March 16, 2020
By Chris Egger
As the state of California, alongside the rest of the nation and a global community, wrestle with a shared and critical response to the outbreak of COVID-19, it is also important to keep an eye on the long-term impacts of current legislative agenda’s in Sacramento focused on affordable housing issues, common ground solutions (if they exist) and the looming ballot measures slated for November 2020’s general election.
Following the recent introduction of SB 902 by California Senator Scott Wiener (D-San Francisco), a measure seeking to encourage new housing development through density increases in a wide range of residential neighborhoods, Connect Media took the opportunity to check in with the Executive Director of the Apartment Association of Greater Los Angeles, Daniel Yukelson, to get a CRE industry perspective on what compelling issues face the multifamily industry in Sacramento, on the ballot in November and at Los Angeles City Hall.
Q: What is the legislative climate right now regarding multifamily related priorities, and how does the introduction of new legislation like SB 902 meet industry priorities?
A: The legislative climate for rental housing providers has not changed a great deal since last year’s legislative session. Some of the proposed 2019 bills that did not pass and that are troubling for housing providers have returned such as one requiring a statewide rental registry (last year’s AB 724 and this year’s AB 2406).
The legislators, at the same time, have proposals to increase housing production, which is what we need to deal with our housing shortages, particularly shortages of affordable rental housing. Senate Bill 902 is one of the proposals that can help increase housing production. However, I am not hopeful that SB 902 will pass, and it will probably see the same demise and last year’s SB 50. If I am wrong and it does pass, I am not convinced it will make a dent in our current housing needs.
The problem is over-regulation in California disincentivizes developers. It is very costly to build with 25% to 30% of a budget spent on the entitlement process before putting a shovel in the ground due to problems encountered along the way from nimby neighborhood groups protesting developments, local ordinances that severely restrict density making projects not viable, and other regulations such as the new statewide rent control (AB 1482) that subjects new developments to rent control after only 15 years!
On top of this, no developer will want to ever build and commit to what would likely cost $650,000 per unit with the ongoing threat of constant rent control ballot initiatives that seek to remove the one thing that keeps rental housing providers in this state in business, vacancy decontrol. That’s the ability to set rent to market rate when a renter voluntarily vacates an apartment unit. New York state eliminated that right last year, and property values have plunged, building upgrades and maintenance are being cut back, and sales of multifamily properties have drastically declined.
Q: What do multifamily investors, owners, and financiers need to know about the coming November 2020 ballot and the potential impacts of the rent control measure, part two?
A: If passed, the Rental Affordability Act would put many owners out of business very quickly, and leave absolutely no incentive to build new rental housing, let alone affordable rental housing, in California. Vacancy de-control is the one thing that keeps rental housing providers subject to rent control, and thanks to AB 1482, rent control now applies or will apply to every property in California, in business. Without vacancy de-control, housing providers will be extremely challenged to keep up with costs, which according to the National Apartment Association study, increased recently by 7% – 8%.
Additionally, single-family or condominium owners with more than two properties could be subject to the strict rent control imposed by the Rental Affordability Act. The ballot initiative limits or “caps” increases on vacant units to just 15% over three years or 5% per year. For owners that are under rent control and renting below market today, if passed their rents will never catch up to market, and their property values will plunge.
The Rental Affordability Act does not create one unit of housing. If passed, it will merely cause more shortages by forcing owners out of business and discouraging housing development.
Q: What are cities leaders focusing on at L.A. City Hall and other relevant municipal bodies that should be encouraging or discouraging to new multifamily development moving into 2020?
A: L.A.’s leaders are focusing on ordinances that would severely limit and in some cases, take-away, property rights from owners. One current proposal would seek to force property owners to give the city a “right of first refusal” when selling a property, so that the city has the first right, the first “bite at the apple” to purchase a property at some valuation it determines. Another proposal involves acquiring rental properties through eminent domain. This kind of proposed expropriation of private property by the government is something we have not seen since the fall of the Berlin Wall and the end of communism in Europe. L.A.’s city council should be old enough to remember what life was like for eastern Europeans under communism, yet they cannot resist an opportunity to pander for the votes of the city’s renters by continuing to punish and put out of business rental property owners. They just cannot help themselves! The only thing the L.A. City Council has left to do to rental property owners is to paint us with horns and a tail.
The city is also working on its own “right to counsel” ordinance to pay for attorneys of tenants facing eviction, although 82% or so of evictions are due to non-payment of rent. We’ve encouraged the city to put resources into eviction defense by offering short-term rent subsidies, job and financial education, and mediation services, which would be far more effective than prolonged court cases that merely run-up owner costs resulting in a need to charge higher rents.
The city of L.A. has had the same, retreaded housing policies for more than four decades. So has Santa Monica, Berkeley and San Francisco. These cities all have worse homelessness problems, the biggest housing shortages, and the fastest rising rents due to these shortages. Sadly, city leaders in Los Angeles do not understand the definition of insanity, which is doing the same thing over and over again but expecting a different result. The city’s housing regulations are outdated and do not work. Property owners can no longer “white knuckle” the rental housing business because of all the regulations. Mistakes can be very costly, so they must join an apartment association as their advisor so that they stay in compliance with the law. We welcome rental housing providers and managers to join the Apartment Association of Greater Los Angeles (AAGLA).
Daniel Yukelson serves as the executive director of Apartment Association of Greater Los Angeles (www.aagla.org) an organization founded in 1917 to serve the interests of owners, managers, and developers of multifamily rental housing by delivering high-quality seminars and networking events; acting as advocates at the local, state and federal levels of government; supporting members with management advice and legal forms and notices, and promoting the highest level of professionalism within the rental housing industry.
For comments, questions or concerns, please contact Chris Egger