All SRO (Single Room Occupancy) units are not created equal in the City of Los Angeles. There are 3 main types – Bachelor Units, Studio Units and Single Units. Many use these three classifications interchangeably, however they are in fact very different as noted below:
Bachelor Units: Bachelor Units are also classified as “Guest Rooms” on a Certificate of Occupancy (clearly differentiated from “Dwelling Units). They are the smallest and most compact of the three options. Bachelors are typically ~200 to 300 square feet and sometimes feature a kitchenette (but not always) and usually has its own bathroom. From a utilities standpoint, Bachelor units generally do not have in-unit gas appliances such as a range/stove. The appliances, if any, are usually electric. It is important to note that most Bachelor units are also not independently metered for gas or electricity – meaning that their utilities are usually paid by the owner (if they are not using RUBS).
Studio Units: Studio units are slightly larger and more versatile than bachelor units. Usually there is no separation between the kitchen and the living/sleeping space. The kitchen is usually located on one of the walls and has a compact oven/stove top and full size fridge — if a refrigerator is included with the unit. Typically, a studio apartment is small, anywhere from 300-600 square feet. The bathroom is also separate from the room.
Single Units: Singles are generally the most desirable of the 3 classifications. What differentiates a single more than anything is that it has has a separate space for living/sleeping and a separate kitchen which is outside of the ‘living space.’ If there is a wall with an entrance to the kitchen, the unit is a single. A single may have compact or full size appliances. A separate bathroom is included in a single apartment. Usually singles have a similar square footage as studios – approximately 300-600 square feet.
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.
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.
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
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 firstname.lastname@example.org
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.
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.
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.
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.
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.
LA County Eviction Moratorium Extended by 2 Months
The LA County Board of Supervisors has voted to extend the countywide renters protections once more. The moratorium will now expire at the end of March 2023. County leaders have indicated that this will be the last time they push the end date.
According to the LA Times and other sources, because properties located in the City of Los Angeles will no longer have its own eviction moratorium (as of January 31, 2023), the eviction moratorium for LA County will apply to the properties and residents of the City of Los Angeles starting February 1, 2023 and ending March 31, 2023.
The Latest Renter Protections in LA
In addition to the LA County eviction moratorium extension, last week the LA City Council also approved additional sweeping renter protections outlined below which pertain to properties located in the City of Los Angeles:
There are three main components to the LA City expanded renter protections:
Universal Just Cause: The LA Rent Stabilization Ordinance currently lays out specific allowable causes for evictions. These include reasons such as failure to pay rent, illegal activity, etc. Just Cause requires a landlord to specify the reason for eviction from the RSO list. In cases where landlords evict tenants without an approved cause (called a “no fault” eviction), then the landlord would be required to pay tenant relocation costs.
Relocation Assistance for Tenants subjected to Large Rent Increases over 10%: While this certainly does not apply to most landlords whose properties are already subject to LA Rent Stabilization, Landlords who raise rents by an amount greater than 10% of their tenant’s current rent will be required to pay the renter relocation costs. Relocation fee amounts are determined based on the length of tenancy with additional relocation fees to be paid to qualified renters.
There will now be a Minimum Threshold for Failure to Pay Evictions: Landlords will not be allowed to evict tenants who fall just a small amount behind on rent. You may only proceed with an eviction if the unpaid rent amount exceeds one month’s worth of fair market rent for that unit type (currently $1,747 for one-bedroom, $2,222 for two-bedroom). IE if a tenant lives in a one-bedroom unit and owes total back rent of less than $1,747 – that tenant cannot be evicted.
10793 Ohio Avenue Los Angeles, CA 90024 7-Units | Just Closed in Westwood
We just closed this 7-unit multifamily property in the Westwood area situated south of Wilshire and just east of Westwood Boulevard. This was a property that had been in the family of the Seller for over 50 years. The Seller, like many other small operators in California, was fatigued by the heightened regulatory environment that accompanies apartment ownership in Los Angeles nowadays. The Purchaser was a local student housing operator who was in the midst of a 1031 exchange.
