It’s always been tough being a landlord in rent-controlled Los Angeles. But recent developments threaten to make that much tougher.
Landlords might have to shoulder more of the financial burden of a recently enacted city mandate for seismic retrofits after Gov. Jerry Brown earlier this month vetoed tax credits that would have helped them out.
Meanwhile, the city is looking at placing a cap on the number of rent-controlled units that can be demolished each year, making it harder for landlords to sell their property for redevelopment.
Taken together, these actions have rattled apartment owners and developers.
“This is developing into a perfect storm,” said Carl Lambert, president of Venice multifamily real estate investment firm Lambert Investments Inc. and a board member of the California Apartment Association. “It’s all very concerning.”
The biggest concern of late has been the city’s seismic retrofit mandate, which Mayor Eric Garcetti signed into law earlier this month. The law requires owners of the city’s more than 12,000 wood-frame apartment buildings that sit atop carports to conduct surveys and reinforce the buildings to better withstand major earthquakes. City officials are hashing out follow-up legislation dealing with who should pay for the retrofits – estimated to cost roughly $10,000 for each rental unit.
The same weekend Garcetti signed the local measure into law, Brown vetoed a bill that would have allocated up to $12 million a year in tax credits to defray some of the cost to building owners. It was among a number of tax credit measures the governor nixed, citing the state’s roller-coaster finances. He suggested that the Legislature appropriate the $12 million rather than offer credits.
“We were very disappointed with the governor’s veto,” said Jim Clarke, executive vice president of the Apartment Association of Greater Los Angeles. “It puts us back to square one on financing the quake retrofits.”
Passing costs on
Current law allows landlords to pass on 100 percent of the retrofit cost to tenants, with a cap of $75 a month for up to 10 years, which is the formula San Francisco adopted for its quake retrofit law. Before Brown vetoed the tax credit legislation, a consensus had been developing in Los Angeles for a 50-50 split of the cost between landlords and tenants.
That consensus now appears to have shattered. Clarke and other landlord advocates said that unless other government funding is found, they will push for a 100 percent pass-through to tenants.
That has drawn fire from tenant advocates, who say any rent hike for seismic retrofits is too much.
“Even at $38 a month under a 50-50 split, most tenants in Los Angeles can’t afford it,” said Larry Gross, executive director of the Coalition for Economic Survival, the city’s largest tenant advocacy group. “If you go any higher, you will just push that many more tenants out of their units and onto the street.”
Hovering over all this for landlords is a nagging concern that the retrofit cost estimates are too low, especially for bigger buildings. Costs to reinforce beams and posts can rise exponentially with each additional floor that must be supported.
One landlord who voluntarily completed a seismic retrofit on a Hollywood apartment building this summer said he ran into all sorts of unanticipated costs. “By definition, these are all old buildings you’re talking about – in many cases over 50 years old,” said Earle Vaughan, a former president of the Apartment Association of Greater Los Angeles. “Any time you open up the walls of an old building, you never know what other problems you’re going to find that need fixing.”
Vaughan said the seismic retrofit work on his 21-unit Hollywood building included installation of rebar and steel beams. But it also exposed problems with the stucco and water drainage channeling; those extra repairs cost $1,500 to $2,000 a unit.
And that’s not the end. There’s also concern about the relatively few qualified structural engineers and contractors available to do all the work. As compliance deadlines near, that will put a premium on their time, which, of course, will push costs up to hire them.
Landlords are also alarmed about the city’s move toward capping the number of rent-controlled units that can be demolished each year. The city’s housing department is examining the proposal and is expected to report back to the City Council early next year.
The aim of such a cap is to preserve affordable rent-controlled apartments.
“Large real estate developers are buying up affordable rental housing and demolishing those buildings to make way for luxury rentals and condos,” said Gross, the tenant advocate. “We’re losing something like 100 affordable rent-controlled units a month. When we’re short 500,000 affordable housing units, this is moving completely in the wrong direction and the cap is intended to stop that.”
But landlords said the cap will actually have the opposite effect: slowing or even preventing development of new housing units.
“A cap on demolitions would limit the ability for the current owner to upsize their building,” said Dan Tenenbaum, founding principal of Pacific Crest Realty, which owns a dozen local rental properties, 10 within L.A. city limits. “If the goal is to increase affordable units, this is the wrong way to go about it. We need to make it easier to add housing units, not harder.”
The demolition cap could also make it harder for owners of older properties to find willing buyers. That, landlord groups contend, would be a violation of the Ellis Act, a 1985 state law that allows landlords to evict tenants en masse so long as the property is demolished to make way for another use. (The property can be reused for rental units but only after five years.)
“If this goes through, it will almost certainly be challenged legally,” said Beverly Kenworthy, executive director of the L.A. chapter of the California Apartment Association, which includes in its membership a number of large regional and national rental property owners.
Also looming next year is a possible attempt to impose an “inclusionary zoning” mandate that requires project developers to set aside a certain percentage of units that meet federal affordability standards or pay an “in lieu fee.” If such a mandate lacks incentives to boost the number of allowable units, it could stymie new projects, which in turn would make it harder for existing landlords to sell a property to developers.
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