The latest incarnation of California’s rent control measure that was defeated last November has returned. Proposition 10 2.0, Michael Weinstein’s Rental Affordability Act, is targeted to be back on the ballot in 2020.

The state’s Legislative Analyst’s Office (LAO) says the bill will result in a number of negative impacts, including California’s housing situation, the state’s finances as well as CRE market. The LAO says it would likely drive rental units from the market, decrease apartment property values, and possibly diminish annual tax revenues by tens of millions of dollars or more.

California voters turned down Proposition 10 last year, but the new version of the bill would allow cities and counties to impose rent control on buildings after they turn 15 years old. Under the Costa-Hawkins Rental Housing Act, local jurisdictions may not impose rent control on units built after 1995.

The proposed measure would also once again allow local governments to apply vacancy controls, meaning rents would remain regulated in rent-controlled jurisdictions even after changes in tenancy.

“The analysis clearly points to a reduction of available homes, as stricter rent control leads property owners to take units off the market, said Tom Bannon, CEO of the California Apartment Association. “Prop 10 2.0 would drive down property values and prompt an exodus from the rental housing market. California needs sensible housing policies that protect tenants and encourage the building of affordable homes for working families. This measure makes the crisis worse.”

by David Crown

As a property manager, I’m in the business of eliminating stress and headaches for property owners. Since nothing can complicate the life of a property owner quite like an irresponsible or malicious tenant, tenant selection is of the utmost importance in this industry, and it’s something I’ve devoted a great deal of time to refining.

Just the other day, I was at breakfast with a client of mine who owns a quadruplex in the San Fernando Valley. He mentioned that one difference he’s seen since he hired my company to manage his property—a difference it took him a few years to notice—is that the tenants we’ve rented his units to tend to stay put. He had told me in our first conversation that he could always fill his units immediately, that finding new tenants was never a problem. I remember my immediate thought back then was that he probably wasn’t getting top dollar for his apartments, and his rent-controlled units were suffering because of it. Now, he said he recognized that keeping the units full was a different story. It got me thinking about the mark of high-quality tenant selection criteria: it doesn’t just fill your apartments. It brings in tenants who stay longer and pay more each month. In this article, I’ll lay out the best ways to choose tenants to rent apartments to.

Firstly, it’s crucial to run an in-depth background check on all prospective tenants. We use an eviction search that spans the whole country in scope, telling us of any evictions the prospective tenant has been subject to. State-limited searches are out there, and if you use one of those, you could easily wind up renting to somebody who’s been evicted a dozen times in other states. In the national search, a record or lack thereof gives us some picture of the tenant’s prior dealings with landlords. We then begin to clarify that picture by contacting their former landlords.

Now, any property manager worth their salt knows to call a prospective tenant’s last listed landlord and ask how easy or difficult they were to deal with. But think about this: if the most recently listed landlord on an application is still currently renting to the prospective tenant, and has had a terrible time dealing with them, isn’t it possible that they’ll tell you the tenant is great, in hopes of pawning the them off on you? I’ve seen it happen before. This is why we call not only the most recently listed landlord, but also the one before that, and sometimes even a third if listed. We ask all of these landlords if the tenant was ever late on rent, if the police were ever called to the tenant’s unit, and if the tenant ever in any way violated their lease agreement. The more thorough you are with your questions, the better.

This brings me to my final point: don’t favor fast over thorough. You might be looking at these steps and thinking, “How can he do all this and fill the unit fast?” But I answer that question with a question of my own. What’s more important to you as an owner: finding tenants who move in immediately or who pay higher rent for a longer time? Plenty of owners and managers boast of their ability to fill units at lightning speed, without considering the fact that they might be leaving money on the table. Don’t get me wrong; we work hard to maximize quickness and efficiency as well. But that’s secondary to finding tenants who’ll pay the rent your property is worth, and who will furthermore stick around for years to come. This leads not only to higher profits for owners, but to the peace of mind that comes with not having to advertise vacancies every year. Don’t turn your apartments into revolving doors for a constant stream of new tenants. Difficult tenants—who turn in rent late, complain about nonexistent problems, and in some cases wrongfully sue landlords—are not worth filling a vacancy fast. Quality tenants, however, are worth the added work and wait.

David Crown is the C.E.O. of Los Angeles Property Management Group, and has over twenty-five years of experience managing all types of income properties. A hands-on leader who has managed properties in 16 states, Mr. Crown has been asked to serve as an expert witness in property management matters, and currently serves on the Forbes Real Estate Council. He can be reached directly at (818) 646-8151.

The Apartment Buildings Conference & Expo presented by Apartment Association of Greater Los Angeles (AAGLA) returns to Pasadena Convention Center on October 2nd, from 9:00 A.M.-4:00 P.M. Expo highlights include an exhibit hall, educational seminars and breakout sessions on trending topics facing multifamily owners, investors, developers, property managers and real estate professionals. Admission is FREE.

Expo attendees are invited to meet with industry experts, guest speakers and attend industry roundtables on rent control, fair housing, legal issues, tenant screening, the eviction process, investment strategies, housing incentives, property management, preventative maintenance, and other topics. An exhibit hall with 100+ suppliers will showcase the latest in management software, forecasting and analysis tools, roofing, seismic retrofitting, energy and utility systems, lighting, fire and safety equipment, insurance, legal counsel, tax preparation, alternative real estate investments and more.

