Rent Stabilization Fallacy Exhibit B: 9683 West Olympic Blvd

In a previous post we followed up on a real estate listing for 169 North Clark Drive that local landlord (and Executive Director of the Apartment Association of Greater Los Angeles) Dan Yukelson had helpfully forwarded to city power brokers. His message: long time landlords are being forced out of business by rent stabilization. He also groused about “over regulation” and suggested (against all indications to the contrary) that rent stabilization makes rental property ownership a losing proposition. We called that an AAGLA fallacy: 169 North Clark was Exhibit A: a cash cow property with even more upside for the new buyer. Here is 9683 West Olympic. It is Exhibit B to show that a professional owner knows when the time is right to reap his gains!

Exhibit B: 9683 West Olympic Boulevard

The listing rightly sings the praises of this “charming French style complex” across from Roxbury Park. The 6-unit property is a fine example of the interwar revival-style in Beverly Hills and features a central courtyard “lovely hardwood floors, tile, wainscoting, and moldings.” According to a city historic survey in 2004 it could contribute to a future Olympic Boulevard multifamily historic district.

9683 West Olympic listingYukelson flagged this listing not for the historic charm but for the current rents. “Look at the rent rolls,” his email said to councilmembers. Low rents and rent stabilization are driving many landlords out of town. “Many more will soon follow,” he added darkly. But is that the case here? Let’s take a look at the rent roll first.

9863 West Olympic
3-bedroom $3,000 2-bedroom $2,375
2-bedroom $2,375 2-bedroom $2,120
2-bedroom $2,200 0-bedroom $1,700

Indeed rents are somewhat below market. For comparison purposes the average 3-bedroom Chapter 6 rent in Beverly Hills is about $3,900 (according to the city’s rental unit registry). The average rent for a 2-bedroom unit is $2,770 and the average studio rent is $1,390. At $1,700 the studio here is the outlier: it punches aboveits weight!

So these rents may have room to rise. Indeed the listing trumpets the “potential upside” for higher rents under the next owner. But that raises two questions: Why are today’s rents below market? And how can the next owner realize the upside if rent stabilization puts him in a straitjacket?

Why indeed are rents low? Sometimes rents are below-market because a longtime owner values his tenants and affordable are a means to discourage tenant turnover. We often see that in earlier generations of owners. When the property is handed down to heirs is when the practices change. Also some mom-and-pop operators may not be experienced in property management nor cognizant of the broader market. They may not see the “upside” opportunities.

However the longtime owner of 9683 West Olympic is neither inexperienced as an operator nor unknowing about the market. ‘Patricia Stark’ is owner on the property’s title. City records indicate that the assessor shows the owner as STARK,PATRICIA F CO TR (a family trust). From what we can see in the permit history, the Stark family took control of the property around 2001 when Patricia’s signature appears on a roofing permit. That’s nearly two decades of operation. These family operators are not newbies.

Moreover a decade ago Stark formed Gpmj Investments LLC to manage her rental apartment leasing businesses. There is yet another entity in city business license records that shows OLYMPIC I APARTMENTS as the lessor at 9683 West Olympic. Searching online shows Stark has been associated with Property MGMT Services, Inc. which manages residential rental property (“serving tenants is our business…”). Clearly Stark is cognizant of the rental market.

Stark was raised in Beverly Hills (nee Farahnick, BHHS class of ’77) evidently living at the property and then subsequently relocating to Newport Beach, California. That’s the location on the title and the LLC paperwork. We include her bio because husband Michael Stark is a Newport Beach-based broker and realtor with a long history in the business and his name appears on the listing as the exclusive broker for 9683 West Olympic. Michael is no tyro mom-and-pop either! Among his many, many YouTube videos for navigating 1031 ‘like-kind’ tax deferred property exchanges is a video explainer about the Beverly Hills market.

As for the second question, low rents cannot be due to the rent stabilization ordinance. The ordinance long allowed a 10% maximum annual rent increase and this longtime owner could have taken advantage of it in the two decades of ownership. Because all units are Chapter 6, per registry data from last year, there would have been no problem bringing those rents to market in only a few years.

Fat Margins = Healthy Cash Flow on the Front End

The more likely reason the family did not increase rents to market was that the cash flow was enough. The Stark family took control of the property after it had undergone a major upgrade. Prior owners Marvin & Mehry Smotrich upgraded electrical, heating and plumbing. They remodeled a couple of units after a fire (notably converting closets into additional bathrooms). Permits indicate the Starks only invested in a new roof. Without significant improvements the property needed only maintenance.

Keeping expenses down means a greater proportion of the rent roll is cash flow. The listing does not identify annual expenses but it does provide the annual gross: rents bring in $165,240 per year. But we can estimate the cash flow based on the city consultant’s identification of 67% as the average margin on medium sized properties (according to industry data). Small properties return an even fatter margin, the consultant found.

9683 West Olympic property taxSo it we take that 67% and then knock a few points for the $2M tax assessment (much higher than 169 North Clark still half the current value) then this landlord is probably pulling in well over $100k in cash flow annually.

