San Diego Rent Control

San Diego Rent Control

Quick Summary

  • Californian’s will get to decide in the November ballots the fate of the Proposition 10,  the so-called “Affordable Housing Act (AHA), which would allow for cities to adopt rent control.  The AHA seeks to revoke the Costa-Hawkins Rental Housing Act, which prohibits rent control on buildings built after February 1995.
  • Some San Diegan’s believe this would provide an answer to our housing crisis, however, many professionals and economists disagree. This initiative is bad for homeowners and renters and will make California’s housing crisis worse.
  • It is estimated that if Proposition 10 is passed, property values will fall 20-25% across the state of California.
  • Prop 10 is flawed and doesn’t create one unit of housing, it discourages new housing.
  • Experts believe rent control would be detrimental to the San Diego economy and would discourage new housing development, further exacerbating the housing crisis.
  • Experts also argue that rent control would eliminate many incentives to own rental properties. This could cause harm to both owners and tenants.
  • Rent control has already been adopted in several cities around the United States, and the results have proved to be harmful to the overall economy by shrinking supply of affordable housing and driving up rental market prices.
  • National City is the first city in San Diego County to try and pass a rent control ordinance (Proposition W). If passed, this could be a watershed moment for other cities in the county to pass such ordinances, further inhibiting our housing supply and placing both renters and owners at greater risk.

Continue reading below to learn more about rent control, Costa Hawkins, Prop W and the impact they would have on the San Diego economy.

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San Diego Rent Control

San Diego is facing a profound housing crisis. Rents keep climbing and supply keeps falling desperately behind demand. According to the San Diego Union Tribune, in March of 2018, the average rent in San Diego County hit an astonishing record of $1,887.

San Diego now ranks as the ninth most expensive market in the United States. Many San Diegan’s are finding it increasingly hard to afford rent and are turning to the government for answers. Their solution? Adopt the Proposition 10 (Affordable Housing Act) and repeal the Costa-Hawkins Rental Housing Act which would allow cities like San Diego to decide on their own rent control measures. The initiative received more than 650,000 signatures and will be placed on the November 6th ballot, giving Californian’s the option to decide on this issue.

Many economists and experts agree that rent control offers no benefits for all parties involved and would be disastrous for our local economy. How would rent control affect San Diego? Let’s take a closer look at the various players in this debate.

What is Costa-Hawkins?

The Costa-Hawkins Rental Housing Act is a California state law that was adopted to counter vacancy control ordinances and spur new construction of single-family homes.

It limits how cities set rent control in two ways

  1. It prohibits cities from putting a rent cap on single-family homes or apartment buildings built after February 1995.
  2. It gives landlords the right to raise rent prices to market value when a tenant moves out, otherwise known as a vacancy control.

Costa-Hawkins does NOT outlaw rent control. Cities like Los Angeles and San Francisco have been able to adopt some forms of rent control but within the state law.

Source: Union Tribune 

What Is Proposition 10 (Affordable Housing Act)?

The affordable housing act has three main objectives

  1. It aims to restore California’s cities and counties to develop and implement local policies that ensure renters can find and afford decent housing in their areas.
  2. Improve the quality of life for millions of California renters and reduce the number of people who face critical housing challenges and homelessness.
  3. Repeal the Costa-Hawkins Rental Housing Act

Supporters of this bill hope that if passed, each California city would begin to pass their own rent control ordinances. In turn, they believe rents will go down, and that many Californian’s will be able to find affordable housing. They believe that increased rents are a result of landlords fueled by monetary greed.  This act would allow cities to prevent landlords from increasing rents once a tenant leaves (among other things). Curious what those other things are? We’ll break down what that could look like later in this article with National City.

Source: Affordable Housing Act Website 

While it is no question that rents are sky-rocketing and that a solution needs to be reached – allowing cities to pass rent control ordinances is not the answer. In fact, I would argue rent control would just exacerbate the problem.

 

Why Proposition 10 Won’t Work

A recent study by the Legislative Analysts Office (LAO) looked at Proposition 10 and said it would lower ALL property values so much so that the state stands to lose $10’s of millions of dollars over the next few years as a result of lower property taxes.

