AAGLA’s Executive Director Has Some Thoughts on Rent Control

Resident ‘landlord crusader’ Dan Yukelson recently shared his thoughts about rent stabilization with the Weekly and he’s not happy! This 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. That looked like a good investment until City Council amended the rent stabilization law. He says it crimps his cash flow and now he’s got buyer’s remorse. But Mr. Yukelson is no naïve investor: rental housing in Beverly Hills will always be the best place to park his investment dollar!

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.

9556 West Olympic BoulevardWhen 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.”

Should we feel bad for Mr. Yukelson? No. Residential rental sales in Beverly Hills have not slowed despite the change to the rent stabilization law and the market hasn’t gone soft. He spent $450 per square foot in 2014 for his place, which was about 20% below the median for a fourplex in the years since, according to the Multiple Listing Service. In that time we’ve seen prices surge past $700 a square foot for 4-unit properties and sale price trails listing price by just 1% on average. Sellers are getting what they ask.

But it’s not about the money. It’s the principle! Yukelson tips his hand as a true-blue, anti-regulation conservative when he grouses in his interview about “socialists on the Council” and rails against a rental unit registry as “burdensome” and “vicious” (in Beverly Hills and Los Angeles respectively).

Yukelson is an official with the formidable Apartment Association of Greater Los Angeles (‘The Voice of Multi-Family Housing’) and so I don’t want to leave his assertions in this interview unchecked. Below I excerpt Yukelson’s responses and follow with observations of my own. Find his interview in its entirety in Weekly issue #969.

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).

The crux of Yukelson’s argument is that City Council pulled a fast one by changing the rules on him. Of course policies change. Yukelson knows that, which is why he signed-on as Treasurer for the only City Council candidate last year who received support from the Apartment Association (or AAGLA as it is known). After the  election, Yukelson, himself a former city official, then signed on as executive director of AAGLA as the organization looked ahead to the renewed rent stabilization policy discussion later this 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.”

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 priced-in that overdue maintenance right? But what of the remainder of that $500k ‘upgrade’? City permits online show only the roof replacement and some modest foundation work. If it was interior remodeling then an average of $125k per unit is quite an upgrade. And it appears to have happened without a permit (at least according to the online record). That’s money well-spent though: a dollar invested in a unit interior will repay itself many times over in rent.

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….

Again, presumably he paid a discounted price for an aging asset. Or maybe he simply overpaid as is often the case with Beverly Hills rental properties. They pay a too-high multiple of the rent roll because owners expect to lay 10% annual increases on the tenants. (Or perhaps clear out the building.)

Yukelson next bemoans paying property tax on the actual value of his property. But can he really complain? No property tax increase for Yukelson will ever outpace inflation. For the foreseeable future he will pay “the lesser of 2% or the rate of inflation” should his property taxes increase. Should his asset value decrease he can petition for an adjustment in the assessment.

Tenants in Beverly Hills should be so lucky. Under the current ‘3%’ policy our allowed annual rent increase “shall not exceed the greater of three percent (3%) of the rental rate then in effect, or the percentage equal to the percentage increase, if any, of the consumer price index.” Notice that? When it comes to property taxes landlords enjoy the “lesser of” the two rates while tenants will pay “the greater of” the alternatives. Moreover, now that inflation is ticking up, the allowed annual rent increase will hit 3.6%. Yukelson’s property tax hike will be is capped at 2%.

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?

I think it’s audacious that the City Council has not protected all tenants and that’s regardless of income. Beyond the cap on rent hikes where is our protection against no-just-cause eviction? Or our guarantee that a landlord actually pays us the relocation fee? What happens if we get evicted in retaliation? The city doesn’t step in. All tenants should have these protections regardless of income.

What’s more, Yukelson’s rent figure is simply misleading. Who’s paying $10,000 for an apartment? Maybe the top one-tenth of a percentile of all renting households. Most of us cascade down the income ladder. So 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 in order to defeat tenant protections for all but a select tenant class or two.

Restricting protection to a small minority of tenants is an element of the ‘death of a thousand cuts’ strategy. AAGLA has rolled it out in many other jurisdictions where rent control is on the agenda. To that end Yukelson argues for exempting from rent stabilization all 4-unit-and-under properties. That would mean as many as 1,348 households (18% of households that rent in Beverly Hills) would have no rent cap or be entitled to no relocation fee. Yukelson is not shooting for his high-earner tenants here: his proposal would carve-out from protection about 42% of the city’s entire stock of residential rental properties.

