by Philippe Hartley

Alan Stone stands on the edge of the roof parapet, his 18-unit apartment building beneath him, arms akimbo and heels sunken into the blinding white of the brand-new surface membrane.  Workmen are affixing the last seams, but his eyes sweep the street 30 feet below, scoping the comings and goings of his tenants.  He’s been keeping turn-over low, intends to keep it that way.   It’s an hour drive here from his house in good LA traffic (which means never), and he’d like to see more revenue for the work. Eighteen months into this purchase the cash flow is still tight. He needs to scale up with another building but values are on fire, as far as his eye can see.

By Christopher Miller, MBA

While attending business school, I took a graduate-level class on the art of negotiation.  What I learned has saved me a lot of money over the years – whenever I buy a property, a car, or even when I hire someone to make repairs.  This article will review some of the main principals of negotiation and is a good start towards sharpening your own skills.

The Goal of a Negotiation

First – the goal of any negotiation should be to keep both the buyer and the seller happy.  As a buyer, you may wonder “What do I care if the seller is happy?”  Well, if you’re having carpet installed and the seller isn’t happy with the deal he made, he’ll probably do a lousy job for you.  It’s pretty much impossible to buy something for an amount that doesn’t make financial sense to the buyer.  It has been my experience that sellers are more open to a good-faith negotiation if they know that I am willing to let them make a living.  (Not a fortune – a living.)

by Florentina Sarac

Today’s demographics look substantially different than they did only a decade ago due to America’s older population growing significantly and at a very fast pace. According to Census data, the U.S. is a rapidly aging country, with more than 22% of the current population being aged 60 & over.

The overall aging of the population is not just the result of the economic hardship following the 2007 Great Recession, reflected in declining birth rates, but also the result of the Baby Boom cohort, America’s largest living adult generation, passing age 53 in 2017.

Our research shows that as the 60+ cohort grew bigger and faster, it also helped push the national median age from 36.7 in 2007 to 38.1 in 2017, the highest it’s ever been.

By Jessica Guerin

When it comes to the health of the economy, the housing market is the canary in the coal mine, providing clear and early clues of pending trouble. And that’s why analysts track its performance intently, looking at a multitude of indicators that might signal the looming recession some are forecasting.

Now, one critical clue from the housing market has emerged to suggest economic growth is likely to backslide, and that is a steady decline in single-family authorizations.

In essence: Construction activity appears to be slowing.

By Daniel M. Yukelson, Executive Director

You have heard it before, but it is worth repeating: There is no denying it, we have a housing crisis here in the Golden State of California.

Since the 1970’s, California has been experiencing an ever-increasing housing shortage, and by 2018, California had the 49th lowest ratio of housing units per resident.  Our current housing shortage has been estimated at 3 to 4 million housing units, or roughly 20% to 30% of California’s current housing stock.  The cause of this shortage is the imbalance between supply and demand resulting from strong economic growth that has led to the creation of hundreds of thousands of new jobs, and that in turn has led to increased housing demand.  However, while the economic “boom” continues, we have failed to construct enough new housing units to meet the demand.  To give you an idea of how bad the shortage is, for California as a whole, from 2011 to 2016, our state added only one new housing unit for every five new residents.

Some of California’s failure to keep up supply with growing housing demand lies in failed housing policies and over-regulation.  Laws such as rent control, the California Environmental Quality Act (C.E.Q.A.), zoning laws and others have discouraged or slowed down developers from constructing new housing units.  Local jurisdictions and “not in my backyard” (a/k/a, NIMBY) residents have slowed down or stopped entirely construction of new housing units in many areas.  The truth is that California does not currently have enough quantities of land that is zoned for housing to meet future demand.  Something has got to give!

Two Studies, Multiple Housing Proposals

This past year, two studies were published that attempt to solve the California Housing Crisis by offering a variety of solutions meant to thwart homelessness, provide more housing units particularly affordable housing, and to help stabilize the population of California renters.  These studies are “Finding Common Ground on Rent Control” published by the Termer Center for Innovative Housing at the University of California at Berkeley (May 2018) and the “CASA Compact” published by The Committee to House the Bay Area (January 2019). 

Why should you care?  Well, we believe that many of the elements contained in these studies may shape the 2019 and 2020 State legislative agendas on housing policy and may result in the proposal and passage of numerous State housing bills and local housing ordinances.  It is imperative that housing providers become familiar with the studies and become part of the inevitable debate that is certain to take place as our elected officials search for ideas to address the California housing crisis.

