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.
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.
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.
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.
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.
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.
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.
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.
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.’
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
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.
TheJustice 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.
Utilizing your property for Short Term Rentals (STRs) such as Airbnb has proven profitable for some, but it is certainly not for everyone. Recent data from the LA Times reveals that the average daily rental cost in 2019 was $152, compared to this year where it has surged to $244. According to Airbnb, LA hosts earned a combined $375 Million in 2022. The reduced availability of listings played a role in driving STR revenue, dropping from nearly 17,000 listings in 2019 to just over 7,000 now. The rules around operating Short Term Rentals in the City of LA are robust. Below is a breakdown as of Sep 2023:
Utilizing Airbnb in the City of LA: The Rules You Should Know
If hosting for 30 days or more: No need to register to publish your listing.
If hosting for 1 to 29 days: You must obtain a home-sharing permit from the City of Los Angeles.
Registration Eligibility: Only primary residences are eligible. ADUs must have a certificate of occupancy issued before January 1, 2017.
Who is Ineligible: Primary residences that are rental units subject to affordable housing covenants, rent stabilization, and/or income restricted under City, State or Federal law are ineligible to register.
If You Are a Renter: If you are renting your primary residence, you need to provide an affidavit signed by yourself and the property owner/landlord that approves you to host short-term rentals.
Taxes Incurred: 14% transient occupancy tax for stays of 30 nights or less. Airbnb collects and remits City tax. Hosts must file monthly returns for tax deductions. County transient occupancy tax applies to unincorporated areas but is not collected by Airbnb.
The Effects of STRs
Less Long Term Rentals Available: Many critics argue that Short Term Rentals remove units from the market thereby leading to more regular renters fighting over fewer units, which in turn would lead to higher rents – ultimately good for traditional landlords.
Neighbors Chime In: Some argue that living next door to a short-term vacation rental can range from mildly concerning to completely life altering. Visitors usually rent the accommodation only for a couple of days, and thus neighbors often complain about trash, parking issues and noise disturbance.
Is This For You? We often speak with owners who are considering the possibility of Short Term Rentals. Some who have walked this path have achieved outsized returns, while others have fallen flat and do not believe it is worth the time invested. Before you consider doing so, it is important that you know the rules in LA, in addition to understanding the time, effort and effects of your decision.
LA Housing Department Stipulates the next allowable rent increase for rent controlled properties effective in 2024.
7% is the number as of right now.
After a 3+ year rent freeze due to Covid-19 Renter Protections, the Los Angeles Housing Department has stipulated the next allowable rent increase for 2024. This information was published on July 1, 2023.
Here are the details for LA RSO Rent Increases:
Landlords of RSO properties can resume allowable rent increases effective February 1, 2024. No banking or retroactive rent increases are allowed.
The annual allowable rent increase under the RSO from February 1, 2024 through June 30, 2024, will be 7%unless amended by City Council. An additional 1% for gas and 1% for electric service can be added if the landlord provides the service to the tenant.
Landlords must provide an advance 30-day written notice for all rent increases of less than 10%.
This information can be found on the latest LA Renter Protections Notice updated in July 2023. You can access that notice here.
UPDATE as of 11/2/2023 – The Los Angeles City Council’s housing and homelessness committee passed an amended motion Wednesday 11/1/23 to lower rent increases from 7% to 4%. View Update Here.
LA and Other West Coast Markets are Experiencing a slow down in new construction development.
Despite a worsening housing crisis, many major West Coast cities have seen a decline in new 2023 construction projects. Although demand for housing remains consistent, developers are pumping the brakes due to high interest rates and the inability to secure debt financing. As demand for housing continues to grow and supply begins to stagnate, upward pressure on rents and property values could lead to additional upside for property owners come 2025.
What’s Happening:
Record inflation in 2022 saw construction costs increase considerably, cutting heavily into the margins of developers.
Debt costs have skyrocketed in the past months, with many construction loans containing rates above 10%.
Further turbulence among regional banks has exacerbated the issue and with many developers either unable to secure loans or forced to finance with very low leverage.
The Mansion Tax in Los Angeles has made the merchant development of apartments nearly unfeasible when 5.5% of future sale proceeds is slapped on to all deals exceeding a $10M+ exit price.
Effects and Implications:
While current construction projects are still hitting the market, you may see the current dip in new construction having its market impacts in late 2024 to 2025, further exacerbating the supply and demand imbalance that exists in LA. .
Lack of supply and an abundance of demand likely will result in increases in both rents and property values, bettering the position of current property owners.
