‘Landlord crusader’ Dan Yukelson recently shared his thoughts about rent stabilization with the Beverly Hills Weekly and he’s not happy! The former Planning commissioner (and current executive director of the Apartment Association of Greater Los Angeles) capped his career in corporate finance with the purchase of a fourplex in Beverly Hills — a good investment until City Council amended the rent stabilization law, he says. But Yukelson is no naïve investor: he knows rental housing in Beverly Hills will always be the best place to invest!
Let’s acknowledge Yukelson’s concern. He buys a 5,300 square foot, 4-unit apartment building at 9556 Olympic Boulevard for $2.4 million four years ago and invests a half-million bucks in ‘upgrades’ (by his account). It’s a nice property.
When City Council last year to put the brake on fast-rising rents, according to Yukelson, it tipped his balance sheet into the red. “Had I known it was coming I might not have made this decision to sell my house and buy rental properties in Beverly Hills,” he told the Beverly Hills Weekly. “The numbers just don’t pencil out for me anymore.”
Clearly he chose carefully: Yukelson paid $450 per square foot in 2014 for this place, which was about 20% below the median for a fourplex in recent years in Beverly Hills, according to the Multiple Listing Service. In the few years since he bought, we’ve seen prices surge past $700 a square foot for 4-unit properties. High demand (or scant inventory) means sale prices trail listing prices by just 1% on average. Sellers are getting what they ask in today’s hot market.
Despite the January 2017 changes to the rent stabilization ordinance, the market hasn’t gone soft and Yukelson’s investment will certainly pay off. When hasn’t multifamily real estate not paid off?
But it’s not as much about the money as the principle, it seems. Yukelson tips his hand as a true anti-regulation conservative when he grouses in his Weekly interview about “socialists on the Council” and rails against the city’s rental unit registry as “burdensome” and “vicious” (referring to registries in Beverly Hills and Los Angeles respectively).
Here he echoes the perspective of the Beverly Hills Weekly and its owner who himself owns a fourplex and has spoken up about the rent stabilization ordinance. They are of the same mind on the issue.
Here we excerpt Yukelson’s interview and follow with observations of our own. Find his interview in its entirety in Weekly issue #969. And a reminder: Yukelson is not speaking just for himself; he’s the top official with the Apartment Association of Greater Los Angeles (‘The Voice of Multi-Family Housing’). We want to leave the organization’s claims unchecked!
Dan: About four years ago, my wife and I decided to sell our single-family home… We made a decision to buy a four-unit apartment building in Beverly Hills on Olympic Boulevard, where we could live in one of the units and then have some of our housing costs subsidized by our rent income. Not long after I purchased this building came the emergency [sic] Rent Stabilization Ordinance (RSO).
Yukelson implies that City Council pulled a fast one on him by changing the rules. But policies change. And he knows that, having signed-on as Treasurer for the one City Council candidate in 2017 who received support from the Apartment Association (or AAGLA as it is known). Elections have consequences!
But it also presented a benefit to Yukelson: after the election he signed on as executive director of AAGLA. The organization was posturing for the rent stabilization ordinance reform discussion that year.
Yukelson puts a fine point on the opportunity for policy change when he adds later in the interview: “Any candidate that runs in the City from now on will have an uphill battle because we’re putting in a lot of money.” And that is a credible threat: landlords have the money to spend. We’re all looking to the next City Council election!
Dan: Because I bought recently, I ended up having a much higher property tax base. My costs are a lot higher, the building is over 80 years old, and not only did I pay a pretty high price for the building; I also put in significant upgrades—almost half a million dollars in upgrades for the building to improve it. Right after doing that, the RSO passed.
Yukelson is savvy buyer who enjoyed a long career in finance. Surely he knows that deferred maintenance is reflected in a below-market price; and with some upkeep his investment is a renewable resource. City permits show only a roof replacement and some modest foundation work. Say $100,000 for those fixes.
If Yukelson was investing an average of $125k per unit, then he was investing in unit interiors — money which will come back in the form of higher asking rents. (And by the way that work appears to have been done without permits.) Indeed a dollar invested in a unit’s kitchen and bathroom will pay for itself in several years in higher rent when a unit turns over.
Dan: The numbers just don’t pencil out for me anymore. I’m very concerned because the costs of operating an 80-year-old building are very expensive. Plus property taxes go up two percent a year and we have a bond the school board wants to pass….