The property traded at sub 4% cap rate and roughly 16x rents. All things In the long run, owning apartments in West LA is generally one of the safer real estate investments out there. The location with respect to transit (and the ocean) are optimal. While the yields upon acquisition may be lower than elsewhere in the market, when all is said and done the rental demand is steady, the rents grow over time, and it’s still ‘The Westside.’
Newsom makes an aggressive pro-housing push in California
If there is one thing residents and landlords can agree on, it’s that California needs more housing. How much more housing? That depends on who you ask. State officials say California needs to ramp up production to 310,000 new housing units annually over the next eight years — a pace that’s 2.5 times faster than the current rate. CA Governor, Gavin Newsom, has taken a proactive approach in his recent passing of pro-housing legislative bills, a few of which are outlined below.
Assembly Bill 2011
AB 2011 allows for ministerial, by-right approval for affordable housing on commercially-zoned lands, and also allows such approvals for mixed-income housing along commercial corridors, as long as the projects meet specified affordability, labor, and environmental criteria.
The bill also requires that all projects seeking approval under its provisions ensure all construction workers earn prevailing wages and receive health benefits.
With thousands of potential commercial sites across California, the bill would allow production of new affordable housing units at scale, without changing the density or character of existing residential neighborhoods. One recent analysis found the potential for 2.4 million units statewide.
Senate Bill 6
SB 6 allows residential development on property zoned for retail and office space without needing a rezoning, and allows project applicants to invoke the Housing Accountability Act (HAA) to limit local discretion to deny or condition approval.
However, SB 6 does not provide a ministerial approval pathway, and it requires applicants to commit to both prevailing wage and more costly “skilled and trained workforce” requirements for project labor (although the law provides an “off ramp” if fewer than two bidders bid for a contract under the “skilled and trained workforce” requirement).
SB 6 does not contain any BMR requirements, and it has fewer site exclusions than AB 2011, and so it is likely to be used most frequently in lower-cost areas of the state and on sites where AB 2011 is not available.
Assembly Bill 2097
This bill would prohibit a public agency from imposing any minimum automobile parking requirement on any residential, commercial, or other development project, as defined, that is located within 1/2 mile of public transit.
Parking mandates, which require parking for cars to be included in new housing, are common in cities throughout California and can add $40,000 or more to the cost of construction per parking spot, while also increasing climate pollution.
Eliminating these costly parking mandates will give Californians more choices about whether they want to pay for parking, or have lower-cost housing in walkable, transit-accessible neighborhoods. AB 2097 increases housing choice and will make it easier to provide lower-cost, walkable-and transit-accessible housing across the state.
What our LA multifamily clients have done with their sale proceeds, post-sale…
Perhaps the most common question we get from our LA multifamily clients when contemplating a sale is: “If I sell, what do I do with the money?” There is no one single right or wrong answer to this question. It’s situational. Sometimes the right answer is you should not sell at all.
But for the ones who have sold, we have seen a few various paths taken by the Sellers in terms of their next step and how they invest their sale proceeds. Of the last 20 or so transactions that we have completed, below are a few different paths taken by the Sellers post-sale, many of course with the goal in mind to avoid paying capital gains taxes.
1031 Exchange into Local Properties
Chances are, if you’re reading this, you have at least heard of the term 1031 Exchange. In case you haven’t, a 1031 Exchange is a tax loophole which allows Sellers of investment properties to defer paying capital gains taxes by selling their properties and purchasing a ‘like-kind’ property of equal or greater value than the property they are selling.
For real property transactions (rental houses, farmland, office buildings, strip malls, etc.) the “like-kind” requirement does not mean selling and buying the exact same type of property. Some of our clients have sold a 6-unit apartment building and 1031-exchanged into a 30-unit across town. Some have sold a 12-unit and traded down into one (or more) 4-plexes for their kids. Others have sought to exit apartments permanently and have traded into commercial strip malls locally. It varies on a case-by-case basis.
1031 Exchange into Out-of-State Properties
Under 1031 Exchange provisions, you do not have to sell and purchase in the same state. In other words, you can sell your LA property and 1031 into another state. Some investors are no longer buying in California as a result of increased regulation. Some of our clients have sold their LA multifamily properties and traded into properties in Sunbelt states such as Texas or Arizona – many with the intent of escaping the unforgiving rent control Laws in Los Angeles and California as a whole.