Attendees are also invited to get free legal, financial and investment advice and learn how to lower property costs and improve performance. Past speakers have included Jon Coupal of The Howard Jarvis Taxpayers Association, Terry Tornek, Mayor of Pasadena, Tracie Mann of Housing Authority of the County of Los Angeles, and Daniel Yukelson, AAGLA Executive Director. This year’s AAGLA-hosted special breakout sessions will feature speakers on the new balcony inspection law, workers compensation insurance and legislative updates with structural engineer Jay Kumar, property expert Angel Rogers, workers compensation specialist Kevin Osterman, and others.

The Apartment Buildings Conference & Expo is produced by AAGLA, Apartment News Publications and On The Edge Promotions. Expo partners are Apartment Age, Apartment Management Magazine, California Association of Realtors (CAR), Beverly Hills Greater Los Angeles Apartment Association (BHGLAA), and California Association of Housing Authorities (CAHA). Held at Pasadena Convention Center on Wednesday, Oct. 2nd, hours are 9:00 am-4:00 pm. Admission is free. On-site parking is $15.00 per day. Exhibitors call (800) 931-6666 or email info@buildingsla. com. Pre-registration and information at www.buildingsla.com.

By Eric D. Jarvis, Esq., Founder of ReassureRent

Tenant screening has long been the method by which rental property owners have protected themselves against unplanned vacancies.  Ask almost any landlord or property manager, and they will tell you that they do excellent screening and have never had an eviction.  And yet, according to the Orange County Register, 499,010 unlawful detainer cases were filed over the last three years in California. The status quo of using tenant screening alone is not enough to protect a property owner’s rental income.  California owners and managers now have a new tool to ensure that their rental income is protected – tenant default insurance.

Conscientious landlords run background and credit checks on their prospective tenants.  It is common belief that renters with higher income levels, a strong credit history, and a history of making rent payments on time are less likely to default on their lease by not paying rent.  So, we have long been taught to obtain credit reports, screen income levels, and check on prior evictions of our prospective tenants as well as we reasonably can. There are many competing providers of tenant screening reports, and these reports are often accessible through apartment associations.  These steps help reduce the likelihood of tenant default, but are not completely foolproof. 

Just google “tenant horror story” and “looked good on paper” to find many examples of tenants who passed every benchmark on their tenant screening, but ended up becoming expensive liabilities.  The tenant stops paying rent, and then employs multiple strategies to hold out in the unit for months, costing the landlord time, money, and emotional aggravation. The loss of rents, legal expenses, and attorneys’ fees pile on top of the landlord’s continuing obligations to pay the mortgage, insurance, and property taxes the entire time.  None of this is predicted, prevented, or cured by a screening report alone.

Now, there is a way for California property owners and managers to guaranty the rent, even if a defaulting tenant slipped through the screening process – ReassureRent tenant default insurance.  Purchased by the landlord at the time of a new move-in, tenant default insurance is an actual insurance policy which protects the landlord against the default of that tenant for nonpayment of rent.  If there is such a default, this insurance will hire and pay for the eviction attorney and court costs, up to $1500, and manage the eviction. More importantly, it will reimburse the landlord for the missing rent, from the day the original rent was due through the day the property is restored back to the landlord’s possession, up to six months (subject to a small deductible).  

Tenant default insurance has long been used in the United Kingdom and Australia as a way for landlords to protect their rental income, but has only recently been made available in California.  One such insurance program is the ReassureRent tenant default insurance provided by eRLY Insurance Solutions, Inc. Under that program, the average cost of the insurance is about 2.5% of annual premium, or the equivalent of about $50 per month (varying by location and monthly rental amount).  ReassureRent has quickly gained the attention and support of California apartment owner associations, including the Apartment Association of Greater Los Angeles, who see this as an emerging and valuable advancement in the protection of their landlord members

Tenant screening alone has been the primary method by which landlords have protected their rental income, and continues to be a valuable risk management tool.  Now that tenant default insurance has become available in California, prudent landlords are able to backstop that screening with a rental income insurance policy.  The new way of protecting rental income, by combining tenant screening with a tenant default insurance, is better than the old way of crossing your fingers and hoping for the best!

Eric D. Jarvis is the founder of ReassureRent tenant default insurance.  Eric is also an attorney, who, prior to his 20 years as an insurance professional, practiced landlord/tenant law in Southern California.  ReassureRent can be reached at (833) 5TENANT (833-583-6268), and at www.reassurerent.com/aptnews.

By Daniel Yukelson, Executive Director of AAGLA

The homelessness problem has become more pervasive throughout California’s major cities and has now shocked our nation.  This condition will soon hopefully gain the attention of voters heading to the polls in the upcoming presidential election season.  So far, it has been a “joke” how the majority democratic leadership in Sacramento and our local elected officials serving city and county governments throughout the Southland have failed to put forth just one (let alone many) constructive solution to address homeless encampments, sanitary conditions on our streets, and the dire need for more shelters and “wrap-around” services such as mental health care.  Will our elected officials every understand the true causes of homelessness, address these causes, and address the problem head-on? Can our elected officials deliver the “right” solutions to homelessness, or will they continue to ride their favorite political wave and continue blaming the one segment of society that actually provides housing to people in our California communities, those of us that own and manage rental property?

There are numerous causes of homelessness, but elected officials never seem to acknowledge them, and that the solution to homelessness requires a multi-pronged approach.  Unless addressed strategically and quickly, we will see even more rapid growth in the homeless population here in California and the Southland. It seems that the most popular cause sighted by super Democratic majority electorate is the widening gap between wages and housing costs in California.  As a result, we hear solutions like higher minimum wage, increased government spending on housing, rent control, laws, eviction restrictions (e.g., “just cause” eviction), government paid-for attorneys (e.g., “right to counsel”), relocation payments, and now, even laws taxing property owners for vacant units.  Yet, more and more regulation, the old playbook of retreaded rent control and housing policies, have only caused more housing shortages by forcing us landlords to exit the rental housing business and by discouraging construction of new housing. These failed policies only caused the price of those few units that become available for rent to continue increasing.  It is a simple “supply and demand” thing! Remember your “Econ. 101” class!