As we sit in a current market marked by rising cost of debt and declining values, it is important to look past the present to see if any future market trends might lead to increased returns. With projections of easing interest rates through 2024 and 2025, combined with the possibility that the lack of new construction may lead to an even tighter housing market, holding now with intent to sell in 2025 may not seem like such a bad option.
Seven LA multifamily properties sell to a single purchaser in one of the few LA portfolio sales of 2023 so far.
Through a challenging market with sales volume down considerably, a thinning buyer pool and a tight credit environment, we were able to close a significant portfolio transaction consisting of 7 apartment properties totaling 94 units spread amongst four core LA submarkets – Mar Vista, Palms, Koreatown and Hollywood.
All 7 properties were subject to LA rent stabilization and were by all measures value-add properties, with current rents significantly below market and significant Capital Expenditures needed in the way of unit renovations, plumbing, roof, electrical and mandatory soft-story retrofits.
General Feedback From the Market
The general feedback from the diverse pool of purchasers was typical for a transaction such as this one, highlighted in few bullet points below:
Systems Capex:Many prospective purchasers were skittish about the amount of systems capex needed (ie roof, plumbing, electrical and seismic) in addition to the standard unit renovations that would be necessary to achieve market rents. With the cost of construction, materials and labor still on the higher end, this was a legitimate concern for many prospects.
Negative Leverage:With interest rates in the low 6s, much of the market pushback circled around the concept of negative leverage – ie the cost of debt for the acquisition loan exceeded the cap rate.
Low Rents: As is customary with many value-add properties with legacy ownership, the current rents were significantly below market with upside of around 65% from current to market. Many were attracted to the upside, albeit harder to capture in today’s landscape.
Attractive Basis: Many purchasers were attracted primarily to the blended ‘price-per-pound‘ basis of the portfolio, which was $186,170 per unit and $275 per SF. 46 units were located in Westside submarkets, while 48 units were located in Central/Eastside submarkets.
Through the marketing process of The LA 7 Portfolio, we attracted attention from the most active buyers in the LA market – both large and small. Most of the prospects were family offices and/or local syndicators.
Throughout our competitive marketing process, we were able to attract attention from some of the most active names in the business. By our Call for Offers date, we had generatedover 20 offers in various property combinations and price ranges – a few of the offers all cash.
The properties were spread out over roughly an 11-mile distance (about an hour drive in LA traffic) from the western-most property to the eastern-most property. Some purchasers preferred only the Westside assets – while others preferred only the Eastside assets.
The terminal buyer was a well-established operator with ~1,000 Units under management locally, who in the end acquired all 7 properties at the full asking price.
The Final Deal Metrics
Below are the final blended deal metrics for the LA 7 Portfolio:
$17,500,000 Sale Price
7 Properties | 94 Total Units
$186,170 blended price per unit
$275 blended price per SF
12.4 GRM
4.5% blended cap rate
Approximately 66% upside in rents from current to market
Located in Mar Vista (2 properties – 20 Units), Palms (2 properties – 26 Units), Koreatown (2 properties – 36 Units), Hollywood (1 property – 12 Units)
We are currently evaluating similar Los Angeles properties and portfolios for local owners. If you would like more information on how we may assist, please reach out to me at ewong@greysteel.com
Many of the properties that I sell in Los Angeles are on behalf of family ownership groups. It may or may not surprise you that more than half of those family ownership groups are at odds with one another, many times because of their joint real estate ownership – some of them to the point where they no longer even speak.
Most of the time, we are dealing with brothers and sisters who inherited properties from their parents. While they may share a strong bond and cherish their relationship as siblings, the complexities of joint real estate ownership can create significant challenges, particularly when it comes to communication and introducing spouses into the equation. As a result, many siblings find themselves contemplating the option of selling their shared properties to forge separate paths and avoid entangling their children in the family co-ownership web.
Here are a few things you may consider if you find yourself in this situation:
Effective Communication is Key To Any Relationship: Communicating effectively within families is essential for any successful endeavor, and joint property ownership is no exception. However, even the best of friends can struggle to communicate effectively when it comes to shared assets. Siblings may have different priorities, financial circumstances, and visions for the property, which can lead to disagreements and misunderstandings. Emotions can run high, and resolving conflicts may require careful negotiation and compromise. If you happen to be the sibling running the show for the property(ies) it is always best to be transparent and up front about the financials (income and expenses) so that no one feels as if they are in the dark.
Spouses and Their Opinions Will Almost Certainly Play a Role: The entry of spouses into the equation often adds another layer of complexity. While spouses should ideally support their partners’ decisions, differing opinions, personal interests, and financial considerations can muddy the waters. Spouses may feel compelled to advocate for their own interests, potentially straining the sibling relationship and complicating decision-making processes. What was once a straightforward matter among siblings can quickly become more convoluted and challenging.
