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Reflection and Moving Forward

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This is the time of year when we all need to take the appropriate time to reflect on the year, make important distinctions, gather up our wins and losses, and evaluate what happened. Then we take everything we’ve learned through our entire lives and gather it all up to move forward and plan the new year. Proudly, I get to say that this has been, in many ways, one of the best years AACSC has ever had—the forward motion, positive changes made, challenges met, and finances for the year—each have not been better in all our history that we can recount. For that, I am extremely proud of our current staff and Executive Board and Officers for their leadership, decisiveness, wisdom, and courage in the face of all the industry naysayers, ill-informed, and those who refuse change no matter how bad things get.

The problem is that some of us spend far too much time looking into that tiny, rear-view mirror of the past and not enough time looking into that massive windshield of the future. When we get stuck on the past, it is a killer in business and progress, and we always need to be on guard for that. The world never stops spinning and growing, and if we cannot grasp that, then we are in big trouble no matter what we do or whom we do it with. Reflection is important, no doubt, but staying there too long is counterintuitive, counterproductive, and has been the source of decline and/or stagnation everywhere you see it, including our own businesses or families. Like any plant on the earth, if it is not growing it is dying, or like my mentor, Darren Hardy says, “If you’re not improving, you’re falling behind.”

The past year took a lot of effort, time, knowledge, courage, introspection, and a boatload of humility to ask for the help we’ve asked for from you—our members, our Staff, our Board, and outside consultants and professionals in order to put us in the position we have arrived at today—in one of the most promising positions we’ve been in since those of us who have been affiliated the longest with AACSC have seen in a long time. There has been a lot of growth and change, and when those things happen, they feel tough—they feel chaotic, but the numbers don’t lie. Change is tough, but necessary. Change is natural. Change is necessary to stay ahead of the wrong philosophies of our local and statewide economics, such as enacting the poorly thought out confines of rent control and other punishing and hindering policies. If we don’t believe these philo sophies will be reintroduced again at a later point with upgraded messaging and thinking (aka: CHANGE) then we are in for big trouble in the future. At the same time, we need to upgrade and change as well to combat for the future win. The same is true for our innerworkings of our association—to remain relevant, to reach and hold onto being the premier association — we need to think about the changes we need to make, and we need our members far more involved and engaged.

As President of the AACSC this year, I came in with two major goals, which #1 had to do with Board Engagement. Admittedly, before this year, the engagement of our Board was not what it should have been, but let’s face it—several years ago, and for many years prior, there was an Executive Leader who ran the show, did so well, and did so much that there wasn’t much left for anyone else to do! A superpower she was, indeed! But, by this time in 2018, change was beyond necessary and change came to the AACSC in fantastic ways; now, I have never seen this Board so deeply engaged, knowledgeable, and continuing to learn and grow—and I have to say I am extremely proud of them for rising to that challenge and blowing the goal away in ways I never imagined.

Goal #2 was to have the best financial year we’ve had in the last five years, and we pulled together and decimated that goal as well. At the beginning of the year, we pushed and pushed for higher budgeting goals, and pushed ourselves, our members, and our Staff to deliver, and even though we didn’t hit every goal the way we wanted, we sure ended on a positive note to the likes of which we never expected or can recall from our recent past.

At the same time, there is also news that is not positive that we also need to reflect on and plan for 2019 and beyond. As of now, we’ve missed some of our deadlines in getting next year’s Board and Officers elected, which we usually have done by now, and that leaves some uncertainty moving forward. No matter how that turns out, we need our members’ voices now more than ever in the coming years to hold our feet to the fire and to make sure we are going after the proper goals and mission of this Association—to preserve, protect, and enhance the rental housing industry. Our members’ voices are very powerful, and you need to check in on us and inspect what you expect from us. You need to make sure we are changing with the times and situations and staying ahead of the opposition and naysayers—within our circle along with externally, and frankly, as a member, I would spend most of my time on the internal—what are we doing and delivering as an association? How are we helping you and doing what we say?