Other clients have sold their LA properties and purchased out-of-state “triple-net” properties (ie CVS, Walgreens, Dollar General etc) – where they simply collect rent from large commercial tenants without having to pay property taxes, maintenance or insurance for the property (ie nets).
1031 Exchange into Delaware Statutory Trusts
Some of our clients who are tired of direct ownership and oversight of a property, and prefer a completely hands-off investment such as a Delaware Statutory Trust, which also qualifies for a 1031 tax-deferred Exchange.
A Delaware Statutory Trust (DST) permits fractional ownership where multiple investors can share ownership in a single property or a portfolio of properties, which qualifies as replacement property as part of an investor’s 1031 exchange transaction. A DST takes all decision-making out of the hands of investors and places it into the hands of an experienced sponsor-affiliated trustee.
One or two of our clients have also carried paper or “Seller Financed” their transaction. Seller financing in real estate is, quite literally, when the seller of a property finances the transaction. The buyer furnishes a down payment and borrows the rest from the seller.
The seller essentially acts as the bank and holds a note, for which they are paid interest by the Buyer. There are certain tax advantages to this: An installment sale is taxed differently than a regular sale in that each installment is taxed in the year received, making it favorable for sellers who want to spread out their tax liability over a number of years instead of paying 100% of the tax in the year of sale.
Some Just Pay Capital Gains Taxes
Believe it or not, there is a large component of Sellers out there who are just done with real estate entirely. They simply do not want to own another piece of property or fractional share of a property. As a result, the transaction would result in the Seller paying Capital Gains taxes on the sale, which between State and Federal can be a significant amount depending on the situation.
Note: The above should not be construed as tax or financial advice. If you are considering any of the above, please seek the assistance of a qualified CPA and/or tax attorney
536 N. Commonwealth Avenue Los Angeles, CA 90004 Stabilized 4-Plex | Just Closed
We just closed a renovated 4 unit property located on Commonwealth Avenue in the heart of Virgil Village just south of Silver Lake. The property was constructed in 1980 and therefore not subject to Los Angeles Rent Stabilization – only to California’s less restrictive statewide rent control as governed by AB 1482, whereby the allowable annual rent increase is 5% +CPI as opposed to the blanket 3-4% increase imposed by traditional LA rent control.
Over the past few years, and in particular since the Covid-19 pandemic, we have seen a flight to properties that were constructed after 1978 (non-LA rent controlled properties), as dealing with LA rent controlled properties constructed before 1978 has become increasingly problematic with various city, county and statewide renter protections.
This unique property was in excellent shape and featured spacious 2 and 3 bedroom units averaging over 1,000 SF each, with ample on-site parking and a sprawling backyard often used for concerts. The 1031 Exchange purchaser, who closed all cash with a 30 day escrow, was attracted to the growing dynamics of Virgil Village in addition to the property’s near-stabilized rents. The details of the transaction are below:
536 N. Commonwealth Avenue. Los Angeles, CA 90019
– $2,300,000 Final Sale Price – 4 Units |4,400 SF – Two and three-bedroom floor plans – Year Built 1980 – $575,000/Unit – $518/SF – 16.2 GRM – All Cash transaction sold off-market to 1031 Exchange Purchaser
Local investors are taking advantage of California’s ADU (“Granny Flat”) Bill in a very big way.
What is California Assembly Bill 68 (AB 68)?
Passed by the California State Assembly in 2019, AB 68 legalized the widespread construction of “Granny Flats,” or Accessory Dwelling Units (ADUs), as easy-to-build affordable housing. ADUs are small, independent homes that are built alongside (or sometimes, within) an existing single- or multifamily home. In addition to traditional ADUs, AB 68 also legalized “junior” ADUs of 500 square feet or smaller, which must be built entirely within an existing home and have a functioning kitchen and bathroom.
Prior to AB 68, cities across California erected substantial barriers to their construction, including high fees, land use and permitting obstacles, and other “red tape.”
