When Landlords Put Profit Before Maintenance

 

200 South Reeves exterior dilapidationBeverly Hills residents take well-kept properties for granted. High-and-rising values generate resources for maintenance and, in turn, maintenance keeps property values up. But maintenance is not part of the business model for some owners of residential rental property. Instead their priority is cash flow. But scrimping on maintenance not only affects tenants; it also augurs an overall decline in the city’s rental housing stock.

“The council has determined that the city has an extensive and widely recognized history and reputation for well kept properties,” according to the Municipal Code chapter that requires that property owners to upkeep properties. “The general welfare of the city is founded, in part, upon the appearance and maintenance of properties.” So says the preamble to Municipal Code chapter 7, titled ‘Maintenance and Sanitation of Premises and Adjacent Public Right of Way.’

For landlords who defer maintenance the business model is straightforward: save a dollar on operating expenses and that’s an extra buck in net operating income. It’s about maximizing the cash flow. Maintenance is one of the few operating expenses that a landlord can control so it’s first on the chopping block.

In my last post, I gave thanks for my professional management company. This time I want to highlight the opposite: what happens when an owner-operator lets his property deteriorate. When peeling paint, dry-rot, dilapidated fixtures and dead landscaping predominate, you can be that the landlord is simply wringing his property for the cash flow.

Case Study: 200 South Reeves Drive

For years I have marveled at the decline of 200 South Reeves (at the southeast corner of Charleville). This 12-unit apartment house was built by a local man, H.M. Hodge, who is reported to have arrived in Los Angeles in 1899 and checked into the swanky Nadeau Hotel on 1st and Spring streets (long gone). Fast-forward four decades later and he’s building an apartment house for which the stated purpose on the building permit reads simply, “income.”

200 South Reeves building permit
The 200 Reeves building is a solid if unremarkable structure of twelve studio and 1-BR units. It was a relative late-comer to the block; by 1941 the region’s residential rental property boom had come to a close and the rest of the block was mostly built out with multifamily properties. Though historical accents are relatively few, at least #200 could stand proud amid the later crap that blights my block.

But time has not been kind to this property, and the deferred maintenance has been less kind still. I’m reminded every day as I walk by and see the telltale signs of neglect.

200 South Reeves exterior dilapidation
Broken shutters, dangling wires and overgrown vegetation not only make for an unsightly structure, they contravene the law. “Any person, or the agent thereof, owning, leasing, occupying, or having charge or possession of any premises in the city, shall keep and maintain such premises and the right of way abutting such premises in a safe, clean, orderly, sanitary and aesthetic condition.” — Municipal Code § 5-7-3 MAINTENANCE OF PREMISES AND ADJACENT PUBLIC RIGHT OF WAY

So imagine my surprise last April when Dr. Stephen Copen, owner of 200 South Reeves, counted himself among landlords who keep their properties well-maintained. He was at City Hall to press Council to raise the cap on annual rent increases from the current 3% to as high as 7%. He shared his reasoning with City Council:

In the February meeting I said a 5-7% increase realistically reflected the costs we have running our buildings. I hope when you come back to this you in April you will consider 3% is not a realistic number. The City Council members did not have had an opportunity to read our mortgage documents, know how much money we’ve borrowed, and know how our costs will go up when the interests rates go up. And a 3% increase may not reflect those expenses. We increase other costs also that probably go up at at a rate more than 3%. We probably are reasonable people who maintain our buildings nicely and are responsive to our tenants’ complaints, and get things painted and repaired and plumbing done when they ask. Just as you’re responsive and listen to people here tonight, we try to be responsive to them, and that may take more than a 3% increase. — Stephen Copen to City Council, April 4, 2017

Perhaps Dr. Copen’s tenants will share their thoughts as to whether he is among those conscientious property owners. But this much is clear: from the exterior 200 Reeves shows few signs of conscientious upkeep. Have a look!