Homelessness Defined

Homelessness is defined as living in housing that is below the minimum standards or lacks secure tenure. However, we most often see people as being homeless when they are: living on the streets, which is technically referred to as “primary homelessness” or moving between temporary shelters such as houses of friends, family and emergency accommodations referred to as secondary homelessness.  Tertiary homelessness refers to individuals living in private boarding houses without a private bathroom or security of tenure. The legal definitions of homeless varies from country to country, or among varying jurisdictions in the same country or region.

Poverty in America: A Brief History

Poverty has existed in some form in America since its founding in the late 1700’s.  By the beginning of the twentieth century, poverty was estimated at 40 percent of Americans as of the year 1900, which was largely due to two interrelated problems; (i.) an economy that was unable to sustain each of its citizens, and (ii) inequitable distribution of wealth – the middle class was virtually non-existent.  Back in the early 1900’s, there was no unemployment insurance, virtually no public welfare or pensions.

By the end of the 20th Century; however, things were different. By the early 1960’s, a welfare state was created out of the nation’s experiences during the Great Depression. Additionally, post-World War II America occupied a position of World dominance with the expansion of the American economy that dramatically raised living standards for most Americans. However, despite numerous policies aimed at reducing poverty among Americans, poverty still existed as a major economic problem.  By the early 1990s, the poor constituted 14.5 percent of the total American population – approximately 40 million citizens. Economists at the time noted that the “income gap” between rich and poor was the largest since at least 1947 when statistics started being kept. For the first time in United States history, America witnessed the emergence of a “class” of homeless people dating back to the mid-1970s.

Structural changes within the American economy over the last twenty years have also had a profound impact on the economic landscape for the “bottom” segment of American society as is evident in the shift from well-paying manufacturing jobs to minimum wage service jobs and temporary or part-time positions.  Some of this shift was caused by America’s integration into the world economy and various trade agreements entered during the last 30 years that have resulted in the job losses in the manufacturing sector. In addition, the labor market is increasingly segmenting workers by education and skills, and according to the Federal Department of Labor, approximately three-quarters of all jobs now require post-high school education for entry-level positions.  Accordingly, these structural changes have left more and more Americans behind and incapable of earning enough, even with multiple jobs.

The Extent of Homelessness

In 2005, an estimated 100 million (approximately 1 in 65 at the time) people worldwide were homeless and as many as 1.0 billion people lived as squatters, refugees or in temporary shelter, all lacking adequate housing. In the Western countries, the majority of homeless have been men (50%–80%), with single males particularly overrepresented.  As of 2015, the United States reported that there were 564,708 homeless people within its borders, one of the highest reported figures worldwide. These figures are likely underestimates as surveillance for and counting of the homeless population is challenging and highly inaccurate. In a recent count within the County of Los Angeles, the number of homeless people increased 12% year over year to almost 59,000, with reportedly more young and old residents and families on the streets.  The 2019 increase was registered just one year after the previous year’s count found a slight decrease in the county’s homeless population with approximately one-quarter of those counted stating they are recently homeless. More than likely, the accuracy of homeless counts taken during the previous year was lacking.

Homelessness counts taken between 2010 and 2017 apparently showed that the number of homeless people across Los Angeles County went from 38,700 to over 55,000 – an increase of 42%.  Many factors contributed to such large increases in homelessness, including Los Angeles County’s housing supply issues. Estimates made have concluded that Los Angeles County needs an additional 568,000 affordable housing units in order to meet the demand of its lowest-income renters.

New York has the largest population of homeless at 76,500 and the Bay Area is closely behind Los Angeles with 28,200 according to data collected by these cities.

The severity of homelessness fluctuates greatly by state with half of all people experiencing homelessness being from five states: California, New York, Florida, Texas and Washington.

What is Being Done About Homelessness?  Solutions Are Stagnated by Politics

California lawmakers have approved more than $2.0 billion in new state spending on housing and homelessness. That’s a huge number!  Although it is not sufficient. Most of this funding will target the state’s homeless population, including $650 million in grants for local governments to build and maintain emergency shelters and $100 million for wrap-around care for the state’s most vulnerable residents. That is roughly a 50% increase over the amount former Governor Jerry Brown approved to fight homelessness last year at the urging of California’s big-city mayors.  Another $500 million will go to quintuple the size of the state’s premier affordable housing financing fund, a long-sought after victory for low-income housing advocates who have sought an augmented funding source for years. The state Low Income Housing Tax Credit Program provides tax credits that subsidize the creation or rehabilitation of housing reserved for low-income residents.

Our state’s lawmakers and Governor Gavin Newsom have expressed their willingness to write sizeable checks to address the homeless situation, but unfortunately, the politicians are still fighting among themselves over who should receive the money and the “strings” that are to be attached.  Large-city mayors and lawmakers want homelessness grants directed towards the state’s largest 13 cities, while Governor Newsom wants to spread out the money to include counties. Major cities like Los Angeles, San Francisco and San Diego argue that the largest share of the state’s homelessness epidemic is concentrated there, right in these cities’ backyards, while smaller cities and counties argue they too have been dealing with increasing homeless populations and lack resources to adequately address their situations.   The homelessness problem is growing ever worse and somebody, our Governor perhaps, needs to “step-up” and act quickly to address the crisis head-on. The money must begin flowing.

