and the Los Angeles Housing Market

Item No. 7 .a.Q)

EconomicStudyof the Rent StabilizationOrdinance(RSO)andthe Los AngelesHousingMarket

Underwrittenby the Los AngelesHousingDepartment

DanielFlaming PatrickBurns Michael Matsunaga Mima Ponce Ken Baar RaohaelBostic Malcolm Bennett GeraldSumner- StatisticalConsultant SocialScienceResearchCenter,California StateUniversity,Fullerton- RenterSurvey

ECONOMIC ROI.JNDTABLE A Nonprofit, Public Policy ResearchOrganization 315 WestNinth Street,Suite1209,Los Angeles,Califomia90015 www.economicrt.org

This reporthasbeenpreparedby the EconomicRoundtableRSO studyteam,which assumesall responsibilityfor its contents.Data, interpretationsand conclusions containedin this reportarenot necessarilythoseof any otherorganizationthat supported or assisted thisproject.

This reportcanbe downloadedfrom the EconomicRoundtableweb site: www.economtcn.org

Acknowledgements We are grateful for assistance,data, ideas, information, and critical suggestionsthat have been generously provided by the Los Angeles Housirrg Department's ploject manager,Anna Oltega, and policy liaison, Marisol Romero, along with the following individuals:

SurveyandFocusGroupContributors RenterSttrvey SocialScienceResearchCenter, CSU-Fullerton GregoryRobinson Emily Otis Jeff Wood Scientific TelephoneSamples JenniferAcosta CelesteBlanchard SteveClark SusanMontoya AngeliqueUglow Landlord Survey Maribel Carrillo EdmundLeon JavierPineda JessicaJew JaShawnWiley JenniferTran BenjaminD. Gaines

Mitchell Printing & Publishing,Inc Frank Velasco Tom Sediva Focus Groups ApartmentAssociationof GreaterLA JamesB. Clarke Yvonne Calderon Valerie Coachman-Moore PatriciaBowie PoloMunoz SandraLuna PlazaCommunityCenter,EastLos Angeles Lizetl.e AIcaraz (chiIdcare) ElizabethAvila (childcare) RobertoandMary Romero, CatholicCharitiesCommunity Center

Ben Franklin Library SharonDelugach,UCLA DowntownLabor Center 'WilliamC. Schweinfurth, VedderCommunity Management ElizabethArévalo,MercadoLa Paloma PHFEWomen,Infantsand Children(WIC) ShannonWhaley Anne Kennedy JudyGomez Jimmy Kwon, SandwichShop CouncilDistrict 15,SanPedro MunicipalBuilding Teni McKinnon MargeO'Brien

Los AngelesHousingDepartment Los AngelesHousingDepartment RobertoAldape Jim Bloor Franklin Campos GlenderChu RobertGalardi Lorena Gonzalez SusanGosden TeresaIrula Mariann Karish Greg Kung

David Law ConstantMok ClaudiaMonterrosa Anna Ortega Eric Romanelli JoseRomero Marisol Romero HakhaMortezaie Sally Richman ThomasSovinec Daniel Snyder

RSOOversightCommittee Mark Vargas,Chair Allan Abshez Tara Bannister Larry Gross BarbaraSchultz Neil Richman Victor Viereck

OtherPublicAgencies Bureattof Engineering,City of Los Angeles DennisBaluyot Cliff Eng RandyPrice EllenZemault

LA Departmentof LI/aterand Power PatriciaReza-Duval City of LA Departntentof Building and Safen David Schnitger

LA CountyPublic Health JoelleF. DuMont L Comty Assessor's Office BulmaroBorero LA CountySuperiorCourt DianeE. Duran

Other Acknowledgements ResearchDesign Beth Steckler,Economic Roundtable Boardof Directors Translation Delia Torres,Languages4 You

Legal Assistance Nona Randois,Legal Aid Foundationof Los Angeles ElenaPopp,Attorney atLavt

Data KonstantinAkhrem, Paragon PartnelsLtd. Ben Bartolotto,Construction IndustryResearchBoard RealFacts ChrisBates Mark Kouba

Tableof Contents Ex¡curlv¡ Sutr¡tvteRy.. .........................1 CriticalTrends .............1 PolicyRecommendations....... .........2 Profile of the RentalMarket from ExistingData........ ..........8 Surveyof RentersLiving in the City of Los Angeles...... ......................10 PropertyOwner Survey........ Impacts of the Rent Stabilization Ordinance on the Outcomes of Apartment Investments Comparison of Los Angeles Rent Stabilization Ordinance with Ordinances in OtherCalifomiaCities......... .....................20 Housing Market Dynamics, DevelopmentFinancing,and Growth Trends..............22

R¡Nr¡ns ANDRENTALHoustNc IN THEClry or Los ANc¡t-¡s: A PRonr-Eop THERENTALMeRrEr DRewN pRoIr¿ ExISTING DATA ...........25 Major Trendsin LA's RentalHousingMarket....... ............25 Populationand HousingGrowth.... ............25 A Cityof Renters ....................26 RecentDeclinein Rentals.. ........................26 RecentDeclinein Overcrowding............ ......................27 R e n tB u r d e n . . . . . . . . . . . . . . . . ............27 EscalatingRent .......... InsufficientNew Construction........... ........28 Summary... ...........29 Inventoryand Characteristics of LA's RentalHousingStock..................................30 LA's RentalHousingInventory... ..............30 Rental Housing Coveredby the Rent StabilizationOrdinance.. ......32 Shareof RSO PropertiesPurchasedafter Rent Stabilizationwas Enacted........34 Preservationand Growth of the Rental Housing Inventory... ..........36 Geographyof CondoConversions................. ...............38 Bedroomsand Rent.... .............39 Sizeof RentalProperties................. ...........40 M o b i l eH o m e s . . . . . . . ..................43 Characteristics of Renters.............. .....-............44 Populationin RentalHousing ,...................44 Age of Headsof RenterHouseholds................. ............46

*:HíT:rffi:t: ::: Vulnerable Renters.......

::

:

1í

....,......51

V1

Occupancy Outcomes for Renters ...................54 H o u s i nV g a c a n cR y ate........... ....................54 ......................58 N u m b eor f R o o m si n R e n t aUl n i t s . . . . . . . . . . ...........59 S i z eo f R e n t eHr o u s e h o l d s . . . . . . . . . . . . . . ......................61 Ratioof RenterPopulation to Bedrooms .....................62 Typesof RenterHouseholds Ratioof LargeRenterHouseholds to LargeRentalUnits..................................63 ...........65 Overcrowdin . .g. . . . . . . . . . . . Rent........... .................68 Lower,MedianandUpperQuartile Rent.......... ...........68 Rentin theUpperTierof theMarket....... .....................69 IncomeDistribution ..................69 of RenterHouseholds RenterIncomes ..............,......,.70 RentBurden .........71 .............72 Impoverished Renters RentSavings ........73 ......77 RentalConditions. Inspection Results ...................77 ......................78 BuildingandSafetyInspection Services andDemolitions ....................80 Conversions H o u s i na g t t h eM a r g i n s . . . . . . . . . . . . . . ................81 Summary ....................83

SuRvsvoFRENTERS Lrvrxc rNTHECrrv o¡ Los ANcsr-ES .............. ..........87 AbouttheSurvey .......87 Telephone SurveyMethodo1ogy................. ..................A1 ..........88 CarryingOut theTelephone Survey Who Responded to theSurvey? .......................88 Data........... ........88 Benchmarking theRenterSurveyagainstCensus How Longdo Renters .......................92 StayandWhere?...... L e n g t ho f S t a y / T e n u r e . . . . . . . . . . . . . . . ................92 BuildingTypeandUnit Size.... ..................92 Renters in PartialUnits.......... ....................93 Household Sizeto Unit Size:Matchor Mismatch?............... ..............,.95 Numberof Persons in RenterHouseholds ...................,95 ............. Overcrowding Are Renters Knowledgeable abouttheRSO?... ..................99 .......99 Awareness of theirUnit's RSOStatus AwarenessofOrdinanceRegulatingRentlncreases ....................100 Reasons LimitingEvictions ....................I02 ................103 Evictions At-FaultandNo-FaultEvictions ..............107 TennantRelocation Assistance ...................109 Prosram

vii Leaseand RentalAgreements .....1I2 Lengthof RentalAgreements ..................113 Language(s)ofRentersandtheirRentalAgreements ...............1l3 Plumbingand Kitchen Facilitiesin RentalUnits and Paying for Utilities.. .........116 How many RentersPay for their Own Utilities? ........I17 Rent........... ...............118 M o n t h l yR e n t . . . . . . . . . . . ........:.......... .............118 R S O v s .N o n - R S OR e n t . . . . . . . . . . . ................119 Contributorsto Rent.... ..........120 Rent Burden .......I20 R e n tS u b s i d i e s . . . . . . . . . . . . . . .........122 R e n tI n c r e a s e . . . . . . . . . . . . . . . ..........I23 RentIncreasefor RSO Units.......... ..........124 RentIncreasefor Market-Rate Units.......... ................126 Excessiveor PotentiallyUnauthorizedRent Increasesin RSO Units.......... ....I27 Rent Discount- Trajectoryof Rent Increases ............I29 Perception of RentalConditions ....................132 Perception of Rental Conditions versus SCEP Findings of Violations.. . ¡ . . . . . . . . . . . .......,.... 1 3 2 Treatmentby Owner/Manager ................133 Recommending theirBuildingsas a GoodPlaceto Live ................................136 TenantComplaintsto LAHD aboutRSO Violations ...................138 RenterConcernaboutAffordableHousing.............. ........I39 Summary ................143 SurveySamplingMethods.... ......146 EconomicRoundtableRent StabilizationTenantSurvev........ ............I49

