The Top 3 Regulatory Issues Burdening LA Multifamily Owners
Being a landlord in Los Angeles used to be simple enough. Among other things, you fix things that need fixing, turn and lease units as they become available, pay your bills on time and deal with an array tenant issues that might come along at any given time. Over the past few years, things have started to shift somewhat. An array of new regulatory issues that have come into play in the City of Los Angeles which have made it increasingly more difficult for "Mom and Pop" owners to operate multifamily investment properties in Los Angeles.
Here are three main regulatory issues contributing to the woes of LA Multifamily owners:
1) The Possible Costa Hawkins Repeal
Perhaps the most pressing issue at the forefront of LA multifamily owners minds at the moment is the possible repeal of the Costa Hawkins Act of 1995. While the actual repeal of Costa Hawkins does not in and of itself change any regulations, it does protect two things for landlords: 1) It protects a landlord’s right to raise rents to market rates once a tenant moves out of a given unit - also referred to as vacancy decontrol. 2) It prevents municipalities from establishing rent control - or capping rent - on structures constructed after February 1995. If Costa Hawkins were repealed, local municipalities would have the ability to implement vacancy control whereby a multifamily owner might only be able to lease a vacant unit for a maximum percentage over what a previous tenant was paying (say 10% over prior rent for instance). If you own a non-rent-controlled building, you might consider raising your rents to market immediately (most likely by re-positioning your building/units) to protect yourself from being stuck with rents that are under market. If your building is rent-controlled, this is easier said than done. But if you are lucky enough to have a tenant vacate (or if you are offering cash for keys), do what you can to renovate your unit and achieve the maximum rent.
2) Soft Story Retrofitting
The Los Angeles City-Wide seismic ordinance passed in 2015 which made it mandatory for owners of "soft story" buildings to earthquake retrofit their buildings effects some 14,000 of properties (most of which were constructed in the 1960s). The average cost for a soft story retrofit for an 8-unit building can run anywhere from $40,000 - $50,000 when you aggregate the costs of engineering, construction and permits/plan submission. Adding insult to injury, there are unfortunately not a lot of great financing solutions out there to assist owners with this cost of construction. Sure, you can bill back 50% of the cost to your tenants over a period of 120 months, but that is a very slow cost recovery process and many landlords are reluctant to even do this. As a result, some Mom and Pop owners find themselves with their backs against the wall when faced with the extraordinary cost of seismic retrofit compliance and in many cases are forced to sell their properties. As an owner of a soft story building in Los Angeles, there is little you can do to circumvent the compliance process. You can hire an engineer and try to appeal, however less than 0.5% of appeals are actually successful according to the Department of Building and Safety.
3) Increase of LA City Trash Pick Up Costs
Over the past 24 months, the average multifamily owner has seen their cost of trash pick up increase by 2-3 times what it was previously due to the city’s designated trash pick up zones which were implemented in 2016. While and extra $200-$400 per month may not break the bank for a lot of folks, this increase in expenses (and decrease in cash flow) may have a significant impact on the overall value of your building. How? Well let's say that you own a building where the cost of trash pick up increased by $400 per month (or $4,800 annually). In an area where multifamily buildings are trading at 4% cap rates, that imputes a difference of $120,000 (or $4,800 divided by 4%) in forgone property value...all because of TRASH! If you would like to make your voice heard, contact your local council person to voice your concerns or join one of the many landlord advocate groups and apartment associations who are banning together to fight this.
Let’s be honest - owning and operating a multifamily property is never easy. There are a slew of issues that you deal with on a daily basis. Government regulation has exacerbated a lot of these issues making it increasingly tougher to be an owner here in Los Angeles. The silver lining in all of this is that the demand for housing and apartment rentals in particular is still incredibly strong due to an immense state and city-wide housing shortage. But these regulations and their effect on property values are a very real thing and are certainly factors that you should think about whether you are buying, selling or simply operating multifamily investment properties in Los Angeles.
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