We need to see to it that we are the leaders of education in property operations and management. We need dedicated staff working full-time on legislative advocacy, growing our membership footprint, and combining forces to educate our lawmakers on the unintended consequences of their laws and actions, as well as to educate renters in the same way. We need to open our doors to the opposition to educate them as well and come to viable solutions that don’t include punishing anyone but instead working out solutions that can fit us all.

We are very hopeful after this tumultuous, yet fantastic year we’ve had in our association and industry, but the hard work has truly just begun, and we cannot allow the rear-view dwellers to send us backwards. We need to continue the forward push; 2019 is going to be the most important year the AACSC has faced in many, many years and we need our members to be highly engaged and involved. We need you on committees to see what we are doing and to help be the voice of forward motion to keep us on track to meet and exceed your expectations.

Cheers to 2018, cheers to you, and cheers to 2019!

This has been an absolute honor, and I cannot be prouder of this experience and hopeful for our future.

California Can’t Afford Proposition 10

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This November, Californians will have the chance to go to the polls and vote on a whole slew of issues, including who will be selected as our next Governor, whether to keep or repeal a recently enacted gas tax, or if it makes sense to eliminate daylight savings time. Unfortunately, there is another measure on the ballot, Proposition 10, that if passed will have profoundly negative effects on California’s economy, our housing industry, renters, and apartment owners large and small.

Proposition 10, the so-called “affordable housing act”, is anything but affordable. It is a flawed initiative that will reduce the construction of new housing and in the process result in the loss of thousands of good paying construction jobs across our state. At the same time, Proposition 10 stands to cost California and its cities and counties millions of dollars in lost revenue, which means less money for schools and emergency services.

Despite the proponents’ arguments, Proposition 10 will not provide any immediate relief for renters facing higher housing costs, will not increase funding for affordable housing, and will not result in any new housing. Frankly, passage of Proposition 10 will significantly reduce the construction of new housing, which will lead to higher prices up and down the state. And that’s important for builders and renters alike in Long Beach and surrounding Southern California cities.

Take Long Beach for example. Last year Long Beach adopted a set of recommendations in a near 100-page report that detailed, after much discussion, proposals aimed at increasing afford able housing. Under Proposition 10, all this work could easily get tossed aside because of increased costs. What good are proposals that no one can afford to implement?

Proposition 10 is opposed by a broad coalition of hundreds of organizations, elected officials, businesses, housing advocates and individuals. It is even opposed by numerous social justice organizations like the California State Conference of the NAACP, Latino organizations, veterans groups and affordable housing advocates. Why? Because they all know that Prop 10 is bad for the economy, bad for renters, and bad for businesses large and small.

For those who live in, manage or own apartments, Proposition 10 could end up being a significant disruption. Proposition 10 calls for the creation of as many as 539 rental boards that will be in charge of housing. It will give government agencies unlimited power to add fees on housing that will ultimately be passed onto tenants in the form of higher rents, resulting in more expensive apartments.

Additionally, many businesses rely on landlord investments to keep their facilities attractive for new customers. But Proposition 10 will reduce property values and, in turn, reduce landlord improvements. California’s non-partisan legislative analyst, along with significant economic research, shows that the market value of non-rent controlled properties in the vicinity of rent controlled properties also declines. This suggests if a business is in the vicinity of rent-controlled properties, it could see a decline in property values. The legislative analyst also found that Prop 10 will likely result in tens of millions of dollars in lost revenue for state and local government, which means less money for schools and emergency services, reduced new home construction, and a loss of thousands of good paying construction jobs.

Ironically, Prop 10 gives apartment owners a huge financial incentive to convert rental properties into more profitable uses like shortterm vacation rentals and condos, making it harder for renters to find affordable housing in the future, even forcing seniors and others living on fixed incomes out of their apartments and communities. At the same time the authors of Prop 10 put language into the initiative that would require California taxpayers to pay the legal bills of the initiative’s supporters if homeowners, tenants or voters challenge the law in court. Crazy as this sounds, even if the initiative’s supporters lose in court, taxpayers will still be on the hook to pay their legal bills.

