We Knock Down Some Landlord Claims

Landlord Kevin Davis penned a letter to the Courier in the July 13th issue that warned of a “massacre” upon those who lease apartments. While we are accustomed to hyperbolic bloviating by associations like AAGLA and its director Dan Yukelson, Davis reminds us that even sober speakers sometimes offer up specious claims. Here is our rebuttal as published in the July 20th Courier.

Mr. Kevin Davis is a real estate broker specializing in multifamily apartment buildings; he himself is a longtime owner and operator of apartments here in Beverly Hills including two of the larger apartment buildings in the city, 432 N Palm and 303 N Swall. Presumably he knows something about the apartment leasing business.

However Mr. Davis does want to talk about his businesses and instead wants to talk about the residents who rent. How they take advantage of landlords and how they get a break from rent stabilization despite “six-digit household incomes.” But for the two-thirds of families who rent and can’t meet that household income bar he shows little sympathy: “Move to a more modest community.”

As he says in his July 2018 letter to the Courier, the city should subsidize those tenants rather than limit the price he charges tenants. We note that public policy subsidizes landlords like David plenty. Check out his letter and then read our rebuttal below. Then scroll down for more about the taxpayer subsidies that pad the margin of residential rental property owners.

Property owner Kevin Davis has a bone to pick with rent control! He believes that City Council should no have a say about rents or tenant ‘protections’ (his scare quotes) because it’s not fair to landlords. Three-quarters of economists agree, he says, and I’m sure that’s true. Many economists like a ‘free market’ (my scare quotes).But Beverly Hills hasn’t had a free market for rental housing in four decades. City Council adopted Chapter 5 rent stabilization in 1978. For lower-rent households it tied rent increases to consumer costs and protected those tenants from eviction. In 1986 Council capped increases at 10% for the rest of us (but allowed no-just-cause evictions).

Rent stabilization was the law of the land in Beverly Hills when Mr. Davis formed his real estate investment firms. He has continued to own rental property here ever since. (Incidentally his businesses are located not in Beverly Hills but Los Angeles.)

State codes have regulated residential tenancies for much, much longer. Both the legislature and City Council understood that rental housing was categorically different from other commercial asset classes in that providing housing comes with a social responsibility. A landlord who doesn’t appreciate the importance of tenant protections should invest in non-residential commercial real estate where no rent control applies.

Mr. Davis owns two large rental properties (24 and 36 units) and so could add something to the policy discussion. Just 6% of rental buildings in the city are as large. So unlike mom-and-pop operators that landlords like to push to the foreground, Mr. Davis has operations numbers that accurately describe market conditions. He could talk about net operating income, change in expenses, trends in asking rents, rates of tenant turnover and most significant but rarely mentioned by property owners, residential real estate asset appreciation.

Mr. Davis instead wants to talk about tenants. The figures he provided suggest that many families in Beverly Hills aren’t doing as well as we want to think. Given the high cost of living – particularly housing – in Southern California, the one-third of families that fall under $50,000 in household income would actually qualify for federal and local assistance programs. That includes free legal assistance, free home repair and other services from our city’s human services providers.

Many of the two-thirds of families with household incomes below $100,000 would qualify too: the County sets the assistance threshold at about $70,000 for a family of four. As for those most-advantaged among us, the households earning over $250,000 in combined income represent just 1% of renting households – an outlier by any definition.

Whatever Mr. Davis’s philosophical concern may be with price controls, he knows that any landlord’s margin is in tenant turnover. The key is asking rents (not paid rent) because a vacant apartment is leased at a market rent. So if his figures are accurate, and indeed 22% of tenants moved house in the past two years, perhaps nearly a quarter of his units are at or near the market rent. And asking rents have been climbing by double-digits in recent years.

We’ve heard from Mr. Davis about tenants but not a word about his business. He’s not sharing THOSE figures.

Last, Mr. Davis reserves some of his scorn for the city’s consultant, HR&A Advisors. That’s a head-scratcher: the firm is completing (at city expense) precisely the kind of economic analysis that landlords were preparing to fund themselves. It will include an analysis of household incomes, of course, but what it will NOT include is data about past rent increases, no-just-cause evictions, landlord code violations, unlicensed apartment leasing businesses or a host of other inputs important to the discussion. Such data was simply never collected.

I formed Renters Alliance last year to encourage those who rent to communicate with each other about landlord problems. So I’m never going to see eye-to-eye with a free-marketeer housing provider like Mr. Davis. But I will side every time with parents of kids in our schools whom Mr. Davis, it seems, would happily price out of housing only to relocate to what he kindly terms “a more modest community.”

Mr. Davis can grouse about unworthy tenants who benefit from tenant protections, but who’s really benefiting from public policies in the residential rental property market? Landlords like Mr. Davis, who reaps a whopper of a property tax break from Proposition 13. That ‘tax reform’ measure was sold to voters as a way to protect senior homeowners from budget-busting tax hikes. But it has always applied to commercial property owners too. And the longer an asset is held the greater the break. Many apartment buildings in Beverly Hills don’t change hands for 30 or 40 years. It falls on local taxpayers (like residents and city businesses) to make up the difference for the property tax break enjoyed by owners of commercial property.

Mr. Davis also enjoys a boatload of federal tax breaks for owning and operating residential rental property. He depreciates his asset and deducts as an expense his cost of financing the property. (His tenants get no tax deduction for their paid rent.)

While his tenants can no longer deduct state and local income taxes under the new tax law, Mr. Davis can: any state and local taxes paid in association with a business remain deductible! When Mr. Davis deducts state and local taxes generated by his business, the rest of us make up the difference with our federal taxes.

Of course the new tax tax law privileges income from investments. Mr. Davis presumably takes pass-through income, which is taxed at 20% – a real break relative to the tax rate on labor income (and that break scales up with property portfolio size). When he flips a property he also enjoys a low capital gains rate of 20%. That is, when he has to pay taxes on those gains: the government allows landlords like Mr. Davis to plow the profit back into the purchase of another ‘like’ property without paying a dime in capital gains tax.

Landlords pay industry associations (like the Apartment Owners Association of America and others at the state and national level) to maintain these tax breaks and tilt the table toward property interests and away from the tenants who pay the rent. These associations also circulate talking points intended to obscure the debate, like Mr. Davis’s main point that only some tenants are worthy of protections (and even then he doesn’t want their rent controlled).

We go through the trouble of debunking the specious arguments and misleading figures offered by Mr. Davis because we don’t want them to find a toehold in the policy discussion. We who rent each have a story we can share about the effect of declining housing affordability on our health and welfare. Please share yours with Renters Alliance.