Terner Center for Housing Innovation: Finding Common Ground on Rent Control

The introduction to the Terner Center study starts out by citing grim details on our current housing crisis:

“California is in the throes of a serious housing crisis, with rising rents and displacement pressures touching a growing number of individuals and families throughout the state…more than half of California renter households (three million) are ‘rent-burdened,’ paying more than 30 percent of their income on housing.  Of those, 1.5 million pay more than 50 percent…Punctuating these sobering statistics are the seemingly endless daily anecdotes of families receiving exorbitant rent increases and being forced to choose between their homes and their other daily needs.”

The study cites a need for State and local policymakers to act to provide immediate rent relief.  The study then discusses the need to increase housing supply.  As a result, the Terner Center study makes two global recommendations to be adopted by California:

• “Broad anti-gouging” rent control to be applied to units State wide, that would make it illegal to raise rents above a maximum threshold; and
• Developer incentives to construct new and rehabilitate existing rental housing units that include a certain quantity of below market rent units.

While the Terner Center study acknowledges the many “drawbacks” of rent control, including providing benefits to those that do not necessarily need it, loss of rental housing units (e.g., the recent San Francisco study concluding that 15% of rental units were lost due to the implementation of rent control laws), and constraining new housing construction, it finds rent control as the only reliable “tool” to stabilize renters and keep them in place.  Accordingly, the Terner Center study proposes a Statewide “Anti-Gouging Cap” on annual rent increases equal to the regional Consumer Price Index plus 5%.  Now for those of us in already rent controlled jurisdictions, this sounds like a “dream come true,” but for those of us that are so fortunate, this represents only the beginning of the end.  The study does caveat that its proposed Statewide rent control limitation would not supersede more strict, local ordinance and that any violations of the Statewide rent control would be subject to both up to a $10,000 fine and up to one year in prison.

On the other hand, the Terner Center study attempts to throw our State’s developers a few “bones” by proposing to increase or preserve the State’s affordable housing stock through tax incentives.  Specifically, owners would receive an ad valorem property tax abatement for multifamily properties by committing to set aside a specific percentage of units at below market rate rents.  This tax incentive would be structured such that owners would be offered a 15-year (or more) tax abatement on the increased value of the sale and/or renovation of an existing multifamily property and on the new value of multifamily construction in exchange for setting aside a specified number of below market rent units.  In other words, the abatement would be equal to a dollar-for-dollar amount of the increase in property taxes resulting from any new assessed value.  The proposed eligibility for abatement is setting aside at least ten percent of units at below market rent for renters that fall into an affordability class of no more than 120% of the average median income for the area.

While the Terner Center study advocates the two previously mentioned recommendations for a Statewide rent control and developer incentives, it makes mention of two other, potential policies to expand rent control by amending the Costa-Hawkins Rental Housing Act.  As you may recall, Proposition 10 on last November’s ballot sought to repeal the protections we as property owners continue to enjoy Costa-Hawkins Rental Housing Act.  The Terner Center study, “as part of its efforts to stimulate new ideas for renter protections” suggests a “rolling inclusion” for Costa-Hawkins exemption from rent control (e.g., exempt new construction from rent control for 30 years) and allowing single family home rentals to be subject to rent control ordinances.  It is ironic that the Terner Center would place these draconian concepts under the banner of “to stimulate new ideas.”

The Committee to House the Bay Area: CASA Compact

The CASA Compact study bills itself as “A 15-year Emergency Policy Package to Confront the Housing Crisis in the San Francisco Bay Area.”  While specific to the San Francisco Bay Area, again we believe that many of the concepts cited in this study could find their way into new State housing laws and into local ordinances within other jurisdictions, including the Greater Los Angeles area.

The CASA Compact study cites several reasons the San Francisco Bay Area now finds itself in its current housing predicament starting with big business that has created jobs to developers that only build luxury housing; from local government officials who oppose new housing developments to environmental and labor interests that drive up construction costs; and of course, community groups that fear changes that new development might bring (a/k/a, the “NIMBYs”).  In making their recommendations, the sponsor of the CASA Compact, The Committee to House the Bay Area, brought together varying interest groups both involved in the cause of and the solution to the San Francisco Bay Area’s housing challenges, including business leaders, government officials, builders, non-profit executives, economists and housing and transportation experts.  Following its 18-month study, CASA Compact purports to deliver a “detailed, comprehensive and actionable” solutions to the San Francisco Bay Area’s housing crisis.