Repealing Costa-Hawkins would lead to shortages in both the quantity and quality of housing. Profits are what incentivize landlords to maintain a building in good shape. If rents are capped at a certain limit, what is the incentive for landlords to maintain the building?  Buildings would become neglected and long-term improvements wouldn’t be invested in. This can create unsafe living conditions for tenants.

Rent control would limit property owner’s potential cash flow to dangerous levels. When you think about things like increased expenses and rising interest rates, this could put owners at risk. If the owner can’t make their mortgage payment because rents have been caped, they risk losing their property. This could create a domino effect amongst many property owners. Tenants might also have to look for a new place to live.

There are already many risks associated with owning a multi-family building, so if you factor in rent control, what is the incentive to buy a place? Owners might opt to convert their building into condos if they do not see enough cash flow to turn a profit. This would take away even more rentals from the San Diego market.

In 2016, the Union Tribune asked 14 experts whether they believed rent control would benefit the San Diego economy, all 14 experts answered, “No”. They cited everything from shrinking the supply, decreasing affordability long-term, to driving tenants out to repurpose buildings.

History has shown us that rent control doesn’t work. Look at New York City in the 1970s and 80s. Landlords simply stopped maintaining the buildings, amenities were no longer looked after, living conditions became dangerous, and eventually, entire streets blocks were left vacant. New York’s neighborhoods fell into an economic recession and investment was at an all-time low. 

 

National City (Proposition W)

This issue is much closer to home than you may think. The National City Rent Control and Community Stability Ordinance (Proposition W) will be voted on November 6th. This ordinance will halt construction, harm the local economy, and do nothing to help with the housing crisis.

Here is a quick highlight of the ordinance’s pitfalls courtesy of ProtectOurHousing

  • Caps annual rent increases at an amount equivalent to the increase in the Consumer Price Index (CPI), but never more than 5%.
  • Rolls rent back to Spring 2018 for existing residents that were in their units at that time. This means if you didn’t increase your rents then, you’re locked into those rates.
  • Upon receipt of a petition by a tenant or rental owner, the rent may be adjusted upwards or downwards in accordance with the Measure.
  • Creates a five-member rent board. At least three members must be tenants in controlled units. There are no seats specifically for property owners. You could, in theory, end up with a 5-member tenant board.
  • Creates a per unit fee to support the Rent Board, starting at $120 per unit per year (most existing Rent Boards charge $350 per unit per year). That comes right off your bottom line, while they’re already caping your rents!
  • The City Council and City Manager shall have no authority to oversee, supervise, or approve the Rent Board’s budget.
  • Requires Rent Board approval for all evictions (little to no recourse should they deny it).
  • Property owners who fail to comply with provisions in the Rent Control Measure can be held liable for damages including emotional distress.
  • The Rent Control Board will make legal assistance available for tenants related to evictions, Board petitions, hearings, and appeals.
  • Enacts Just Cause Protections, limiting an owner’s right to require a tenant to vacate a unit. This makes the removal of problematic tenants very difficult, leaving good residents to suffer. 
  • Withdrawal of units from the market requires 120 days to 1-year notice and requires relocation assistance of $7,000 and $10,000 if they are elderly, disabled, or have minor children.
  •  If Costa-Hawkins isn’t repealed but Prop W passes, ALL rental units in National City must pay $80/per year/per unit for Just Cause and also will be subject to relocation fees.
  • Owners who move into their own units will also be required to pay relocation costs.
  • Duplexes and homes with “granny flat” rentals will be subject to rent control unless the owner lives in one of the units.
  • Prohibits Ratio Utility Billing Systems (RUBs), thereby hurting conversation efforts.
  • If you decide to renovate the property and put a bunch of money into it, that evicted tenant will have first right of refusal at the market rate which they rented it at before.

As you can see, this list is quite overwhelming. National City could very well set the tone for future rent control ordinances throughout San Diego County. It is imperative that this bill not pass in order to save future cities from this same disaster. There are approximately 70,000 residents in National City and 70% of the population rent. With 25,000 registered voters, it is important they are informed of the impact this legislation would have on them.