Think About the Next Generation: If you own real estate with your siblings and you yourself have children, ask yourself this question: Do you ideally envision your sons or daughters owning this real estate with their aunts or uncles? If the answer is no, you start planning for the future. Many worry about the potential complications their children might face as co-owners of the property. This concern stems from the desire to maintain harmony within the family and avoid any potential conflicts or burdens that could affect the relationships between cousins, nieces, nephews etc.
Many Siblings Part Ways with their Joint Ownership of Real Estate: To alleviate these concerns, many siblings often find themselves leaning towards the idea of divesting interests from their shared properties and going their separate ways. By doing so, they can ensure that their children do not become entangled in the intricacies of joint ownership and potential conflicts that could arise in the future. This choice allows each sibling and their respective families to maintain independence and pursue their own paths without the added complications that come with co-ownership.
It is worth noting that not all families choose to sell their jointly owned properties. Some families successfully navigate the challenges and maintain harmonious relationships while managing shared assets. These families prioritize open and honest communication, establish clear boundaries and responsibilities, and actively seek to find common ground. Professional guidance from mediators or attorneys specializing in family property matters can also prove invaluable in resolving conflicts and ensuring a fair and satisfactory outcome for everyone involved.
While joint property ownership amongst siblings can no doubt present unique challenges within a family dynamic, with effective communication, clear boundaries, and professional guidance, many are able to navigate these challenges and maintain successful joint ownership.
Let’s face it: As of this moment in June 2023, rates are up, credit is hard to come by, transaction volume is down precipitously, investors can clip a 5% risk-free coupon rather than buy real estate, and the regulatory environment for LA multifamily owners is uncertain at best. Generally speaking, not favorable conditions for a Seller.
That said: Some owners have sold in the past 12 months and below is a partial a list of reasons why they have done so:
Life Events – Death, Divorce, Partnership Dissolution – Life events such as death, divorce, or partnership dissolution may lead an investor to sell an investment property in order to divide assets or distribute wealth amongst partners and/or beneficiaries.
Step Up in Tax Basis – Related to the bullet point above, an investor (or child of an investor) who has inherited a property may sell to take advantage of his/her “step up” in tax basis, potentially resulting in very little (or no) capital gains tax exposure when the property is eventually sold.
Major Capital Expenditures – An investor may choose to sell an investment property if the property requires significant repairs or renovations that the investor does not want to fund. Many owners in Los Angeles have sold in order to avoid mandatory seismic retrofits which can cost upwards of $100,000 for small buildings.
Heightened Government Regulation – Between rent control, tenants rights, eviction moratoriums etc. heightened government regulation makes it more difficult and costly for an investor to maintain an investment property and achieve adequate returns, often times leading to an investor selling a property.
1031 Exchange – An investor may sell an investment property as part of a “1031 exchange,” also known as a “like-kind exchange,” in order to trade up to a larger (and possibly more valuable property) while deferring capital gains taxes. People also trade down, say from an 8 Unit to a duplex (or two). There are various other property types and alternative 1031 vehicles which investors trade into as well.
Problematic Tenants – Problematic tenants, such as those who consistently pay rent late or cause damage to the property may lead an investor to decide to sell the property in order to avoid the ongoing hassle and potential financial losses.
Return Capital to Investors – Many professional syndicators who have raised LP capital from investors have 5-7 year hold periods or investment horizons, after which they sell properties in order to return capital to their investors (and hopefully harvest their promote).
Retiring from the Business – Let’s face it, some just get tired of doing it. An investor who is retiring from the business of owning and managing investment properties may choose to sell their remaining properties to free up liquidity as part of their retirement plan.
Let me begin by saying: There are no “best” streets in Los Angeles…there are only “favorite” streets. But if there is one that does it for me, it’s Fairfax Avenue which is a major North/South artery which spawns from West Adams, hits the 10 Freeway, cuts right through the heart of the city, and ends in the West Hollywood area.
No matter what, I will always have a soft spot for Fairfax: In my earlier years, I worked at The Dime which is a classic LA nightlife establishment located on Fairfax between Beverly and Melrose. Unlike most bars in LA, The Dime is still very much operating and has been open for 20+ years (Shout out to The Dime Fam). If you’re into old school hip hop, The Dime is where you go. The first apartment deal I ever brokered was also located on Fairfax. It was an 8-Unit apartment building just north of Pico Boulevard, which to this day is still one of the most value-add of value-add deals that I have ever come across.