This past January, Governor Newsom in another well thought out move (just kidding folks) proposed a polemic idea that would withhold transportation funds to cities that do not build enough housing. His plan did not take into consideration reforming the California Environmental Quality Act (C.E.Q.A.) or provide tax incentives to facilitate construction or make any attempt to streamline the entitlement process – the Governor merely said to California’s cities “do as I say.”  Fortunately, there’s no certainty Governor Newsom’s ill-conceived proposal will ever see the light of day. Another Newsom proposal would speed construction of homeless shelters by circumventing environmental laws – this too is uncertain.

Unfortunately, all the bond money and tax revenues being poured into homelessness will barely make a dent.  Once one considers that the cost to build an affordable unit from land acquisition to entitlements and through construction can cost approximately $550,000 to $600,000 per unit, $1.0 Billion only builds about 1,700 to 1,800 units.  With an estimated 55,000 plus homeless people on the streets in Los Angeles County, the cost to solve homelessness in Los Angeles County alone could be more than $25.0 Billion. Accordingly, Newsom, Garcetti, Bonin and City Council members, County Supervisors and our State Legislators need to do some “out of the box” thinking rather than “out of their minds” thinking here on how to solve the issue in the most efficient and expeditious manner.  Housing solutions like “micro” units, dormitory style construction with shared kitchen and living areas, motel conversions, density bonuses and permit streamlining, and fast tracking are all solutions that must be a part of the “solve for homelessness” equation.

This stagnated response to the homelessness crisis and housing production thus far has been no more than the “same-old blame game” by singling out rental housing as “price gougers’ and proclaiming that evictions are the sole cause of homelessness in California.  Sadly, rental housing providers are politically expedient for our politicians and as a result, we have seen a tsunami of tenant protections being thrown upon us with more to follow. 

Why Do We Have Homelessness?

What politicians always fail to acknowledge is the significance of mental illness and substance abuse in the homeless community.  A recent U.S. Housing and Urban Development report noted that 45 percent of homeless suffer from mental illness, and according to a University of Pennsylvania report, about 50 percent suffer from alcohol or drug dependence.  

There are many other causes of homelessness too.  California continues to “early release” our state’s prisoners into local communities without providing housing or supportive services.  Our state’s foster care system is broken and jettison’s those turning 18 and exiting the program directly to the streets without further means of support.  Many homeless on our streets today were once abused at the hands of a parent or spouse. For women, domestic violence is a leading cause of homelessness. In addition, mental health policies of limiting involuntary commitment and allowing state hospitals to discharge patients with nowhere to go have been a complete disaster.  Moreover, many experts attribute contemporary homelessness to the increase in dysfunctional and single, female headed households. 

Unfortunately, our politicians ignore the obvious causes of homelessness and always seem to place blame on rental property owners for political expediency.  For example, a report by Los Angeles Country lists the top causes of homelessness among families were: (1) lack of affordable housing, (2) unemployment, (3) poverty, and (4) low wages.  We’re #1 on the list! Yet, very sadly, each of these four reasons are mostly caused by poorly thought-out and implemented housing policies and other regulations that have led to shortages of affordable housing and stifled job and wage growth.  And even more sadly, Los Angeles County ignores the main reasons people become homeless: drug and alcohol abuse, mental illness, lack of supportive services, and domestic violence. As a further example, a report by several large city mayors omits entirely that substance abuse is one of causes of homelessness let alone the biggest cause.  In fact, in an entire 106-page report prepared for mayors Kevin Johnson (Sacramento), Stephanie Rawlings-Blake (Baltimore), Helene Schneider (Santa Barbara), and A.C. Wharton (Memphis) never once mentioned the word “drugs” or “alcohol.” But the mayors’ report did cover “rent burdened” renters and evictions as a primary cause of homelessness.

Los Angeles’ Mayor, Eric Garcetti, now facing a recall campaign due to his mishandling of the homelessness crisis, has pledged huge increases in spending to solve the issue. Los Angeles taxpayers should be aware that one of Mr. Garcetti’s proposed uses for the money is to pay homeless people to pick up their own trash.  Liberal Los Angeles City Councilman Mike Bonin, who is facing a major homelessness crisis in his Council District that includes the Venice neighborhood, also has shared some brilliant ideas (just kidding again folks) on how to address the issue: “So if somebody is living on the street, they have to go to the bathroom, so let’s provide some toilets,” he said. “If somebody is living on the street, there is trash that they will generate, so let’s provide trash receptacles.  If somebody is living on the street, let’s provide showers.” You cannot make this stuff up! More recently, Councilmember Bonin has proposed taxing vacant units to raise money for homelessness – Mr. Bonin is obviously sniffing model glue again as he once did before he shut town two highly trafficked lanes along the ocean in Playa Del Rey.

Some communities throughout the Southland have begun to take matters into their own hands by creating task forces made up of volunteers committed to compassionately address homelessness issue.  It is these private, local solutions being supported by local contributions that seem to work. Smaller cities such as Beverly Hills and Santa Barbara, or local neighborhoods such as Koreatown in Los Angeles deploy trained community liaisons that patrol the streets and assist the homeless in getting off the street and into shelters.  Task force members and trained community liaisons’ approach and talk to homeless people to assist them and provide compassionate, effective services, and to assist them with finding housing and locating family members.