What A Failure to Kill Prop 10 and Prop W Means for San Diego

A failure to kill Proposition 10 and Proposition W  would create a cascading effect. As these fights continue to go on in cities throughout San Diego County, the costs for various associations and professionals to go out and amend these ordinances to find workable solutions would become astronomical. We would be stretching ourselves far too thin. We need to send a clear message by defeating Prop 10 and Prop W and protecting Costa Hawkins.

It’s important to remember that if Prop 10 passes, that does not mean rent control is enacted. It simply allows cities the right to pass ordinances similar to what is trying to be done in National City.

Repealing Costa Hawkins and or enacting rent control in National City will not fix California’s (and San Diego’s) housing crisis. 

The Impact on Development

What about developers and investors? Would the same incentives remain for them to continue to build new construction if they knew property values would be artificially capped?

A recent CoStar report discussed the impact that rent control could have on development.

“Many developers are concerned about the economic impact there will be on new development if it is subject to rent control… it would change the “whole economics” of how developers view potential development opportunities… It’s hard enough and costly enough for a developer to make a decision to build housing, and now they are put on notice that the housing may be subject to rent regulation… they may very well be unwilling to make those tough decisions of being invested in building a development”.

If developers are unwilling to build new units, which San Diego desperately needs, that is a losing scenario for all parties involved. This would place us further behind meeting the demand for housing. Alan Gin at the University of San Diego argues,

“the problem is the lack of construction of both single-family and multi-family residential units. Controlling rents would reduce the incentive to build more multi-family units”.

If developers see fewer incentives to build housing, they may turn to other development avenues like commercial, retail, office, etc…

The Building Industry Association recently commissioned a study that found that up to 40 percent of the cost of a new home is attributable to the 45 agencies that govern home building in California. This means that on a $5,000,000 project, $2,000,000 is spent paying these 45 agencies that govern homebuilding. Legislation like the California Enviornmental Quality Act (CEQA), while once good intentioned, has proven to be a major roadblock to countless developers.

Rent control not only discourages development, but it would contribute to less affordable housing developments being built. Austin Neudecker of Rev points out that rent control would increase the prices for those who cannot find a controlled unit. New York City and San Francisco are prime examples where soaring rental prices and rampant abuse of rent-controlled housing exists.

Another big concern with rent control is tenants deciding to stay for extended periods of time in their current unit or subleasing it out. This makes it harder for people who need affordable housing to get into units.

A 2017 Standford Study and this LAO report also concluded that rent control does more harm than good. I recommend giving these a read, they provide some valuable insight into what happened in San Francisco and their attempts at rent control.

 

Final Thoughts

Think about this for a moment. If produce is too expensive, should we limit how much the farmer makes? What about if Apple Computers are too expensive? Do we start paying people who make them less?

The same concept applies to landlords when being asked to accept rent control. Just because rents are going up, it doesn’t mean the responsibility falls on owners and developers.

Or how about this

Rent Control does nothing to empower homeownership. It doesn’t give us more supply and furthermore, it keeps you and your future heirs in a constant state of renting. Is that really what you want?

The failure of Government at all levels has created the housing crisis in California, not landlords. 

Between now and November, we need that message to get to the voters, and that will require support.

More permanent solutions lie within increasing zoning, reducing the time it takes to build, and expanding our public transit system and building communities around those transit centers.

Lowering parking space requirements could prove to help as we enter a future where vehicle ownership could decline. Developers fees should be prorated by size. As it currently stands, big and small units face the same fees, which gives developers no incentive to build smaller, less expensive units.

These are just jumping off points but could be great starts to solving what is arguably one of San Diego’s biggest dilemmas. I will be updating this post as more developments arise, so please stay posted.

Where you can get involved

National City Protect Our Housing

If you know people who have property, or better yet reside in National City, have them vote no on prop W!

