What is the Value of a Vacancy?

When a tenant receives a cash-for-keys buyout offer her logical question would be whether the money is worth the trouble of moving. Today’s Westside market is tight and the cash may not stretch as far as she would like. But is that even the right question to ask? Rather the tenant with a buyout offer in hand should ask, What is my vacancy worth to the landlord? As it turns out, quite a bit.

To some landlords, an apartment is worth much more empty than occupied by a rent-paying tenant. That makes leverage when the landlord comes calling with an offer. It may make sense for a tenant. The better the buyout, the more likely is the tenant to see her tenancy much like a vintage film noir protagonist eyes a troublesome husband: he’s worth more dead than alive if the insurance pays. But the key is recognizing how valuable is the tenancy when contemplating the offer.

Why Would a Vacant Unit Be Valuable to the Landlord?

A vacant unit is valuable to the landlord for several reasons. Most obviously there may be a disparity between the current rent and potential (market) rent. Buyouts are all about timing; the disparity will yawn wider in a tight market but may disappear altogether during an economic trough.

While tenants may think about themselves as an asset to the landlord, the fact is that in a hot market a long-term tenancy can be seen as an encumbrance. To today’s landlords it’s worth more dead than alive when the next tenant pays 50% to 100% more rent.

A vacant apartment is also one that is ready for remodeling. A newly-remodeled apartment will fetch a much higher rent because today’s finishes and furnishings are in high demand. But the landlord will not remodel for a current occupant because he can’t soon recoup his investment. Besides, why encourage the current occupant to stay longer? Turnover is the objective when repositioning a rental property!

The smart landlord knows that his options are limited now that Beverly Hills has ended no-just-cause termination. Without a 60-day notice in his back pocket, the landlord must now abide by the rent stabilization ordinance’s remodeling provision. The required notice for a termination under that section (BHMC 4-6-6) is one year.

That brings us to yet another reason why a vacant apartment is valuable: time is money! He can either wait out the year’s notice requirement or simply offer the tenant a buyout, which is quick and clean and would sever his obligation to the tenant under the ordinance. (We detail the obligations in Extended Remodeling: What You Need to Know).

For these reasons the tenant who is contemplating a cash-for-keys buyout should think carefully about the key question: How much is my apartment worth to the landlord? A ballpark figure could be ten times the monthly rent. And the long-term tenant in a desirable apartment could ask for much more. Whatever, just don’t give it away. A landlord with a plan can throw tens of thousands of dollars at a tenant because multifamily properties are changing hands at record prices!

The Cash Value of a Vacant Unit Accrues to the Seller

Which brings us to the moment when a vacant apartment is most valuable to the landlord: when he is selling the property. The buyer will often pay bigger bucks to avoid having to terminate current tenants.

337 N Oakhurst front facade
Not a charmer: 337 N Oakhurst Drive

Let’s show the importance of vacancies using 337 North Oakhurst as an example. Last year it sold for $4.5M, which is $554 per square foot (a pretty good price for a building with no character and not a single window facing the street). Seller Philip Blustein was an early (and loud) opponent of changes to the rent stabilization ordinance but it seems that rent stabilization did not hurt his property’s value!

Now, it wasn’t charm that helped close the sale. It wasn’t its proximity to Robertson Boulevard or the rent roll (the annual gross income from rents). Indeed three of the eight units at 337 North Oakhurst sat empty. But that’s precisely the point: the vacant units made this property attractive. The most conspicuous aspect of the listing? The three vacancies “held for the new buyer’s use.”

337 N Oakhurst sold listingSeller Bluestein had evidently kept three units off the market with a sale in mind. Worse, two of the vacancies were 2-bedroom apartments — the size that appeals to families with children in the schools.

Fast forward a year and the property is now back on the market. The asking price is up to $5.1M — a potential 13% appreciation in one year — and it comes with (wait for it) four vacancies…including the same two 2-bedroom apartments. The new market listing also celebrates the empty units!

337 N Oakhurst active listingThe listing calls 337 North Oakhurst a “trophy asset” but the real promise of this ‘trophy’ is the higher rents after a remodel. “Plans are also included,” the listing helpfully adds. “Permits are ready to be issued.”

Like the troublesome spouse with great life insurance that got the noir protagonist thinking about termination, a rental property, too, may be worth more to a buyer dead than it alive with tenants.

What Can Our City Do?

We can ensure that rental properties remain available to the market by taking a few simple steps:

  • Force property owners to follow the state’s Ellis Act. Owners can remove a property from the rental market but only under certain conditions. For too long our city stood by as landlords used 60-day notices to evade that law’s requirements. The city could condition any future approval of a condominium conversion on having followed the Ellis Act.
  • Impose strict limitations on ‘unit warehousing.’ There are very limited reasons for terminating a tenant now that the city ended no-just-cause but that doesn’t mean that units liberated by tenant attrition are subsequently inhabited. Our city could require any landlord to obtain permission for any purpose that would keep units uninhabited.
  • Require that units remain habitable until being repurposed. Owners can apply for a condominium conversion or can redevelop their property. Both require extensive city review. Plans and permits add additional time. There is no reason that any rental property should sit fully or partially empty while a two-year approval process plays out. Our city should look closely at the (re)development timeline to see how we can maximize use of those relatively affordable units before they are lost.
  • Undertake some analysis to identify patterns or practices in withholding units from the market. There are numerous properties with multiple vacancies but the city undertakes no accounting. The Rent Stabilization Program should audit the rental unit registry to identify owners who are intentionally keeping units off of the market.

Proactive action to make sure we use the resources we already have won’t solve our affordable rental housing problem, but it would acknowledge a truism recognized by planners everywhere: the most efficient means of providing affordable housing is to preserve what we have today.

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