Moses Kagan on Real Estate

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Lyft, Uber and America

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Regular readers know I’m a major fan of ride-sharing companies. They’ve totally changed the way that I, and many other Angelos, get around our city. And, as I’ve written before, I think the changes are sufficiently profound to eventually reshape the built environment here, too.

But today I want to focus on what I regard as a side benefit of using these services: The opportunity to speak with the drivers.

I speak with every driver, because I’m naturally curious. And, so far, particularly on Uber, the drivers tend to be immigrants. They are all studying, learning English, working multiple jobs, and looking out for opportunities to start businesses.

Every time I have one of those conversations, I’m reminded what an amazing country we have. Because we’ve set up a free economy where people can get ahead by working hard, we attract the hustlers from everywhere, the ones who are willing to forsake the places they were born to follow a dream.

Not all of them will succeed; indeed, many will probably end up going back where they came from. But, from among that group of hungry, energetic risk-takers, you know that businesses are getting created, jobs are getting created, and capital is being formed.

I find it almost impossible to be discouraged about the future of our country, no matter our problems. As long as the hustlers choose us, we’re going to be just fine.

Written by mjkagan

09/02/2014 at 10:19 am

Posted in Development

Highland Park gentrification response

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Hat-tip to Curbed for linking to this really fascinating piece on Highland Park gentrification.

Before I get into my problem with the article, I want to congratulate the author on what I think is a fair, reasonable account of the changes taking place in Highland Park.

Now, to the problem. Here’s the money quote:

These [renter] residents have reason to be anxious about what gentrification may bring to Highland Park…[w]hile rising property values allow homeowners to cash out, there’s no economic upside to gentrification for renters, many of whom are likely already stretched financially…”

Can you tell what’s wrong with the above paragraph? Read it again.

Give up? Here’s the problem: It’s like the author has never heard of rent control.

It’s true that Highland Park has a large number of non-rent control apartment buildings plus plenty of single family rentals (which are non-rent control by definition). So there are definitely residents who are getting pushed out by the more affluent tenants moving into the area.

But there are also tons of pre-1978 apartment buildings which are covered by rent control, which limits rent increases for existing tenants to 3% per year. And, because much of HP is covered by a huge Historic Preservation Overlay Zone, most of those buildings can never be torn down, so matter how high market rents get.

What does it mean to be a rent-control tenant in a gentrifying area?

The market rent is the price put by the market on consuming a particular unit in a particular building. The price is determined in part by characteristics intrinsic to the unit (number of bedrooms, baths, condition, etc.). But it is also determined by extrinsic factors, principally how desirable the neighborhood is.

Rents in Highland Park are running up way faster than 3% / year, in large part because the neighborhood is gentrifying (better food, booze, retail, etc.). And legacy tenants get to patronize those new restaurants and coffee shops alongside the newbies.

So, one way (not the only way) to interpret the above facts is this: As a rent control tenant in Highland Park, you’re getting a better and better deal with each passing year (as your rent falls further and further below the market price for your unit).

Written by mjkagan

08/29/2014 at 11:22 am

Posted in Development

The two economies

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If you’re reading this, you probably don’t know about LA’s Other Economy. How do I know? Because you can read English, and the Other Economy is not, for the most part, English-speaking.

What is the Other Economy? It:

  • Comprises mainly immigrants and their American-born children
  • Is conducted in Spanish, Chinese, Tagalog, Khmer, and other languages
  • Is transacted in cash
  • Is offline
  • Has prices that are anywhere from 20-50% lower than those in the mainstream economy

Picture a food truck. If what comes to mind is a new vehicle with cool graphics staffed by hipsters with ironic facial hair, you’re a mainstream economy kind of person. The Other Economy foodtrucks are the original ones: usually a bit more beat-up, with hand-lettered signs, staffed by Latin people (often families), and charging much, much less (even though the food is often much, much better).

Car window broken? You can go to your dealership and pax X. Or you can go up towards Chinatown to the strip of places that specialize in just fixing windows, negotiate in Spanish, transact in cash, and get it done for probably 33% of X.

Need an apartment? All over LA, there are neighborhoods where no apartments get rented on Craigslist. Instead, when there’s a vacancy, the resident manager, who often speaks no English, puts out a sign in his/her native language advertising the vacancy. Unsurprisingly, the rents achieved this tend to be way, way less than what you would probably consider to be market.

