Moses Kagan on Real Estate

How one little equation perpetuates slum conditions

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Dave C commented on yesterday’s post asking, in effect, what can be done about a rent control building which is deteriorating. The short answer is: nothing.

The reason is one little equation.

If you’re the owner of a rent-controlled building with below-market tenants in Los Angeles, your tenants are never leaving. You can’t raise the rent, except by the city-mandated 3% per year. So there’s little incentive to invest in your building, because there’s no way to earn a return on that investment.

Understanding this problem, the city created the Capital Improvement Program. Administered by the usual suspects over at LAHD, the Capital Improvement program is intended to provide a way for landlords to get compensated for (part of) the cost of fixing problems in their buildings.

Here’s an example of how the program works: You spend $30k re-piping your 8 unit, 1920s building. Then you apply to the city for a small, temporary rent increase from your tenants to cover the cost.

Except here’s how the city calculates the rent increase:

“For applications filed after September 30, 1989 the allowable capital improvement cost is 50% of the costs approved by the Department. Thus, the landlord divides the total allowable capital improvement cost by 60 and then divides this monthly increase equally among all units benefitting from the capital improvement. (LAMC 151.07 A)… For capital improvement rent increase applications filed after September 30, 1989 the cumulative rent increase (s) for a unit cannot exceed $55…”

What this means, in plain English, is that you will only ever re-coup 50% of the cost of that $30k re-piping. And you will only do so through rent increases of $55 / month on your eight tenants, or $440 / month. So, the city is saying, lay out $30k of your hard-earned money and you’ll get back $15k in $440 chunks over the next 34 months.

Would you take that deal? Neither would anyone else! And that’s why no one fixes the systems in slum buildings without first getting rid of the tenants so that the rent can be bumped to market. All because of that 50%.


Written by mjkagan

09/25/2012 at 7:11 am

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