Seeing the big picture

One of my agents is working with a client on an interesting deal and running into a problem.

The building itself is great – big, recently built, non-rent control, in an improving area, fair price.

The problem is that the current owners don’t have their act together. Missing leases, conflicting estoppels, deferred maintenance issues.

None of this is unusual; as I have written here many times no one sells you a great building at a fair price. They sell you great buildings at unfair prices or screwed up buildings requiring a bunch of work at fair prices.

This particular deal is an example of the later type, except that, as issues with apartment buildings go, these ones are pretty minor.

So, what’s the problem?

Our clients are detail-oriented people who are successful in their jobs. They run their affairs in an orderly manner and I believe it unnerves them to see this asset so poorly managed. They have therefore been wavering about whether to move forward with the deal.

This is totally understandable. But it’s short-sighted.

Why?

In our business, you need to think not about how things are but about how they can be. Then, you need to work backwards from your vision of the future to see whether you can make it happen for an amount of time / hassle / money to make the deal attractive to you.

This deal, with a little effort, looks like this:

  • $230 / sq ft
  • 9.8x GRM
  • 7.25-7.5% cap (unlevered yield)
  • 10-12% cash on cash return (!), depending on how they finance it

All of this on a newer, non-rent control building in an improving area.

Do you know what that is, particularly in this market? A home run.

Some thoughts on rents going up in Highland Park

The last few weeks have seen a ton of interest / debate / protest about the rapid gentrification of Highland Park.

We have been receiving media inquiries and I thought I’d take the time to share my thoughts here.

We have learned a lot, both from our day-to-day business and also the reaction to our agent’s bike tour in Boyle Heights, about the human impact of gentrification, in general, and our business model, in particular.

We understand that losing one’s home is scary and painful. And we know that, even if you’re not losing your home, seeing your neighborhood change rapidly around you can be disorienting, at a minimum.

That said, having considered the issues carefully, we come down on the side of those who believe that housing ought to be subject to the free market, just like most other things we consume. So, we will continue to conduct our business in a way which is lawful (of course) and also respectful of the feelings of the people whose lives are affected.

We recognize that other people disagree and that’s fine; we’re glad we live in a country where those disagreements can be had in a peaceful, civil manner.

Finally, some unsolicited advice for people who are concerned about the prospect of losing their homes (in Highland Park or anywhere else):

  1. If you rent, you should immediately determine whether you are protected by LA’s Rent Stabilization Ordinance. In general, buildings with two or more units built prior to 1978 are protected and those built after are not. To find out whether your building is protected, either look it up on zimas.lacity.org or ask the Housing Department;
  2. If your building is covered by the RSO, you are in reasonably good shape. There are circumstances in which you can be forced to move, but those circumstances are pretty rare and you would be entitled to a large payment (somewhere between $9-19,000, depending upon your age, income, etc.). You may also be able to negotiate for more, depending on your specific circumstances. If you need help understanding your rights, you can always call the Housing Department.
  3. If your building is not covered by the RSO (which many in Highland Park are not), you should strongly consider moving to one that is. I know moving is painful and expensive, but, as a tenant in a non-rent control building, particularly if your original lease has expired, you are in danger! The owner of your building can require you to move out in 60 days and there is not much you can do.
  4. If you have decent credit, an on-the-books job, and have (or can get from family) as little as $15,000, you should strongly consider purchasing your own home or small apartment building. There is a government program called FHA through which the federal government can help you buy with as little as 3.5% down. You may not be able to afford to buy in Highland Park, but, if not, you should consider doing so in other, more affordable neighborhoods close by.

We hope that everyone will accept the above information / advice in the helpful spirit in which it is intended.

Why all us smirking hipsters are wrong about the Palmer fire

Have spoken with a ton of people over the past few days who are sort of happy Geoff Palmer’s partially-built apartment building burned down.

Obviously being happy about a fire is kind of weird. But no one got hurt (that I know of) and many people loath Palmer’s buildings because they’re ugly and anti-social (in the sense that they are designed as fortresses protecting their inhabitants from the neighborhood).

I have to admit that I’ve been walking around thinking about the fire as an act of righteous architectural vigilantism.

But that view is wrong.

I dislike Palmer’s buildings for the same reasons everyone else does

But he has built thousands of apartments. If you care about housing being affordable, then you have to be in favor of people adding to the supply. And Palmer has added more to the supply of apartments in LA than almost anyone else.

Paying for Garcetti’s earthquake plan

Today, Mayor Garcetti announced the release of a major report on earthquake safety.

The report addresses telecommunication, water systems, office buildings and, most importantly from our perspective, apartment buildings.

The issue with apartment buildings is pretty simple. The city has roughly 16,000 soft-story apartment buildings. These are buildings whose ground floor structure can give way in a quake, leading to total building failure. Obviously, when a whole building collapses, there is major risk that people with die.

The solution for these structures is pretty simple: You just build a steel frame on the ground floor to support the structure.

The downside is, of course, cost. Depending on the size of the building and some other factors, the cost of retrofitting each building is likely to be $15-60k.

The question, as with all city regulation, is: Who pays?

The simple answer is the building owner. After all, it’s his property that’s at risk.

But what about rent control? After all, the city has basically made the tenants in rent controlled buildings into long-term partners with the owner (who can’t make them leave, nor raise their rent to cover the cost of the improvement to the building).

The city has a capital improvement program for improvements to building systems where the benefit is shared across all the units. Retrofitting soft-story buildings ought to fit right into that program (no matter how absurd I think the program is).

But the problem is that the program requires the owner to front the money for repairs and then get reimbursed 50% of the cost by the tenants over a long period of time. What about owners who can’t come up with $15-60k?

You might think the city could set up a program to lend owners the money. After all, the payments on a $30k loan at 5% interest amortized over 15 years are only $236 / month, which is affordable, particularly if the tenants are contributing via the capital improvement program.

But here’s the problem: Many modern commercial loans prohibit second trust deeds (eg loans which are junior to the first mortgage). So, a city loan program would either need to be unsecured (eg not on title, and therefore nowhere near as secure as a mortgage) or else require some kind of city / state law requiring banks to allow for a second loan specifically for the purpose of covering earthquake retrofitting (which, it has to be said, would protect the bank’s collateral!).

Has the mayor’s team considered the above problem? Guess we’ll find out.