So far, the Democratic presidential candidates have been avoiding the topic of homelessness crisis.  However, as the crisis continues, these candidates will soon be forced provide answers for our state’s failed policies.  In June, President Donald Trump issued an executive order that establishes a White House Council to address housing affordability issues that will be chaired by Secretary of Housing and Urban Development, Ben Carson.  The White House Counsel mission will focus on “eliminating regulatory barriers to affordable housing.” There is no telling what impact President Trump’s executive order will have on the current homelessness crisis.

Final Thoughts

One of the central issues of homelessness in America is the need for “goal setting” of policies that are aimed at dealing with homelessness in America and throughout California and identifying the most effective methods for achieving the goals.  Our elected officials should look at what is being done in the City of Austin, Texas, which created a homelessness task force that meets twice per month, and after several meetings recruited two homeless individuals to serve on the task force.  The two homeless individuals, having had the unfortunate experience of living on the streets, offered incredible ideas. As a result of this type of “out of the box” thinking by the City of Austin, the city has created some very interesting solutions that are quickly being passed by the City Council and being implemented, including providing soap, toiletries and cosmetics to people living on the streets; providing locked storage lockers in areas where the homeless reside on streets so that the can secure their belongings while at appointments such as seeing a doctor or in many cases attending a job interview; and providing locations for the homeless to receive mail to access to computers.

Ultimately there is no “right” answer to the diverse causes and needs of the homeless population, and any significant progress in resolving them depends upon a collective response on the part of every American citizen – not by singling out one segment of our population: “Landlords.” What is needed is for our elected officials to recognize the root causes of homelessness and the creation of programs that address these causes head-on, and for social activism in our  local communities to take charge to address the problem of homelessness.

Daniel Yukelson is currently the Executive Director of The Apartment Association of Greater Los Angeles (AAGLA).  As Certified Public Accountant, Yukelson began his career at Ernst & Young, the global accounting firm, and had served in senior financial roles principally as Chief Financial Officer for various public, private and start-up companies.  Prior to joining AAGLA, Yukelson served for 12 years as Chief Financial Officer for both Premiere Radio Networks, now a subsidiary of I-Heart Media, and 3 years for Oasis West Realty, the owner of the Beverly Hilton and Waldorf Astoria Beverly Hills where he was involved with the development and construction of the Waldorf.

By Dwight Kay

When considering a Delaware Statutory Trust property for a 1031 exchange, investors and their CPAs must also consider the tax treatment of DST properties. This article gives a brief overview of the various Delaware Statutory Trust tax treatment and DST taxation topics that investors should understand and go over with their CPA and tax attorney prior to making any investment decisions.

Treatment as “Like Kind” for the Purposes of a 1031 Exchange The IRS under Revenue Ruling 2004-86 blessed the Delaware Statutory Trust (DST) as “Like Kind” exchange property for the purposes of a 1031 exchange. 

Delaware Statutory Trust Tax Return –  Year End Accounting and Reporting

When an investor purchases an interest in a DST 1031 exchange property, they will receive a year-end operating statement that shows their pro-rata portion of the properties rental income and expenses. They will then provide this to their CPA who will plug the numbers into Schedule E on the investor’s tax return, just like all other rental and commercial property the investor owns. If you would like to see an example of the year end reporting provided by various DST sponsors please email us atinfo@kpi1031. com or call Kay Properties directly at 1(855) 466-5927.

Depreciation Deductions and DST Taxation

With a 1031 exchange, an investor’s basis from the property he or she recently sold will carry forward with them into the new DST properties that they purchase. If the investor fully depreciated the property they sold already, that basis carries forward into the new DST properties. If they still had basis in the property they sold, or if they purchased a greater value in the DST properties than they had in the property they sold, then they now are able to take advantage of depreciation deductions to help shelter the income from the DST properties.

Delaware Statutory Trust State Tax Treatment 

When owning property out of state, you typically will need to file state income tax returns in that state. The same goes for DST properties unless the property is in a state with no income tax filing requirements, such as Texas or Florida. Typically CPAs will charge clients a few hundred-dollar fee for filing out of state on behalf of a DST investor.

Future 1031 Exchanges – Tax Treatment of Delaware Statutory Trust Properties in Future 1031 Exchanges

When an investor purchases a DST property and that DST property eventually sells, the investor is now free to purchase any other type of like kind real estate. Many of our investors end up 1031 exchanging back into more DST properties when it is time to reinvest.

Purchasing Equal of Greater Value – DST Property Taxation Regarding 1031 Exchange Rules

One of the 1031 exchange rules require investors to purchase property of equal or greater value. There-fore, it is recommended that investors who have paid off their properties in full invest in DST properties that are all-cash/debt-free. This is recommended for two reasons; first using leverage/loans in any real estate purchase or investment greatly increases the risk of loss. Second, if an investor that has $1 million of equity from a building he sold free and clear purchases a DST that has a 50% loan to value, then that investor is now purchasing $2 million of that DST ($1 million of equity down plus the $1 million of debt due to the property being a 50% LTV equals a total purchase price of $2 million). When the DST property sells, that investor will have to purchase equal or greater value per the IRS 1031 exchange rules and the investor now is stuck with having to continue to take on debt to have a fully tax deferred exchange. That investor no longer has the luxury of staying debt free like he was before he exchanged into the DST property in the first place. Many clients that are at or near retirement have already paid off their properties in full and taking on more debt is not wise, especially considering the 1031 exchange rules.

At Kay Properties, we have been involved in billions of dollars of DST 1031 exchange properties and have worked with hundreds of investors, DST sponsor companies, CPAs and tax attorneys throughout the country. It is important to note that Kay Properties is unable to provide you with any tax or legal advice so please do speak with your CPA and attorney prior to making any investment decisions.