PRop¡RryOwN¡R SuRv¡y ...............163 Overview of Data and Owners ....163 Overview... .........163 ProjectingSurveyResultsonto the RentalMarket....... .................164 ResidentialRental Holdings and Experienceof RSO Owners ......165 Property and ManagementCharacteristics ....1,66 V a c a n c yR a t e s . . . . . . . . . . .............166 TenantTurnover.... ................166 Long-TermTenants ..............168 F i n d i n gT e n a n t s ............¡..i..r ....................170 Leases ................171 Perceptions of the RSO Prograrn............... ....I72 FinancingCapitalImprovements.............. ..................172 SystematicCode EnforcementProgram(SCEP) ........177 Views of the RSO Program ......................181 Owner-Tenant Relations................. ...............184

vlll

TenantAccountability..... ...... .................184 T e n a nRt e l i a b i l i ti yn P a y i n g Rent........... ....................185 Evictions ............187 T e n a nCt o s t s . . . . . . . . . . ................189 Financial Outcomes ....................192 Properfy Maintenance ................. .............192 ReasonswhyOwnersAcquiredRSOProperties........... ..............193 Debton Rent-Stabilized Properly ............195 ProfitandReasonable Returnon Investment................ .................195 FactorsAssociated with Reportinga Prof,rt or a Loss.... ................198 Re-investing in Rent-Stabilized Housing..... ...............202 OverallHousing Needs ...............202 AffordableHousing ..............202 Redeveloping RSOProperties .................206 Specialized RentalMarkets...... ................208 Post-Survey Discussions .......211 Summary ................213 SurveyMethods .......218 City of LosAngelesRentalProperlyOwnersandManagers Survey.....................222

4 Ivpecrs oFTHERBNISreerLrzATIoN ORoweNcpoN THEOurcovss or Introductioni.................. ..............231 RentalUnitsUndertheRSOandthe OperationtheRentalHousingMarket.........231 Characteristics.of theRentStabilized Stock... ............232 Turnover in Tenancies ................. ............233 Trendsin MarketRents.......... ..................235 Summary... .........237 The Impactsof theAr¡rualRentIncreaseCeilings ..........237 AnnualAllowable RentIncreasesunderthe RSO Comparedto Increases in theConsumer PriceIndex(CPI) ..........238 AnnualAllowable RentIncreasesunderthe RSO Comparedwith AverageRentsin theU.S.,Los AngelesRegionandCity of Los Angeles ...........238 Annual Allowable RentIncreasesunderthe RSOComparedwith RentIncreases in OtherMetropolitan Areas......... ......................240 Impactsof RSOCeilingson RentIncreases for ContinuingTenants...............240 Summary... .........241 AverageApartrnentOperatingCostsandIncreases in OperatingCosts......... .......242 AverageOperating CostsandVariationsin Operating Expenses ....................242 Increases in OverallApartmentOperating Costs.......... .................243 OperatingExpensesby Type of Expense- Ratiosof Operating Expenses to RentalIncome...... ...............244

ix Increases in ApartmentOperating Expenses ....245 by Typeof Expense .............. Estimateof OverallIncreases in OperatingExpenses from 1999to 2006 Basedon Estimates of Increases in EachTypeof Expense............ ..............'.251 Summary ............252 TrendsinNet Operating Income....... .............252 Background ........252 Trendsin Net Operating Income1999-2006 ..............254 Adequacyof RentAdjustments for OwnerswithoutVacancies .............. .......256 Summary ............258 ThePerformance of Investments in MultifamilyHousing ..................258 L e n g t ho f O w n e r s h i p ......j............ ................258 Comments on VacancyRates......... .........258 Values Trendsin Apartment ....................260 2 0 0 8a n d4 f t e r . . . . . . . . . . ............266 Ratesof Returnon AparlmentInvestments ................266 Summary... .........269 the Impacts the Overviewof of RSOon Outcomesof ApartmentInvestments.....270 Conclusions andRecommendations ..............272 Reasonableness of the Annual RentIncreaseAllowed Under TheRSOProgram..... .........272 Accuracyof the MethodologyUsedto Calculatethe ArurualRent AdjustmentPercentage in ReflectingActual Changesin Operating Costs.......... ......272 Recommended Changeto the RSOBasedon AvailableEvidence AboutFinancial Outcomes ...................272 Methods..... ...............274

R¡Nr INcnpASE SrANDAnos: Los ANcnl¡s RpNr SreerI-rzATroN ORorNeNc¡ (RSO)ANDCoMpARrsoN wrrH ORDTNANCES rNOrHERCeuRoRNre .....277 Crrrps........ Brief HistoricalPerspective on RentRegulations in theU.S.and L o sA n g e l e.s. . . . . . . . . . . . . . . .............277 The Costa-HawkinsRentalHousingAct - StateLaw Requires VacancyDecontrol... ..........279 Tighteningof Eviction ControlsandIncreasingRequiredMitigation for TenantDisplacement ....279 Comparison of AnnualRentIncrease Standards................. ................280 AlternativeMethodologiesand Standardsfor SettingAllowable Annual R e n tI n c r e a s e s . . . . . . . . . . . . . .............292 An AlternateCPI Index ........282 Annual RentIncreaseBasedon a Dollar Ceiling Ratherthana Percentage .............284 Ceiling TheImpactof theFloorandCeilingon AllowableRentIncreases..................285

AllowableAnnualIncreases Basedon ApartmentOperatingCost StudyUsinga WeightedCostIndex. ....286 Passthroughs of Exceptional Expense Increases. ........288 Allowable RentIncreasesfor ApartmentOwnerswho Pay for Master Metered Gasand/orElectricity ...................289 PolicyAltematives ................290 Commenton Proposalsfor Loweringthe Annual Allowable Increasefor Seniors and/orDisabled Persons onFixedIncome....... ....................291 L e g a Il s s u e s . . . . . . . . . . . . . . . . . ..........292 Practical andPolicyIssues......... ..............293 New York'sSubsidyOffsettingRentIncreases of Low IncomeSenior andDisabledTenants... ......294 ......................294 "Banking"of RentIncreases.... RentStabilization Programs- AdministrationFees.. ........296 Summary ................297

R¡NIRI-M¡.Rrsr ANeLysrs:HousnscMem¡r DyNAMrcs,DgvpLoptr¡¡Nr FNaNCING,ANDGRowTHTRENDS ProductionTrends for Market-Rateand Affordable Housing Projects. ................299 The Dynamicsof Productionof Market Rateand Affordable Housing.,...............301 Land and DevelopmentCosts ..................:...................102 DevelopmentFinancing................ ...........305 Policy Optionsfor ProducingMarket-Rateand Affordable Housing....................306 InclusionaryZoning....-. .,....:............ .......307 Housing Choice Vouchers ....307 D e n s i t y8 o n u s . . . . . . . . ...............308 RegulatoryRe1ief......... .........308 Creativeuse of "Non-Traditional"Land........ .............309 IncentivesforIntemalCross-Subsidy..'............ ConcludingThoughts... ...............312

CoNCLUSToNS ANDPolrcy R¡col,rv¡NDATToNS ....................315 The RSO and Housing DepartmentPolicy ....315 Overviewof RSO Strengths andLimitations........... .....................315 S c o p eo f t h eR S O . . . . . . . . . . . . . . . . . . . . . . . . . . . . . : .......316 IncreasedCommunicationwithRentersandOwners ....................316 Evictionsand TenantRelocation ................... .............3I7 Loss of RentalHousingUnits Due to CondominiumConversions..................318 CapitalImprovementPassthrough Program...............:... ...............319 BankingRentIncreases.............. ..............321 Joint Code of Responsibilityfor Landlordsand Tenants ...............32I SystematicCode EnforcementProgram(SCEP) ........323

Xi

U p d a t i nLge a s e s . . . . . . . . ............324 Information Needed for Administering theRSO..... ......................325 Feesto Payfor ImplementingRecommendations ......325 Calculating AnnualRentIncreases.............. .....................325 Reasonableness of the ArurualRentIncreaseAllowed Underthe RSOProgram ......................325 Accuracyof the MethodologyUsedto Calculatethe AnnualRent AdjustmentPercentage in ReflectingActual Changesin Operating Costs.......... ........326 Recommended Changeto the RSOBasedon AvailableEvidence aboutFinancial Outcomes..............;. .....326 JustandReasonable RentIncreases.............. ..............327 Affordable Housing ....................327 Balancing Population, HousingandJobGrowth...... .....................327 RenterandOwnerSupportfor AffordableHousing. .....................333 Recommendations for AffordableHousins ................334

ENoNorps C h a p t e1r . . . . . . . . . . . . . . . C h a p t e2r . . . . . . . . . . . . . . C h a p t e3r . . . . . . . . . . . . . . . C h a p t e4r . . . . . . . . . . . . . . C h a p t e5r. . . . . . . . . . . . . . . . . C h a p t e6r. . . . . . . . . . . . . . . . . C h a p t e7r. . . . . . . . . . . . . . . . .

....................339 .....................365 ....................374 .....................387 ....................392 ....................395 ....................397

xii

List of Fieures ChapterI 1-1 City of LA HousingUnitsandPopulation1970-2006 ..............25 l-2 RentalUnits as Shareof LA andUS Housine ......26 1-3 TotalRentalUnitsandRenters ..:................ ...........26 I-4 Ratioof Renters to RentalUnitsandBedrooms.. .....................27 1-5 IncomeandRentof RenterHouseholds ................28 I-6 AnnualRentIncreases for RentalHousingin theLow AngelesRegion........................28 L-7 AnnualBuildingPermitsfor New Housing198l-2007 ...........29 1-8 RenterOccupied HousingUnitsasa Percentof All Occupied HousingUnits..............30 1-9 Owner-andRenter-Occupied HousingUnits by Area PlanningCommission i n 1 9 9 0 , 2 0 0a0n d2 0 0 6 . . . . . . . . . . . ..........31 1-10 Renter-Occupied HousingUnits Built Before1980andCoveredby theRSO asa Percent of all Occupied HousingUnits.......... ....................32 l-11 Renter-Occupied HousingUnits Built Before1980asa Percentof all Renter-Occupied HousingUnits .........32 I-12 Los Angeles'CurrentInventoryof RSOUnitsandProperties by YearBuilt................33 1-13 Los Angeles'CurrentInventoryof Residential Properties by YearBuilt and R S OS t a t u s .......................33 l-14 RSOUnitsby APC andby ShareBoughtafterRentStabilizatíon wasEnacted...........34 (BaseYear)andCPd....................35 l-15 RSO-Regulated HousingUnitsby YearPurchased 1 - 1 6 R S OP r o p e r t i e b sy 4 P C . . . . . . . . . . . ...........36 I-17 LA City'sCurrentRSOUnitsby YearBuilt (1900-1979) andLocation................ .......36 1-18 ApartmentPropertyConstruction Conversions andDemolitions,199T-2007 ...............37 1-19 Occupied RentalUnitsby Bedrooms andRent- Cityof L4......... .............39 l-20 OccupiedRentalUnitsby APC,Bedrooms andRentin 2006 City of L4..................39 l-2I RentalProperties by Numberof Unitson Property ..................40 l-22 RentalUnitsBrokenOutby Numberof Unitson theProperty..... ..............41 l-23 Numberof Unitsby ProperfySizeandRSOStatusin 2000 .......................42 I-24 City of LA MobileHomesby Tenure.. ..................43 1-25 OccupiedHousingUnitsby TenureandPlanningArea, 1970-2006.. .........44 I-26 Populationin OccupiedHousingUnits by TenureandPlanningArea, t970-2006 ........................45 1-27 Age Distributionof Headsof RenterHouseholds by CommunityPlanning A r e ai n 2 0 0 0 . . . . . . . . . . . ..........46 l-28 Ethnicity of RenterPopulationby Tenure 1-29 Ethnicityof RenterPopulation by 4PC...... ...........48 1-30 Educational Attainmentof RenterHouseholders APC.. by ......49 1-31 Nativityby Tenure ...........49 l-32 Tenurefor Foreign-born Householders by YearsLivingin U.S. ................50 1-33 Nativityof RenterHouseholder by APC ...............50

