Rent Stabilization Fallacy Exhibit A: 169 North Clark Drive

Local landlord Dan Yukelson recently circulated an email to city power brokers to claim that rent stabilization harms mom-and-pop multifamily property owners in Beverly Hills. The email links to multifamily properties for sale. He says, “These are ‘long time’ housing providers being forced out of business by over regulation and bad housing policies in Beverly Hills.” We had a look at the listings. But rather than support specious claims about harm to landlords, these listed properties make the opposite point: multifamily is still a money-minting business and landlords have nothing to fear.

Dan Yukelson emailYukelson is Executive Director of the Apartment Association of Greater Los Angeles and is not stranger to City Council. He frequently harangues councilmembers via mass emails which darkly proclaim that rent stabilization will be the end of multifamily apartment ownership in Beverly Hills. When was the last time an owner went bankrupt?

Indeed the apartment rental business is still the best place for a small investor’s money. Why? Because rents are relatively high; required maintenance is slim-to-none; and operating margins of as much as 70% generate ample cash flow. The best part is the backend: the asset annually appreciates at double-digit rates until the buyer cashes out. Plus there are also tax deductions and capital gains tax breaks that disproportionately reward property owners compared to any other business.

It is a business model that few longtime owners walk away from. Family owners simply hand it down from generation to generation. Relatively few of the city’s 1,096 rental apartment houses come up for sale. And that’s why buyers pay a premium — as much as 35 times the annual rent roll. Prices have topped $1,000 per square foot. The properties that Yukelson highlights are not on the market because of rent stabilization; they offered at top-of-the-market prices despite rent stabilization.

Exhibit A: 169 North Clark Drive

The “absolutely beautiful 1930 Spanish style fourplex” (according to the listing) at 169 North Clark Drive is characteristic of many small multifamily rental properties owned by the family for generations. It is aging into its ninth decade yet it still brings some charm to the four relatively spacious 2-bedroom apartments inside. This property has not changed hands in fifty years; it has been “owned and lovingly maintained by the same family,” says the listing.

169 North Clark listing
Here is the rent roll. These are relatively affordable rents and exactly what our rental market needs! That’s why properties like this one are an important part of our rental housing stock.

169 North Clark Drive
2-bedroom $2,148 2-bedroom $2,148
2-bedroom $2,404 2-bedroom $2,404

Yukelson highlights the rent roll in his email to suggest that rent stabilization has kept these rents too low for too long to enable profitable operation. That is why the owner is existing the business. Nonsense!

If anything the rent roll suggests that the Quillin family owners have kept rents relatively low to retain tenants. Had they not pursued a deliberate pricing strategy but instead reached for maximum increases, we would see rents close to the city average of $2,800 for a Chapter 6 tenant in a 2-bedroom unit. (Landlords were long allowed a 10% annual rent increase.)

And how does Yukelson explain identical rents for each pair of apartments if not for a deliberate pricing strategy? (Normally rents in a property range widely according to length of tenure or other factors but rarely are the same dollar amount.)

The Quillin family may have kept rents lower because they recognize that older rental stock does not meet today’s market demands. That’s the case at 169 North Clark: the aging plumbing and electrical systems means clogged toilets and blown circuits. These kitchens were optimized for early twentieth century living and they don’t easily accommodate today’s families. And there is no central air (window air conditioners).

Most importantly the parking is limited to one space per 2-bedroom unit and the location is Los Angeles adjacent. Not the best location in the city though it is close to Horace Mann school.

169 North Clark taxesThere is a good reason why the Quillin family could keep the rent reasonable: the carrying cost of this property is low because there is likely no mortgage (beyond refinancing for cash); the property tax is quite low ($2,760 per year on a total $200,000 valuation thanks to Proposition 13); and there has been maintenance but no significant improvement.

Low carrying cost means generous cash flow for this hands-off owner living in Carlsbad, California. So if the bank held no note and the property tax is covered by a single apartment’s one-month rent, why even sell it? We can’t answer that question but we know that it’s not because of rent stabilization!

The listed price of $3.9 million, 169 North Clark would cost almost a million bucks per door. Looked at another way, that price is $704 per square foot, which would value this property higher than 90% of all multifamily property sales over the past decade (according to MLS data). Moreover a sale will trigger a tax reassessment and the bank would be holding a multimillion dollar mortgage.

So why buy it? In a word, “upside.” And that upside is achievable despite rent stabilization.

Upside for the Buyer, Downside for the Tenants

The “large upside potential with rents” noted in the listing is the harbinger of higher rents to come. Whenever a property goes on the market there is the prospect of new ownership, of course, but also a different style of management — and potential disruption to established households. Families that have found relatively affordable housing at 169 North Clark should know that change is in the air.

Of course meaningfully higher rents at the property would be Exhibit A that debunks Yukelson’s fallacy that rent stabilization hounds operators out of the apartment rental business. In his telling, rents can’t rise because of an excessively low cap on the maximum allowed annual rent increase. But those rents can rise as much as 4.1% this year anyway and every vacancy is a new opportunity for that “upside.” Toss in a remodel and those units will fetch a 50% higher rent.

For some reason the current owner did not choose to maximize rents or invest for the upside. Not that they couldn’t: the below-market rents still returned to the Carlsbad family a whopping 66% profit on operations. That calculation is based on figures right there in the listing: $109,256 gross minus $39,800 in expenses generates a net operating income of $67,456.

These are the kind of figures that Yukelson and his AAGLA steadfastly refused to provide even as they advanced their specious claims that rent stabilization would strangle mom-and-pop owners. They never provided a single figure on operations! Nevertheless we would guarantee that mom-and-pop owners enjoyed fatter profit margins than any other kind of operator. (Some even pocketed the business tax they should have been turning over to the city.)

To sum up, this property is on the market for a high price because the current owners have priced-in the “upside” and want to take the gain now.

Time to Sell… But Not Due to Rent Stabilization

Several reasons make the time right to cinch the sale on 169 North Clark. For one thing, the Republican tax law now takes a smaller tax bite out of capital gains. Moreover the new law keeps the 1033 exchange that allows another investor to plow his existing ‘like-kind’ gains tax free into this new $4M investment.

Despite rent stabilization the demand for multifamily rental properties in Beverly Hills remains robust, too. We are seeing record prices for some properties. Indeed the long game where residential rental property is concerned is not the 66% margin and cash flow but rather the appreciation. Double-digit annual appreciation tends to price-in the upside. Any new buyer willing to pay 35 times the rent roll will have to find a way to cash it out.

And speaking of upside, this property is a great candidate for condo-conversion. As a ‘character-contributing’ property it will allow the condo converter off the hook for meeting certain city code requirements (not least the parking requirement). We want to see this remain rental housing but it is important to note that rent stabilization will offer little protection to tenants if a condo-converter comes calling.

For today’s tenants, a sale can mean rising rents, potential displacement for remodeling or condo conversion, or just everyday changes in management’s approach. Any course of action may make 169 North Clark less appealing than it was. Have you lived at 169 North Clark? Get in touch with Renters Alliance!

Next we follow up with a look at two other listings forwarded by AAGLA’s Dan Yukelson: 9683 West Olympic Boulevard (a handsome 5-unit property if you don’t count the illegal unit) and 300 South Doheny (a modest entry-level 6-unit property). They have even more to tell us about the AAGLA fallacy about rent stabilization!

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