Southeast Area is Movin’ On Up!

Look around my multifamily neighborhood southeast of Beverly and Wilshire. You can’t miss the changes: newly spruced-up properties market remodeled one-bedrooms at $3,500+ per month and a duplex unit will fetch nearly $5000. A couple of multifamily properties have changed hands at one million bucks per unit. Is rent stabilization that bad for landlords?

It was the Bentley parked in a duplex driveway that got me thinking about the effect of rent stabilization on my neighborhood. But it is not only that Bentley; there is a prevalence of expensive makes parked where modest sedans once were. My neighborhood is movin’ on up!

Last November, Apartment Association of Greater Los Angeles executive director Dan Yukelson sent a letter to the Beverly Hills Weekly that remarked on the situation.

 

Yukelson letter: "This is a photograph showing the cars parked at the apartment building where Beverly Hills’ rent control advocate Mark Elliot lives. Look at the cars parked at Mark’s building: a Lexus SUV, a BMW 5-Series, and two Mercedes Benz sedans. Why am I and other owners in Beverly Hills being forced to subsidize these renter’s lifestyles through the rent control ordinance? I drive a Chevy. I can’t afford the cars at Mark’s building!"Never mind that Yukelson got the facts wrong (it was not my building’s garage in the picture.) What could the prevalence of fancy cars on my block (including the Bentley) mean? Has rent control kept the lid on rents overall? Have asking rents spiked into unaffordable territory (as a $3,500 studio suggests)?

Of course both could be true. We can only speculate until we have facts like average and asking rents and how they have changed since City Council amended the ordinance in early 2017.

Where there is room for speculation there will be differing opinions and Yukelson has his view. His letter to the Weekly implies that tenants are riding high on the backs of landlords; that we enjoy an undeserved subsidy due to rent control.

(His gripe reminds me of the ‘welfare queen’ caricature from the 1970s. Remember the single mother who fraudulently reaps a fortune by collecting welfare payments in the name of nonexistent recipients? Today it is not the taxpayer taken to the cleaners these days but the Chevy-driving landlord.)

In his view, rent control is nothing more than a latter-day Bolshevik revolution, which is why the Apartment Association likes to resurrect the red scare to motivate landlords. Perhaps it was no coincidence that Beverly Hills tightened tenant protections on the 100th anniversary of the 1917 Russian Revolution!

Tenants likely have a different view. Maybe apartment rents aren’t low despite four decades of rent stabilization. Our city consultant found that rents on average in Beverly Hills were higher than surrounding municipalities (read the data brief). The fancy car then is not some sign of an underserved subsidy but instead shows that tenants who pay near-market rents in Beverly Hills can also travel in style.

Second, Beverly Hills has had rent control for decades yet the vast majority of tenants fell under Chapter 6 of the ordinance. That chapter allowed 10% annual rent increases (and some of us received those in successive years). So despite rent stabilization the rents could have kept up with market rents if the landlord chose. (That’s why we never heard landlords complain about rent stabilization until January of 2017 when the annual rent increase cap was reduced.)

Third, the relatively high rate of tenant turnover among renting households in Beverly Hills (according to the city’s consultant) means that most renting households would be paying market rent or close to it despite the lower cap on the annual rent increase. Why? Because the landlord establishes the rent for the apartment once it is vacated; a high rate of turnover means that rents in a property will approach market rate as those units are re-rented.

(It is worth noting that not a single landlord has taken advantage of a provision in the rent stabilization ordinance called the ‘rent adjustment.’ It allows an owner to petition the city for an annual rent increase higher than what the cap allows if he can show that the recent changes to the ordinance has harmed his profit. Not a single owner has stepped up to make that claim because landlords are most likely seeing record returns on their investment.)

Fourth, there is a reason why a property buyer would pay one million bucks per unit for multifamily rental real estate in Beverly Hills: the margins are too damn good to pass up! The city’s consultant estimated that, on average, about two-thirds of every rent dollar is taken as profit. For a duplex with a rent roll of $100,000 per year, for example, the landlord would clear $70,000 in profit. Add capital gains and favorable tax treatment and a host of deductions (including every life expense he can put on the business’s books) and it’s a cash machine.

(The reason why so few multifamily properties change hands in Beverly Hills is the fat margin: buyers will overpay for the opportunity. Longtime owners especially benefit: Proposition 13 froze property tax assessments in 1976 for the longest-term owners. (That is back when disco topped the charts.) Those properties are passed down through family trusts. And the ultra-low property tax they pay means more goes to the bottom line. No wonder few want to sell.)

We can take Yukelson as an example. Since he bought his Olympic Boulevard fourplex in 2014 the property has appreciated at an estimated annual rate of 6.3% (Redfin) to 11% (Realtor.com). Taking the average of those rates (9% annually) the property is worth about $3.4 million today. That represents a paper gain of a million bucks since 2014. Then there is his profit on rental operations too. Moreover, lower mortgage interest rates means that refinancing now would lower his operating cost even further even as his rents continue to rise.

Yukelson’s capital gain alone on his investment suggests he could be driving a Bentley when he tires of his Chevy. He need only borrow against equity and put a lot of cash into his pocket. Yukelson is a professional accountant so I don’t have to tell him how to do it. He knows he is in the best business going when it comes to generating cash.