xllI

l-34 l-35 l-36 l-37 i-38 1-39 l-40 1-41 1-42 l-43 l-44 l-45 l-46 l-47 l-48 l-49 1-50 1-51 l-52 l-53 I-54 1-55 1-56 I-57 1-58 1-59 1-60 1-61 I-62 1-63 I-64 1-65 I-66 l-67

SeniorRenterHouseholders by APC.. ...................51 SeniorRenterHouseholders ........................51 by PovertyStatus Percent of IncomeSpenton Rentby SeniorRenterHouseholders ............... .................52 PoverlyStatus Disabled of householders................ ..................53 Percentof IncomeSpenton Rentby DisabledHouseholders ......53 ............... Datafor VacancyRatesin All RentalHousingUnits.......... ...........54 Census Department of WaterandPowerandU.S.CensusBureauVacancyRates for RentalUnits.......... ......55 VacancyRatesin All LA City Residential Units.. ....................56 VacancyRatesin LA City RentalHousingUnits.......... ...........56 VacancyRatesin LargeRentalProperties .............57 Numberof Bedrooms in OccupiedCity of LosAngelesRentalUnitsby APC.............58 Numberof Peoplein RenterHouseholds 2000-2006 ...............59 AveragePeopleper Householdin Renter-occupied Units .......61 AveragePeopleperHousehold in O-Bedroom Units.......... ......61 AveragePeopleperHousehold in l-BedroomUnits.......... ......62 Typesof RenterHouseholds by APC in 2006 .......63 Numberof OccupiedRentalUnits with 3* Bedroomsfor Every Renter Household with 5+ People....... ..........64 Overcrowding of RenterHousehold ........65 by APC Overcrowding of Renterhouseholds by Bedrooms................. .........;..........65 Overcrowding by Percent of PovertyLeve1.......... ....................66 Overcrowding by RenterHousehold by Ethnicity ....................66 Overcrowding of RenterHouseholds by Citizenship Status... .....................67 City of Los AngelesMonthlyRentby Quartiles ......................67 RentQuartilesfor City of Los AngelesPlanningRegions .......68 Monthly Rentper Sq.Ft. For Apartmentsin LargeBuildings20* Years Old by RSOStatus ...........69 Incomeof RentersasPercent of PovertyThreshold.. ...............69 MedianIncomeby TenureandAPC .....................70 IncomeDistribution .........70 by Tenure.. RenterHouseholds Paying50o/o .........71 or Moreof Incomefor Rent1990-2006............. RentBurdenby Household Incomein 2006....... ......................71 PoverfyRatesby Tenure....... ..............72 PoverlyRatesfor RenterHouseholdsby APC RentBurdenby PoverlyRatein 2006.......... .........73 RentalUnitswith Incomplete Plumbingor Kitchenin 2000....... ................82

Chapter2 2-L Respondents Completingthe City of LA RenterSurvey,Overlaidon Rental Unitsasa Percent .............87 of all Housin9.............. 2-2 PhoneCallAttempts madeto eachRDD Number................ .......................88 2-3 LA City Renters by Income ................89 2-4 Lengthof Stayat CurrentRentalUnit,by APC .......... .............91

XiV

2-5 2-6 2-7

SurveyRespondents by RentalType.......... ...........92 P a r t i aRl e n t e U d n i t sb y T y p e . . . . . . . . . . .......................93 Breakoutby APC of TotalRenterHouseholds, Households Living in Entire

2-8Hlliåî1iîLïlî'Iiäl ::

::: -

;?,8îï:ÏîilÏËiifi:fth;üsi;;:ðt,y;filAü;i;; :: -

2-11 2-12 2-I3 2-14 2-I5 2-16 2-17 2-I8 2-I9 2-20 2-21 2-22 2-23 2-24 2-25

2-26 2-27 2-28 2-29 2-30 2-31 2-32 2-33 2-34 2-35 2-36

;1 377

HouseholdSizeby Roomsin U:rit City of Los Angeles .......98 Is your unit underrentstabilization? By APC .......99 Renters'Awareness of RSO Statusof theirUnits,comparedwith actualStatus......... 100 Did you know thatrentstabilizationlimits the amountof annualrentincreases? .......100 Tenants'Awarenessof RSO Limiting the Amount of Ar¡rual RentIncreases a n dR e a s o nf o s rE v i c t i o n . . . . . . . . . . . . . . . . .....................101 Unlawful DetainerCasesFiled in the Los AngelesSuperiorCourt,Landlord Declarations of Intentto EvictFiledwith theCity, 1988-2007 .. ...............104 LandlordDeclarations of Intentto EvictRSOTenants by YearCaseOpened............104 LandlordDeclarationsof Intentto Evict Filed with LAHD as a Percentof Total RSOProperties andRSOUnits,by Yearof Purchase by CurrentOwner....................105 LandlordDeclarations of Intentto Evictby Type ..................105 Evictionsby TypeandYearPurchased by Present Owners ......................106 No-FaultEvictionsby APC, 1998-2008, Comparedto CurrentDistribution of theRSOInventory............. ...........107 LAHD Eviction CasesOpenedMonthly andNumberInterviewedby Relocation Services Provider..... .......109 Declarationsto Evict Tenantsin RSOUnits, 1999-2008,andRelocation S e r v i c eCsa s e s . . . . . . . . . .......109 Characteristics of TenantHouseholdsInterviewedduringRelocation Assistance Process, by Type..... ........I l0 Monthly RentBeforeandAfter Relocationfor TenantHouseholdsDisplaced by No-FaultEvictions ....11I Do you havea writtenleaseor rentalagreement with yourlandlord? ............. ............I12 Do you speaka language otherthanEnglishat home? . ........113 HowwelldoyouspeakEnglish?..... ....................115 How well do youreadEnglish?.........,..... ............115 CompletePlumbingFacilitiesfor Renter-Occupied Units in 1990,2000 a n d2 0 0 6 . . . . .....................116 CompleteKitchenFacilitiesfor Renter-Occupied Units in 1990,2000 and2006.... .....................116 Do you payfor anyof yourown utilities?by APC ................117 Percentof Renters Payingfor Utilitiesby Type .....................117 MonthlyRentby APC .......... ............1 18 MonthlyRentby RSOStatus ............119 Numberof Wage-Earners Conkibutingto Rentby APC .......120

XV

2-37 RentBurdenedHouseholds (Rentasa Pêrcentof HouseholdIncome) byAPC...... .....................120 2 - 3 8 A b i l i t yt o P a yR e n b t y4PC........... ......................121

i:^Zffi::i'i:Xiå,1í,å'"î-öi,y;¡i;;ds;i;; : :: i\? 2-41 RentIncreases EveryYearby APC andRSOStatus ..............123 2-42 Percentby which CurrentRentsdiffer from ProjectedRentsfor RSOUnits ..............125 2-43 Percentby which CurrentRentsdiffer from ProjectedRentsfor Market-Rate Units....... ......................1^26 2-44 RentIncreases by APC andHousehold Income .....................127 2-45 RSOComplaints by Type,2003-2007. ................128 2-46 RentIncrease Complaints by Outcome,2003-2007 ................ ..................I29 2-47 PercentIncreasein MedianRentby yearsLiving in Unit ......I29 2-48 Tenants' Description of theirUnit'sCondition................... .................,....I32 2-49 Tenants'Descriptionof their Unit's Condition,Overlaidwith Ratio of SCEPViolationsperUnit..... 2-50 Tenants'Descriptionof the'Waythe Owneror Mangerof their Building TreatsTenants...... ..........135 2-51 Tenants'Likelihood of Recommendingtheir Building to a Friendor Relative asa GoodPlaceto Live,by APC.......... ...................136 2-52 RSOComplaints by Type,2003-07............... ......139 2-53RatioofRSoComplaintsperUnit,2003-08..... 2-54 How importantis it for LA to adoptpoliciesandprogramsto provide affordable housingfor renters? .........140 2-55 What shouldLos Angelesdo to provideenoughaffordablehousing f o rr e n t e r s ? .....................140 Chapter3 3-1 Ownership Roleof SurveyRespondents............ ....................1'6,4 3-2 Profileof SurveyRespondents................. ............164 3-3 Properfy Portfolios of RSOOwners ....................165 3-4 YearsExperience owningRentalProperly..... .....165 3-5 Occupancy Status of RSOUnits.......... ................166 3-6 Percent AnnualRSOTenantTurnover... .............166 3-7 Turnover RateCompared to Non-RSOUnits.... .....................167 3-8 Changein TurnoverRateoverPastYear ............167 3-9 Monthly RentBasedon Annual Changesin LA's ConsumerPriceIndex for RentalHousingandAllowableAnnualRentIncreases UndertheRSO.................169 3-10 RSO RentasPercentof Market-rateRentfor Long-termTenantswhose RenthasbeenIncreased by theAnnualAmountAllowedUndertheRSO..... .............169 3-11 How do youusuallyf,rndyourtenants? ................... ...............171 3-I2 Durationof LeaseAgreements .........I71 3-13 OwnersthatReportApplyingfor CapitalImprovement Passthrough Program...........172 3-I4 Owner'sAssessment of CapitalImprovement Passthrough Program .......I73

