Moses Kagan on Real Estate

Per Adrian at Curbed, the City Council just voted to allow homeowners to paint murals on their houses in Echo Park and some of the surrounding areas.

If you think this is going to end well, check out the handiwork of one aspiring artist in the area, thoughtfully painted on the front fence one of my buildings:

Can you imagine what this budding artiste could do with an entire single family home as his canvas. And, lest you imagine that the type of people who do this stuff don’t own homes, I direct your attention to the area around the intersection between Echo Park Ave. and Baxter, where several of the homes are, indeed, owned by known gangsters (who periodically get shot at by disgruntled associated / rivals / etc.).

One of the more annoying aspects of LA zoning is the requirement for large front setbacks in almost all neighborhoods.

What’s a “front setback”? Simple: It’s a front yard.

In your standard R1 zone, which is the zoning for most single family homes in the city, the required front yard is 20% of the depth of the lot, up to a 20 ft maximum. A standard LA lot is something like 50′ x 150′ (7500 sq ft). 20% of 150′ is 30′, so the font setback would have to be 20′ deep (because 20′ is the maximum). That means that 20′ x 50′ = 1,000 sq ft of the lot, or 13%, is required by the city to be front yard.

Why is that so annoying? I’ll answer the question with another question: When was the last time you saw anyone actually using their front yard?

I think the reason no one uses the front yard is because it’s not private. It’s by definition close to the street. And, due to LA’s insane fence ordinance, which limits fence heights in many places to 3.5′, there’s no way to screen that street-adjacent land from prying eyes.

So, you’re left with a big patch of nothingness, which is likely to be planted with grass and will therefore require a bunch of chemicals and tons of water to maintain.

How should the code be changed? One possibility would be to allow parking the front setback. That would free up space on the sides and in the rear that is generally used for parking. But the problem with this idea is that no one wants to walk / live on a street with a bunch of cars parked in front of the houses.

So, a better option is to allow houses to be built much closer to the street. I would dramatically decrease the minimum front setback, to something like 5′. I would not increase the allowable floor to area ratio; in other words, I would not allow houses to grow, just shift forward on the lot. The result would be larger back yards, which are by definition more private and usable, and (I think) more interesting streetscapes, with less wasted space.

We’ve just completed construction on another fourplex for Adaptive Realty Fund 1.

This one is on London St, just south of the 101. It’s kind of an experiment for us, since we’ve never done a project there before. But the units came out great, and we’re pretty confident we’re going to get our rents.

If you know anyone interested in an amazing 2 bed / 1 bath place with private outdoors space, two off-street parking spaces, and all of the modern conveniences, have them shoot an email to Doll [at] adaptiverealty [dot] com.

Meanwhile, check out these pics:

No, this isn’t a piece about taxes on our utility bills. Or, at least, not explicit taxes.

Instead, I’m writing today about the implicit tax imposed on LA property owners by DWP’s horrific customer service.

First, some context: When you buy and renovate an apartment building, you need to:

• Switch the master utilities into your name
• Then, when the tenants move out, switch each individual unit’s utilities to your name
• Then, once renovations are complete and the units are rented, have the tenants switch the units to their names

Each of the above necessitates multiple calls to DWP. Until a few months ago, hold times for these calls were a ridiculous but still manageable 60 minutes or so.

Now, since the installation of a new phone system (presumably purchased, used, from some backwater in Botswana), wait times have swelled to 120+ minutes. And, about half the time, you get through the 120 minutes, only to be hung up on.

The net result, in our office, is that my assistant spends her entire day on hold with DWP.

In any non-monopoly business, the market severely punishes any company that treats customers this way. But DWP is a monopoly. So, the only way things are going to improve is for the politicians who oversee DWP to demand better. Know anyone?

We just signed the last lease on a 13 unit project on Silver Lake Blvd.

Total time to lease up all of the units was 18 days, start to finish.

Rents ended up averaging around 10% more than what we expected when we started the project last Christmas.

Hat tip to Jon for his designs and Ilana for managing the whole leasing process.

I’m always surprised, when I speak with other so-called “value add” players, how limited their definition of “value-add” is.

There are loads of firms out there running around buying buildings with plans to slap on a coat of paint, re-carpet the hallways, switch out the appliances, and raise rents a little bit.

We are not those guys.

Here’s an example of what we’re doing to a five-unit we’re doing (with permits!) for some fee-for-service clients:

• Total re-configuring two upstairs one beds into wonderful two beds
• Dropping staircases from downstairs one beds into unused basement area and turning each unit into a 3 bed two bath
• Re-configuring the horribly laid-out two bed in back into a wonderful, efficient 2 bed / 2 bath
• Adding private outdoor space, decks, etc.
• Re-piping / re-wiring / etc., so that these systems last for 50-100 years
• Adding all the modern conveniences (washer/dryer, dishwasher, etc.)