Driving North on Fairfax from the area just south of the 10 Freeway yesterday, the diversity of both the people and the real estate becomes very apparent – and it once again reminded me of why it’s my favorite street in Los Angeles.
Here is what you will see while driving on Fairfax:
West Adams(Fairfax between Adams and the 10 Freeway): Fairfax starts in the West Adams area, just South of the 10 Freeway where it splits off from La Cienega. What’s undeniable about West Adams is its historical charm and architectural heritage – full of craftsman and Victorian homes built at the turn of the century, as well as 1950s and 1960s vintage apartment buildings (also called ‘dingbats’). When you cross Adams Blvd on Fairfax and look to the right, you can get a peek at just how much the area has transitioned from infill retail to new office, hospitality and residential developments.
Little Ethiopia (Fairfax between Pico and Olympic): Just north of Pico Blvd on Fairfax, you will pass a vibrant and bustling neighborhood that is a testament to LA’s diverse cultural fabric. The best Ethiopian restaurants in LA are clearly on this block of Fairfax – so is Hansen’s Cakes which has been around since 1920 and is one of LA’s most famous bakeries.
Historic Homes of Carthay (Fairfax between Olympic and Wilshire): Just past Little Ethiopia you will pass Carthay Square on the West side of the street, which is one of LA’s 35 Historic Preservation Overlay Zones. You’ll see amazing historic Spanish style homes built in the 1920s and 1930s whose character and aesthetic are protected and maintained by the HPOZ mentioned above.
Iconic Museums (Fairfax at Wilshire): As you hit Wilshire Blvd, you’ll pass Museum Row on the right – which is the stretch of Wilshire Boulevard that extends between Fairfax Avenue and La Brea Avenue on Wilshire Blvd. Driving North on Fairfax, you’ll pass The Peterson Automotive Museum (RIP Biggie), the Academy Museum of Motion Pictures, and LACMA which is just east of Fairfax on Wilshire.
The Grove (Fairfax between Third Street and Beverly): The Grove (and adjacent Farmers Market) which are at the intersection of Fairfax and 3rd Street are two LA Landmarks that need zero introduction. If you live in LA and you have not been-to or at least heard-of The Grove, I would urge you to step outside of your house a bit more frequently. The Grove is also across the street from the CBS Television City studio, which sold a couple of years ago for $1.85 Billion.
LA’s Streetwear District (Fairfax between Beverly and Melrose): While some argue that LA’s Fairfax Streetwear district has had its best days behind it, legendary streetwear brands like Supreme, Diamond Supply Company and The Hundreds were built on this stretch of Fairfax. But prior to the influx of new-age retail stores, it would be a disservice to ignore the roots of this part of Fairfax, which was a historic center and Bastian of the LA Jewish community. Many of the LA Jewish population in the city—who had previously resided in Eastside neighborhoods like Boyle Heights, City Terrace, and East Los Angeles—moved to this area of Fairfax Ave prior to World War II, establishing delis, restaurants, kosher butchers and bakeries – some of which still exist like Canter’s Deli and Diamond Kosher Bakery which have been neighborhood staples since the 1940s.
West Hollywood (Fairfax between Melrose and Sunset): Drive North on Fairfax long enough and you will hit WeHo. No real need to expand on West Hollywood and its happenings – incredible area with no shortage of action. If we are talking about areas of LA that need zero introduction, West Hollywood is at or near the top of that list. And Fairfax cuts right through WeHo until it ends just north of Hollywood Boulevard.
Is there more history on Fairfax Avenue than included in the brief, drive-by window synopsis above? Of course. Are there other streets in LA that may be just as favorable (or better)? Very well could be the case. But if you are comparing all of the major North/South arteries which are off-ramps of the 10 Freeway from the Beach to Downtown (ie, 26th Street, Bundy, Robertson, La Cienega, La Brea, Crenshaw, Arlington, Western, etc) – for me it’s Fairfax all-day, every-day.
As we move further into 2023, the California legislative lineup for laws and bills affecting property ownership and the real estate industry continues to evolve. In the past year, there have been several changes and updates that are important for property owners and investors to keep up with. Below is a closer look at the 2022 and 2023 California legislative lineup and explore how these changes may affect property owners and the broader real estate market in California.
Costa Hawkins at Risk (Again): This legislation would dissolve core elements of the landmark Costa-Hawkins Rental Housing Act, California’s most important rental housing-protection law. Costa-Hawkins prohibits cities and counties from imposing local rent control ordinances on any type of housing built after 1995, although the cutoff is earlier in some cities with rent control ordinances that pre-date Costa-Hawkins. It also bans local rent controls on single-family homes and condos of any age. SB 466 would undo these tenets of Costa-Hawkins. SB 466 would authorize California cities and counties to impose strict rent controls on single-family homes, condominiums and apartments as soon as they turn 15 years old.