The “key” recommendations of the CASA Compact, each termed a “Compact Element,” are summarized below:

In addition to the ten elements outlined in the table above, the CASA Compact makes the following additional recommendations as “calls to action”: (1) Reestablishment of redevelopment agencies; (2) lower voter threshold for housing funding ballot measures; (3) increase incentives for cities to develop housing vs. commercial development, e.g.,  so-called “Fiscalization of Land Use;” (4) address homelessness through intervention policies that provide relief and housing; and (5) grow and stabilize the State’s construction labor force.

Implementation of the recommendations contained in the Terner Center study or of the CASA Compacts elements will take time and require many new State legislation and local ordinances be passed, and will take incredible leadership by our new governor, Gavin Newsom.  There is no telling which of the recommendations or elements, or derivatives of them, will resonate with our State legislature or other elected officials to be carried forward.  Some aspects suggested in the two studies are things we, as property owners, can live with and continue to be successful.  Other aspects will be very challenging for our industry.

As Charles Dickens book and namesake for this article, “A Tale of Two Cities,” goes:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

I think so much of Charles Dickens’ sentiments ring true for California’s housing crisis, and for property owners and renters alike.  Stay tuned!

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.

WASHINGTON – The Trump Administration has announced its proposed Fiscal Year 2020 Budget for the U.S. Department of Housing and Urban Development (HUD), a $44.1 billion spending plan that expands resources to prevent/end homelessness; invests record funding to reduce lead and other home health and safety hazards; and preserves rental assistance to HUD-assisted households.

The President’s Budget continues a commitment to fiscal restraint, targeting lower value HUD programs for elimination or reduction, while seeking stable or increased funding into the highest impact programs that provide housing and support for vulnerable populations.

“This Budget advances our key priorities, including empowering HUD-assisted families to achieve self-sufficiency,” said HUD Secretary Ben Carson.  “For generations, the idea of the Federal Government providing housing assistance meant only one thing—helping to pay the rent so families can have a roof over their heads. But we must also think about how we can help families to access financial programs, educational opportunities, and higher paying jobs. In short, we must think beyond investing in bricks and mortar, and think about investing in people.”

ENDING HOMELESSNESS

The 2020 Budget continues the Federal goal to prevent and end homelessness by seeking nearly $2.6 billion to support thousands of local housing and service programs assisting those living in the nation’s sheltering system and on the streets. This represents a $215 million or 9 percent increase over the Administration’s 2019 budget request.

PROMOTING HEALTHY HOMES

To protect families and their young children from potentially dangerous lead-based paint and other home health and safety hazards, the Administration is seeking a combined $290 million for HUD’s Office of Lead Hazard Control and Healthy Homes. This request doubles the investment the Administration sought last year and represents a historic contribution to State and local governments as they work to remove lead hazards from homes occupied by low-income families with young children who are especially at-risk.

CONTINUING RENT ASSISTANCE

The Budget continues support for 4.7 million HUD-assisted households by increasing rental assistance to $37.9 billion, maintaining support to all current participating households. This request includes $22.2 billion for HUD’s Housing Choice Voucher Program which will allow local Public Housing Authorities (PHAs) to maintain support to approximately 2.2 million families nationwide and represents a 7.6 percent increase over the Administration’s 2019 request. The request also includes $12 billion to renew rental subsidies to privately owned multifamily housing developments through the Project-based Rental Assistance (PBRA)Program, a $874 million increase over the President’s 2019 budget.

The 2020 Budget proposes $644 million for the Housing for the Elderly (Section 202) and $157 million for the Housing for Persons with Disabilities (Section 811) programs. These requested amounts represent an increase of $43 million and $17 million respectively over the President’s 2019 budget request.

PURSUING RENT REFORM

The current rent structure in HUD’s rental assistance programs creates disincentives to employment; imposes large administrative burdens for Public Housing Authorities (PHAs), private owners, and tenants. The Administration believes this structure generates significant and increasing costs to the Federal Government and represents a one-size-fits-all approach that adequately consider local community needs. With the Making Affordable Housing Work Act (MAHWA), submitted to Congress in April 2018, HUD proposed to reform rental assistance to address these issues.

The Budget incorporates the proposed reforms, which promote work, simplify program administration, reduce Federal costs, and increase local choice. These reforms include increased tenant rent contributions for those able to work (not including elderly/disabled households); reduced frequency of income recertifications; and additional flexibilities for public housing authorities and property owners to develop alternative rent structures. In addition, the Budget proposes uniform work for work-able households, while exempting the elderly, the disabled, those caring for a disabled family member or small child, and pregnant women.