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.

121 S Elm from the Courier
An investor hiding behind an LLC recently purchased this 16-unit aging building and is moving to displace all tenants for an extended remodeling. They have no right of return.

Yukelson and I both know that Wall Street firms and other corporate owners are here. We’re already seeing increasing turnover (with commensurate tenant displacement).

I expect tenants will also more see an increase rate of condo conversions and a surge in new construction too. The Republican tax law will only accelerate the transition as ‘active’ ownership by local owners yields to ‘passive’ investors like corporations and LLCs that can realize greater tax benefits. (I would defer to Yukelson on this because he knows much more about it than I do but he doesn’t mention the issue.)

I do take Yukelson’s point concerning the disruption of social community. As it happens, I have invested in my neighborhood, too, as have my friends who have lived near me for more than a decade on average. We’re all invested and we don’t want to be displaced by rent increases (or eviction, and the best step the city can take to preserve a community like mine is to end no-just-cause eviction).

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. Should cash flow unfortunately fall short of expectations, though, he has a couple of options. He could lease his apartment and perhaps downsize (again) to a less-expensive rental. (Landlords often give that advice. Witness landlord Stephen Copen helpfully suggest his longtime Roxbury Drive tenants should economize before he evicted them for no-cause.)

Or Yukelson could simply exit the rental business. There is a generous tax break on his property’s appreciation should he sell; and if he wants to try his luck in the rental business again he can take advantage of the ‘like-kind’ exchange (under section 1031 of the United States Internal Revenue Code) to plow his gains into a new property tax free. Another bonus: the Republican tax law gives landlords like Yukelson a new tax break on pass-through income from rents so that should cushion the blow of rent stabilization.

Next the Weekly asked Yukelson about the city’s hiring of a consultant to guide  Council through the upcoming rent stabilization deliberations.

Weekly: The City is spending over $130,000 on an RSO study. What do you make of this?
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 why they pressed so hard for a study that they said landlords were undertaking themselves. What is crazy is that the city stepped up to pay for their study.

As for the city’s nascent rent stabilization program, last fall the Council funded it at fifty cents on the dollar. So the consultant’s estimate of $1.4 million was slashed in half as Council agreed on just $700,000 for temp employees to do most of the work. (That is less than $100 per renting household and doesn’t even include the cost that the city already foots for related functions.) No landlord can call the city’s halting progress toward a real rent stabilization program aggressive or an overreach. It’s half what Council spent on holiday lighting this past season.

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 more frequently approach the allowed maximum (3% for now). Why? Because cities that establish a ‘certified’ base rent for each tenancy then subsequently identify a ‘maximum allowable rent.’ Often that’s what a landlord then demands. But in my view that only underscores the importance of determining an allowed increase that is tied to the rise in consumer prices (as tenants argued in one of our position papers). Which brings me to….

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. That’s an important reason why there is a rental housing crisis in Beverly Hills and the region. Over the past forty years the city has increased its inventory of rental stock by only 2% overall, and any suggestion that those are ‘luxury’ properties (at least by today’s standards) is nothing more than an exercise in branding.

Second, anybody who waved a notice of “double digit increases” (as I did) weren’t likely to live in a larger property anyway: 60% of renting households here live in properties of 10-or-fewer units. So when the city imposed a 3% cap on annual increases it was more likely than not benefiting everyday families with children and our increasing number of single-income households. But to be fair we don’t really know because the city never collected the data.

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” is the signal that opponents will try to circumscribe the reach of rent stabilization by carving out from protections the tenant classes landlords deem unworthy of protection. And the personal remark bears no semblance to reality. But that isn’t the point anyway: it is intended to suggest that supporters of rent stabilization are unworthy of protection (and perhaps even scheming – see ‘welfare queen’).

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! But here it’s a red herring. I’m sure that City Hall won’t warm to the idea of a locally-operated Section 8-type housing program. Tenants should not warm to it either given the stigma attached to housing vouchers.

Why take it out of my pocket?

This is the easiest one of all! Because Mr. Yukelson choose to invest in housing. Housing is a good that confers on ‘housing providers’ (the landlords’ favored term) a social responsibility. That’s what distinguishes it from any other asset class (like ‘blood diamonds,’ say). Rental housing just so happens to provide property owners with a host of tax benefits and a reliable cash flow. As long as the savvy investor doesn’t overpay for his asset to begin with.

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