More Turbulence Expected for Property Owners

The Battlefield between our politicians & property owners, particularly housing providers continues with more financial bloodshed on their agenda.

Bloomberg Opinion’s senior columnist Merryn Somerset Webb writes…….” whenever rent controls are introduced, two major things always happen: First, the supply of properties to rent falls as landlords pull out of the market. Second, the quality of the housing deteriorates. What’s the incentive to improve a house if you aren’t making any money and the tenants aren’t leaving until they die?”

The regulatory assaults on property owners are deep and with the progress of Senate Bill SB567 it is likely going to be more painful. (Waiting for Governor to approve & sign) But if we just take a trip over the recent past, property owners have been in the crosshairs of every progressive politician to confiscate as much income and wealth through a cafeteria of laws.

In the Assembly; AB211, AB682, AB916, AB1551, AB2031, AB80, AB 2221, AB 2234, AB946, AB 2527, AB2188, AB 2097, AB2343, AB3088, AB1041……Then not to be outdone by the Freshman Class of Clowns, the Senate under Senate Bills SB6, SB9, SB91 SB234, SB638, SB1162, SB1044.

These are all in addition to the staggering list of Propositions, Measures, & Mandates together with the not so temporary roster of Emergency Ordinances passed and approved by countless Cities.  California Governor Gavin Newsom and his battalion of bandits are always planning the next attack on Proposition 13  with either split-rolls or all together elimination, not to mention their constant attacks to destroy the laws under Costa-Hawkins. Apartment Owners are truly in crisis and if your City has it’s own Rent Controls, Stabilization Ordinance or Just Cause Eviction Rules, then the problems run deeper.

Leah Cuffy, the Director of Advocacy for the NAA (National Apartment Association writes about the 10 Unintended Consequences of Rent Control Policies;

1.Reduces the Incentive to Develop New Rental Housing

2.Discourages Investment

3.Reduces Property Taxes

4.Deters/Defers Maintenance & Improvement Spending

5.Pressures Housing Providers to Sell

6.Subsidizes High Income Residents

7.Decreases Housing Options for Low Income Individuals & Families

8.Smaller Landlords are Most Impacted & Hurt by Rent Control

9.Rent Control Does Nothing to Aid Those who are Entering the Rental Market

10.Encourages Residents to Sublet or Stack the Units

Erin Stackley of NAR (National Association of Realtors)  writes; “ Rent Control is a rare instance where their research is fairly conclusive: It Doesn’t Work!

Let me send out another warning…. Cities across the State are developing or have developed zoning ordinances that allow, permit or encourage “Live-Work” activities in what has always been a traditional industrial or commercial area. You are, or will be a target of rent controls, so be very careful about the direction you take your investment property.

Property Insurance. At Systems Real Estate Management & Brokerage, we buy a lot of insurance policies for a lot of properties on behalf of our Managed Clients, from fire & casualty, liability, workers comp, auto, tenant policies & earthquake. Insurance is getting harder and harder to secure in the California market with carriers dropping out of the State regularly. We’re being forced to consider Non-Admitted Carriers or forced to complete a list of capital improvements dictated by insurance underwriters. We’re being told that “older buildings” pre-1980s will be very difficult to insure without improving the property to meet more current standards in fire, life safety, seismic/earthquake, electrical, mechanical, energy conservation and handicap accessibility. Then, if you’re in an area with rent control limitations, the problems get only more complicated with the restrictions imposed by carriers. They’re cherry picking only the finest of properties and dropping anything that could pose an increased risk. All this as we witness rates jump 7% to 15% annually.

Financing has also changed dramatically in the past year for all asset classes. Commercial and Industrial loans when you can get them are 5.75% to 7.25% with all banks wanting a very significant deposit relationship with some banks requiring deposits equal to the requested loan amount. Loans on investment property are at best a 50% LTV, but SBA Loans are more generous. Be prepared to get “Nit-Picked” with property age, condition, tenant mix, tenant risk, environmental risk, & possible compliance issues. Then that “Relationship” you thought you had with your banker, well, it’s just not going to be as strong as your thought. In the multi-family apartments the typical 25 to 30 year loans will be a 5 to 7 year fixed rate loan that range from 6.25% to 6.75% Their benchmarks for expenses and compliance will be tough and the real pain in today’s market are for those investors looking to refinance out of maturing loans in the 4% to 4.25%……Today you’re 2% higher in the long term rates, as such, apply that to an average sized loan of say $4Million and that loan payment just went up by $80,000 a year or $6,600/month. That’s a real hit to Cash Flow (what’s left of it) and the LTV will no doubt get questioned so prepare for a possible principle reduction to get that loan funded.  In Los Angeles and many Southern California Cities that are subject to some form of rent controls or caps you’ll find your ability to pass on this new cost of money with increased rents is not available. You will be reducing your standard of living all while your tenants are enjoying the protections our government provided. It’s subsidized housing, but I bet you didn’t know we’d all be subsidizing the effort.

Last item for multi-family apartments. In a landmark vote, the Los Angeles County Board of Supervisors has UNANIMOUSLY approved a motion authored by Holly Mitchell & Hilda Solis to establish a Right to Counsel Ordinance and universal access to legal representation through the “Stay Housed L.A.” initiative. Yep, the County intends to offer and pay for lawyers to represent tenants in default of their tenancy in housing matters & going through eviction. So even with overwhelming evidence that your tenant is, has and continues to be in default for monetary and non-monetary reasons, they now get an attorney to dodge, confuse, plea, file senseless motions, delays, request discovery etc. This will now require many property owners to also retain an attorney driving the cost of evictions and unlawful detainers through the roof. But I submit to you, every elected official already knows the result……It was always their goal to legally assault & intimidate property owners with increased delays, court costs & legal expenses. This new form of regulatory extortion, or “cash for keys” settlement by property owners will become the new path for Landlords and Tenants.  You’ll be forced to write off debt, suck up the loss and pay the deadbeat tenant to leave. Enabling scam tenants, their attorney’s & our Lawmaker Politicians to have yet another angle to defraud, cheat, swindle, hose, victimize & screw property owners. Happy Monday.

by Tony Maniscalchi 7/26/2023

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