomes vacant (also known as vacancy de-control) is protected by Costa-Hawkins. In 2024, property owners will face two pieces of legislation that threaten to undermine and/or eliminate these important protections.

ACA 1
& The Threat to Prop 13

The ACA 1 ballot measure will not itself upend Prop 13, nor will it approve any additional special taxes or bonds.  Instead, it asks voters whether the threshold to pass taxes and bonds that cities use to pay for local services and affordable housing should be lowered from 66% to 55% – which is the same bar required to pass bonds for school renovations.

  • The Threat to Prop 13: ACA 1 directly challenges Proposition 13’s taxpayer protection by lowering the voting threshold required to pass these local special taxes and bonds.  Currently,  a two-thirds vote of the electorate is required for any taxes and bonds to pass.  Opponents of ACA 1 believe this is a direct attack on Prop 13 in that it would open the floodgates to higher taxes.  Struggling taxpayers may be hit with higher local taxes after every election, thereby exacerbating the cost of living and property ownership that exists in California.

The Justice For Renters Act
& The Threat to Costa Hawkins

  • Aiming to Upend Costa Hawkins:  The Justice for Renters Act seeks to repeal the Costa-Hawkins Rental Housing Act of 1995, which would allow local governments to impose stricter rent control on newer apartments and single-family homes.
     
  • Vacancy Decontrol at Risk:  The JFR Act may also eliminate the state’s ban on vacancy control, giving local authorities the power to regulate rents between tenancies.  Currently, vacancies are de-controlled – ie vacant units may be leased at market rent upon re-rental.
     
  • Expansion of Rent Control:  Additionally, the act would prevent the state from limiting the right of local governments to implement or expand residential rent control. Despite California’s passage of a statewide rent control law (AB 1482) in 2019, which capped rent increases for most of the state’s multifamily housing stock at 5% plus the consumer price index (or a maximum of 10%), there are continued efforts to undermine or eliminate the Costa-Hawkins Act.


You can expect for both of these bills to be widely discussed and contested leading up to November 2024.  As the last election has shown (specifically with the passage of The Mansion Tax), voters have not shied away from passing anti-property owner legislation. Where we go from here, only time will tell.