More Information

San Diego Union Tribune “What’s the Deal With Rent Control” 

EconoMeter Critics Panel Report

Rent Control is No Answer to California Housing Crisis 

 

Written by Blake Imperl in collaboration with Curtis Gabhart

Curtis Gabhart and Gabhart Investments, Inc – 2018 All Rights Reserved
The material contained in articles that appear on gabhartinvestments.com is not intended to provide legal, tax or other professional advice or to substitute for the proper professional advice and/or commercial real estate due diligence. We urge you to consult a licensed real estate broker, attorney, tax professional or other appropriate professionals before taking any action in regard to matters discussed in any article or posting. The posting of an article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

Commercial Real Estate Due Diligence Class Recap

Commercial Real Estate Due Diligence Class Recap

Commercial Real Estate Due Diligence

After having a great discussion during my last class on Commercial Real Estate Due Diligence, I wanted to take this opportunity to share with you some of the key takeaways. This article is intended mainly for apartments/multi-family, however many of the same principles will apply across different areas of commercial real estate. I’ll start with a brief overview, then dive into each topic a bit more, and finally leave you with my powerpoint presentation that gives an overview of the topics I covered in my class. It is my hope you will add many of these ideas to your property analysis toolkit.

What is Due Diligence?

Due Diligence is a necessary part of any real estate transaction.

  • It is the process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk.
  • Applying a consistent standard of inspection and investigation to determine whether actual conditions reflect the information represented.
  • The process by which you confirm that all of the facts of a deal are as they have been represented to you by the seller.

 

Conducting proper due diligence can be the difference between turning a profit or suffering a financial loss in a real estate transaction.

If you’re new to commercial real estate transactions, I recommend that you consider bringing in someone with more knowledge. It’s OK to admit you need help. Getting help from an experienced commercial real estate broker can add a lot more money to your pocket and make the process much easier for all parties involved.

 

Start With Initial Due Diligence

Once you’ve found your target property, begin by requesting all of the information in the seller’s possession (expense reports, property records, profit and loss statements, etc…). Often you will find on smaller to mid-sized apartment buildings that owners do not keep detailed records. This means you will need to do a little more investigating to get the accurate expense numbers.

Talk to the current tenants about things that are wrong with the building. Ask how long have they been there, if they are happy with things, what’s the neighborhood like, etc.… Current tenants can be a tremendous resource for learning about a property. If there is a current property management company in place, ask the tenants how responsive they are to their needs. A lot of times it’s easier to keep the same management company in place for the first few months of acquisition if they are doing a good job. Talk with the maintenance people about matters not tended to or problems that will have to be fixed in the future. They are often going to be more honest than a seller would about the actual condition of the property.

 

Financial Due Diligence

commercial real estate sales comparable

  • Review the profit and loss statements (P&L). Make sure you pay extra attention to any areas where significant gains or losses occurred and try to spot any discrepancies.
  • Underwrite the property. Never take a seller and brokers provided pro forma at face value. Their numbers are usually a smaller look at the property and might not reflect how the financial performance of the property in a few years time.
  • Look at rent and sales comparable in the area.
  • Since your evaluation of the property will depend upon income today and tomorrow, the accuracy of the historical data, as well as the validity of projections, will significantly alter your potential financial return.
  • Look into the rent roll and leases including the terms, deposits, and payment history.
    • Be aware of handwritten changes to the leases
    • Get written confirmation or an Estoppel Certificate from the tenants if you can’t read the document or if the statements are unclear.
      tenant estoppel certificate

      Tenant Estoppel Certificate

      • An Estoppel Certificate is a statement signed by the landlord and tenant that states that particular facts are correct, that there are no defaults, and that rent is paid on a specific
    • Look for rent concessions
    • Are the security deposits mentioned in the lease the same as those outlined in the rent roll? (This is usually a problem area)
    • Cross check the rent roll against the income statement.
  • Get a lease abstract. This is a summary of the essential financial, business and legal information that exists in a commercial real estate lease. It should bring to the reader’s attention any important lease provisions, financial obligations or other issues of importance.
  • Always add your property management fees back into your expenses. Quite often, the current owner could be managing it and won’t factor that cost into their expenses, which could make the NOI appear higher than it would be if you bought it.
  • Reconstruct the financials on your own… add things back like long-term capital improvements (HVAC, electrical, roof, cabinets)… then show how that would affect your financials as you spread those costs out over time.
  • Recommend taking CCIM classes for understanding the financials and underwriting a property.

