Rent Stabilization Fallacy Exhibit A: 169 North Clark

Local landlord Dan Yukelson recently circulated an email to city power brokers that claimed rent stabilization is harming mom-and-pop multifamily property owners in Beverly Hills.  “These are ‘long time’ housing providers being forced out of business by over regulation and bad housing policies in Beverly Hills,” it says, and linked to several multifamily properties for sale. So we had a look. The listings don’t support specious claims but instead make the opposite argument: multifamily is still a money-minting business!

Yukelson 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 that darkly proclaim the end of multifamily apartment ownership in Beverly Hills. This email is no different.

Dan Yukelson email

Are small property owners really being “forced out of business by over regulation?” Does this example support Yukelson’s specious claim about rent stabilization killing them these operators? Let’s take a look.

Exhibit A: 169 North Clark Drive

The listing boasts of an “absolutely beautiful 1930 Spanish style fourplex” that has not changed hands in fifty years. It has been “owned and lovingly maintained by the same family” and now the property is gracefully aging into its ninth decade. It is representative of the many small multifamily rental properties that bring character — not to mention quality housing at a (relatively) affordable price — to our neighborhoods. Properties like 169 North Clark are an important part of our rental housing stock because the provide good housing at a relatively affordable rent.

The rent roll from the online listing:

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

The Quillin family, longtime owners, have kept rents here relatively low. That is not surprising: some owners keep rents affordable to maintain tenant stability; or they sacrifice maximum cash flow to retain the tenants they appreciate. For whatever reason the Quillin family appears to have pursued a deliberate pricing strategy that eschewed maximum increases.

Compare these rents to the average citywide rent for a two-bedroom unit at $2,800 per month, according to the city’s rental unit registry. Rents were allowed to rise that high under the rent stabilization ordinance because it allowed for 10% annual increases up until two years ago. This owner chose not to take advantage of it.

But there is a pricing anomaly too: each pair of apartments show identical rents in the listing. That is quite unusual as rents can range widely even in the same property. Two rents of the same dollar amount underscore deliberate pricing as opposed to allowing the rent to rise to whatever the maximum would allow.

Modest Amenities, Low Carrying Costs

The Quillin family might have kept rents relatively low because they recognize that this older building does not meet today’s market needs. There are aging plumbing and electrical systems and that means clogged toilets and low-amp circuits. The kitchens are optimized for early twentieth century living and don’t easily accommodate today’s family needs. There has been no significant improvement to the property.

The building suggests other compromises too. There is no central air as these units feature window air conditioners. Parking is limited to one space per 2-bedroom unit where today’s code would require three spaces. There is no electric charging in the garage either. Finally the location is not the best (Los Angeles adjacent) but on the brighter side it is close to Horace Mann school.

169 North Clark taxesThe Quillin family could keep the rents reasonable because the carrying cost is quite low. There is likely no mortgage (except perhaps refinancing). The property tax is quite low — just $2,760 per year on a total $200,000 valuation (!) thanks to Proposition 13 — and it is covered by a single apartment’s single month’s rent.

Challenges for the New Buyer

At the listed price, 169 North Clark will cost the buyer almost a million bucks per door for these older 2-bedroom units. That means a big mortgage. And the tax bill will increase when the property is reassessed for tax purposes.

The operating margin will look much different for a new buyer too. The gross rent multiplier of 36 (according to the listing) means means about 36 years of rent to earn back the purchase price. The property will also need improvements to bring it up to current market expectations.

Why invest in 169 North Clark when the value proposition is risky? That asking price is $704 per square foot, which values this property higher than 90% of all multifamily property sales in Beverly Hills over the past decade (according to Multiple Listing Service). That’s going out on a limb.

Maybe Dan Yukelson has a point about rent stabilization: how could the buyer recoup his investment when rent stabilization shackles his hands? How can he realize the advertised “large upside potential with rents”?

Realizing the ‘Upside’

Despite rent stabilization there are numerous ways of realizing the ‘upside’ as advertised in the listing.

  • Demand the maximum allowed annual rent increase each year, which will raise rents faster than inflation;
  • Raise the rents upon each unit vacancy, which, despite the rent stabilization ordinance, is allowed under the law (called ‘vacancy decontrol’);
  • Undertake a major remodeling to ‘reposition’ the property after a relatively modest investment (and terminate existing tenancies in the process); and,
  • Re-purpose the property through condo-conversion or redevelopment, either of which would put the property beyond the reach of rent stabilization and price caps.

The Republican tax cuts take some of the risk out of the investment. There  is a much smaller tax bite out of operating profit especially for the corporate investor; accelerated depreciation schedules; and the federal 1033 like-kind exchange that will save the buyer  capital gains tax on his prior investment if he plows such gains into this investment.

The Long Game: Fat Operating Margins and Asset Appreciation

The price on the listing has priced-in some of that ‘upside’ already, of course, but over time the long-term benefits of residential rental real estate will come  back to the foreground. These include fat operating margins and asset appreciation.

The operating margin in rental real estate is known to investors as ‘cash flow.’  Speculators talk about it all the time. And this listing describes it plainly: $67,456 net operating income (cash flow) each year on $109,256 in gross rent after expenses of $39,800. That is a 66% margin and the new owner will realize a similar margin after some years of operation.

Let’s note that Yukelson and his Apartment Association member pals have steadfastly refused to provide such figures. Flatly refused. Even though they continue to make  claims about rent stabilization and “over regulation” hobbling mom-and-pop operators. This 169 North Clark listing puts claims about the poorhouse to rest.

The other long game benefit is asset appreciation — something else Yukelson and owners don’t ever talk about. The demand for multifamily rental properties in Beverly Hills remains robust despite rent stabilization because properties like 169 North Clark come up for sale relatively infrequently. Owners overpay.

Appreciation increases at double-digit rates some years and near double-digits on average over the decades. That is the real long game for residential rental property investors. That’s why they’re in it. And that’s why the Quillin family is asking nearly one million bucks per door. This business, from margins to back-end appreciation, is too good not to be in.

Next we follow up with a look at another listing forwarded by Dan Yukelson: 9683 West Olympic Boulevard, a handsome 5-unit property (not counting the illegal unit). Have you lived at 169 North Clark or 9683 West Olympic? Get in touch with Renters Alliance!