In a previous post we followed up on a real estate listing for 169 North Clark Drive that local landlord (and Apartment Association executive director) Dan Yukelson had forwarded to city power brokers. His message was that longtime landlords are forced out of business by rent stabilization. He groused about “over regulation.” And he suggested that rent stabilization makes rental property ownership a losing proposition. That was all fallacy: 169 North Clark is a cash cow property. It was ‘exhibit A’ in rental property ownership ‘upside.’ Here is ‘exhibit B’: 9683 West Olympic.
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. Around a central courtyard are arranged apartments with “lovely hardwood floors, tile, wainscoting, and moldings.”
According to a city historic survey in 2004, 9683 Olympic could contribute to a future multifamily historic district. But Yukelson flags this listing to our city officials not for its historic charm but for the listed rents. “Look at the rent rolls,” his email says as he reminds his many recipients that low rents are driving many landlords out of town. “Many more will soon follow,” it adds darkly.
But is that the case here? Let’s take a look at the rent roll.
|9683 West Olympic|
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 because it really punches above its weight.
So these rents may indeed have room to rise, and the listing trumpets the “potential upside” for higher rents under a new owner. But the listing raises two questions: Why are today’s rents below market? And how can the next owner realize the upside if rent stabilization has put him in a straitjacket?
Why Are the 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 but when the property is handed down to heirs, then the practices change and rents rise.
Also some mom-and-pop operators may not be experienced in property management and not cognizant of the broader market rent trend (which is up). They may not recognzie the “upside” opportunities of rent-gouging.
However the longtime owner of 9683 West Olympic is neither an inexperienced operator nor is unknowing about the market. ‘Patricia Stark’ is owner of record on the property’s title. City records also show the owner as STARK,PATRICIA F CO TR (a family trust) for tax purposes.
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 so these family operators are not newbies.
Moreover a decade ago Stark formed ‘Gpmj Investments LLC’ to manage her apartment leasing businesses. But yet another entity is listed in city business license records as the lessor at 9683 West Olympic.: OLYMPIC I APARTMENTS. Additionally online records show that Stark has been associated with Property MGMT Services, Inc. which manages residential rental property (“serving tenants is our business…”). Stark must be cognizant of the rental market with so many entities tied to her name.
Stark was raised in Beverly Hills (nee Farahnick, BHHS class of ’77) and evidently lived at the property. She subsequently relocated to Newport Beach, California (the location on the title and the LLC paperwork). We reference Starks’ bio because husband Michael Stark is a Newport Beach-based broker and realtor. He also has a long history in the business and indeed he is listed as the exclusive broker for 9683 West Olympic.
Now, Michael is no beginner mom-and-pop either. Let his many YouTube videos help you, tomorrow’s rental real estate speculator, navigate the federal 1031 ‘like-kind’ tax deferred exchanges rules. Have a look at his video explainer about the Beverly Hills market too.
Is Rent Stabilization a Straitjacket?
How much ever Yukelson wants to grouse about it, low rents cannot be attributed to the rent stabilization ordinance. The ordinance long allowed a 10% maximum annual rent increase; any longtime owner (like Stark) could have taken advantage of it. She had two decades of ownership to keep pace with market rents.
The more likely reason the family did not hike rents aggressively is that the cash flow was enough for the Stark family. it took control of the property after it had undergone a major upgrade: prior owners Marvin & Mehry Smotrich improved the electrical, heating and plumbing and fully remodeled a couple of units (after a fire, notably converting closets into additional bathrooms). Those expenses were already made.
Permits indicate the Starks only invested in a new roof. Without significant improvements the property needed only year-to-year maintenance which meant for them a big proportion of the rent roll went to cash flow.
While the listing does not identify annual expenses, it does provide the annual gross rent: $165,240 per year. If we can estimate the family’s margin using the city consultant’s estimated 67% of grosses as profit, we see very healthy cash flow indeed!
For example, we take the estimated 67% of gross and knock a few percentage points off for the higher $2M tax assessment after the purchase. (That is MUCH higher than our ‘exhibit A’ property at 169 North Clark.)
After accounting for the higher tax bill the Stark family is probably pulling in well over $100k in cash annually from 9683 Olympic.