If you or your CPA have any questions regarding DST properties taxation, tax treatment or how they work with your tax return feel free to email us at info@kpi1031.com, register on our website at www. kpi1031.com or call us at 1(855)466-5927.

There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed. For an investor to qualify for any type of investment, there are both financial requirements and suitability requirements that must match specific objectives, goals and risk tolerances.

Diversification does not guarantee returns and does not protect against loss. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.

This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, Kay Properties and Investments, LLC, WealthForge Securities, LLC and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.

Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. Real estate is typically an illiquid investment. Please read carefully the Memorandum and/or investment prospectus in its entirety before making an investment decision. Please pay careful attention to the “Risk” section of the PPM/Prospectus. All photos are representative of the types of properties that Kay Properties has worked with in the past. Investors will not be purchasing an interest in any of the properties depicted unless otherwise noted.

IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of WealthForge Securities, LLC, Member FINRA / SIPC. Kay Properties and Investments, LLC and WealthForge Securities, LLC are separate entities.

DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor.

“Property Owner – Beware!” Local Structural Engineers play the bait and switch with clients causing unfair business practices and thousands in over-charging….

I own and manage an apartment building in West Hollywood.  On my journey to soft story compliance, I have had the ‘dubious privilege’ of meeting some unscrupulous and outright fraudulent structural engineers – to say the least!  if you’re in the world of retrofitting your property, don’t flip the page until you read this article – get a load of this: 

After months of no communication, lack of response to my inquiries and being kept in the dark, I was finally given a set of ‘approved’ plans along with a quote for construction by the engineering firm I hired to provide plans to LADBS in order to stay within my compliance timeframe.  

Everything sounds fine and dandy right? Well, keep reading! 

The bid I received seemed on the high side based on a similar property my partner owns and was able to complete for substantially less.

While meeting a few different contractors, I received construction bids that were exponentially higher than the bid I received from the original engineer, all of a sudden their price didn’t seem so high anymore, I felt that every other bid I received was so much higher, I’m talking 80% higher, it was almost impossible to imagine hiring anyone else!

Here’s where it gets good! One of the  contractors I met with, Cal Retrofit, pointed out that something ‘smelled fishy’ with the plans I provided them.  They quickly pointed out that the remediation method used was over-engineered, over complicated, and not the normal courses of action taken by a professional engineering firm, who claims to be “soft story specialists”. 

I started to believe what I was hearing and finally shared the price that I received from my engineering firm for the construction phase of the retrofit. 

To my astonishment, I was quickly shown how the price I received was less than the actual cost to other contractors, there was no real chance to compete from the get go!  Something was off!  

Having experience in real estate development, I wanted to do a little investigation of my own to find out how a leading contractor was not able to give me a quote that was remotely comparable to the one I originally received from my engineering firm! 

I took my plans down to The Los Angeles Department of building and safety and sat down with the plan checker that was assigned to my project, when I asked the plan checker to review the remediation method and possibly shed some light on why I was receiving price quotes that varied so much!? He  simply re-iterated that a different set of plans, a much simpler remediation method was submitted as a correction to the plans that were originally submitted which I was out there wasting my time bidding. 

What?  I asked, a different set of plans were submitted? Yes, he answered, though it is common that we receive corrections to original submissions, it is uncommon when a completely different methodology is submitted for the same property by the same engineering firm.

Hmmm?  It took me a few moments to think about it, but it quickly became apparent that I was sent out to fail, I was duped! The firm I hired sent me out to waste time and receive bids for plans that were intentionally over done in order for the bidding process to go in their favor, while ‘quietly’ they submitted completely different, a more current and optimized remediation method that would make the entire construction cost less.  

They had me chasing my own tail, almost believing, that the price they originally gave me was gold!  Come to think of it, you can buy some serious gold with the 34k they were going to overcharge me! 

I don’t know about you, but I call that fraud, unfair business practices, and outright theft, oh, and by the way, I don’t intend to go quietly!  

Based on legal advice, we chose to keep confidential, the name of the establishment that I’m talking about, but I do want to give credit to CalRetrofit for their honesty, integrity, and willingness to prove themselves and stand behind their word!  I ultimately awarded the contract to CalRetrofit.  They were able to completely re-engineer my soft story project, thus saving me thousands in construction costs. Their administrative management team’s communication was a breath of fresh air.   With them, I truly feel I am in good hands.  

Please, fellow property owners, beware of shady engineers trying to take advantage of us!  

West Hollywood Property Owner 

DON’T BE FOOLED BY UNSCRUPULOUS RETROFITTERS! 

With over 24 years of experience, our team of experts in the fields of structural engineering, construction and project management,  offer a unique professional perspective that streamlines every step of the retrofit process. CalRetrofit is highly recommended by our clients, we deliver results, on time and on budget.

by Jon Coupal

Recently, a San Francisco judge upheld the validity of a local special tax that failed to secure a two-thirds vote of the city electorate as required both by Proposition 13 (1978) and Proposition 218 (1996), also known as the Right to Vote on Taxes Act. Both initiatives were sponsored by the Howard Jarvis Taxpayers Association. The lawsuit was brought by HJTA and, after the ruling, it immediately filed an appeal.

The harmful consequences of the court’s ruling cannot be understated. Unless reversed on appeal, a gaping new loophole will have been created in the Constitutional protections for taxpayers that voters have repeatedly ratified over the decades. Moreover, the decision is a green light to tax-and-spend interests to extract even more dollars from the most heavily taxed citizens in the United States.