It is true that as a recent buyer Dan’s tax base was much higher than the prior longtime owner. Again, as a finance professional that would not have been a surprise. No doubt he enjoyed a low tax basis on the house he and his wife sold. California taxpayers picked up the bill for the low property taxes he was likely paying, and now he’s paying full-freight in real estate taxes.
Moreover, no property tax increase for Yukelson will ever outpace inflation: Proposition 13 guarantees that. This year we saw consumer prices increase at a 3.1% rate (and so did rent for his tenants). Next year may be higher. But his tax bill will increase at the lesser of 2% (the capped tax increase) or the rate of inflation.
And should his asset value decrease, he can petition for an adjustment in the assessment. Will his tenants be asking for a reduced rent?
Indeed Yukelson’s tenants don’t enjoy the same capped rent increase that their landlord does. Under the current policy, the allowed maximum allowable annual rent increase is the greater of three percent (3%) or the percentage change in the consumer price index. The landlord enjoys the “lesser of” the 2% cap or inflation — the 2% cap being a ceiling — while the tenant can pay “the greater of” 3% or inflation. The 3% on the rent increase is not a ceiling but a floor.
For example, with inflation is ticking up, should the change in consumer prices for our region hit 3.6%, so will the rent increase. Yukelson’s property tax hike will be is capped at 2% because his tax basis will greatly trail the actual value of the property.
Dan: I was upset. The audacity of the City Council wanting to protect tenants that can afford to pay $10,000 a month—who are we protecting in our city?
Yukelson’s rent figure is simply misleading: who’s is paying $10,000 for an apartment in Beverly Hills? Maybe the top one-tenth of one percent of renting households? The average rent for a 2-BR apartment in Beverly Hills is more like $2,800, according to rental unit registry data, while a 1-BR bedroom unit averages under $2,000. Here Yukelson is setting up a classic straw-man argument: why offer tenants protections when most simply don’t need protection?
AAGLA has rolled out this claim wherever rent control is on the agenda. It’s part of a strategy to whittle away rent control by arguing it should only go to the demonstrably needy; that classes of owner (‘mom-and-pops’) should be exempt from the rent stabilization ordinance; or that properties under a certain size should get a total pass. For example 4-unit-and-under properties like the one that Yukelson himself owns. If City Council took his advice we would see as many as 1,348 households (18% of all RSO households) be stripped of the cap on the annual rent increase. Those families would have no relocation fee if terminated.
I’ve invested in my neighborhood. I live in my neighborhood. If people want [the proposed Affordable Housing Act, an initiative that may find a place on November’s ballot], you’re just going to get big Wall Street firms coming in, scooping up these buildings, knocking them down, building housing. You’re going to get owners who just don’t care about Beverly Hills.
Yukelson and I both know that Wall Street firms and other corporate owners are already here. And the Republican tax law will only accelerate the transition by returning outsized tax savings to corporations (a new lower 21% rate) and so-called passive investors including LLCs that can realize a greater tax benefit though pass-through income.
We will defer to Yukelson on the federal tax benefits he gets as an owner operator. Suffice to say they are very generous, including deductions and depreciation.)
We take Yukelson’s point about the disruption of community. We tenants often invest in our neighborhood. We have friends. We raise kids. We don’t want to be displaced by excessive rent increases or involuntary termination.
Dan: You can’t operate a business without any flexibility to increase your prices. Being capped at three percent makes it even more challenging. Plus, with a building like I have to run, it’s nearly impossible. I’ll be in the red more often than not.
Mr. Yukelson should keep his eye on the real prize: asset appreciation. That’s where the real gains are, and the new tax law does away with capital gains taxes for his heirs. But he can take some comfort in the fact that across our region, landlords take about 67% of gross rents as cash flow on average (that is, after expenses). That is a very healthy margin!
His cash flow may fall short of expectations now as a new buyer, but of course he knew that. He’s a finance professional! Certainly his margins will improve.
If it gets really bad for Yukelson, he can simply exit the rental business. If he wants to try his luck in the rental business outside of a rent control city, federal tax law allows him to take advantage of the ‘like-kind’ exchange (section 1031 of the United States Internal Revenue Code) so he can plow his capital gains into another rental property tax free.
Weekly: The City is spending over $130,000 on an RSO study. What do you make of this?