XV1

Dollar Value of CapitalImprovementClaims .....173 Outcomesfor CapitallmprovementClaims ........114 Most FrequentUsesof CapitalImprovementFunds ..............174 ReasonsforNot Using CapitalImprovementPassthrough Program .........175 CapitalImprovementPassthrough ApplicationsApproved1985-2007 .......................175 LA City Properties with SCEPCases ..................177 Experiencewith SCEPInspectionProgram . ......177 Ratioof Citationsto Inspected Units.......... .........180 How would you describe the way the Housing Department balances landlord-tenantinterests?................. ....................181 3-24 Is thereanythingyou would like to changeaboutthe RSO program?.........................181 3-25 What are the most important lhings to changein the RSO program? .......I82 3-26 Experience with Holding Tenants Accountable for Maintenance and Repairs that shouldbe Their Responsibility ..................;.............. .......184 3-27 Owners' Views about Tenant Accountability and Complaints about RSO Violations.. .....................184 3-28 Owners' Views on Tenant Accountabilitv and Renters Views on Treatment by Landlord ... ..... ........ . . . . . . . . . . . . . . .I.8. .5. . 3-29 Average Percentageof Delinquent Rents in a Typical Month by O w n e r s h i pS i 2 e . . . . . . . . . . . . . . .. . . . . .... . . . . . . . 1 8 6 3-30 Tenant Evictions for Delinquent Rent in the Past Two Years as a Percent of Numberof Units Owned....... ............187 3-31 Tenant Eviction Proceduresfor Disruptive Behavior in the Past Two years as apercentofNumberofUnitsOwned....... ...........187 3-32 Legal Requirementsto Evict for Disruptive Behavior ...........189 3-33 Views aboutAnnual RentalUnit and SCEPFees........... .......189 3-34 Do you passon rentalunit feesto tenants?...... ....190 3-35 Additional CostsPaid by Tenants. ....190 3-36 Do you usually increaserents by the annual amount allowed under LA's rent controlprogram?... .....................191 3-37 What level of maintenance are you able to provide with the income from rent-controlledproperfy?................ 3-38 How does this compare to the level of maintenancefor your rental units that arenot underrent control?................. ...........I92 3-39 Primary Reasonswhy OwnersAcquiredRent-ControlledProperly............................193 3-40 Debt on the Rent-StabilizedInventory ................194 3-41 Year when Debt on Properlywas Assumed.............. .............195 3-42 Year when Properties werePurchased.............. ......................195 3-43 Did you make a profit lastyear? .......196 3-44 Do you get a reasonablereturn from rent increases? ..............197 3-45 Have rent increaseskept up with increasingOperatingCosts? .................197 3-46 If you were deciding again today, would you still acquire your rent-controlledunits? .....202 3-47 How important is it for Los Angeles to provide affordablehousing for renters?.........202 3-15 3-16 3-17 3-18 3-19 3-20 3-21 3-22 3-23

XVii 3-48

What should Los Angeles do to provide enoughaffordablehousing for renters?........204

i-t1,åîi::fii:ïï:ÈiällËlll ::::::

3-51 3-52 3-53 3-54 3-55 3-56 3-57 3-58 3-59 3-60

332

CitywideSubsidyStrategies .............205 Interestin Redeveloping RSOProperfyat HigherDensity ....207 Assistance Needed to Redeve1op................ .........207 Most Impofant Thingsto Changein theRSOProgram..... ....208 Did youmakea profitlastyear?.......... ................209 Most ImportantThingsto Changein the RSOProgram..... ....210 How importantis it for theCity of Los Angelesto provideaffordablehousing?........211 Interested in discussing theresultof thissurvey?...... .............211 Distribution of SurveyRecipients by Numberof UnitsOwned....... .........2I9 Distributionof SurveyRespondents by Numberof Units Owned ............220

Chapter4 4-l UnitsCovered by RSOby AgeandSizeof Buildine........... .....................223 4-2 Distribution of RSOUnitsby LocationandAge of Building ...................223 4-3 MedianRentsfor UnitsBuilt before1980versus1980or Later.......... .....235 4-4 AverageRSORentsin 2000,2005,2006basedon Lengthof Tenancy......................237 4-5 Comparisonof Annual Increasesunderthe RSOwith Increasesin Los AngelesRegionandU.S.CPI RentIndexes...... ..............239 4-6 AverageperUnit Assessed Valueof RSOProperties 1999to 2007............................246 4-7 Estimatedtrncrease in OperatingCostsper Apartmentper Month from 1999to 2006.......... ........251 4-B Income,ExpenseandNet OperatingIncomeTrends,Instituteof RealEstate Management, IncomeÆxpense Reports...... .........253 4-9 Income,ExpensesandNet OperatingIncomeTrends,UrbanLand Institute, Income/Expense Reports ................ .....................254 4-I0 Summary of All FourEstimates of Net Operating Income...... .................256 4-ll Trendsin ApartmentValuesin the City of Los Angeles1990-2007 ........261 4-12 TheImpactsof TrendsinCapítalization Rateson Apartment Values..........................262 Chapter5 5-1 ConsumerPriceIndex- All ItemsandAll ItemsLessShelter,Los Angeles Region,1979-20 . .0. .7. . . . . . . . . . . . . ...........283 Chapter6 6-l Permits for LargeStructure Units.......... 6-2 ConstructionandBuilding CostTrendsComparedto the Consumer P r i c eI n d e x

..............301 .....................304

:

XViii Chapter 7 7-I Number of Approved Capital lmprovement PassthroughApplications b y M o n t h l yP a y m e nAt m o u n t . . . . . . ....:.............. .....319 7-2 PopulationandHousingUnit Growth- Projections through2015..............................328 7-3 Ratioof Residents to Units - Projections through2015........... .................330 7-4 Jobsin LA County'sFormal Economy 1978-2007and Projectionsto 2014...............332 7-5 Importanceof Initiativesto ProvideHousingthat Residentscan Afford.....................333 7-6 Supportfor Initiatives to Provide Housing that Residentscan Afford ......333

XlX

List of Tables Chapter1 1-l Numberof OccupiedHousingUnits,Renter-andOwner-Occupied .........30 l-2 Change in RentalUnitsandRenterPopulation ........................31 1-3 Numberof OccupiedHousingUnits,Renter-andOwner-Occupied ..........31 l-4 PeakPeriodsfor Construction of RSO-Regulated Housing ........................34 1-5 Numberof Building PermitsApprovedfor ConvertingAparlmentsProperties to Condominiums, by APC 1997-2007.. ....,...........38 I-6MedianHouseholdIncome-Buyersvs.Renters. I-7 MobileHomesby CPSsfor Top 3 APCswith LargestNumberof Mobile Homes.......43 1-8 Disabled RenterHouseholds by APC ....................52 I-9 Cityof LA HousingYacancy Rates.......... .............56 1-10 'Numberof Bedrooms in Occupied RentalUnits.......... ............58 1-11 Change in Sizeof Occupied RentalUnits2000-2006.,........ .......................59 1-12 AverageSizeof Households PayingCashRentin 2000and2006 .............60 1-13 MedianGrossRentby RSOStatusandYearsin Unit in 1990,2000and2006.............74 l-14 AverageGrossRentby RSO StatusandYearsin Unit in 1990,2000and2006...........75 1-15 SCEPProperties andCodeViolations by APC 2005-2008. ........................77 I-16 TwentyMostCommonSCEPViolations ..............78 1-17 Most CommonviolationsCitedby the Los AngelesDeparfmentof Building andSafetyfor RSO-Regulated Buildings ..............79 1-18 RSO-Regulated Buildingsor Properties Convertedto IllegalUsesViolations Identified by LABDS,by YearCitedandAPC........... .............79 l-I9 AverageYear Built of RSO-Regulated Buildingsor PropertiesConvertedto Illegaluses,by YearCitedandAPC .....................80 I-20 PermitsIssuedto CovertApartmentsBuildingsinto Condominiurns by APC..............80 I-2I PermitsIssuedto DemolishExistingAparlmentBuildingsby APC..................... ........81 Chapter2 2-l BenchmarkingTable- Comparisonof Respondents to RenterSurveyand 2006Census ACS ............90 2-2 Lengthof Stayat CurrentRentalUnit, Comparingthe City of Los Angelesto Non-Rent-SÍabllized neighboring 4reas......... ..........:........ .......9I 2-3 Unit Size City of LosAngeles .........93 2-4 Profileof Renters Living in EntireUnitsvs.PartialUnits................. .........94 2-5 AverageSizeof Household by APC...... ................95 - Cityof LosAngeles 2-6 Overcrowding ....................96 2-7 Is yourunit underrentstabilization? .....................99 2-8 Awarenessof the RSO's Role in Limiting RentIncreasesper Year by TotalHousehold Income. ..................101

XX

2-g 2-10 2-11 2-12 2-13 2-14 2-15 2-16 2-17 2-18 2-19 2-20

Awareness of theRSO'sLimit on Reasons for Evictionby TotalHouseholdIncome................. .....................101 EvictionTypes:No-FaultandAt-FaultEvictions ..................106 LAHD EvictionCasesInterviewedby RelocationAssistance Services, by TypeandEntitlement Amount .....110 How longis thetermof theagreement?............ .....................I12 In whatlanguageis therentalagfeement thatyou signed? ....113 you speakat homeotherthanEnglish? Whatis thelanguage ...................114 M o n t h l yR e n b t y A P C. . . . . . . . . . ............118 AverageandMedianMonthlyRentby RSOStatusandAPC.... ...............119 StartingandCurrentRentsby RentIncreases ............. ...........I27 MaximumRentDiscount for Typical(Median) RSOTenants.....................................130 ActualRentDiscountfor Typical(Median)RSOTenants........... ..... ........ 131 SampleDispositions andEstimated EligibleCases....... .........147