And what about that upside the listing brags about? Wouldn’t rent stabilization hold the new buyer back? The crucial consideration is ‘vacancy decontrol.’ Every vacancy is an opportunity to raise the rent to whatever the market will bear. Even under rent stabilization the landlord can raise the rent by 4.1% this year on an existing tenant.
The proof that rent stabilization is no straitjacket is right there in the listing price: $5.2M for six units. That works out to more than $800k per unit on average. Certainly that is pricing-in the upside, as they say in the industry.
Certainly upside opportunity is the “development opportunity” that the listing highlights. That could be a condominium conversion or perhaps new construction as a rental or condominiums. Any of those choices would remove these units from rent stabilization permanently. It is not like the new buyer would be shackled by rent stabilization.
Double-Digit Asset Appreciation
The real upside is asset appreciation. The Apartment Association likes to trash-talk rent control but never mentions that asset appreciation is the real long game for multifamily property owners.
Multifamily rental property in Beverly Hills can appreciate at double-digit rates. We see those real estate industry prognostications all the time about how rental property prices are on the rise. But let’s look at some actual data: 10 years of multifamily sales via MLS (2007-2018).
From sales data we see that multifamily rental real estate prices are reaching all-time highs — nearly $1M per unit — and routinely breaking $700 per square foot. These are ninety year old properties we are talking about. In fact we’ve seen sales well over $1,000 per square foot in recent years.
Why are buyers paying 35 times the annual rent to own rental property if rent stabilization is strangling profitability? Of course it’s not; residential rental is a great business to be in here in part because of that HUGE appreciation (and a lot of tax breaks too).
Investors Are Keeping Values High
We looked at 19 properties that were listed on MLS and that had been sold and resold between 2007 and 2018. This is an interesting data point because multifamily in Beverly Hills turns over infrequently. Some never turn over. But we see 19 that were sold and resold with a median time between sales of only 34 months. That suggests that investors are pouncing on the few properties that do turn over (and over).
Looking again at those 19 resales we see the average appreciation was 15% per year. Per year! (Inflation is running less than 3% per year.) Those numbers will lift the whole market and benefit 9683 West Olympic too. When it sells, the Stark family will earn plenty on the back-end appreciation.
So even if rent stabilization were to crimp the cash flow from operations, the back-end appreciation would take care of the profit on the back end.
About that Studio Unit…
Yukelson’s real concern with rent stabilization is not the price cap but the regulation: with a new Rent Stabilization Program office open there is a new sheriff in town. That’s what he means when he brays about “over regulation” of the business.
Ever on the lookout for shady business practices, we noticed this bit in the real estate listing description for 9683 West Olympic: “The 6th unit is a studio which may not be up to code.”
Indeed the building permit shows only 5 units.
Moreover, city’s own field survey from the time when the Stark family took over actually flagged unit 9683 1/2 as a mystery too. “Not on [building] permit or on file,” it says.
Not only does the tax assessor not show six units; our city’s rental unit registry doesn’t show the extra unit registered either. In mid–2018 only 5 units were registered at this address and that did not include the studio, 9683 1/2.
Clearly the Stark family was leasing an unpermitted unit and they knew not to register it. Interestingly, the studio unit leases for $1,700 a month, according to the listing, which makes it the only unit for which rent is actually above average compared to average rents for studios in Beverly Hills.
Could it be that the unit was not declared and not registered because it was never properly regulated under our rent stabilization ordinance?
Gee it Sure Looks Like an Unlawful Unit!
A telltale sign that this is not an original unit is right there in the listing images: they show that the door is different from the rest of them. In fact it looks like a utility door. And that mailbox has a stuck-on look to it. And the address plate is different than the others too.
Nothing about this ‘studio’ unit even looks lawful!
Experienced owners know better than to lease an unpermitted unit. So our first question is whether the city ever inspected it — for fire safety.
Our second question is whether the $1,700 rent was ever declared for business tax purposes. Gross rent receipts are taxable. Was $20k per year in rent ever reported?
Does the current tenant believe she has protections under the rent stabilization ordinance? We have asked these questions and more.
The tenant at 9863 1/2 should bring a civil suit to recover the rent that she paid unlawfully. With a sale in the offing she will have no greater leverage than right now to leverage that civil claim.
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!