Faced then with all of these potentially terrible impacts, why are proponents pushing for its passage? That’s a curious question that is difficult to answer. Its primary funder is LA activist Michael Weinstein and his non-profit AIDS Healthcare Foundation (AHF), which has bankrolled a slew of ballot measures aimed at impacting prescription drug pricing and significantly curtailing, and in some cases elim i nating, LA area real estate development, including some affordable housing projects.

According to the LA Times, Weinstein’s AHF poured millions of dollars into numerous failed campaigns, including one which would have imposed a moratorium lasting up to two years on any new development, essentially putting a choke hold on construction.

Weinstein and his non-profit were even at odds with groups wanting to build affordable housing—AHF opposed a state bill requiring cities and counties to limit environmental, planning and other reviews for some development, which was recently signed into law by Governor Jerry Brown. He even tried to block construction of two residential buildings next to his offices because it would block his view. Thankfully a judge rejected Weinstein’s efforts.

Like the judge in the aforementioned case, California voters are shrewd enough to see past power grabs and vanity projects. Proposition 10 just has too many flaws. Nameless faceless government bureaucrats should not dictate pricing for tenants and property owners, put taxpayers at risk for millions in legal costs, or take tens of millions away from state and local government.

Proposition 10 is not the right answer to resolve California’s housing crisis.

 

August 2018

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It is almost time for Trade Show and we are hot on the heels of a great event. Have you submitted your nominations for the 23rd Annual Saluting Our Stars Regional Awards Breakfast yet? This is the best time to honor maintenance staff, property managers, regionals, vendors and properties to recognize them for all the work that they do for this industry.

I want to thank the Apartment Association of Greater Los Angeles, National Association of Residential Property Managers, Santa Barbara Rental Property Association, and the Long Beach Commercial Real Estate Council for participating in the Regional Awards event. We are expecting record nominations, but we can’t consider yours unless we receive your form and video. It’s a great way to say thank you to those who support our industry.

I also want to acknowledge and thank California Safety Agency, our Trade Show Kentucky Derby Sponsor! Their continued support over the years is greatly appreciated.

For those who attended the annual Summer Social, what a great way to enjoy the afternoon. As usual, we had great attendance and even more of you came out to meet our vendors and members at the Maya Hotel. A special thanks to our sponsors Jim’s Floor Covering, McCarthy Roofing, V&S Carpet & Cleaning, Chase Multifamily Lending, PPG Paints, and BMS CAT. We will share the pictures in next month’s Apartment Journal.

On the educational front, we are starting our second and last round for the year of the NAA Certified Apartment Manager (CAM) Certification Course this month, so be sure to sign your staff up for this important course. Individual classes can also be taken—see you there!

Another important reminder is the issue of Costa-Hawkins Rental Housing Act and our fight to keep it firmly in place. If you have not attended a meeting about this very critical vote, please make sure you go to our website to stay informed about any upcoming meetings or information. AACSC is fighting hard on your behalf but we need every owner and operator to support this effort. This will forever devastate our industry so be sure you are educated about the negative impacts.

Here, again, are some of the important facts if the Costa-Hawkins Rental Housing Act were to be repealed:

• If passed, all types of housing may be subject to rent control, regardless of the year built.
• If passed, all protections against onerous rent control laws will be eliminated statewide.
Property owners will be at the mercy of local government and special interest groups.
• If passed, public employee pension funds, many of which are heavily invested in apartment buildings, will decline in value and unfunded pension liabilities will increase even more.
• If passed, vacancy decontrol will be eliminated, meaning that your local lawmakers and nonelected rent control boards can limit the amount of rent you can charge to new tenants after your old tenants move out.
• If passed, rent control can apply to condominiums and single-family homes, and not just to apartments.
• If passed, many more communities throughout California will be emboldened by rent control activists and special interest groups to pass laws that will severely restrict your property rights and the rent you can charge.
• If passed, the only way to repeal or amend the initiative will be through another voter initiative. That will take years at best. Your State Legislature is powerless when it comes to amending and appealing these new burdens that will be placed on property owners.
• If passed, hundreds of millions of your tax dollars are at stake. Any court actions to challenge its constitutionality will be paid by taxpayers. That’s you!
• If passed, property values will decline as owners of rental property will incur significant losses in revenue and will no longer be able to maintain their properties resulting in neighborhood blight. Lower property values steal badly needed property tax dollars that fund our schools and first responders.
• If passed, no new affordable housing units will be created, new housing construction will decline, and construction jobs and trades servicing the apartment industry will be negatively impacted.