Dan: It’s crazy. I don’t think they really know what they’re looking for. They’re kind of shooting in the dark, hiring a so-called expert. $130,000 [for the study] is just a drop in a bucket compared to the proposed $1.4 million a year the City wants to spend in managing and administering this RSO.
Mr. Yukelson should ask his fellow landlords themselves pressed so hard for this kind of study. They were going to fund it themselves! The city has saved them the trouble and the money, so why grouse about it?
As for the city’s new rent stabilization program, the city consultant’s estimate of $1.4 million is for a full cost-recovery program. And tenants will pay half of that cost in a monthly charge. (The landlords pay the other half.) Besides, City Council spent $1.5 million on holiday lighting this season, so maybe Yukelson should grouse about that.
Dan: It’s been proven all over again that rent control only increases rents higher than people expect because property owners need to make up the cost of operating their buildings. When tenants move out, they need to jack up the rents much higher. In looking at Beverly Hills, rent increases for studios and one-bedrooms were approximately 2.3 percent of a year [sic]. Once the RSO passed, they shot up to 2.9 percent.
I haven’t seen Yukelson’s data but his observation may be accurate: tenants will probably see increases that approach the allowed maximum. Why? Because landlords demand it. Let’s go back to the 67% average margin that landlords take home. Some take home well over 70% according to a profit-and-loss statement we’ve seen on several properties in the city. That margin too often comes from landlords not investing in maintenance.
Look around: there is no shortage of the small, older stock that has been allowed to deteriorate, to reach ‘end-of-life’ when in fact rental housing is a renewable resource when properly maintained. Amsterdam tenants life in buildings that are 300 years old! In Beverly Hills, where landlord investment is relatively minimal already, end-of-life comes in about 80 years.
If Yukelson has to pay dearly to keep up his nice building, it’s because prior owners never renewed the electrical and plumbing systems.
Which brings me to….
Dan: The only instance of double-digit rent increases that these rent control zealots like Mark Elliot keep spewing out were in luxury buildings like the 4 and 5 star buildings, and there aren’t a lot of them in Beverly Hills. Rent increases were over 10 percent but the minute the RSO passed, they dropped down to three percent. So, the City is actually protecting wealthier tenants.
First, there are relatively few 4- and 5-star rental buildings. Plenty are marketed as ‘luxury’ but we hear the truth from those tenants who suffer poor maintenance under owners like Sterling. As the city increased its inventory of rental stock by only 2% in four decades, how many 4- and 5-star buildings could there be?
Second, those who received “double digit increases” weren’t likely to live in a larger luxury property anyway. In fact, 60% of renting households in the city live in properties of 10-or-fewer units. Some are very nice; most aren’t because they weren’t maintained. Yet those 10% rent increases came especially with some distance from the economic crisis.
Dan: I’m totally for helping people that need it; I just think the City spending $1.4 million to benefit everybody, even people who don’t need it—Elliot is some type of tech executive [sic]. I wish I could afford the type of bikes he rides on weekends. Why not try to get something as cheap as he can?
“People that need it” means carving out a few percent of households at the bottom of the household income ladder and leaving the rest of city households without a cap on the rent increase or other tenant protections.
The personal observation bears no semblance to reality but that isn’t the point: it’s a way to characterize some tenants as unworthy of tenant protections.
Dan: If the City really wants to help people, they could take that $1.4 million they want to spend every year and come up with some kind of voucher system based on actual need.
Another essentially conservative idea: vouchers! The only thing true-blood conservatives like less than a direct “handout” is effective regulation. Yukelson would rather have the public purse pay some tenants than provide rent stabilization for all. Here the voucher is a red herring: City Hall is not likely to warm to the idea of a locally-operated voucher program.
Dan: Why take it out of my pocket?
This is the easiest one of all! We have a public interest in regulating the price and provision of rental housing because 1) housing is a social good; and 2) the market has failed to provide it or regulate it. (Our city’s own Housing Element says it is a policy goal to provide housing for everybody regardless of income.) Regulating the price of rental housing like any other utility is essential to the stability and sustainability of tenant households. City Council said as much when they declared a housing crisis in January of 2017.
Yukelson could have invested in many asset classes. Commercial real estate has not rent control at all! Yet he has invested in rental housing. And that confers some social responsibility. Rental housing also provides property owners with a host of tax benefits, fat margins and reliable cash flow.