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Economic Study of the Rent Stabilization Ordinance and LA Housing Market

Economic Study of the Rent Stabilization Ordinance and LA Housing Market. Housing, Community & Economic Development Committee October 7, 2009. Economic Roundtable. Outline. Overcrowding and Rent Burden Renters’ RSO Knowledge Property Maintenance Financial Profile of RSO Properties

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Economic Study of the Rent Stabilization Ordinance and LA Housing Market

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  1. Economic Study of the Rent Stabilization Ordinance and LA Housing Market Housing, Community & Economic Development Committee October 7, 2009 Economic Roundtable

  2. Outline • Overcrowding and Rent Burden • Renters’ RSO Knowledge • Property Maintenance • Financial Profile of RSO Properties • Analysis of Financial Outcomes for RSO Owners • Recommendations • Background • Financial • Demographic • RSO Inventory and Evictions

  3. Overcrowding and Rent Burden Economic Roundtable

  4. Overcrowding Overcrowded Rental Units Severe Overcrowding Decreased from 2000 to 2007 • 24% in 2000 • 9% in 2007 • In 2007, there were… • Less rental units per person in the City • However, there were… • - More bedrooms per person in the City(Decrease in ratio of renter population to bedrooms) Not Crowded Overcrowded (1.01 to 1.50 persons/room) Severely Overcrowded Low-income renters & a majority larger households (5+ persons) are still overcrowded. (1.51+ persons/room) Source: U.S. Census

  5. Rent Burden Rent Burdened Households in the City of LA • Rent burden increased from 2000 to 2007 • By 2007… • 29% severely rent burdened • 29% rent burdened • Vulnerable populations: • seniors • persons w/ disabilities • low-income households Less than 30%of income for housing Rent Burden (30%-49%) Severe Rent Burden (50% or More) Source: U.S. Census

  6. 100% Don’t know 90% 80% Not important at all 70% Somewhat unimportant 60% 50% Somewhat important 40% 30% Very important 20% 10% Renters: (indwt weight) (Universe: respondents in City of LA) 0% Owners: (landwt) (Universe: RSO owners) Owners Renters Is Affordable Housing Important? A majority of both renters and owners agree that affordable housing is important…

  7. Renters’RSO Knowledge Economic Roundtable

  8. Limits Rent No Yes Increase? Limits Reasons for No Yes Evictions? 0% 20% 40% 60% 80% 100% Awareness that RSO Limits Rent Increases & Reasons for Eviction • 72% aware the RSO limits rent increases • 52% aware the RSO limits reasons for evictions Source: Economic Roundtable. 2007-08 City of LA Renter Survey, RSO Study. Knowledge about... (Individual weight) Universe: All respondents with a geographic identifier who answered "yes" to q18 (unit under rent control).

  9. Knowledge Gap Q19: Did you know that rent control law limits the amount of rent increases? Source: Economic Roundtable 2007-08 City of Los Angeles Renter Survey, Q35, RSO Study Awareness of RSO is greater among higher income households

  10. Excessive or unauthorized? % by which Current Rents differ from Projected Rents for RSO Units - City of Los Angeles Rent Increase: Unauthorized? Within Allowable Increase 44% Below Allowable Increase Above Allowable Increase 30% 27% • Who’s potentially receiving excessive or unauthorized rent increases? • Low-income renters • Renters with low starting rents

  11. Property Maintenance Economic Roundtable

  12. How would you describe the condition of your apartment building? • Non-RSO renters rate their apartments as being in better condition than RSO renters • 31% of RSO renters rate their units as very poor, fairly poor or fair, vs. 19% for non-RSO renters • 69% of RSO renters rate their units as fairly good, good or excellent vs. 81% for non-RSO renters Source: Economic Roundtable renter survey, responses from 2,640 renters in the City of Los Angeles, Household weights Calculated Using Household Weights (p<.001)

  13. Capital Improvement Program In 1989: Provision was changed to limit pass-through from 100% to only 60% of approved capital improvement cost From 1990 to 2007: $148M of pass-through investments were approved for over 64,000 RSO units From 1985-1989: $279M of pass-through investments were approved for over 140,000 RSO units Source: City of Los Angeles Housing Department, Capital Improvement Pass-through Database