Chapter3 3-1 Numberof Yearsthat Rent-stabilizedUnits havebeenOccupiedby t h eS a m eT e n a n t . . . . . . . . . . . . . . . . . . . . . . . . . . . .....168 3-2 Ownersof RSOPropertiesBrokenOut by the Percentof Their Units for whichDeclarations of Intentto EvicthavebeenFiled.......... ....................188 3-3 Geographic Distribution of Declarations of Intentto Evict.... ............. .....188 3-4 Reportsin OwnerSurveyof Evictionsfor DisruptiveBehaviorandFilings of Declarations of Intentto Evict with theCity of Los AngelesHousingDepartment....188 3-5 Whatwerethereasons for acquiringrent-controlled units? ......................I92 3-6 ProfitComparison for RSOandNon-RSOUnits ...................196 3-7 ProbabilitythatOwnerswill Reporta Profit on Their Rent-Controlled Property........199 3-8 OwnersReporting a Profitanda Reasonable Retum .............20I 3-g MethodologyandSizeof SurveyReplicates.. .....219 3-10 SurveyResponses fromOwners............... ...........220 Chapter4 4-l Distribution of RSOProperties by Numberof Units...... ........232 4-2 Distribution of RSORentalUnitsby LocationandSizeof Building...........................234 4-3 Lengthof Timein SameRentalUnit 1980-2006............. .......235 4-4 PercentIncreasein MedianRents,Units Constructed1979or Earlier Compared with UnitsConstructed 1980or Later.......... ........235 4-5 Increases in MedianandAverageRentsfrom 2000to 2006by APC, Rental HousingConstructedbefore 1980.......... .............236 4-6 Comparison of Increases in U.S.CPI RentIndexandCPI-AllItemsIndex................238 4-7ArrnualIncreasesA11owedunderRSoComparedwithCPIRentIndex Increases in Standard MetropolitanStatistical Areas .............240 4-8 AverageOverallApartmentOperatingCostsper ApartmentUnit per Month L o sA n g e l eAs r e a . . . . . . . . ......................243 4-9 Operating Expense/Income Ratios- LosAngelesApartments....................................245

,

'

XXì

4-10 4-11 4-12 4-13 4-14

Average WaterandSewerCostsperApt.UnitperMonth.. ......................247 AverageInsurance costsperApartment perMonth ...............249 Management andMaintenance Expenses perApartmentper Month ........250 IncomeandExpenseTrends"ApartmentBuildingAppraises& AnalystsReport"....255 Estimateof Trendsin Net OperatingIncomeBasedon Reportsof Average SalePricesandCapitalizationRates by CoStar........ ..............255 - city of Los Angeles- 1999-2006 4-15 AverageSalesPricefor Apartments ...................264 4-16 City of Los Angeles,Countyof Los Angeles,andOtherRentControlledCities .......265 4-17 U.S.MarketAreas- Average Apartment Values- 1999-2006 ...................................267 4-I8 CashFlow Projections Pre-2000Purchaser andRecentPurchaser ...........269 Chapter5 5-1 AnnualRentIncrease Standards underRentControlOrdinances................................280 5-2 AnnualRentIncreases SincetheAdoptionof RentControls..... ...............281 5-3 Comparison BetweenIncreases in CPI All ItemsandCPI All ItemsLess Shelter Indexes...... .........284 5-4 Annual RentAdjustments,Fixed Percentage Comparedwith Fixed Dollar Me1hod.,................. ........295 5-5 Impactof 3o/o Minimumon AllowableAnnualRentIncreases........................:...........285 5-6 Exampleof WeightedOperatingCost Study,RentIncreasesRequired to coverOperatingCostIncreases andAdjustNet OperatingIncome ......287 5-7 CPI andnon-CPIAdjustedCostFactorsin OperatingCost StudyandAnnual GeneralAdjustmentDetermination of SantaMonicaRentControlBoard..................287 5-8 RentAdjustmentsfor Buildingswith Master-Metered Gas and/orElectricity underCalifornia RentControlOrdinances....-............ ............291 5-9 ArurualAllowable RentIncreasesComparedwith Increasesin Los Angeles AreaCPI RentIndex,1992-1998.. ....293 5-10 BankingProvisions in CaliforniaRentControlOrdinances. .....................295 5-11 Administrative FeesandBudgetsfor CaliforniaRentControlPrograms ....................296 Chapter6 6.I PermitsIssuedby Decadein Los AngelesCounty Chapter7 7-l Recommended Durationof TenantRentIncreases ............. 7-2 JointCodeof Landlord-Tenant Responsibilities............ 7-3 RHNA Goals- Cityof LosAngeles(1998to 2005)......... 7-4 RHNA Goals- City of LosAngeles(2006-2014).................. 7-5 EstimatedPopulationDistributionandHousingNeedsof the Annual HomelessPopulationin theCity of Los Angelesin2007

....... ........300

...320 ........322 .....331 ...................331 ......335

XXlI

List of Text Boxes Chapter2 2-l FocusGroupComments aboutOvercrowding ......96 2-2 FocusGroupComments aboutTenantEducaiion ..................102 2-3 FocusGroupComments aboutEvictions ........... ....................108 2-4 FocusGroupComments aboutLeases................. ...................114 2-5 FocusGroupComments aboutRentBurden .......122 2-6 FocusGroupComments aboutBuildingMaintenance........... ...................134 2-7 FocusGroupComments aboutFairTreatment by Landlords ......................................135 2-8 FocusGroupCommentsaboutLandlordResponsiveness andCommunication..........137 2-9 FiveGroundsfor Complaints by RSOTenants ......................138 2-10 FocusGroupComments aboutAffordable Housing.............. ...................141 2-Il Commentsof RenterSurveyRespondents aboutAffordableHousing .....I42 Chapter3 3-1 Describeyour experiencewith the passthrough programfor capital improvement costs .........I72 3-2 Why haven't you usedthepassthrough optionto help pay for your capitalimprovements? ............ 3-3 How would you describeyour experiencewith the HousingDepartment's inspection of yourrentalunits(theSCEPprogram)? .............178 3-4 Whatarethemostimportantthingsto changein therentcontrolprogram?... .............182 3-5 Otherreasons for acquiringRSOproperty ..........193 3-6 What shouldLos Angelesdo to provideenoughaffordablehousingfor renters?. .......203

r

,úxecutrveSummary Cp¡rrcar Tn¡Nrs Decline in Overcrowding Between 2000 and 2006, overcrowding trends of the previous 20 years changeddirection. Ratesof severeovercrowding fell 65 percentfrom 2000 to 2006,leaving 8 percentof the City's renters in severely overcrowded (more than 1.5 occupantsper room) conditions and another 11 percent in overcrewded conditions (more than one occupant per room). This was the result of a growing stock of larger rental units and a small decline in the renter population. Despite this good news overcrowding remains widespread among low-income renters, with 28 percent of those at or below 200 percent of the poverty level living in overcrowdedconditions. Increase in Rent Burden In2006, LA renterswere lessable to afford housing than they were 16 yearsago. Census data shows that 58 percent of renters are rent-burdened,paying over 30 percent of their income for rent. The share of residents who are severely rent-burdened,paying over half of their income for rent, increasedto 31 percentin 2006. Reduction in Rental Inventory In 2000, LA began to emergefrom the 1990shousing constructionslump and therewas an increasedpace of both additions and subtractions of rental units from the City's housing inventory. The net outcome from demolition, renovation and new construction of rental properties was a growing inventory of rental housing wt112004. The subsequentspike in condominium conversions resulted in a net loss of rental units by 2006. Low Capitalization Rates (low ratio cashflow to purchase price of property) A quarter of the rental unit inventory in buildings with five or more units was purchased in 2005 or later. These recent purchasershave much larger debt service loads than longer-term owners, making them vulnerable to minor fluctuations in expensesor the decline in rental income that can be expected as part of the current recession. Housing Construction Costs Construction costs fypically account for about 60 percent of the cost of building rental housing, and land typically accounts for another 30 percent. Construction and land costs are high in Los Angeles, making it extremely difficult to produce new rental housing at prices that are affordable to most Los Angeles renters. If solutions are to be found, policy-makers must establishing a framework that acceleratesthe production of affordable housing in the City. Policy recommendationsbased on findings from this study are presentedin the following section. The final section of the Executive Summary presentskey findings from each chapter.

2

City of Los AngelesRSO Study

Poucv R¡coruveNDATIoNS Rent Stabilization Ordinance (RSO) Strengths and Limitations The Rent StabilizationOrdinance(RSO) covers 66 percentof LA's inventory of rental units and, when owner-occupied units are included, 40 percent of all housing in the City. The majority of Los Angeles renters are rent-burdened,paying over 30 percent of their income for rent, and roughly a third are severely rent-burdened,paying half or more of their income for rent. Strengths of the RSO program include that it touches alarge segment of householdsin Los Angeles, most of whom are at the lower end of the income distribution, and protects them against rapid rent increasesand arbitrary eviction. The RSO program is limited in that it does not addressthe overall scarcity of housing in Los Angeles and the acute scarcity of housing that residents can afford, it provides little rent savings for short-term tenants, and it places administrative burdens on owners. The purpose of the RSO is to protect tenants from excessiverent ìncreases,while allowing orvnersa reasonablereturn on their investments. This balance is very difficult to achieve in a rental market with both long-term decline in renter incomes and rapid inflation in housing prices. Scopeof the RSO Options for the scope of coverage of the rental market by the Rent Stabilization Ordinance are to retain the current scope,or to reduce the scope,most likely by eliminating coverage of properties with 2 to 4 units. The third conceivable option of expanding the ordinance to include rental units built after 1978 is precluded by state law. The primary findings from this study that argue in favor of excluding small owners from RSO coverage are that small owners are the least profitable segmentof RSO owners, have the weakest grasp of financial issuesrelated to their properties, and sometimes are ill-equipped to deal with the additional paperwork required for complying with the RSO. The primary f,rndingthat argues against excluding small owners from RSO coverage is thar.24percentof all RSO units are held by owners of 4 or lessunits. In the poorestareasof the City, the shareof units held by small owners is even larger - 38 percent in the Harbor region,42 percent in South LA, and 50 percent East LA. Eliminating theseunits from RSO coverage would result in rent increasesand loss of securetenure for a significant share of LA renters, most of them in householdsthat already are rent-burdened. A secondargument against eliminating RSO coverage of small owners is that four-fifths of RSO properties have been acquired since rent stabilization took effect in Los Angeles, for prices that took account of the effect of the RSO on income and profits. It is recommendedthat the City retain the current scope of coverage by the Rent Stabilization Ordinance and provide technical assistanceworkshopsfor small owners.

