Right now, one of the biggest problems I see across multiple deals is the total lack of understanding of LA rent control among bank underwriters.
Underwriters are the guys (and gals) who review the property and the borrower to help the bank decide whether- and how much- to loan on a given deal.
Because they see a lot of rent rolls, they tend to think they know the rents in different areas. But, without understanding how rent control works, seeing a rent roll can actually lead you far astray.
For example: Say you, the underwriter, look at five rent control deals in Silver Lake in a row. All contain one bedroom apartments with legacy tenants paying between $600-1250. You think you’re now an expert on Silver Lake rents. You probably think that the right range for market rents for 1/1s in Silver Lake is $1000-1250.
You’re totally wrong. Market rent for a decently renovated unit in Silver Lake is easily $1500 and probably more like $1600. But you, the underwriter, don’t know that, because you’ve seen a bunch of rent rolls with rent-controlled tenants paying less.
So, then, when I bring you a building with a few vacancies and I tell you the rent for those units will be $1500-1600, you think I’m bullshitting you. But I’m not. You just don’t know what you don’t know.