200 South Reeves corner view
CONDITIONS PROHIBITED ON PREMISES: Improperly maintained landscaping which is visible from streets, including, but not limited to…Dead, decayed, or diseased trees, weeds, and other vegetation. — Municipal Code § 5-7-4
200 South Reeves peeling paint under eave
CONDITIONS PROHIBITED ON PREMISES: Buildings with deteriorating or peeling paint which allows the exterior building coverings to deteriorate or allows the effects of sun or water penetration so as to cause decay, dry rot, warping, or cracking. — Municipal code § 5-7-4
200 South Reeves poorly-maintained ground-floor window
CONDITIONS PROHIBITED ON PREMISES: Buildings with deteriorating or peeling paint which allows the exterior building coverings to deteriorate or allows the effects of sun or water penetration so as to cause decay, dry rot, warping, or cracking. — Municipal Code § 5-7-4
200 South Reeves overgrown vegitation
CONDITIONS PROHIBITED ON PREMISES: Improperly maintained landscaping which is visible from streets, including, but not limited to…Trees and shrubbery growing uncontrolled without proper pruning. — Municipal Code § 5-7-4
200 South Reeves stucco cracks
CONDITIONS PROHIBITED ON PREMISES: Building exteriors, walls, fences, driveways, or walkways which are cracked, broken, defective, deteriorated, [or] in disrepair. — Municipal Code § 5-7-4
Household junk stored on the front patio.
CONDITIONS PROHIBITED ON PREMISES: Abandoned, discarded, or unused furniture, stoves, sinks, toilets, cabinets, or other household fixtures or equipment stored so as to be visible at the ground level from a public alley, street, or adjoining premises. — Municipal Code § 5-7-4
200 south reeves sign
Note expiration of 2017 permit. PERMITS REQUIRED: It shall be unlawful to erect, reerect, construct, alter, or maintain any sign except as provided by this code and pursuant to a required permit for the same issued by the building official…a permit shall be required for each sign. — Municipal Code § 10-4-502. MAINTENANCE OF SIGNS: All signs shall be maintained so as to be structurally safe, attractive, and clean. — Municipal Code § 10-4-210.
200 south reeves rock
CONDITIONS PROHIBITED ON PREMISES: The following conditions do not comport with a safe, clean, orderly, sanitary and aesthetic condition on premises and are prohibited … (h) Lumber, junk, trash, debris, or salvage materials maintained upon any premises which are visible from a public street, alley, or adjoining property; (n) Mounds of soil, dry grass, weeds, dead trees, tin cans, abandoned asphalt or concrete, rubbish, refuse, or waste or other unsanitary material of any kind. Municipal Code § 5-7-4.

If the Money Isn’t Going Toward Maintenance, Where IS it Going?

In his comments to City Council last April, Dr. Stephen Copen suggested that landlords are pinched by rising costs and need a few extra percentage points in the annual increase simply to cover their expenses. For some, maybe. But is that true for Dr. Copen?

Copen said that an annual 5-7% rent increase would “realistically reflect” the cost to landlords of operating their businesses. Copen provided no support for his claim of high expenses (and neither do landlords who make the claim).

Fortunately the Bureau Bureau of Labor Statistics publishes the change in annual costs concerning a variety of housing inputs like utilities, floor coverings, labor, maintenance and lawn care. And over the past five years those costs actually increased at a rate lower than inflation – only 1% on average year-over-year between 2012 and 2016. When utilities are broken out separately we see that electricity, gas, water and trash increased on average 1.9% year-over-year.

BLS housing input change in costs year-over-year from 2012 to 2016
The costs of operating housing have increased far less than the 5% to 7% annual rent hike that Copen wants. Incidentally, last year inflation edged up to just 1.8%. Accordingly, Santa Monica and West Hollywood allowed landlords there only a 1.8% annual increase.

Dr. Copen also complained about the cost of financing and noted the unpredictable change in financing costs. The latter is nonsense; interest rates have been ultra low for ages and haven’t budged no matter how much the federal government tries to overheat the economy. As for the cost of financing real estate, Copen told City Council that his properties have been in his family for five decades. Presumably then there is no mortgage on 200 Reeves or any of his other four properties on Reeves. So there would be zero finance costs to Copen and no exposure to rising interest rates. (If Dr. Copen has drawn on his equity to finance operations, it is surely not reflected in property upkeep.)

Landlords also say that property taxes drive the costs of operations higher. Not for Copen: his properties have not changed hands in fifty years. The assessed value (for taxing purposes) of 200 Reeves remains frozen at 1975 levels: only $285,000 for land and building combined. The actual value is probably fifteen times that. Why? In 1978 voters passed Proposition 13 which rolled back property taxes to 1975 levels and put a tight lid on future tax increases. And until a property changes hands, it is not reassessed for tax purposes. Copen probably pays less in annual property taxes for 200 Reeves than a single tenant of his pays for a year’s rent on a studio apartment.