You may think this sounds excessive. But, my guess is that, even after paying us a big fee to do the project, our clients are going to be all-in on this building for 9.5x the annual rent and something like $300k / unit for large, efficient units with parking in a premium area.

Does that sound high? The guys building all those units downtown are all-in for something like $400-500k / door for one beds in huge “warehouses for people” where they compete with thousands of other, identical units.

I used to wonder why we get paid what we do on these fee-for-service deals. Now I know.

If you spend a lot of time in crappy parts of LA (like I do), you have probably noticed an odd kind of retail establishment popping up in low-end strip malls: Water stores.

Here’s how these businesses work:

• They have a normal connection to the city water system
• They install a fairly expensive charcoal filtering system to filter the city water
• The sell the water, sometimes via vending machine, to customers who bring in containers of the type you see on top of office water bubblers

But wait, you ask, why do people need to pay for filtered water when city water is supposed to be potable right out of the tap?

The answer, like many things on this blog, comes down to rent control. Why?

Imagine you are the owner of a 1920s apartment building with, say 30 units. Your building is rent controlled and many of your tenants have lived there for years. Your plumbing system probably dates to the time the building was built, with patching done over the decades as the pipes started to leak.

Now the water in your building is brown coming out of the tap due to corrosion in the pipes and your tenants want you to fix it.

Re-piping your building is going to cost you around $100k, give or take. The city will only let you recover 50% of the cost from your tenants in the form of a maximum rent increase of $50 per unit spread out over 33 months (almost three years).

So, here’s the investment decision:

• Invest $100k
• Get back $50k, in the form of additional monthly payments of $1,500 for nearly 3 years

Do you make that investment? Not if you’re sane.

So, your tenants spend time and money each week driving to the water store to fill up bottles like they live in a village in the developing world, instead of in the center of the second largest city in America.

…is about changing the culture.

The LA Times has an interesting article about efforts to clean up the area around Macarthur Park.

Gil Cedillo, the local council-member, has targeted millions of dollars of city funds to try to clean up garbage residents leave around.

The solution has little to do with more garbage pick-ups. Why? In my experience, once people realize that someone is going to regularly come andpick up large items from a particular spot, that spot becomes the place people leave large items.

So, what’s the solution?

Most of the people who live in Westlake / Pico-Union come from other countries with different norms around sanitation. It’s not really that strange. Have you watched the Mad Men episode where Don and Betty take the kids to the park for a picnic and just leave their trash on the ground? That was the norm here as recently as the 1960s / 1970s.

What changed? Well, large fines were enacted for littering. But who do you know who has ever received one of those tickets?

Mostly, what changed was that government and private groups mounted huge education campaigns intended to stigmatize the act of throwing garbage on the ground. The campaigns were of such size and duration that they succeeded in changing the norms across the entire culture.

The problem is that most of the people who live in Westlake and Macarthus Park have not yet acculturated to American norms. This isn’t their fault, any more than it would be our fault if someone dropped us in Guatemala and blamed us for not knowing how to conduct ourselves in the tienda or on the guagua.

What is needed is massive public outreach, via Spanish advertising and English school discussions, explaining why it’s not OK to leave trash around. My guess is that a few years of sustained effort followed by regular “refreshers” would do the trick.

Regular readers may remember 1947 Clinton St: It’s the gigantic fourplex at the corner of Alvarado and Clinton acquired by Adaptive Realty Fund 1 roughly a year ago.

When we bought the property, it was in rough shape due to roughly 30 years of neglect by the previous owner. Pretty much everything that can wear out on a building had worn out.

We spent roughly 10 months fixing every single problem and re-imagining the property with stylish details and every modern convenience.

Our efforts paid off when we signed leases. The rent roll is now roughly $138k / year, up from something like $28k(!) when we bought it.

As you probably know from reading this blog, my general inclination is to hold real estate, not sell. That is particularly the case with this property, where our return on equity invested is likely to be around 10% / year, without using leverage.

That said, we recently received an unsolicited offer for the property. We therefore owe it to our investors to determine what the market value is. After all, it is my experience that, at the right price, anyone is a seller.

Here’s the MLS listing, in case you’re interested.

Just opened a new project for a fee for service client on Silver Lake Blvd.

Take a look at these units: http://losangeles.craigslist.org/lac/apa/4151779381.html

I spent two weeks right before Christmas 2012 helping our partner close on what was a terribly neglected, blighted property in a great location. It’s amazing to see what Jon has done with the place.

If you or someone you know is looking for a stylish one bedroom apartment with every modern convenience, private outdoor space, and parking, my strong suggestion would be to get in touch with Ilana at (215) 833-5015.