  14. Financial Profile of RSO Properties Economic Roundtable

  15. Year of Purchase • 79% of L.A.’s RSO units were purchased after 1978. • Examples of neighborhoods include: • Panorama City 91% • Southeast L.A. 86% • Hollywood 79% • West L.A. 63%

  16. Did your rent-controlled units make a profit last year? • The percent of owners who did make a profit last year increases with ownership size. • Similarly, the percent of owners who did NOT make a profit last year decreases as ownership size increases. • Similar outcomes for non-RSO units of same owners – only 28% say RSO units are less profitable than non-RSO units

  17. Do Owners Increase Rents by the Annual Amount allowed by the RSO? Owner survey shows… Renter survey shows… • Owners with small holdings report they are much less likely to increase rents than large property owners • “Use-it-or-lose-it” policy adds pressure to increase rents annually 100% 20% 90% Rent NEVER 25% increased 80% 17% 70% 22% Rent increased, 60% but NOT every year 50% 40% Rent increased 63% 30% EVERY year 54% 20% 10% 0% Non-RSO RSO • Tenants in RSO units are more likely to receive a rent increase every year.

  18. Owners of 77% of the RSO inventory assumed debt on their properties from 2003-2008 when cap rates were low and now face difficulty repaying their loans Debt on Rent-Stabilized Inventory Year when Debt on Property was Assumed

  19. The average annual increase in the CPI over the past 30 years has been 4.3% Percentage increase over prior year, using 12-month period ending in September of each year Source: Ken Baar, Table 5-3, 2009 Rent Study, Data from U.S. Dept. of Labor, Bureau of Labor Statistics. Consumer Price Index (CPI) Tables, 1979-2008. Washington, D.C.

  20. Analysis of Financial Outcomes for RSO Owners Economic Roundtable

  21. Increases in Median and Average Rents from 2000 to 2006 Table 4-5 Increases in Median and Average Rents from 2000 to 2006 by APC Rental Housing Constructed before 1980

  22. Income, Expense and Net Operating Income Trends Figure 4-8 Income, Expense and Net Operating Income Trends Institute of Real Estate Management, Income/Expense Reports Los Angeles Area Apartment Buildings 1979-2006

  23. Income and Expense Trends Table 4-13 Income and Expense Trends “Apartment building Appraisers & Analysts Report” Los Angeles area apartment buildings

  24. Trends in Apartment Values in the City of LA 1990-2007 Figure 4-11 Trends in apartment Values in the City of Los Angeles 1990-2007 Buildings w/ 5 or more units constructed before 1979 Source of “Market Area” data: Annual “National Apartment Report” (2004-2008 annual issues) published by Marcus & Millichap, Real Estate Investment Brokerage Company. Data supplied to Marcus & Millichap by CoStar Comps. Tables taken from City of Los Angeles RSO Study. 2009. (Table 4-17)

  25. Cash Flow Projections Table 4-18 Cash Flow Projections Pre-2000 Purchaser and Recent Purchaser Hypothetical Scenario

  26. Economic Roundtable Recommendations Economic Roundtable

  27. Economic Roundtable Administering the RSO • Scope of RSO Coverage • Retain current scope of RSO, streamline for owners of 1-4 units • Establish a Rent Registry • Collect rent history and vacancy decontrol information for overseeing rent increases, and making rent banking possible • Fees to Pay for Implementing Recommendations • Increase the annual rental unit registration fee by the amount need to pay additional costs

  28. Economic Roundtable RSO Rent Increases • Annual Utility Allowance for Master-Metered Buildings • Authorize utility increases when significant gas and/or electricity cost increases occur • Continue using 100% of CPI as benchmark for annual rent increases • Eliminate 3% floor and retain 8% ceiling on annual rent increases • Average CPI since 1978 has been 4.1%, need to allow 0% rent increase years • Allow Rent Banking • Allow owners to bank annual rent adjustments if they do not apply them • Increase Capital Improvements Passthrough • Increase the pass-through amount and extend the repayment term up to 10 years • Just and Reasonable Rent Increases • Publicize the Just and Reasonable rent increase process; keep rents within 35% of market