ExecutiveSummary 3 City Communication with Renters and Owners Information provided by both renters and owners shows that many of those affected most directly by the Rent Stabilization Ordinance lack basic information about requirements and opportunities that are part of the program. A third of renters have incorrect information about, or are unaware of, the RSO status of their unit. Two-thirds of low-income renters are unaware that the RSO limits rent increasesand protects against evictions without just cause. Half of owners do not know about the capital improvement passthroughprogram, and despite their concems about rent ceilings, 99.9 percent of owners have not sought relief through the just and reasonable rent increaseapplicationprocess. It is recommendedthat the City mail annual letters to each RSOhousehold and property owne4 identifying responsibilities, resources and benefits that are part of the program. Evictions and Tenant Relocation Most renters and landlords agree that at-fault tenants who are disruptive, destructive, or do not pay their rent should be evicted. Renters and landlords both expresssupport for making it easier to evict disruptive and destructive tenants. The other side of this coin is that the City's low vacancy rate and rapid housing inflation during much of this decadewas accompaniedby a spike in no-fault evictions. Declarations were filed to remove over 20,000 units from the RSO inventory between 2000 and 2007. Inmid2007, the City added housing relocation searchservices to help tenants in no-fault evictions. The Housing Department referred 274 displacedhouseholds to the housing relocation assistance organization, which helped less than one-in-ten households find replacement rental housing. It is recommendeclthat the City inform owners that the RSOdoes not restrict evictionsfor disruptive or destructive behavior, inform renters about protections against no-fault eviction provided by the RSO,and evaluate the delivery of tenant relocation services and the level of servicefunded under the relocation assistanceprogram. Loss of Rental Housing Units Due to Condominium Conversions Rental vacarrcyrates for the past eight years have fallen below the 5 percent threshold establishedin Los Angeles Municipal Code for suspendingcondominium conversions on residential rental properties of two or more units. The high rent burden for City residents,high levels of overcrowding and low vacancy rates are evidence that affordable rental housing is in short supply. Conditions that warrant denial of approval for condominium conversions have existed in the City for the past eight years. It is recommendedthat the City suspendapproval of condominium conversio.ns,monitor rental vacancy rates at the Community Plan Area (CPA) level, and retain the moratorium in CPAs with vacancy rates below 5 percent. Capital Improvement Passthrough Program The City's aging RSO inventory requires continued investment in capital improvements,

4

City of Los AngelesRSO Study

including periodic outlays for major rehabilitation that addressesprimary structural, plumbing, electrical or mechanical needs. The City's main program to provide additional revenue to owners for capital improvements is the Capital Improvement PassthroughProgram, which allows temporary rent increasesto pay for 60 percent of the cost of improvements. In the past 5 years, only 1 percentof RSO owners,representing4 percentof units, have filed applicationswith this program to pass capital improvement costs through to their tenants. It is recommendedthat the City increase the capital improvementpassthrough amount to: 75percentfor work that meets cutent criteriafor the passthrough program but does not meet the criteriafor primary renovation; 100percentfor structural,plumbing, electrical, or mechanicalwork that can be done while tenantsoccLtpytheir units; and 100percentfor either capital improvements or primary improvementsfor owners whose total ownership, including all properties, is 4 units or less. It is also recommendedthat the term of paymentfor the tenant's share ofcosts be extendedfor up to I0 years to keep rent increases below $25 per monthfor as many tenantsas possible, that the 855 monthly rent-increaseceilingfor the share of capital improvements that can be passed on to tenants be indexed to the ConsumerPrice Index, and that the atmulative amount of capital improvementpassthroughs approvedfor eachproperty be tracked to ensure that tenants do not receive multiple rent increases that total more than the ceiling amount. Banking Rent Increases RSO tenants experiencemore frequent rent increasesthan non-RSO tenantsbecausethe current use-it-or-lose-it policy for RSO rent increasesadds pressure to increaserents annually in order to avoid losing the prerogative to make an increase. Seven other jurisdictions in Califomia with rent control allow owners to bank rent increases,that is, landlords who do not increaserents by the allowable annual amount in a given year are allowed to make this increasein future years. The option to bank rent increasesmakes the current 3 percent floor under the annual rent adjustment unnecessary. In years when the housing market is slow and rents are most likely to be banked, the change in the Consumer Price Index typically is less than 3 percent. It is recommendedthat the City allow owners to bank annual rent adjustmentsand to apply them in combination with the annual increasepermitted under the RSO,with banked adjustmentsplus the annual adjustmentnot to exceed10 percent. It is also recommendedthat the 3 percentfloor on aftnual rent adjustmentsbe eliminatedand that the current I percent ceiling on annual rent increasesbe retained. Joint Code of Responsibility for Landlords and Tenants The most widely expressedconcern of landlords about their tenants,as well as tenants about their landlords, is that the other party does not reciprocate reasonableand responsible behavior. This is not a universal problem but it is the most frequently identified problem in landlord-tenant relations. It is recommendedthat the City adopt a Joint Code of Responsibilityfor Landlords and Tenants as a statement of expectations that will be used in administering the Rent Stabilization

ExecutiveSummary 5 Ordinance. It is also recommendedtltat all RSOowners be encotLragedto use written leases when renting units and to ensurethat the leasesare consistentwith tltis Code. Systematic Code Enforcement Program (SCEP) The SystematicCode EnforcementProgram,or SCEP,is the most frequentpoint of contactbetweenthe Housing Departmentand Los Angeles landlords. The program has been recognized for its successin improving the habitability of rental housing in Los Angeles, but it evokesmixed reactionsfrom properly owners. The two concerns most frequently expressedby owners about SCEP are the need for more consistency in how inspections are conducted and the need for greatertenant accountability for code violations they cause. It is recommendedthat the City enforce the recommendedJoint Code of Landlord-Tenant Responsibilities by holding tenants accountablefor code violatiorts that they cause. It is also recommendedthat the City develop starudardizedproceduresfor documenting code violations in order to ensuremore consistentoutcomesfrom inspectio4s. Updating Leases The RSO prohibits unilaterally changing the leasesof tenants in ways that reduce services without corresponding rent reductions. For long-term tenants this means that their original lease can stay in force throughout their entire tenancy, even ifthe property changes ownership. However, as some tenancies extend, the original lease can become outdated relative to state and local laws, and even contradict them. It is recommendedthat the City inform owners and renters that changes in law constitute automatic amendmentsto RSO leases. Information Needed for Administering the RSO Information from the renter survey suggeststhat a significant minority of owners are imposing unauthorized rent increases. These increasesappear to be most prevalent among lowincome renters, which is the population most in need of protection by the RSO. Cunently, the RSO program does not have information other than what is received through complaints to enable it to monitor rent increases. Building this capacity is important becausethe core purpose of the Rent Stabilizalion Ordinance is to protect tenants against excessiverent increases. It is recommendedthat the City expand the yearly registration renewal application to include information about the rentfor eaclt unit and whether or not each unit has been vacated and decontrolled in the past vear. Reasonablenessof the Annual Rent Increase Allowed Under the RSO Program An analysis of the Consumer Price Index and data on increasesin apartment operating costs supports the continued use of the Consumer Price Index as a fair and objective benchmark for determining arurualallowable rent increases. It protects sitting tenants from excessiverent

6

City of Los AngelesRSO Study

increases,while at the sametime providing apartmentowners with annualincreasesthat are reasonableand tied to a commonly used measureof price increasesin Los Angeles' economy. Tlte CPI antrual increasestandardfairly balancestlte interestof renters and owners. Accuracy of the Methodology Used to Calculate the Annual Rent Adjustment Percentage in Reflecting Actual Changes in Operating Costs The ConsumerPrice Index (CPI) is the best available economicbenchmarkfor setting rent increases. The CPI is the only systematic, market-wide source of data that reflects changes in maintenance and managementcosts, and net operating income. The CPI is the best available tneasure of an allowance for increases in operating costs. Recommended Change to the RSO Based on Available Evidence about Financial Outcomes The annual rent increase ofone percent per year to offset gas and electricity utility increasesin master-meteredbuildings (a total of two percent if both servicesare provided) should be replaced by periodic analysesof actual changesin costs. The allowance currently used has no connection with and has substantially exceededthe actual cost increasesresulting from increasesin the cost of providing gas and electricity in master-meteredunits. It is recommendedthat the City authorize utility increasesperiodically when significant gas and/or electricity cost increasesoccur, rather than an unchangingfixedpercenlageannual increase. Just and ReasonableRent Increases The reduced level of rent paid by long-term RSO tenants can have a significant impact on small properly owners, for whom a single unit provides a quarter to half of total rent revenue. Relief should be available for owners if rent for an RSO unit falls 35 percent or more below the market rate. A 35 percent ceiling on RSO rent gaps is recommendedbecausethis is the greatest gap tha| has been shown to result from the rent adjustment provisions of the Rent Stabilization Ordinance. Gaps that exceed this amount can reasonably be viewed as inconsistent with the RSO objective to fairly balance the interests of landlords and tenants. It is recommendedthat the City inform property owners that Just and ReasonableRent Increase application process can be used to address extreme disparities in rent levels. Balancing Population, Housing and Job Growth Demographic and economic projections underscore the challengesthe City faces in providing housing that meets the needs of its diverse rèsidents. Increasing the supply of housing is important, but the level of housing affordability may be even more crucial to the wellbeing of the City's residents. It appearsthat the City is on track to meet the needs of higher-income residents, but will make only modest headway in ensuring adequatehousing for lower-income residents, most of whom are severely cost-burdenedand often live in overcrowded conditions.