Don’t let this happen, stay informed and vote NO in November.

California Housing Crisis: Part 3

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Editor’s Note: This is Part 3 of a three-part article. Part 1 and Part 2 appeared in the May and June issues of the Apartment Journal.

VI. Local Governments Are Unaccountable and Stifling Growth.

Two statewide housing laws, the Housing Element law and the Housing Accountability Act (HAA), establish local governments’ responsibility to plan, promote, and remove barriers for housing development. The Housing Element law requires cities and counties to develop comprehensive plans every eight years to build new homes in their communities. The HAA was enacted to ensure local governments work to remove barriers to housing development through speedy development approvals and rezoning. Neither of the laws are respected or honored by local governments.

“We’re kind of lying,” said a Foster City councilmember about his city’s 87-page housing plan, which proposed hundreds of new homes.41 “We have no intention of actually building the units.” The councilmember’s prediction came true according to a recent LA Times article. “Despite soaring demand for housing in the Bay Area, the city hasn’t approved any new development projects in more than five years.”42

Foster City’s decision to ignore the housing element is pervasive among cities and counties throughout California. That’s because the housing element law has no teeth—it does not hold local governments accountable for any home building.43

State lawmakers have known about the law’s weaknesses for decades but haven’t fixed them. They have added dozens of new planning require ments to the process but have not provided any incentive, such as a greater share of tax dollars, for local governments to meet their housing goals.44

In addition to ignoring the housing element, local government housing decisions have made it even more difficult to build new housing.45

More than two-thirds of California’s coastal communities have adopted measures - such as caps on population or housing growth, or building height limits—aimed at limiting residential develop ment, according to the Legislative Analyst’s Office. A UC Berkeley study of California’s local land-use regulations found that every growth-control policy a city puts in place raises housing costs by as much as five percent there.”46

Cities are also bypassing their responsibilities under HAA by rezoning areas for commercial development over housing, and by modifying their zoning plans in ways that make housing infeasible.47

City and county inaction has become such a big problem that several bills from the 2017 housing package were necessary to stifle the ability of local governments to use zoning, environmental and procedural laws to thwart projects they deem out of character with their neighborhood.48

All in all, local governments are not holding up their end of the bargain to accommodate housing needs. Instead of adopting policies that facilitate the development of more housing units, they often target the rental housing industry for regulation, which in turn produces fewer housing units, and forces rental housing owners to remove units from the market.

VII. The High Cost of Development.


Development costs, land values, and permitting fees are soaring, making it more difficult for develop ment of rental housing to pencil out. One architect in 2014 conducted a study on the real cost to build a housing unit in San Francisco. According Mark Hogan, the costs are staggering.49

The following is his breakdown of the costs to build a San Francisco unit.50 Calculations are based on a 100-unit building assuming 800 square feet per unit, which is approximately 640 square feet of usable space based on typical building efficiency:

  • Land cost per unit of housing: $120,000
  • Construction cost per unit: $240,000 ($300 per sq. ft.)
  • Subsidy to build affordable housing below market: $27,000 (based on $200k per unit subsidy times 12, divided by remaining 88 units)
  • Permits, city fees and professional services: $48,000 (20 percent of $240,000)
  • Selling expenses: $34,000 (marketing, legal fees and real estate commissions at eight percent)
  • Total: $469,800 (total cost of 800 sq. ft. per unit)


It is no wonder rents are so high and housing is unaffordable. It is expensive to build. Rental property owners must charge higher rents to keep up with the cost of development.