PUBLIC HOUSING

HUD estimates that the nation’s public housing stock is experiencing a backlog of billions of dollars in capital needs resulting in the loss of thousands of affordable units each year due to severe disrepair. The cumbersome regulatory structure of the Public Housing program limits local Public Housing Agencies’ (PHAs) ability to adequately address their significant needs.  The budget again proposes to merge the Public Housing Capital Fund into the Public Housing Operating Fund with reduced overall funding. This new combined Operating Fund will be given extra flexibilities to pay for capital improvement needs.  This better supports local needs by allowing increased flexibility for each PHA to make decisions that best serve their residents.

Meanwhile, HUD will work with local PHAs to shift public housing units to a more sustainable financing model and to allow State and local governments to take a more active role to support these functions. One of these more sustainable models is HUD Rental Assistance Demonstration (RAD).  Given the scarcity of federal funds and the substantial capital needs of the nation’s aging public housing stock, the Administration proposes removing the statutory limit on the number of public housing units that can participate in RADwhich, to date, has preserved more than 100,000 units of affordable housing that would otherwise have been lost permanently.

SUPPORTING HOMEOWNERSHIP AND FAIR HOUSING

The 2020 Budget continues to support homeownership through the FHA mortgage insurance programs, providing up to $400 billion in new single-family loan guarantee authority that includes critical funding to support targeted improvements to FHA’s aging information technology systems, some of which are based upon the outdated COBOL programming language. In addition, the budget requests up to $30 billion in new loan guarantee authority for FHA’s multifamily, hospital and healthcare mortgage insurance programs.

To further support homeownership opportunities, the Budget seeks $550 billion in new guarantee authority for Ginnie Mae, a part of HUD. Ginnie Mae makes affordable housing a reality for millions of low- and moderate-income households across America by channeling global capital into the nation’s housing markets.  Specifically, Ginnie Mae provides significant liquidity, allowing lenders to obtain a better price for their mortgage loans in the secondary mortgage market. The lenders can then use the proceeds to fund new mortgage loans.

As it did last year, the Administration is seeking $62.3 million to support HUD’s fair housing mission.

ELIMINATING/REDUCING INEFFECTIVE PROGRAMS

The Administration continues to seek the elimination of the Community Development Block Grant (CDBG) Program, shifting the activities the block grant program supports to the State and local level.  Since 1980, and most recently in 2013, HUD studies found that CDBG is not well targeted to the poorest communities and has not demonstrated a measurable impact on communities. Similarly, the Administration proposes through the Budget the elimination of HUD’s Choice Neighborhoods Initiative, HOME Investment Partnerships Program, and the Self-Help Homeownership Opportunity Program (SHOP), because State and local governments can better meet their communities’ needs.

HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all.
More information about HUD and its programs is available on the Internet
at www.hud.gov and https://espanol.hud.gov.

by C. Finley Beven, JD, CPM, CCAM

The tenant from #3 called today and said that he needed to speak to me about something important. He was right.

by Michael Trainotti

On January 18, 2019, the Internal Revenue Service (“IRS”) issued final regulations and three related pieces of guidance, implementing the new qualified business income (“QBI”) deduction (“section 199A deduction”).  One part includes rental real estate activity and certain safe harbor guidelines to follow. The safe harbor, however, excludes triple net leases mentioned below. Lastly certain planning has been recently recommended by Alan Gassman, a nationally known tax expert and speaker, to tax advisors after the final regulations were issued regarding triple net leasing. 

By Christopher Miller, MBA

I previously wrote an article titled “Would You Buy Your Property for What it is Worth?  If Not, Why Aren’t You Selling?”  I was looking at local apartment listings recently, and was shocked at the extraordinary values that I saw.  CAP rates in the 3% range, and GRM numbers above 20!  If you have a property that you are thinking of selling “someday,” perhaps today is a good time to cash in on these high values.  If you, understandably, don’t want to pay taxes on your gain and lose a large chunk of your principal; a 1031 Exchange is an option.  But what sort of property would you want to buy as your replacement property?  That is the topic of this month’s article.

By Stephen C. Duringer, Esq., The Duringer Law Group, PLCQuestion         Normally I love the smell of garlic, but enough is enough!  I’ve been receiving escalating complaints from my residents concerning a housing tenant on Section 8, who seems to use a bit too much garlic and curry when cooking meals.  The smell permeates the building and has been bothering the other residents.  Other than the garlic and curry complaints, she is a great tenant, don’t want to lose her, but I certainly can’t lose the other tenants!  What to do?