If you’re an expert in the location you’re interested in; you may still feel comfortable buying a property without the expense reports because you’re familiar with what expenses should look like. This is another reason why having an experienced broker could help because sometimes you will find properties that could be good deals but may lack proper financial reports.

Make sure you’re comfortable with the deal above all else.

financial due diligence checklist

Here is my quick financial due diligence checklist

Physical Due Diligence

commercial real estate physical due diligence

  • Walk every unit. It sounds like common sense but make sure you take a look at everything.
  • Don’t trust the seller/broker to tell you the unit is in perfect condition.
  • As you walk the units, I recommend using a “walkthrough sheet.” I have included a sample in my PowerPoint, which you can find at the end of this blog post. If you would like the full checklist, please let me know if the comments below.
    • As you walk the units, assess the overall condition of them. Take inventory of things that need to be addressed, breaking it into what must be fixed and then a “wish list” of items you’d like to get to eventually.
    • Look for any warning signs or safety concerns.
    • Are there any tenant concerns? Things like hoarding, multiple pets, an excessive number of occupants, unapproved alterations, illegal activity, …
  • Building inspectors are never a bad thing to have. Often you’ll get your money back in the deal.

physical due diligence commercial real estate

Legal Due Diligence

Here are some necessary things you’ll need.

  • Title inspection and survey
  • Environmental inspection (typically paid for by the buyer)
  • Inspection for building code violations. This is critical for understanding any potential hazards or areas that need immediate addressing.
  • Checking to make sure that the property is in zoning code compliance

Disclosures

When using AIR Commercial Real Estate Forms

  • Seller Mandatory Disclosure Statement (SMDS)
  • Property Information Sheet (PIS)
  • Tenant Estoppels (TEC)
  • Commercial Property Owner’s Guide to Earthquake Safety (pre-1960 buildings)

AIR is a leading, member-owned real estate network. From contracts to networking and education, they’ve been helping commercial real estate professionals for years. Developed by top commercial real estate experts, AIR CRE Contracts are recognized as the industry standard, and the most efficient way to close a deal. I highly recommend you look into becoming a member as they offer over 50+ contracts that you can use and edit to your own needs. Learn more by clicking here. 

When using CAR (California Association of Realtors) Residential Income Purchase Agreements

  • Know Material Facts
    • Seller property questionnaire (CAR Form SPQ) or Exempt Seller Disclosure (C.A.R. Form ESD) if TDS-Exempt
  • Commercial Property Owner’s Guide to Earthquake Safety (Pre-1960 Buildings)
  • Tenant Lease Agreements
  • Tenant Estoppels (TEC) if agreed in the contract
  • Survey, plans and engineering documents, if any, prepared on seller’s behalf or in seller’s possession.
  • Permits and structural medication documents – if in seller’s possession

Statutory Disclosures

When using CAR Residential Income Purchase Agreement (cont’d)

  • Lead-based paint pamphlet and form
    • Applies only to residential property built before 1978
  • Natural and Environmental Hazards
    • Seller is required to disclose if the property is located in a special flood hazard area; potential flooding (inundation) area; very high fire hazard zone; state fire responsibility area; earthquake fault zone; seismic hazard zone; and (iii) disclose any other zone as required by law and provide any additional information needed for those zones. These are satisfied with an NHD Report.
  • Withholding Taxes
    • Seller shall deliver to the buyer or qualified substitute, an affidavit sufficient to comply with federal (FIRPTA) and California withholding law (C.A.R. Form AS or QS)
  • Condominium/Planned Development Disclosures
    • Seller has seven days (standard) after acceptance to disclose to the buyer whether the property is a condo minimum or if its located in a planned development or other common interest subdivision.

Click here to download the CAR Sales-Disclosure-Chart

The California Association of Realtors (CAR), is real estate trade association to develop and promote programs/services that enhance a member’s ability to conduct business with integrity and competency. They have many tools designed to help you thrive in your real estate career. From their zipForm transaction tools to their education courses and more, they are a great resource. Learn more by clicking here

legal due diligence checklist real estate

Final Thoughts

Thank you for taking the time to read this article. I hope you found it helpful. As always, please leave any thoughts or comments below. We hope you will join us for our next class on “Don’t Take Cap Rates At Face Value” on Thursday, May 31st.

