Category: Los Angeles Multifamily

Categories
Cash For Keys Los Angeles Multifamily Tenant Buyouts

Los Angeles Releases Cash For Keys Data

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

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

But First – Why “Cash for Keys”?
 

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

The Numbers
 

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

# of Buyouts Trending Down
 

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

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

Categories
Los Angeles Multifamily

How LA Multifamily Sales Fared in 2023 vs 2022

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

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


The Year-Over-Year LA Sales Metrics


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

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

Categories
Legislation Los Angeles Multifamily Prop 13 Property Insurance Rent Control

The Year-End Wrap Up

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

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

A Year of Choppy Waters

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

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

Categories
Los Angeles Multifamily Property Insurance Rent Control

Informal Poll Reveals 3 Big Issues Faced by LA Apartment Owners

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


Property Insurance

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

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


Rental Market Softening

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

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


Rent Control and Regulatory Environment

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

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

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

Categories
Los Angeles Multifamily Property Insurance

Insurance for Apartment Buildings is a Huge Problem

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

What’s Happening?

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

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

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

What it Means?

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

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


Long Term Owners Weigh Their Options

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

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

LA County’s New $46 Million Rent Relief Program

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

The Details

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

Issues from Past Rent Relief Efforts

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

Update to Los Angeles Allowable Rent Increase for 2024

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

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

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

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

California is Capping Security Deposits with AB 12

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

The Details of AB12

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

Unintended Consequences:

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

Q3 2023 Los Angles Multifamily Sales Snapshot

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

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

LA County Apartment Sales Q3 2023
By the Numbers

286

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

$1.1 Billion

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

$277,427

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

4.7%

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



Looking forward:

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

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

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

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

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

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

Categories
Cost Recovery Programs Los Angeles Multifamily

The Cost Recovery Programs Available to LA Landlords

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

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

Next Allowable Rent Increase for LA Rent Controlled Properties

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.

Categories
Development Los Angeles Multifamily

New Apartment Construction is Down Considerably

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.
Categories
Los Angeles Multifamily

Just Closed – The LA 7 Portfolio – 7 Properties, 94 Total Units

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.


Healthy Buyer Interest
with Multiple Offers Generated

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 generated over 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 ~2,000 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


The LA 7 Portfolio

12 Units in Hollywood
18 Units in Koreatown
18 Units in Koreatown
9 Units in Palms
17 Units in Palms
10 Units in Mar Vista
10 Units in Mar Vista
Categories
Los Angeles Multifamily

Why some of our clients have sold properties

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.

Categories
Los Angeles Multifamily

With Utility Bills Higher, Property Owners Look to RUBS

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. 

Categories
Legislation Los Angeles Multifamily Rent Control

What to know About LA’s Latest Renter Protections

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.

Categories
Los Angeles Multifamily

Just Closed | 10793 Ohio Avenue in West Los Angeles

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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.’

Categories
Los Angeles Multifamily

Newsom passes sweeping pro-housing legislation. But is it enough?

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.
Categories
1031 Exchange Los Angeles Multifamily

You have sold your investment property. Now what?

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.

Seller-Financing

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