One way to think about gentrification is as a process that moves physical assets (apartment buildings) from the Other Economy, where they generate lower returns, to the mainstream economy, where they generate higher returns. The negative side-effect of this process is that the Other Economy shrinks, making life more difficult to the people who live and work in it.

Written by mjkagan

08/22/2014 at 2:11 pm

Posted in Development

Amnesty for illegals (apartments, that is)

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Per the LA Times (and via Curbed): Landlord and tenant groups in LA are uniting around an initiative to allow landlords to legalize non-conforming apartments more easily.

Right now, if the Housing Department catches a landlord with an illegal apartment, here’s what happens:

  • LAHD cites landlord for un-permitted unit, orders her to either get it permitted or vacate it
  • Landlord attempts to permit; discovers that it’s nearly impossible to do (because adding a unit always requires adding parking and adding parking is nearly impossible)
  • Landlord decides to vacate unit
  • Tenant is evicted; receives $8-19k from landlord (ouch), who must also pay to remove the kitchen and bathroom

The net result of the above is that the tenant is out a place to live and the landlord is out a bunch of money and receiving less rent going forward.

You can see why landlords and tenants have an incentive to band together to try to change city policy. And, lo and behold, they’re trying: The idea is to get the city to make it easier for the landlord to bring the unit into compliance so that the tenant can stay.

I’ve permitted a non-conforming unit before and it’s no joke. The problems break down into two categories:

  1. Bringing the unit itself up to code. That means appropriate ingress/egress, windows, fire protection, etc. This is almost always possible to do, so long as there is sufficient money… and the value-add from adding a unit would almost always justify the cost;
  2. Adding the parking. In my case, I was able to squeeze in another parking space by moving a giant electrical panel at the cost of $30k. But, generally, this is impossible, because there’s just not enough space on the lot and digging out subterranean parking would be totally financially infeasible.

So here’s the rub: If the city is going to make it easier to permit non-conforming units, it’s going to have to waive the parking requirements.  And the city has generally been very wary of anything that would reduce parking and therefore anger neighbors.

Have rents got so high that politicians are willing to consider allowing alienating homeowners by allowing landlords to reconfigure existing buildings to add more units? I doubt it. But I hope I’m wrong… because my business would get much, much better if it did!


Written by mjkagan

08/19/2014 at 10:38 am

Posted in Development, How to

What’s wrong with this picture?

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I usually avoid giving design advice on this blog, mostly because my partner Jon is the design expert at Adaptive. I mostly do the numbers.

That said, I thought I’d draw your attention today to a classic error that landlords make when renovating apartments.

Look at this picture:


Can you see what’s wrong?

The owner decided to use tile or some kind of laminate for the dining / kitchen area.

The effect is to make the room feel considerably smaller than it actually is, because the eye is tricked into thinking it’s divided in two.

If, instead, the owner had continued the wood floor all the way to the far wall, the space would feel huge and open.

Why do people choose to do tile dining / kitchen areas? Well, I guess there’s an argument that they hold-up better when water is spilled on them. But tenants these days tend to cook a whole lot less than before.

That said, as between getting (1) higher rents but having to refinish the floors slightly more often; and (2) getting lower rents, I’ll take 1 every time.

Written by mjkagan

08/15/2014 at 5:45 am

Posted in Development

Off with the security bars

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How can you tell that Silver Lake and Echo Park weren’t always so nice?

The window bars.

Back in the 1980s and 1990s, both neighborhoods had plenty of shootings, burglaries, etc. People naturally responded by “up-armoring” their homes with strong doors, fences and window bars.

Now, both neighborhoods are very safe. It’s not that there’s no crime; it’s just that most of the serious stuff is gangster-on-gangster violence that does not involve civilians.

Meanwhile, those window bars are still up, mostly due to laziness on the part of homeowners and landlords.

But they send absolutely the wrong message about the neighborhoods. And, worse than that, tenant absolutely loathe them. No one likes to spend a lot of money to feel like they’re in jail.

So, do us all a favor and take a look at your Silver Lake / Echo Park property (properties?). If you still have those bars up, it’s time to send the handyman over to take them down.

Written by mjkagan

08/14/2014 at 9:35 am

Posted in Development

Interesting piece on the history of LA zoning

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I recognize that my continued harping on our antiquated zoning code is not the fastest way to build readership (to put it mildly). However, I am not going to stop writing about it, because zoning shapes LA in ways of which most people are not at all aware.