Stay up to date with all of our upcoming real estate classes by clicking here. We offer one class a month that covers relevant and important commercial real estate topics.  

 

Curtis Gabhart and Gabhart Investments, Inc – 2018 All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of Gabhart Investments, Inc. The material contained in articles that appear on gabhartinvestments.com is not intended to provide legal, tax or other professional advice or to substitute for the proper professional advice and/or commercial real estate due diligence. We urge you to consult a licensed real estate broker, attorney, tax professional or other appropriate professionals before taking any action in regard to matters discussed in any article or posting. The posting of an article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

 

Flat news at the USD Residential Real Estate Conference

We attended this years 12th Annual Residential Real Estate Conference at the University of San Diego and here is a quick summary of the event.

For both California and San Diego, the forecasts for 2012 are predicting only a slight decrease in the number of distressed homes and flat prices due to

  • Low consumer confidence
  • Tough credit qualifications 
  • Lack of hiring by employers. 

We are not yet at a long term equilibrium in home ownership rates and many more “strategic” defaults are in the pipeline for the banks & a higher % of distressed inventory is selling as short sales vs. REO. This strategy is helping banks minimize their losses and are processing the short sales in half the time.

 

At GII We can attest to all of this through our deals. It appears that not only will our single-family renovate and sell strategy fit the market conditions in 2012 it may be time to start buying and holding more properties.

 

Highlights from Fannie Mae chief economist Doug Duncan, PhD:

 

  • New housing starts at long term rate for household formation by 2015
  • 20% of us home values are underwater
  • 0% growth in small business hiring in 2012
  • 1.6% growth in US GDP in 2012
  • Gdp is at prerecession levels but employment has not recovered and will remain at same level through 2012
  • 75% of americans think economy is headed in wrong direction
  • Reaching levels of historical % of ownership and rental properties
  • Long term home ownership level expected to be 65%

Highlights from USD Assistant Professor Ryan Ratcliff, PhD:

 

  • 12% unemployment rate in CA
  • SD nonfarm unemployment increased 7% and has only declined 3%
  • CA average resale home price down 5% year over year
  • SD resale prices have only declined slightly year over year
  • $100-300k is the price range of most distressed sales in 2011 in San Diego
  • Best CA employment gains were in high tech and business services, worst sectors were manufacturing and construction.

Highlights from USD Associate Professor Alan Gin, PhD:

 

  • Best SD employment gains were in health care services, admin. and support services, real estate and hospitality (theme parks)
  • SD gained 24k jobs in 2011
  • SD unemployment rate dipped just below 10%
  • Gin’s local consumer confidence indicator is down 2% in SD
  • Job growth in SD expected to be 15-20k in 2012
  • 5k home and multifamily units authorized in 2011 – up from 3k in 2009 and 3.5k in 2010
  • 2.5k of the 5k in 2011 were multifamily (comprised mostly from a couple big projects – this is up 128% from last year

Burnham-Moores Center Presentation Slides

Presentations from the 12th Annual Residential Real Estate Conference,
December 13, 2011:

 

 

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US Real Estate Home prices adjusted for inflation plotted as a roller coaster

US Real Estate Home prices adjusted for inflation plotted as a roller coaster

I was using stumbleupon which is a really cool site which as they claim “Discover the Best of the Web in less time” is true.

Here is how the site describes itself

StumbleUpon helps you discover and share great websites. As you click Stumble!, we deliver high-quality pages matched to your personal preferences. These pages have been explicitly recommended by your friends or one of 8 million+ other websurfers with interests similar to you. Rating these sites you like () automatically shares them with like-minded people – and helps you discover great sites your friends recommend.

Anyways it is a great tool to search the web for great content and is where I ran across this interesting video that plots the housing market since 1890 from a roller-coasters perspective. Don’t miss the end.

For the most updated information & news on real estate & Gabhart Investments go to our facebook & twitter pages

ps. click here to like us on facebook

 & Here to follow us on twitter