As the coronavirus crisis continues to upend day to day life across Los Angeles, we’re seeing local government take an active and aggressive role in housing issues with what appears to be an eye towards possibly becoming the county’s largest de facto landlord. The Los Angeles County Board of Supervisors and the Los Angeles City Council are both taking advantage of the crisis through unprecedented and highly questionable actions aimed at wrestling control of properties away from property owners under the guise of providing affordable housing. Through a Machiavellian combination of rent moratoriums, eviction restrictions, future rent increase freezes, and tenancy termination restrictions, city and county officials are setting the stage for significant landlord losses and potential foreclosures that they now plan on sweeping up to create an affordable housing portfolio unlike any other.
During a marathon 12-hour session of the Los Angeles City Council on April 22, 2020, council members Mike Bonin, David Ryu, and Marqueece Harris-Dawson presented and ordered the City Attorney’s office to draft ordinances on three items of significant consequence to Los Angeles landlords. These include:
• freezing rent increases until 90 days after the end of the declaration of the coronavirus emergency;
• classification of unpaid rents as consumer debt, therefore not subject to the unlawful detainer process, and;
• prohibition of tenancy termination or eviction of residential tenants until 30-days after the end of the coronavirus emergency.
A reasonable person may perceive these tactics to be heavy-handed and so punitive that they cannot possibly be legal. In fact, the City Attorney’s office representative present at the meeting pushed back on all three points as such. The City Attorney representative made it clear that these three items, if passed, would create a variety of legal concerns and potential liabilities that the City would face. In other words, what the council members want is not currently legal or possible and passage of these ordinances, while possible, will likely lead to a wave of lawsuits against the City. The City Attorney’s office was told to go figure it out and make it work.
What is clear, though, when watching the video of the meeting, available here is that these council members are not concerned about the impending legal issues that the City would face or the detrimental effects that such ordinances will have on landlords. This is nothing more than a power grab disguised as what the Councilman Bonin calls a public health issue. The Los Angeles County Board of Supervisors is doing their part as well. During the May 12, 2020 meeting, the board recommended extending the rent moratorium from the current June 30, 2020 to August 31, 2020.
If that wasn’t enough, the Board of Supervisors also passed a motion, authored by Supervisor Hilda Solis, to establish a County “right to purchase program” that would allow the county to purchase apartment buildings in default with the goal being to “preserve single and multi-family units for conversion to permanent affordable housing.” The measure is meant to combat speculative or large-scale purchases of residential properties facing default by investors and instead put the county in control of units. While the source of funding for these purchases was not made clear, we know that the county is sitting on billions of dollars already earmarked towards affordable and homeless housing initiatives. It would likely be easy to re-assign these funds towards acquiring existing properties, and provide the county with a war chest many times larger than any private opportunistic fund in existence. It would also likely lead to the county becoming the largest landlord in the region. As we’ve seen over the past few years, these government actions, however small, play into a larger picture that is seemingly designed to eliminate the appeal of private investor apartment property ownership through layers upon layers regulations and red tape and ultimately reducing return on investment to the point where it just doesn’t make sense to own any more.
How could this play out? One possibility is that the county starts to acquire properties and convert them to affordable housing. As the portfolio grows, so too does their power to legislate more change and add restrictions, possibly eliminating landlord protections such as Costa-Hawkins, lowering annual rent increases, and further expanding tenant protections through inspections and regulation. After all, the county is not doing this to make money, so they will set the tone when it comes to operations.
We’re constantly asked by our clients where we see the market heading, and it is a very difficult question to answer today. If we look at what happened in New York City in 2018, where rent control and housing rights advocates beat all the odds, we may see a similar result: 50% drop in transaction volume and 30% decrease in property values. The effects of the coronavirus crisis have yet to be felt, as well. As our city slowly opens back up, we may see continued job losses and unemployment possibly leading to population shifts out of Los Angeles, a trend that was already underway before this crisis began. If we look back on the past two recessions, in 2001 and 2008, we see that the impact to apartment buildings was not felt for six to nine months following the initial event. While buying and selling activity today is picking up, driven primarily by low interest rates, and continuing local demand for housing, we may start to see a swing in the fourth quarter of 2020 as government stimulus and assistance wears out. As with any crisis, there is opportunity. For the conservative investor, there is the flight to quality. The ability to sell undesirable assets, either based on age, maintenance problems, location, or tenant issues, and acquire in stronger and more stable locations. For the more aggressive investor, there is the potential to acquire properties in default, albeit with possible competition from the county. If you do nothing else, we feel now is a good time to, at least, consider your options.