ExecutiveSummary 7 Renter and Owner Support for Affordable Housing Over 90 percentof rentersand 60 percentof owners supportCity initiatives that will help meet the need of residents for homes they can afford. Renters and owners agree that the housing needsof seniorsand families should be prioritized, that it is important to save existing affordable units, that inclusionary zoning is desirable, and that public spending should be increasedto subsidize affordable units and create home ownership programs. Recommendations for Affordable Housing 1. Include housing that residents can afford as part of market rate development. 2. Use housing choice vouchers to increase the revenuesgenerated by affordable rental projects. 3. Streamline entitlementprocesses to reduce carrying costsfor affordable housing projects. 4. Identify "non-traditional" land that has the capacity to be developed into housing. 5. Focus developmentinterest by providing information about parcels that the City is most interested in seeing developed. 6. Streamline the condemnation and eminent domain processesfor blighted properties to provide incentivesfor current landowners to either sell their property or clean and redevelop the property in a timely fashion. 7. Usepublicfunds to purchase affordable units with covenants on the brink of expiration and to incentivize owners of these units to continue providing their units at affordable rent levels. 8. Develop an affordable housing land bank. 9. Promote mixed-income and mixed-useprojects where internal cashflows create subsidies. 10. Establish developmentfees for residential, commercial and industrial construction projects that increase tlte demandfor affordable housing. 1I. Link affordable housing developers with the 1,363 RSOowners that reported in the landlord suruey that they interested in redeveloping their properties at higher densities with affordable or rent-controlled housing included in the new development. Fees to Pay for Implementing Recommendations Five recommendations that are being made will require additional funding for the Housing Department: 1) technical assistanceworkshops for small owners, 2) annual educational letters about the RSO to renters and owners, 3) higher level of relocation services,4) creation of a rent databasefor all RSO units, and 5) collection and analysis of cost data.for gas and electric utilities. It is recommendedthat the City increase tlte annual rental unit registrationfee by the amount necessaryto payfor theseadditional responsibilities.

8

City of Los AngelesRSOStudy

PRopnEoFTHERsxrar M.qnr¡r FRoMExrsuNc Dara Major Trends in LA's Rental Housing Market .

o .

o o

Much of the current housing scarcity emergedin the 1980s,a decadewhen LA's population grew 77 percent but its housing inventory grew only 9 percent - about half of the population growth rate. In the following decade,population growth slowed but the margin of disparity between new residents and new housing remained the same. Los Angeles residents rent their homes at about double the national rate. The shift toward greater home ownership seenin New York and Chicago may also be seenin Los Angeles in the coming decadeas immigrants who arrived in the 1990s continue to make economic gains and are increasingly able to buy homes. Since 1997, the increase in rents in the Los Angeles region has been much greater than the increasein other consumer costs. Price increasessince 1997 for rental housing in the Los Angeles areahave been270 percent greater than increasesin all other consumer costs.

Inventory and Characteristics of LA's Rental Housing Stock o . o ¡

o .

Los Angeles has 764,197renter-occupiedhousing units. This is roughly 60 percentof the City's occupiedhousing. The Rent StabilizationOrdinance(RSO) covers 178,254rental propertieswith 638,051 housing units, or two-thirds of LA's rental inventory. Seventy-nine percent of the RSO-regulated inventory of rental housing units was purchasedby the current owners after the RSO ordinance went into effect. Since 1997,the net outcome from demolition, renovationand new constructionof rental properties was a growing inventory of rental housing until 2004. The subsequentspike in condominium conversions resulted in a net loss of rental units by 2006. Most rental property owners are small landlords. Sixty-nine percent of rental properties in the City of Los Angeles have just one unit and only 3 percent have 20 or more units. Two-thirds of all rental units are on properties with 10 or more units, with managerswith a sufficiently large scale of operations to apply professional capabilities to managing their properties.

Characteristics of Renters o

¡ ¡

As foreign-born residentsbecome long-term stakeholdersin their communities, home ownerships rates grow. After 30 years of residency, home ownership rates for foreignborn residentssurpassedthoseof U.S.-bom residents. In 2006, à quarter of senior householdersin Los Angeles were living in poverty and over 40 percent of all senior renters were severely rent burdened. In 2006,35 percentof householders'with disabilitieswere living in poverty. Forty-five percent of all renters with disabilities were devoting 50 percent or more of their income

Executive Summary

9

to rent and another27 percentwere devoting 30 to 49 percentof their income to rent, making them one of the most vulnerablerenterpopulationsin Los Angeles. Occupancy Outcomes for Renters o

o

o

.

o

o

.

Rental vacaîcy rates for the past eight years have fallen below the 5 percent threshold establishedin Los Angeles Municipal Code ("LAMC") Section 12.95.2(F)(6)for suspendingcondominium conversions on residential rental properties of two or more units. The high rent burden for City residents,high levels of overcrowding and low vacancy rates are evidence that affordable rental housing is in short supply. Conditions that warrant denial of approval for condominium conversions have existed in the City for the past eight years. Condominium conversions have filled a need for market-rate, owneroccupied housing in the City, but often at the cost of reducing the scarce supply of rentstabilizedhousing. The geographic distribution of condominium conversions reflects the distribution of household wealth in the City. Citywide, buyers have two and a half times more income than renters, with the incomes of both renters and buyers being highest in West LA and the South Valley. Citywide from 2000 to 2006,the net impact of demolitions and new construction was a 15 percent decline in the share of studio aparLmentsand an 11 percent increasein the share of apartments with2 or more bedrooms in the City's rental inventory. This made an important contribution to reducing overcrowding. Occupant density in shrdio or 0-bedroom rental units dropped 35 percent and in 1bedroom units dropped 11 percent between 2000 and 2006. A key factor contributing to this outcome was the recent increasein the typical size of rental units. Between 2000 and 2006, overcrowding trends of the previous 20 years changed direction. Rates of severeovercrowding fell 65 percent from 2000 to 2006,leaving 8 percent of the City's renters in severely overcrowded conditions and 11 percent in overcrowded conditions. Overcrowding remains widespread for low-income renters, particularly for those living at or below 200 percentofthe poverty level.

Rent o

o

.

Between 2000 and 2006, a new trend may have begun to emerge: the share of "middle income" renters grew by 2 percentagepoints and the shareof poor renters declined 3 percentagepoints. A large income divide still separatesowners and renters: :-r;12006, the median income (measuredin2007 dollars) was $73,000 for homeownerscomparedto $32,000 for renters. In 2006, over 30 percent of renter households in the City were severely rent-burdened, paying 50 percent or more of their income for rent. The shareof Los Angeles residents who are severely rent-burdened has increasedby 23 percent in the last decadeand a half.

10

City of Los AngelesRSOStudy In2006, nearly a quarterof all renterswere living below the federalpoverfy threshold(as defined by federal guidelines) and40 percentwere living at or below 150 percentof the poverty threshold. The median rent for RSO tenants is less than the median rent for non-RSO tenants,and the gap in averagerents is even greater. In 2006, the median and averagedifferentials were $ 113 and $ 142,respectively. The rent differential for RSO units appearsto have resulted from two factors: 1) the inherent difference between rents for older RSO units and newer non-RSO rental units that exists in the market place, and2) RSO policies that limit annual rent increases.

Conditions in Rental Housing .

o o

r

¡

From April 2005 through June 2008, the SCEP inspection program identified an average of 1.5 violations in eachof the 757,677rental units that were inspectedthroughoutthe City of Los Angeles. The most common SCEP violations are: deterioratedinterior walls, inoperableor missing smoke detectors,windows or doors requiring maintenance,and unsafe floor coverings. The most frequent code violation, found in 18 percent of Building and Safety notices to comply issued, is for construction work that was done without a permit, often to increase the size and occupant capacity of housing units. The second most frequent type of violation, found in 9 percent of cases,is for garage conversions that were done without a building permit, typically to createrental housing that in some caseswas substandard. There have been 441 casesfrom2002 through early 2008, in which RSO property owners were issued notices by the LA Depafment of Building and Safety for corrverting an apartrnentbuilding or properly to another use. The number of apartment buildings converted to condominiums has increasedannually since 2003, with more than 100 former apartment buildings converted each year since

2005. . ¡

Citywide in Los Angeles, the CensusBureau reported that 3 percent of units lacked complete kitchen facilities and2percent lacked complete plumbing facilities. There is a direct connection between the income level in a community and the number of substandarddwelling units reported - individuals in substandardunits are likely to be extremely poor, disabled and/or linguistically isolated.

SunvBy oF RENTERS LrvrNGrN THEClry op Los ANcprps CarryingOut the Telephone Survey . .

A random-sample telephone survey of 4,859 renters was completed, providing up-to date information about the attitudes, finances, and experiencesof renters. The survey achieved a 44.4 percent overall responserate and was conducted in three languages- Spanish, English and Korean.

Executive Summary .

11

Thirty percentof respondentschoseto donatethe value of their gift card to LA's Affordable Housins Trust Fund.

Benchmarking the Renter Survey against Census Data . .

The renter suruey obtained responsesfrom two-thirds as many renter households in LA as the U.S. CensusBureau's 2006 American Community Survey (ACS). The types of householdsthat the CensusBureau has the greatestdiffrculty reaching low-income renters - are the households from which the renter survev obtained hisher representation.

Length of Stay/Tenure .

Citywide, 70 percent of the renter survey respondentshave lived in their current units less than ten years.

Overcrowding o

. ¡

There is evidence showing that the overcrowding problem in the City has improved since 2000. Survey dataindicates that28 percent fewer renter households live in severely overcrowded condition than reported by the 2000 Census. The survey, however, found more overcrowding than2006 Censusfigures. Overcrowding and severeovercrowding are most prevalent in the South LA, East LA and North Valley regions. A majority of renter households with 5 or more people live in units with inadequate space. Seventy percent of 5-person householdslive in overcrowded or severely overcrowded units with 4 rooms or less, and almost 90 percent of householdswith 6 or more people live in inadequatedensities.

Renters' Awareness of Their Unit's RSO Status and RSO functions ¡ . .

Thirry-four percent of renters are incorrect about, or unaware of, the RSO status of their unit. Only 41 percent of renter survey respondentswho say that they speak English "Not well" or "Not at all" are av/are that the RSO lìmits rent increaseseach year. Only 48 percentof renterswith householdincomesless than $25,000per year know that the RSO limits the lesal reasonsfor eviction.