And what about that upside? A new buyer can take advantage of the upside if he can raise the rents. But if Yukelson is correct, wouldn’t rent stabilization hold him back? Let’s not forget that every vacancy is a market opportunity and under RSO this year the landlord could still raise the rent by 4.1%.

The proof is in the listing price: $5.2M for six units. That works out to more than $800k per unit on average. The price offered by an industry professional prices-in the upside. Presumably the cap on the maximum allowed annual rent increase can’t be too onerous!

Another “upside” opportunity is the “development opportunity.” That’s what the listing says. Now that could be a condominium conversion or perhaps a new rental or condo building entirely. Any of these choices would remove the units from rent stabilization entirely, so it’s not like the buyer is shackled by RSO.

Double-Digit Appreciation on the Back End

AAGLA never reminds us that asset appreciation is the real long game for multifamily property owners. Instead like to talk about high-and-rising expenses without ever providing any data. Yet appreciation is factored into the landlord’s ‘fair return’ under the law because it counts as a gain from the investment.

Multifamily rental property in Beverly Hills appreciate at double-digit rates annually like the entire Westside. We’re not disadvantaging owners because we have rent control. If anything property prices are as high or higher in areas where rent control is actually more strict! (AAGLA does not tell us that either.)

The real estate industry will publish their own optimistic prognostications about prices on the rise but we thought to look at the actual data. Ten years of multifamily sales data via MLS (2007-2018) show that multifamily prices are reaching $1M per unit and routinely breaking $700 per square foot. We’ve seen sales well over $1,000 per square foot in that time. We see gross rent multipliers of 35 times the annual rent. Thirty-five times! Rent control is not sapping the Beverly Hills multifamily market of vitality.

We also looked at 19 properties listed on MLS that had been sold and then at some time between 2007 and 2018 were resold. These are interesting data points because multifamily in Beverly Hills turns over infrequently. The 19 resold had a median time between sales of 34 months each. That’s a small set and a short hop between sales that suggests few properties are available, and investors are pouncing on perceived upside.

Across those 19 resales the appreciation averaged 15% per year. That’s a whopping gain for turnaround specialists and the higher prices lift the whole market. That’s the case with 9683 West Olympic too: it’s been off the market for some time but when it sells the Stark family will earn plenty on back-end appreciation.

Needless to say, AAGLA keeps the focus on expenses without mentioning grosses and never talks about this kind of double-digit appreciation. Even if the Stark family were not in the real estate business, that kind of appreciation would ameliorate any cash flow left on the table due to lower rents.

About that Studio Unit…

Reading the online listing description we can’t help but trip over this bit: “The 6th unit is a studio which may not be up to code.” A look at the building permit from 1936 shows only 5 units (as does the tax assessor).

9683 West Olympic building permit (1936)The city’s own field survey about the time the Stark family took over actually flagged unit 9683 1/2 as “not on permit or on file.”

9683 West Olympic field survey excerpt
The city’s field survey in 2001 — about the time the family stepped in — flagged a unit not on permits.

Moreover, the rental unit registry data for mid–2018 shows only 5 units registered at this address. The studio numbered 9683 1/2 was not among them. So if the Stark family was leasing an unpermitted unit, they knew not to declare it as an occupied unit. That unit leases for $1,700 a month, according to the listing, and it is interesting that it is the only unit for which rent is above average for the unit size.

9683 West Olympic studio door
What about this unit looks like the others?

A telltale sign that this is not an original unit is right there in the listing too: pictures show that the door is different from the rest. It looks like a utility door; it has a stuck-on mailbox; and the address plate is different than the others. Nothing about this ‘studio’ even looks legitimate!

These owners know better than to operate an unpermitted unit. Has it ever been inspected for fire safety? Is the rent included in the taxable gross receipts that are reported to the city annually? Does the tenant believe she has protections under the rent stabilization ordinance? We will be asking these questions and more.

Note to the ‘studio’ tenant at 9863 1/2: you can bring a civil suit to recover the rent that was collected unlawfully. With a sale in the offing, you will have no greater leverage than you do right now if you file a civil claim.

Yukelson’s real concern with rent stabilization is that there is a new sheriff in town: the RSO office. And city leaders have shown a renewed appreciation for tenants’ rights. Perhaps that’s what he means when he brays about “over regulation.”

To sum up, AAGLA claims about rent stabilization and price controls portending an end to the apartment rental business in Beverly Hills is simply nonsense. If the cash flow won’t keep an owner in the business then the double-digit appreciation surely will. And the longtime owner that walks away likely has other good reasons.

Broker Michael Stark and family will see plenty of “upside” from this sale. He’s something of a self-styled expert on the federal tax 1031 ‘like-kind’ provision that would allow his family to plow their gains from 9683 West Olympic into the next investment tax-free. As he’s keen to find ‘pocket listings’ (which never hit MLS or are advertised) in Beverly Hills, his tax-deferred dollars will go even farther.

So it’s hard to feel to bad about rent stabilization when longtime owners like the Stark family benefit from fat margins, reap big appreciation, and then find federal tax breaks on the sale. There are many reasons to cash out of rental property but rent stabilization is not among them.

Have you lived at 9683 West Olympic? Get in touch with Renters Alliance!

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