AB 1532
The Office-to-Housing Conversion Act Status: Introduced
What to do with Aging Office Buildings: AB 1532 could make use of $400 million in grants Gov. Gavin Newsom has outlined in his recent budget proposal specifically for the conversion of office buildings to apartments. But questions remain about how many conversions that amount of money could actually help get off the ground given the difficulty and high costs of converting offices to apartments.
In its current form, the bill would: Prevent local governments from blocking or delaying office-to-housing projects through special permitting processes, design and planning reviews, or appeals, require conversions be allowed in all areas regardless of local zoning laws, require planning departments to respond to conversion applications within 90 days of submission, limit development fees on conversion projects and require that all conversion projects set aside dedicate 10% of housing units for low- or middle-income residents.
AB 2097
Parking Requirements Status: Passed
No Parking Minimums within Half-Mile of Public Transit. This law prohibits public agencies from imposing minimum parking requirements on residential, commercial or other development projects located within a half-mile of public transit.
While the law provides flexibility for builders to respond to market conditions and voluntarily provide parking, such parking may be required by the public agency to require spaces for car-share vehicles to be shared with the public, or to charge parking owners for the parking stall. Public agencies may still require builders to provide electric vehicle supply equipment and/or accessible parking spaces that would otherwise apply to the development project.
SB 897
Increased Height Limits for ADUs Status: Passed
SB 897 provides minimum height limits of 16 feet (for detached ADUs on same lot with an existing or proposed single-family or multifamily dwelling); 18 feet (for detached ADUs located on lot that is within a half-mile of a major transit stop, or detached ADUs on lot with an existing or proposed multistory, multifamily dwelling); or 25 feet or base zone height, whatever is lower (for attached ADUs).
The law introduces the potential for two-story ADUs if certain conditions are met, but ensures local agencies are not required to permit three-story ADUs. SB 897 now clarifies that two detached ADUs may be constructed (and qualify for building permit ministerial review under Subdivision (e)) on lots with proposed multifamily dwellings. This change will allow developers to include two detached ADUs in their design and planning processes for new multifamily residential projects.
AB 2011
Housing Development on Commercially Zoned Sites Status: Passed
Housing Development on Commercially Zoned Sites. The centerpiece of this year’s housing production legislation are two different laws that aim to advance residential development on sites currently zoned and planned for commercial and retail use. AB 2011 provides a streamlined ministerial approval pathway, comparable to Senate Bill (SB) 35 of 2017, for qualifying multifamily projects on commercial zoned land that pay prevailing wages and meet specified affordable housing targets. This law does not take effect until July 1, 2023.
Many Landlords Consider Billing Tenants For Utilities via RUBS Program
As the cost of utilities continues to rise for LA landlords, many owners are considering the implementation of a Ratio Utility Billing System (RUBS). RUBS is a way for Landlords to manage their expenses by proportionately sharing utility costs with their residents. While RUBS is not without its critics, many landlords have found it to be an effective way to manage rising utility costs.
Utility Costs Surging
SoCalGas bills up 3x: Natural gas prices in California have increased significantly in recent months, driven by factors such as extreme colder weather events, supply chain disruptions, and an overall increased demand. SoCalGas, the largest gas utility in California, has warned its customers that bills for 2023 could be up to 3x higher than last year due to surge in prices.
LADWP not far behind: Not to be outdone, in 2022 The Los Angeles Department of Water and Power implemented rate adjustments on water usage, a move that has lead to higher bills for many customers. The change went into effect in January 2022 and primarily impacts residential customers who are the highest water users. LADWP uses a four-tiered pricing structure based on usage to determine the rates a customer pays for water.
Benefits of RUBS
RUBS typically proportionately divides water, sewer, trash, electricity, gas, or pest control utility costs among residents using a formula based on several factors including state and municipality regulations, size of units, and the number of occupants in each unit. Some of the benefits are as follows:
Tenant Cost Absorption: Tenants absorb the costs of their utility consumption as opposed to the landlord.
Fair Cost Distribution: Utilitycosts are divided on an individual basis, making the process more equitable for tenants.
Increased Net in Operating Income: Utility consumption contributes to a decrease of Operating Expenses leading to an increased Net Operating Income.
California does not currently have any laws that prohibit the use of RUBS and there are many companies that you can employ to implement RUBS at your property. Additionally, there are also programs which can be purchased to independently implement RUBS.