The government again plays a significant role in the high cost of development. For one, its permitting and impact fees continue to rise. But more importantly, instead of providing incentives to offset the costs of development, the government continues to focus on burdening the rental housing industry with costly regulations.

If the State and local governments want to begin addressing the out-of-control development costs, it must give serious consideration to incentivizing development of new and afford able housing, including density bonuses, fee and permitting waivers, and CEQA waivers. Several recent studies have found that for every 10 percent increase in density reduces a project cost by up to 5.7 percent on average, and that for every 20 percent increase, the likelihood a site will be developed increases by 25 percent.51

Moreover, parking requirements can increase the cost of a housing development by 25 to 40 percent. One study found that reducing parking requirement by 20 percent increased the likelihood of housing being built by 87 percent.

Finally, waiving or reducing development impact fees as an incentive to build can help spur growth. In the Bay Area, impact fees can range from $24,000 – $40,000 per unit. Even a small reduction in the impact fees, or complete waivers depending on the number of affordable units provided within a development could yield big return in terms of housing development.

Conclusion

Instead of blaming and regulating the housing industry for the housing crisis, it is time for government to take a good hard look in the mirror and assess how its own actions and inactions over the last 50 years have significantly contributed to the crisis. Until the government can acknowledge that it is part of the problem, the State will continue to make the same mistakes over and over. It will continue to offer up the same problematic legislative measures, like Costa Hawkins repeal, that exacerbate rather than solve the State’s housing problems.

As California’s population continues to rise, its housing problems will continue to get worse unless real reflection occurs and real solutions are offered. It is time for the government to take responsibility for its actions and begin regulating and reigning itself in.

Ron Kingston can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

No portion of this article may be reproduced or copied without the permission of the author (Copyright © 2018 CALPCG).

 



41 Supra note 18 (article dated June 17, 2017).
42 Id.
43 Id.
44 Id.
45 Id.
46 Id.
47 Kevin Burke. “How Cities Bypass State Law, Causing the Housing Crisis.” The Bay City Beacon. August 2, 2017. Web January 2018.
48 See Sen. Bill 35 (Cal. Stat. 2017), Sen. Bill 167 (Cal. Stat. 2017); Adam Nagourney and Conor Dougherty. “The Cost of a Hot Economy in California: A Severe Housing
Crisis.” The New York Times. July 27, 2017. Web January 2018.
49 Mark Hogan. “The Real Costs of Building Housing.” The Urbanist. February 11, 2014. Web January 2018.
50 It does not include construction financing expenses, contingencies or developer’s profit, among other things.
51 Matthew Palm. “Getting the Most Out of California’s New Affordable Housing Funds.” The Bay City Beacon. December 5, 2017. Web January 2018.

 

 

Tax Reform

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Tax reform is front and center on the congressional agenda, and there is a real chance it will become law this year. The last comprehensive tax reform legislation was the Tax Reform Act of 1986 (TRA 1986) signed into law 30 years ago by President Ronald Reagan. We all remember how that bill devastated the industry for years, so it is imperative that we engage with policymakers to ensure a more positive outcome.

In the years since TRA 1986, legislation has changed the tax code—mainly at the margins—focusing on rate changes and other targeted pro visions while comprehensive reform has eluded policymakers.

The election of Donald Trump and continued Republican control of the Congress has changed the outlook for tax reform. One-party rule where reform is a priority for all of the key players has increased the odds that broad-based legis lation can become law.

At this stage of the process, House Republicans are taking the lead on reform. While President Trump made a number of proposals during the 2016 campaign, it is House Republicans who have put forward the most detailed plan. Entitled “A Better Way Forward for Tax Reform,” the House GOP released a “blueprint” for reform last summer, which is the starting point for their internal discussions. The blueprint would:

• Reduce the top tax rate on LLCs, partnerships, S Corporations and other pass-thru entities to 25 percent from 39.6 percent;
• Tax capital gains, dividends, and interest at a maximum rate of 16.5 percent;
• Replace depreciation with immediate expensing of all investment except for land;
• Eliminate the deduction for business interest;
• Eliminate like-kind exchanges;
• Eliminate the Low-Income Housing Tax Credit; and
• Repeal the estate tax while retaining stepped-up basis for inherited assets.