AB 68 addressed all these issues by:
Reducing the maximum time for approved permits from 120 days to 60
Eliminating local ordinances that had the effect of banning ADU construction, such as minimum lot sizes and floor area ratios
Eliminating the requirement that garages converted to ADUs include 1:1 replacement parking
Allowing by-right approval (i.e., minimal process) for both an ADU and a JADU
Prohibiting cities from banning short-term rentals in ministerially-approved ADUs
Granting the state’s Department of Housing and Community Development the authority to evaluated whether local agencies’ ADU ordinances comply with state law
Existing single-family properties in California have the potential for roughly 1.8 million new ADUs.
Roughly 85 percent of these are single-family homes where building an ADU pencils out according to current construction costs and rents; the remainder are sites ideal for both an ADU and JADU
ADUs in the Los Angeles Multifamily Market
We have recently seen numerous clients of ours utilize AB 68 for their local multifamily properties by building one or even multiple ADUs on-site, in areas such as storage rooms, laundry rooms, attics, basements, garages, and soft story parking areas (as pictured above) – or as fully detached structures.
From an income and value standpoint, it makes perfect sense for most investors. You can generate additional (and meaningful) cash flow for the property while adding tremendous value. Put very simply – if multifamily properties in your area are selling for $450,000/unit and you can build additional unit for $250,000/unit (which is about the going rate for ADU construction), why wouldn’t you?
1241 & 1247 S. Dunsmuir Avenue. Los Angeles, CA 90019 16 Units | Just Closed
We just closed a 16 unit value-add multifamily transaction, sourced off-market, which was located on the border Mid-Wilshire and Wilshire Vista neighborhoods of Los Angeles – two of LA’s well-established yet seemingly fast-growing rental submarkets. The property was located on South Dunsmuir Avenue near San Vicente Boulevard, a quiet tree-lined side street with a mix of single-family residential, multifamily (old and new) as well as small lot sub-divisions.
I like this area for a variety of reasons. It is close to major thoroughfares such as San Vicente Boulevard, Pico, Olympic, Fairfax, La Brea and it is a straight shot into popular parts of town like Beverly Grove and West Hollywood. Additionally, the real estate in this area is as diverse as the residents who populate it. As mentioned above, the properties in the area feature everything from new construction, to 1930s Spanish Duplexes, to charming SFRs and 1960s apartment buildings – the list just goes on.
This particular property, originally constructed in 1947, consisted of all one-bedroom floor plans averaging approximately 800 square feet, situated on an R-3 zoned 17,407 SF lot. The property was held by a family operator for over 30 years who like many other LA owners were seeking to transition to a slightly more hands-off investment out-of-state via a 1031 Exchange due to the heightened regulatory environment locally.
The purchasers were attracted to the value-add potential of the property in addition to its central location and proximity to areas like Beverly Grove, Beverly Hills and West Hollywood. The property was delivered with 2 vacancies which the Purchaser plans to renovate and lease at market rent, along with other improvements to the property. The details of the transaction are below:
1241-1247 S. Dunsmuir Avenue. Los Angeles, CA 90019
– $4,605,000 Final Sale Price – 16 Units | 12,364 SF – All one-bedroom floor plans – Year Built 1947 – $287,812/Unit – $372/SF – 15.3 GRM
Douglas Emmett pays a record price for 1221 Ocean Avenue in the heart of prime Santa Monica
I don’t typically write about institutional transactions but this is what I would call a WOW price. Douglas Emmett, a firm that is very near and dear to me, paid a record-price for a multifamily asset in prime Downtown Santa Monica with the purchase of 1221 Ocean Avenue – which is certainly one of the most prestigious multifamily assets on the West Coast with unbelievable ocean views. The Seller was The Irvine Company, who had owned and operated the Class-A property for years. 1221 Ocean was one of a few assets that they own in Los Angeles – outside of their core market of Orange County.
Here are the deal Metrics:
$330,000,000 Purchase Price
120 Unit Multifamily Property
$2,750,000 per unit
$1,800 per SF
98% leased at close
1,500 SF Average Unit Size
Closed April 26, 2022
Purchased in the low 3% Cap range
DE plans to continue to significantly upgrade units and common areas
The deal was purchased via a new Joint Venture managed by Douglas Emmett in which they own a 55% interest. The property is a nice addition to the vast portfolio of Class-A office buildings which they own in the area, in addition to their sister multifamily assets also in Santa Monica – The Shores and Pacific Plaza. Congrats to my friends over at DE on this incredible acquisition!