In any case, today I want to draw your attention to an interesting piece about the history of our code which was recently posted on the Recode LA website.

Here’s the money quote:

“[C]onflicts over the maintenance of the early postwar concept of good zoning have led to a great number of discretionary actions built into the Code. These have tended to increase the weight of those disinclined to allow change. This use of discretion has been at the expense of the creation of new housing. It has been at the expense of the environment and efficiency, displacing density from urban areas to exurban locations.”


Written by mjkagan

08/13/2014 at 12:54 pm

Posted in Development

An email filter I’d like

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Can someone please figure out how I can block solicitations from brokers who want to sell me “turn-key” assets?

“Turn-key” is broker-speak for “No value left to add”.

Don’t misunderstand: There is a large group of investors for whom turn-key deals make a ton of sense, including everyone who has bought deals from me over the past five years.

Busy, wealthy people who want to place capital in multifamily can do a LOT worse than paying the market price for a very-close-to-perfect asset with high quality tenants.

And syndicators who can raise cheaply and don’t mind thin margins can do well with these deals, too, because they don’t require much in the way of management time and expertise.

But I’m not personally wealthy (yet!) and I’m not the best fund-raiser in the world (I’m temperamentally unsuited to bullshitting people). So the money we raise is expensive.

And that means we’re looking for screwed-up buildings, where there is plenty of value to add and excess returns to be generated.

So, please, no more calling / emailing me about “turn-key” deals… I’m totally uninterested.

Written by mjkagan

08/12/2014 at 11:10 am

Seeing the matrix

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Do you remember The Matrix, the amazing 1990s sci-fi flick with Keanu Reeves? In it, Keanu’s character learns to see the numbers behind the invented reality he inhabits.

Why am I talking about this on a real estate blog? Because it occurred to me this morning as I was taking out the trash from our office that I see the matrix, too (or, at least, a part of it). Stop laughing.

Take a look around you. Do you see buildings? If you do, what you’re really seeing are the physical manifestations of capital and the cashflows that capital commands.

What’s capital? Capital is stored, excess value. You work, generate income, and consume less than you generate. The remainder, which you save, is capital, which can be put to work productively, either by you or by others to whom you give it (via equity investment or loans) in exchange for a cashflow of some kind.

And capital and its attendant cashflows are physically manifested all around us, all the time.

Do you see a house? That’s capital provided by a bank which commands a cashflow from the borrower who “owns” the house (I put “owns” in quotes because, of course, the bank has first call on the value of the house until the lien is satisfied). There’s also an implicit stream of cash flowing to the owner in exchange for his equity which he enjoys in the form of the right to use the house and benefit from the appreciation.

Do you see an apartment or office building? That’s a stream of rent, less expenses, flowing to the owners and to whichever bank financed them.

Do you see an owner-user commercial building (like a factor owned by the company that produces things there)? The company doesn’t pay rent to itself. However, the company’s profits are higher because it’s not paying rent and the difference between what the company’s profits are and what they would be if the company had to pay rent for the space represents an implicit cashflow owing to the company because it owns the asset.

Depending on, inter alia, interest rates, the rate of decay or improvement of the physical structures themselves, and long-term changes in the desirability of different neighborhoods, the values placed by the market on the cashflows constantly change. Understanding those values and being able to anticipate how they can and will change is at the heart of what we do.

Remember this as you walk around looking at buildings.

Written by mjkagan

08/11/2014 at 5:08 am

Posted in Development

History repeating?

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Back in the 1980s, Japanese companies flush with cash acquired a ton of office buildings (and maybe hotels, too?) in LA at very high prices.

In the recession of the early-to-mid-1990s, they got their asses handed to them.

Now, there is a wave of Chinese developers flush with cash buying up office buildings, hotels, and development projects in LA.

But there is a ton of apartment / condo / hotel product getting built right now, especially downtown, where many of the target properties are located.

The question these developers need to ask themselves is pretty simple: Will the current cycle persist long enough for the market to absorb all this new product?

I’m not ready to say that the Chinese money is going to get crushed the way the Japanese money did.

But I’m not sure I’d be making the bets they’re making.

Written by mjkagan

08/08/2014 at 4:17 am

Posted in Buying, Development