News

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Here, again, are some of the important facts if the Costa-Hawkins Rental Housing Act were to be repealed: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

It's Not Over Til It's Over

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Many experts on both sides of the political aisle know full well that our great State’s utmost economic threat right now is the crisis in our housing economy. We mentioned recently about how some laws are just cleverly named but end up doing the opposite of what they are titled, and although I believe that all Americans (all people worldwide, actually) should have a basic healthcare plan—as well as a basic investment, time management, career, education, and retirement plan, too—there is no doubt that the “Affordable Care Act” has indeed not achieved what it was titled. No matter how you feel about the ACA, there is no denying that prices skyrocketed following its inception. Although it made it more affordable for some people, it has not come close to achieving the level of care promised and it pushed prices out of reach of others. It’s much more of a burden for the public than a benefit, and certainly we can do better.

This is the same type of a play on words we are up against now for the “Affordable Housing Act” now being considered across the State, which is the repeal of the one thing keeping current rent controlled cities afloat—the Costa-Hawkins Rental Housing Act. As many of you know, Costa-Hawkins allows vacancy decontrol. It keeps rent-controlled cities from directing pricing on vacant apartments, keeps cities from being able to include condos and single-family residences into the ordinances, and keeps from adding properties built after February 1995 from becoming part of a “rent stabilization ordinance.” The latter is one of the most important details of Costa-Hawkins because it keeps new development on the table. Our problem is not a price control problem; it’s a supply problem and a ton of red tape to jump through from city to city to keep development moving forward.

It is no wonder that the NAACP, California Community Builders, United Latinos Vote, California Senior Advocates League, American G.I. Forum, Howard Jarvis Taxpayers Association, and CalTax (just to name a few) are all against this repeal and rent control initiatives themselves. It hurts who they want to protect, especially minority communities.

The State and cities really need to make up their minds on what they want to do if they plan to allow an increasing number of people to live/migrate here. If they don’t want to turn people away, then they need to unlock the bottleneck of new development to make a place for new settlement instead of punishing housing providers and current residents by making it impossible to find quality accommodations at an affordable price. I love our melting pot here in LA and I would love to see it expanded, but this isn’t the way.

The repeal of this law (and really the current allowance of rent control to be initiated in cities has been and) will continue to hurt families, workers, and businesses—most of which are the people who it aims to protect, along with the newcomers who are risking a lot moving here.

Look no further than what is already happening in rent-controlled communities to the union workers and specialized tradesmen/women due to those ordinances even with having the ability to increase market rents on a vacancy: Minimum work and purchases (spending by the housing providers) for the upkeep and remodeling of apartments. This affects maintenance supply stores to the workers themselves as well as their office teams—schedulers, billers, and the like. It limits the work of painters, plumbers, electricians, suppliers, builders, pest control companies, gardeners, tax in come for the city, and more—which is not the goal of rent control, but the repeatedly proven reality. This goes much deeper than it seems most of these pushers of the wrong kind of change care to look at. They are taking this at face value—the name only—and making very incorrect assumptions that have already and will continue to reinforce the unintended consequences raining down on our people and economies.

Don’t let this happen. Spread the word and prepare to get out the vote; this is going to be a fight that none of us can afford to lose because it affects every facet of our economy. Keep abreast of what’s going on as well as keep engaging with our Association and PAC. Donate today to help the fight—we all need to get ahead of this before we allow it to destroy our economy and the many pains that will surely follow.

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.

 

 

Legislative Update - June 5, 2018

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On Friday, June 1, the local Long Beach Rent Control Ordinance proposed did not garner enough signatures to be turned in. What does this mean? The Rent Control Ordinance will not be on the November ballot. However, they still have until July 30 to collect signatures so please remain vigilant and let us know of locations where they are actively asking for signatures. Thank you for all you have done and will continue to do.

Other Bills:

AB 2364 (Bloom) – Dead – Bill that would have imposed rent control on property owners that decide to go back into business within 10 years.

AB 2618 (Bonta)
– Dead - Would have required anyone who manages residential AND commercial property to obtain a state run certificate program after completing a state supervised education class.

AB2343
– Is being amended – will update as we learn more.

AB 2925 (Bonta)
– Dead – Would have imposed a just cause mandate if property owner serves a 30- or 60-day notice to terminate for all residential AND commercial property.

 

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

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

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