  29. Economic Roundtable Other RSO Recommendations • Condominium Conversions • Suspend at the Community Plan Area-level when vacancy rate falls below 5% • Evictions and Tenant Relocation • Mailings, assessment of service provider and funded service levels • Systematic Code Enforcement Program • Hold tenants accountable for their code violations, continue training for inspectors • Increased Communication with Renters and Owners • Mailings, outreach initiatives • Updating Leases • Inform owners and renters that evictions are permitted for destructive behavior • Joint Code of Responsibility • Adopt articulated set of values for civil tenant-landlord behavior • Affordable Housing • Prioritize affordable housing for high-need populations, build more affordable housing

  30. Financial Background Economic Roundtable

  31. Income, Expense and Net Operating Income Trends Figure 4-9 Income, Expense, and Net Operating Income Trends Urban Land Institute, Income/Expense Reports Los Angeles area apartment buildings 1998-2004

  32. Rent Increases – more volatility for non-RSO units than for RSO units RSO and Non-RSO Rent Increases for Tenants who Moved in 1997-2006

  33. Number of Approved Capital Improvement Pass-through Applications by Monthly Payment Amount • The median pass-through is $13 • The average is $19 • Three-quarters are <$25 per month • 5% pay $55 per month

  34. Demographic Background Economic Roundtable

  35. Rental Units Covered by the RSO Rules

  36. Ethnicity of LA City Renters by APC

  37. Education of LA City Renters by APC

  38. Types of Renter Households by APC

  39. Overcrowding of LA City Renters by APC

  40. Income of LA City Renters by Tenure and APC

  41. Poverty Rate of LA City Renters by APC

  42. Rent Subsidy by RSO Status

  43. RSO Inventory and Evictions Background Economic Roundtable

  44. Eviction Cases – LA County & LA City Unlawful Detainer Cases Filed in the Los Angeles Superior Court, Landlord Declarations of Intent to Evict Filed with the City, 1998-2007 50,000 Unlawful Detainer Cases Filed, rest of LA County Unlawful Detainer Cases Filed, City of LA LAHD Declarations of Intent to Evict (Units Affected) 40,000 30,000 20,000 10,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 • Landlord Declarations of Intent to Evict (LAHD) increased and peaked in 2005. • Decline in number of cases in more recent years • Largest number of cases filed in LA City and rest of County was in the 1990s

  45. Owner/Family Intent to Occupy Demolition of Apartments Perm. Removal from Rental Use Compliance w/ Govt. Order Resident Manger Occupied Property Downsizing Major Rehabilitation HUD Property to be Sold Drug/Gang Related All other Eviction Types Declarations of Intent to Evict by Type & Year Purchased Evictions by Type and Year Purchase by Present Owner 3,500 3,000 75% 2,500 2,000 1,500 1,000 500 0 1975 or Before 1980 1985 1990 1995 2000 2005 Year Rental Property Was Purchased • Majority (75%) of evictions are: • Owner moving in to occupy a rental unit • Demolition of the rental unit • Permanently removing the unit from rental housing use 54% of all evictions recorded by LAHD are related to condo conversions Source: Los Angeles Housing Department. 2008. Landlord Declarations (Evictions) Administrative Dataset (6). Data are counts of RSO properties with evictions recorded by LAHD.

  46. 500 Net balance of permits Newly Built Properties, plus Existing onesConverted into Apartments (+) 400 300 200 100 Annual Permits Issued 0 -100 -200 Apartment Buildings Demolished or Converted into other Uses (-) -300 -400 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -500 Recent Gains and Losses in L.A.’s Supply of Rental Housing Properties Source: City of Los Angeles, Department of Building and Safety, Building Permit Data from the Plan Check and Inspection System (PCIS), 1997-2007.

  47. Vacancy Rates for LA City Rental UnitsDWP Data for 761,639 Multi-family Individually Metered Housing Units January 1998 to March 2008; U.S. Census Rental vacancy rates for the past ten years have fallen below the 5 percent threshold established in LAMC 12.95.2(F)(6) for suspending condominium conversions on residential rental properties of two or more units Department of Water and Power and US Census Bureau Vacancy Rates for Rental Units DWP Data for 761,639 Multi-family Individually Metered Housing Units January 1998 to March 2008

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