By way of background, in June of 2018, 50.87% of San Francisco voters voted affirmatively for Proposition C, a tax on commercial rents. There is no dispute that the tax, projected to raise $145 million annually, was intended for the specific purposes of providing child care, early education, and salary increases for preschool teachers in the City of San Francisco.

The less than fifty-one percent of the vote doesn’t cut it. Proposition 13, approved by California voters in 1978, requires a two-thirds vote of the electorate to pass a tax increase for any special purpose. This has been the law for 40 years. It has also been the consistent position of interests often hostile to taxpayer rights. The Legislative Analyst’s Office, California League of Cities, and numerous other local governments have agreed that all local special taxes require two-thirds voter consent.

The basis for the court’s strange ruling, unfortunately, had its genesis in an earlier California Supreme Court case in 2017. But that case, California Cannabis Coalition v. City of Upland, had nothing to do with vote thresholds. Rather, it was limited to a narrow technical question: When a local initiative seeks to impose a new tax, does the measure need to be put to the voters at the next general election or can the proponents, relying on other laws, require a special election that happens sooner? The lower court had ruled that taxes proposed by initiative are exempt from the taxpayer protections contained in the state constitution, such as the provision dictating the timing of the election. But Upland never addressed the issue of whether the requirement for a two-thirds vote would not apply if the tax increase was proposed by initiative.

The Supreme Court in Upland reasoned that local voters were different from the governing body when it comes to enacting legislation. But for decades courts have said that when voters use the initiative power they are simply “stepping into the shoes” of the governing body and have the same powers and same limitations. For example, a local city council cannot seize someone’s real property without paying “just compensation.” The reasoning of the court suggests that if local housing advocates propose an initiative to seize someone’s property, there’s no requirement to pay for it. That is surely an absurd result.

Unless reversed on appeal, the ruling of the trial judge in the Measure C case will create a bizarre system whereby different vote thresholds – including no vote at all – will depend on whether a tax was proposed by the local governing body or by the initiative process. Abuses from this system are obvious. Now, when the politicians themselves use the citizens’ initiative process, they can ignore the requirement of two-thirds voter consent.

Another abuse that will surely manifest itself is that public agencies will collude with outside interests to propose taxes in the form of an initiative, then submitt a tax under a lower vote threshold than that currently required. The worst-case scenario would be if a local government were to rely on Upland as legal authority to impose a tax without any election at all.

The legal fight over taxes imposed in violation of the two-thirds vote requirement was predicted by HJTA immediately after the Upland case was decided. The Measure C lawsuit is just one such case. Another Measure C (also from San Francisco, which appeared on the later June ballot), also involves a special tax that failed to achieve a two-thirds vote. That tax is being contested by HJTA and others. And a third case has been filed in Fresno where, once again, HJTA lawyers are defending the two-thirds vote mandate.

The Supreme Court has caused unnecessary confusion with its ruling in Upland that, regrettably, has necessitated several lawsuits being filed to enforce taxpayer rights. Ultimately, the Supreme Court will have to provide clarity, one way or another. And if it is against taxpayers, another statewide measure in the mold of Prop. 13 will surely be on the table.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

By Kathy Adams

You might not allow smoking within your rental units, but what about vaping with e-cigarettes?

About 15 percent of adults under 40 vape, so you might want to allow vaping in your rental property to attract more tenants. But you should learn all you can about e-cigarettes before you do.

Like regular cigarettes and cigars, e-cigarette emissions leave behind a residue that could build up on the walls and floors over time. Even if you decide to allow vaping indoors, it’s worth considering the extra cleanup work that could result when that vaping tenant moves out. So even if your state permits vaping in many public areas, you might want to restrict their use within your rental units.

Cigarettes versus e-cigarettes: the vapors

E-cigarettes: The vapors emitted from an e-cigarette contain far less nicotine than the smoke blown from a regular cigarette.

Cigarettes: Cigarettes leave behind a nicotine-stained film that discolors everything from walls to furniture. And then there’s that stale cigarette stench that’s notoriously hard to remove from a chain-smoker’s home.

Related: How to Remove Cigarette Odor From Your Rental Property

E-cigarettes: The vapors emitted from an e-cigarette contain just a fraction of the amount of nicotine found in cigarette smoke.

Cigarettes: Cigarette smoke contains a laundry list of harmful chemicals such as lead, arsenic, and formaldehyde.

E-cigarettes: Vapors in e-cigarettes typically contain less harmful chemicals, although they’re still packed full of chemicals.

The main difference, when it comes to residue left behind from smoke or vapor, is that cigarette-smoke residue builds up faster and reeks. It’s also visibly noticeable, since nicotine discolors some surfaces.

Even though vaping doesn’t cause nicotine stains, the vapor still creates a messy buildup. One substance in the vapor is vegetable glycerin, which leaves behind an oily residue. Oils attract dust and small particles, so a home exposed to frequent vaping ends up with a dirty, greasy buildup.

Cleaning concerns

Cleaning up after a smoker typically involves steam-cleaning carpets and curtains, washing  non-porous surfaces thoroughly, and repainting the walls. Removing odors could be extremely difficult, depending upon the amount of smoking done indoors.

Cleaning up vaping residue means deep-cleaning carpets, fabrics, and upholstery; washing non-porous surfaces with equal parts water and vinegar; and potentially repainting walls after wiping them down with the vinegar solution. All surfaces could be harder to clean than similar surfaces in a nonsmoker’s unit, thanks to the oily vaping residue.

