Fixing the small lot ordinance

Was listening to a podcaster bemoan the failure of the Small Lot Subdivision Ordinance to deliver affordable housing in LA.

There’s a lot of noise around this issue, because the homes that have been built under the ordinance have ended up being pretty expensive.

Have two, distinct points to make about this issue:

  1. It is insane to compare brand-new small lot homes to older conventional homes in the same neighborhood and complain that the small-lot homes aren’t priced at a discount. Of course they’re not… they’re brand new! (By the way, over time, I expect the prices of small lot homes to fall in real terms relative to similarly-sized conventional because they don’t come with much land.)
  2. The reason it’s impossible to deliver small lots at “affordable” prices is the parking requirement.

The idea behind small lot is to cram a bunch of free-standing homes onto one lot.

The problem is that the parking code mandates two parking spaces per unit. That’s a ton of square-footage – usually 18′ x 9′ for one car and 15 x 9′ for the other. That’s ~300 sq ft of ground-floor space. Then, you need ~10′ of backup for each space… another ~330 sq ft (the rest of the backup is generally in the driveway outside the home). That’s a total of ~630 sq ft of your ground floor building envelop devoted to parking two cars.

Given the way the ordinance works, the total footprint for these homes is going to be roughly 35′ x 30′ or something… so, 1050 sq ft on the ground floor.

But 630 of that space is devoted to a garage, leaving you just 420 sq ft, which needs to support an entry hallway and stairs up, leaving just enough room, if you’re lucky for a bedroom or office space on the ground floor.

And that means having to fit two bedrooms, two baths, a kitchen and living space into the 1050 (less stairwell) on the second floor.

How do developers respond? By going up another story, to fit more habitable space onto the same footprint. And the result of the third story is considerably more square footage and higher construction cost, leading to “luxury” pricing.

Want to fix the small lot ordinance? Reduce parking required to one space, then limit the number of stories to two. The result would be a bunch of more efficient, cheaper homes.

Which was kind of the point, right?

On competing with cowboys

Yesterday, while perusing the MLS, I came across a renovated duplex for sale in a neighborhood we like.

Curious about the renovations, I checked the LADBS website to review the permits pulled.

Of course, there were no permits on file for the rehab.

This infuriated me. Why?

Well, these units are going to compete for tenants with our units.

We are absolutely scrupulous about using permits for our deals, which imposes enormous additional costs, both in money and in time.

When a competitor can plan for a cowboy rehab and get similar rents, it means he can pay more for a building than I can, denying me (and my investors) deals that should have been mine.

I strongly considered reporting this particular cowboy to the city, which would have resulted in a whole round of costly re-piping, inspections, etc.

But I didn’t, because the owner has an FHA loan, so I know he’s a scrappy hustler trying to make one deal work, rather than a professional investor. And I don’t have any interest in ruining his life.

Not sure I would have been so forgiving if this were a pro’s deal.

Another successful Adaptive deal

We just closed on the refinancing of an 11 unit apartment building.

We bought the building two years ago for $2.65MM, then spent another $900k renovating it, bringing the total investment to ~$3.55MM.

Our net loan proceeds on the refi are $3.54MM and we’ve accumulated ~$250k in cash from operations since lease-up.

So, today we’re going to be able to return a bit more than 100% of the capital invested in the deal to the investors.

Since this is beautifully renovated (to the studs!), non-rent control building in a prime area, we’ll hold it forever, with a levered yield that is, literally, infinite.

The refi was delayed by 2-3 months due to some wrangling with the bank, so I wouldn’t say this is literally the perfect Adaptive deal.

But it’s close.

Preservation or affordability on Sunset?

Curbed LA has a story today about the possibility that the city will deem the Hollywood Reporter building on Sunset a Historic Cultural Monument and thereby prevent a developer from moving forward with plans to build ~300 hotel rooms, ~190 condos and and ~700 apartments on the site.

I appreciate interesting architecture. But I think the time has come to make the trade-offs inherent in preservation explicit.

We are living through a full-blown housing affordability crisis. We’re not even building enough units to keep pace with population growth, let alone put a dent in existing rents.

With respect to my fellow smaller-scale developers, absent some major changes to the zoning laws and building codes, we’re not the ones who are going to solve this crisis. It’s simply not possible to add thousands of units 4-8 units at a time.

The solution, like it or not, is large complexes, where one developer can add hundreds or thousands of units of housing in one shot.

Currently, the only places the zoning allows for these huge complexes is along commercial streets like Sunset.

In this case, we have an obviously obsolete office building (it’s been vacant for years!) taking up land that could be used to add materially to the city’s housing supply.

We need to ask ourselves what’s more important: The aesthetic sense of the preservationists among us, or the ability of working and middle class people to continue to live in our city?

LA population growing faster than housing stock

Just like the prices for every other commodity, pricing for housing units (eg rent) is governed by supply and demand.

Between 2016 and 2017, Los Angeles gained ~40,000 people (taking us above 4MM for the first time).

The number of apartments delivered, in the midst of a historic boom in multifamily construction: ~13,000.

Depending on how many people you think fit in an apartment (and my guess is that the median is something like 2), construction is either falling behind population growth by a little or a lot.

Either way, expect more rent growth in the next year or so.