Business taxes aren’t murdering landlords either. Beverly Hills takes just over a buck on every hundred dollars in gross receipts (rent) despite the grunts and groans about excessive business taxes. And it turns out some weren’t even registered to pay their business tax (even one who sat across the table from tenants and complained about the business tax).

I hope I have demonstrated that maintenance can’t be gobbling up Copen’s profit at 200 Reeves. So let’s move on to the doctor’s worldview.

The Copen Philosophy

Dr. Stephen Copen, LandlordDr. Stephen Copen has appeared before City Council numerous times to argue against rent controls. Often he frames his argument in terms familiar to conservatives (as he did in July):

You create a category of people who will not work with our degree of motivation to compete in the market, and in the economy broadly, and who will sit here and let us subsidize their rents, and sit here and pay under market rents for nice apartments, benefiting from all the development… and all the amenities of this community, and they will live subsidized by other people who go and work hard in the marketplace. — Landlord Stephen Copen, July 18, 2017

Presumably he’s referring to his hard work and his nice apartments. That’s his privilege. But Copen has some definite thoughts about his tenants, and he’s spoken of them in strikingly personal terms (if without naming them).

You haven’t discussed whether people living in a two bedroom apartment across from Roxbury park with a view of the clubhouse should maybe economize and live on Doheny, where they don’t have that view; or move from a two-bedroom to a one-bedroom. And you haven’t discussed how people have bragged that their children have graduated from Beverly Hills High School and have graduated from MIT and [who] own a company that employs many people in Massachusetts, and [who] should contribute to caring for their parent, and instead you’re asking those who own a building to subsidize some of the living style of those people. — Landlord Stephen Copen, April 20, 2017

Watch the video. In retrospect, the bit about his Roxbury tenant is noteworthy. Having had a few months more to ruminate about his tenant’s Roxbury Park view, perhaps, Copen then pushed her out of her apartment at 458 South Roxbury after 30 years of tenancy. She received a no-just-cause involuntary termination, she said, giving her 60 days to uproot her life. I don’t have the courage to ask her if she’s “economized” into a one-bedroom place on Doheny (as was recommended by her landlord, ever-mindful of thrift).

(Update: Copen also pushed out a 29-year tenant from the same property the following April.)

As for the 5% to 7% increase he wants, it’s not only about protecting his tenants from the moral hazard of sloth that he associates with a too-low rent; it’s also key to his business model.

My method of operation in investments that my parents made 52 years ago was not to be bothered if I rent it for 10% under what I perceive to be the market rent. Because I knew I could get up to speed next year. — Landlord Stephen Copen, July 18, 2017

Either he’s a generous guy who gives a tenant a first-year break, or he’s a landlord that offers a ‘loss leader’ rent to land a tenant, only then hit her in month 13 with a big increase. (It’s like when a shop lures you in with a deeply-discounted item in the hopes that you’ll pick up few things at full price.) Landlords know that there is no such a thing as a free market in rental housing once a tenant leases. Instead she is likely to tolerate additional increases even if they are four times the rate of inflation, and even if not warranted given the condition of the property.

If Copen couldn’t maintain his property with forty years of 10% allowed annual increases, how can he do it at only a 3% allowed increase? That’s what he seems to be saying. But ironically 200 Reeves is exactly the kind of property that his fellow landlords point to as an example of what happens when rent stabilization caps rents. “See how it fell into disrepair!” Only rent stabilization has nothing to do with the way this particular landlord has maintained this particular property.

Update

200 Reeves Renovations December 2017Copen has made some upgrades to his 200 Reeves property! First he slapped a new coat of paint on dilapidated window sills. Then he replaced the busted shutter. Then he picked up some of the junk littering the place. He got some guys to tack down those hanging wires and patch the dry rot under the eaves.

200 reeves sodMost shockingly he laid down some sod. It only took a handful of code violation reports to get this landlord to invest in his own property.

Update to the Update

But not a couple of weeks after the sod went down, the lawn has been consigned to an amber hue. The culprit: no irrigation. It’s a shame to see this improvement undone for want of sprinklers. Copen’s miserly approach to maintaining his property is why his tenants can’t have nice things.

200 reeves dying lawn

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