What about the law?

As is the case with traditional cigarettes, the laws regulating e-cigarettes vary greatly from one region to another.

San Francisco, for instance, bans use of e-cigs wherever traditional cigarettes are banned.

Minneapolis lawmakers, however, believe e-cigarettes do not violate clean-air laws. In Minnesota, landlords decide whether tenants can smoke cigarettes or e-cigs within their units and on-site outdoor spaces. State law prohibits smoking and vaping in common indoor areas of rental properties, however.

Read up on your state’s laws to determine if there’s already a law regulating e-cigarettes and whether that applies to rental housing. If you choose to ban  e-cigarettes and similar electronic vaping products, clearly state this in your rental agreement. Define what forms of smoking and vaping you prohibit. Note any areas where vaping is allowed, such as outdoor spaces far away from rental units. Also clarify any bans on vaping in common indoor and outdoor areas.

Fire hazard is real

Vaping doesn’t carry the same fire hazard as falling asleep with a lit cigarette, but it still has its risks. In an eight-year period ending with the close of 2016, 195 vaping-related fires or explosions were reported in the United States. Many of these incidents happened when the device or spare lithium-ion batteries were in the user’s pocket. Other incidents happened while charging the e-cigarette’s batteries. All of the reported problems related specifically to lithium-ion batteries.

The charging incidents in particular are worth noting, as fires could occur while the tenant is away or asleep. Even so, the number of reported incidents is relatively small, considering that more than 3 percent of all U.S. adults vape, according to 2016 statistics.

Ultimately, it’s up to you whether allowing e-cigarettes is worth the extra cleanup effort or the potential fire hazards. If you decide to allow vaping, it may be worthwhile to note an extra cleaning charge in the rental agreement. Make sure your tenants are well aware of your vaping and smoking rules before renting to them. A questionnaire asking potential tenants about smoking and vaping habits could help protect your property from careless tenants. They’ll be responsible for any excessive repair or cleanup issues that result during or after their tenancy.

By Jenna Chandler

California is one step closer toward having statewide rent control. An expanded version of an “anti-rent gouging bill” cleared its first senate committee late Tuesday night.

“We have to recognize some people are hurting in our economy,” said Senator Hannah-Beth Jackson (D-Santa Barbara), who chairs the senate judiciary committee.

The bill was heard by the committee Tuesday afternoon during a marathon session, but because several committee members were absent, it didn’t get the votes it needed until shortly before midnight. Several Los Angeles advocates, including a rep for Mayor Eric Garcetti and organizers with ACT-LA, were at the Capitol in Sacramento to register their support.

AB 1482 will have to be vetted next by the senate appropriations committee. If it ultimately approved in the full Senate (it already passed the Assembly) and signed into law by Gov. Gavin Newsom, it would make it illegal for property owners to raise rents more than 7 percent, plus the Consumer Price Index, in one year. The CPI averages about 2.5 percent in California. Homes constructed in the past 10 years would be exempt, and the law would expire in 2023.

AB 1482 now also includes a provision that would only allow landlords to evict tenants with “just cause,” originally part of another bill, AB 1481, that did not clear the Assembly before a key legislative deadline in May. Examples of just cause include failing to pay rent, causing a nuisance, and “criminal activity by the tenant on the premises.”

The rent control element would have the largest impact on cities that don’t already have rent control laws. But renters in cities that do have local rent control laws—including the city of Los Angeles—could benefit, too, according to a new analysis from the Terner Center for Housing Innovation at UC Berkeley.

The report estimates AB 1482 would impact 4.6 million households statewide, protecting them “from unsustainable rent increases, at least in the short term.”

The Terner Center zeroed in more closely on 10 communities, including three with rent control laws: Fruitvale and West Oakland, the Mission in San Francisco, and Boyle Heights in Los Angeles. In those areas, it determined the bill would extend rent control provisions to 31,212 residential units.

That’s because AB 1482 would apply to rental units that are not already covered by local rent control policies. In Los Angeles, for example, units built after October 1, 1978 are not covered by the local rent control law. Under AB 1482, units built in Los Angeles between 1978 and 2009 would be covered.

The California Apartment Association and the California Association of Realtors are fighting the bill, calling rent control a “decades-old failed policy.”

“Our biggest concern is we don’t make a bad problem worse by scaring off development in California,” said Debra Carlton, a California Apartment Association spokesperson.

California has vastly underbuilt housing for years, and it’s one of the reasons why the cost of renting is so expensive.

Over the last decade, an average of less than 80,000 homes have been built in California annually, according to the state’s housing department. A 2016 report from McKinsey Global Institute finds that California ranks 49th out of all 50 states in terms of per capita housing construction.

Opposition groups have already hashed out a compromise with lawmakers to water down the bill, lowering the rent cap from 5 percent, as originally proposed, to 7 percent.

The Terner Center says that amount is high enough that it would “not curtail new [housing] production.”

“I believe landlords should have room to operate at a reasonable profit,” Jackson said Tuesday. “This bill as amended… gives landlords plenty of room to raise rents, some might argue too much room.”

Jenna Chandler is the editor of Curbed LA. She oversees the site’s editorial operations and writes about housing and density. Before joining Curbed in 2016, she was a staff writer at the Orange County Register, a senior local editor at Patch, and a reporter for the Porterville Recorder in California’s San Joaquin Valley. Raised in the sunshine of Los Angeles and Orange counties, she always puts “the” in front of freeway names (but never before PCH). She has lived in Long Beach and Santa Monica; today she lives between Pailin Thai Cuisine and Griffith Park.