It is important to note that while the Blueprint appears to eliminate the Low-Income Housing Tax Credit (LIHTC), there are good indications it may be put back into the House GOP proposal.

As the most developed tax reform product in circulation at the moment, the Blueprint is the centerpiece of conversation around tax reform. However, it is not yet legislation, and there could be significant changes made before an actual bill is introduced.

Moreover, the White House and Senate still need to flesh out their own proposals. There is much time to go before a reform agree ment is reached, if at all, and we can expect the details of any agreement to change several times along the way.

For our part, the apartment housing industry’s primary objective in reform is to support legislation that promotes economic growth and investment in rental housing without unfairly burdening apartment owners and renters relative to other asset classes. To this end, we are pushing lawmakers to ensure the following priorities are reflected in any bill that moves forward.

Tax reform must protect “flow-through entities” (e.g., LLCs, partnerships, S Corporations, etc.), which are the dominant business structure in our industry.

Under this model, a firm’s earnings are passed through to the partners who pay taxes on their individual tax returns. Accordingly, Congress must not reduce corporate tax rates financed by forcing flow through entities to pay higher taxes by subjecting them to a corporate-level tax or by denying credits and deductions.

It is also a priority for the apartment housing industry to maintain “like-kind exchanges” where property owners can defer tax on the gain on sale of an asset if, instead of selling their property, they exchange it for another comparable prop erty. These rules encourage property owners to remain invested in the real estate market. Such an important tool for investment must be maintained in a reformed tax code. Notably, with the exception of land, the expensing proposal in the House Republican Blueprint provides for de facto like-kind exchanges.

Tax reform should also take care to preserve investment incentives. Borrowing is a central part of how apartment housing is financed (a typical development project could be financed with 1/3 capital and 2/3 debt and the tax code has long provided a full deduction for interest). Indeed, without business interest deductibility, the cost of debt financing would increase and shift many real estate business models. This would inhibit devel opment activity at a time when we face significant affordability challenges.

Policymakers should also take care when making changes to cost recovery rules like depreciation so they do not harm real estate investment. Apartment buildings are currently depreciated on a 27.5-year schedule. While House Republicans are proposing to allow buildings to be immediately expensed, others have suggested extending the current law depreciation period. This would surely lead to reduced development and invest ment and ultimately undermine real estate values and stifle job creation.

Finally, protecting the Low-Income Housing Tax Credit (LIHTC) is a priority for the apartment housing industry. The LIHTC is the central vehicle producing housing for moderate- and low-income families. We are in a period of crisis in housing affordability and need stronger incentives like the LIHTC to effectively respond. This program must remain a vital part of the strategy to address our nation’s housing needs.

You will notice some overlap between what is being proposed, at least in the House GOP Blue print, and the apartment housing industry’s priorities. It is important to remember that policy makers are truly looking to reshape how taxes are levied in this country and that perhaps what they propose could effectively replace what is in the tax code now and keep the apartment housing industry whole. We remain open minded on this point as we continue to press for our top priorities and evaluate in detail what tax reform proposals mean for our business.

Every member of the apartment housing industry must be engaged in the advocacy campaign on tax reform. That means contacting your members of Congress and communicating our message.

Changes to the tax code will impact all of us, and it is our responsibility to ensure whatever reform is passed does not harm our ability to provide housing to one-third of the nation. To learn more about how you can get involved in shaping the debate, contact Peter Fromknecht at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and take our Advocacy Interview at http://re.spon.se/OTmUtG to see who you might know on Capitol Hill! Your relationships with lawmakers and your willingness to act on those relationships will make the difference between success and failure on tax reform.

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Contact AACSC

Apartment Association,

California Southern Cities
333 W. Broadway St., Suite 101
Long Beach, CA 90802
(562) 426-8341

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