Landlords' Declarations of Intent to Evict Tenants; Tenant Relocation Program .

o

There was a surge in Landlord Declarations of Intent to Evict frled with the Housing Department from 2000 onwards, peaking in 2005, counter to the downward trend in overall unlawful detainer cases. Evictions related to condominium conversion account for 54 percent of all evictions recorded by the Housing Department.

12

City of tos AngelesRSO Study o ¡

East LA and West LA standoutas having disproportionatelymore casesof evictions during the period from 1998 to 2008. The Housing Departmenthad referred 187 no-fault eviction casesto its housing relocation assistanceservicesprovider as of mid-May 2008, representing274 tenant householdsand at least 532 tenants.

Leases and Rental Agreements . ¡

Seventy-onepercent of renters have a written lease or ïent agreementwith their landlord. Among survey respondentswhose lease is written in English, 77 percentwere renters who completed their telephone interview in English, 27 percent in Spanish, and two percent in Korean.

Rent . . . o e o .

The rent differential between RSO and non-RSO units ranged from a high of $500 to virtually no difference A little over 60 percentof Los Angeles' householdshave less'thantwo people contributing to rent payments Citywide survey results show 18 percent more severely rent burdened householdsand I 1 percent more rent burdened householdsthan the 2006 Census. A majority of renters in Los Angeles say that it is somewhat or very diffrcult to pay rent. Overall, 1I percent of respondentsin the City receive some form of rent subsidy Sixty{hree percent of tenants in RSO units report that their rent increasesevery yeaÍ. Only 54 percent of their counterpartsin non-RSO units report yearly rent increases. The share (56 percent) of market-rate units with rent increasesbelow the rate of rent inflation) is 27 percent larger than the share(44 percent) of RSO units with rent increases that are less than thoseallowed by the RSO.

Excessive or Potentially Unauthorized Rent Increases in RSO Units; Tenant Complaints o o .

o

Twenty-seven percent of tenants in RSO units reported current rents that were above the projected allowable increase permitted by the RSO. Tenants who appear to have received rent increasesabove the projected allowable increase were those with the lowest starting rents. A portion of RSO tenants may well be receiving unauthorized rent increases. Lowincome renters are more likely to have rent increasesthat are above the allowable increase. The City of Los Angeles Housing Deparfment (LAHD) receives over 7,000 tenant complaintsper year concerningpossibleviolations of the RSO - complaintsabout illegal rent increasesaccount for a third ofthese.

ExecutiveSummary 13 Trajectory of Rent fncreases o

o ¡ .

o o

Renterswho moved into RSO units between 1997 and 2006 receivedrent increasesfrom their landlordsthat were on average15 percentless than the RSO's maximum allowable rent increases. Tenants of market-rate units who started renting their units between 2001 and 2005 received rent increasesat rates similar to the RSO allowable increase. Median RSO rent increaseshave generally increasedat a steady rate slightly below the RSO allowable increase. Typical non-RSO tenantshave consistently received larger rent increasesin comparison to RSO tenants. Additionally, rent increaseshave generally not kept pace with increases in the CPI and have varied with fluctuations in the economy and rental market. Between 1997 and2006,typical RSO tenantsreceivedrent discountsranging from2 percent to over 40 percent. The size of the RSO rent discount is contingent upon fluctuations in the market that impact the degree to which non-RSO rents increase.

Tenants' Perception of Rental Conditions o

o

o

¡ ¡

A plurality of renters in the City of Los Angeles (46 percent) reports their housing units being in "excellent" or "good" condition. Another 43 percent charactenzetheir rental units as being in "fairly good" or "fair" condition. The Housing Department's Code Enforcement Unit found a higher rate of violations in the units of renters who describedtheir unit as being in "Fairly Poor" or "Very Poor" condition. A majority of renters in the City of Los Angeles say that they are treated either "very well" (courteousand polite - 50 percent)or "somewhatwell" (33 percent)by their landlord. Th¡ee quarters of renters living in the City of Los Angeles are "very likely" or "somewhat likely" to recommend their building to a friend or relative as a good place to live. Tenants' most common complaint to LAHD is about illegal rent increases,with complaintsabout false or deceptiveeviction noticesbeing almost as common.

Renter Perceptions of Affordable Housing o o

o . .

Over 90 percent of renters in the City believe that is very or somewhat important that l-os Angeles create affordable housing. Renters ranked 11 potential policy initiatives to provide affordable housing in the City the only option that did not garner overwhelming support was "let private markets solve housing problems." Renters' highest stated priority is to provide affordable rental housing for seniors. The secondhighest priority is informing tenants of their rights and helping them access services. Discrimination and unfairness are paramount concerns among renters.

14

Citv of Los AnselesRSO Studv

PRoppRrv OwNpn Sunvsy Ownership Structure o

Most owners in all size classeshave many yearsof experiencein owning and managing residentialrental property. Two-thirds have at leastten yearsof experience. Only 7 percenthave two or less yearsofexperience. o Th¡ee-quartersof RSO owners have small holdings, 4 or less units, usually on a single properry, with long-term experience (10 or more years) with this scale of ownership they own one-quarterof RSO units. o One-quarter of RSO ov/ners have medium or large holdings (5 or more units), long-term ownership experience,and often own multiple properties, some of which are in other cities - they own three-quartersof RSO units. Vacancy Rates and Turnover o

o

¡

The survey interval of November 2007 through April 2008 covered a period of high demand for rental housing. Ninety-six percent of RSO units were occupied, 3 percent were vacant for rent, and 1 percent were vacant for other reasons. The point-in+ime vacancy rate is low despite the fact that roughly a fifth of units turn over in the course of a year, indicating that owners have not had to wait long to find new renters for vacant RSO units. There are fewer turnovers in RSO units than in non-RSO units.

Long-term Tenants . o

o

Eight percentof RSO units have been occupiedby the sametenant for 15 or more years. If owners increaserent every year by the amount allowed by the Rent Stabilizafion Ordinance, rents are unlikely to be more than 35 percent less than market rates. It is probable that any gaps greater than this are the result of other factors, including years in the 1990s when the housing market was depressedand owners did not increaserents, and neighborhoods in which rents have increasedmore rapidly than the overall LA average. A small share of long-term RSO tenants with very low rents appearsto have a disproportionate and adversefinancial impact on a subpopulation of small properfy owners. To fairly balance the interests of tenants and owners, as called for by the Rent StabilizationOrdinance,it is reasonableto considerproviding somerelief for thesesmall owners.

Finding Tenants and Leasing Units . .

Overall, 47 percenf of owners use word of mouth to find tenants. Next most frequently, 41 percent of owners use signs on their property. Eighty-eight percent of RSO tenants rent their rurit with a written lease or rent agreement.

Executive Summary

15

Financing Capital Improvements ¡ . ¡

.

From January2003 to April2008, only 1.3 percentof RSO owners applied to pass through capital improvement costs to their tenants. Fifty-six percentof thosewho had not applied said it was becausethey had not heard of the program. The most widely expressedconcem about the Capital ImprovementPassthroughProgram is that a larger share of the cost for maintaining the basic infrastructure of rent-stabilized housing needs to be sharedby tenants. Prior to 1989,when the passthroughamount was 100 percent,the amount of investment was 189 percent greater and the number of units upgraded was 218 percent greater than in the following l8 years when the passthroughamount was reduced to 50 percent.

SCEP Inspections r e . . o

o ¡ o

o

Sixty-seven percent of the City's RSO properties and 58 percent of market-rate properties were found to have code violations that required correction. An important factor affecting the likelihood of code violations is the age of a property. Nearly half of owners (48 percent) say that the SCEP program was either "very helpful for identifuing neededmaintenance,"or "a useful service." Owners of propertiesbuilt inl967 or later are2.5 times more likely than owners of properties built in 1966 or earlier to say that SCEP is an "unnecessaryexpense." Owners of properties built in 1960 or earlier are 3 .6 times more likely than owners of properties built in 1961 or later to say that SCEP is "very helpful for identi$ring needed maintenance." Owners of 10 or lessunits are 3.1 times more likely than owners of 11 or more units to say that SCEP is "very helpful for identif,iing neededmaintenance." Comments by ov/ners suggestthat the preferable approach to strengthening the program is by replicating the best practices of the most knowledgeable and judicious inspectors. Owners of older, smaller properties tend to experienceSCEP as a useful source of technical assistancefor maintaining their properties. Owners of newer, larger properties tend to experience SCEP as an unnecessaryintrusion into the managementof their properties. The two most frequently expressedconcerns about SCEP are the need for more consistency in how inspections are conducted and the need for greater tenant accountability for code violations they cause.

Tenaút Accountability and Reliability r

Responsesabout problems with holding tenants accountablefor things that should be their responsibility are almost evenly divided: 48 percent of owners say this is never or rarely a problem; 53 percent say it is sometimes or often a problem.

l6

City of Los AngelesRSO Study .

o

o

o

.

Owners of I to 4 units report fewer problems with tenant accountability - they were 3 times more likely than owners of 5 or more units to report that holding tenants accountablefor maintenancewas never an issue. Owners who say that tenant accountability is often a problem are nearly twice as likely to have had a complaint filed againstthem for failure to comply with Rent Stabilization Ordinance regulations as owners who say that this is never an issue. Negative attitudes are often reciprocal between owners and tenants. Owners who have more positive views about their tenants appear,in tum, to be viewed more positively by their tenants. Among owners of 1 to 4 units an astounding 44 percent of tenants fail to pay their rent on time in an averagemonth. The rate of delinquency goes down as ownership size increases,with owners of 40 or more units reporting an avetageof 6 percent late payments per month. There appearsto be no difference between RSO and non-RSO properties in the rate of rent payment delinquencies.

Evictions . o

o .

.

o

.

o o

Eighteen percent of owners report having evicted tenants for rent delinquency in the past two years. The high rent delinquency rates reported by owners of I to 4 units appearto be accompaniedby high eviction rates; over the course of two years, evictions are reported for 48 percent of their units. Eviction rates for delinquent rent drop dramatically as ownership size increases- down to 2 percent for owners of 40 or more units. Evictions for rent delinquency are highly correlated with evictions for disruptive behavior, that is, the owners that are frling for evictions for rent delinquency are the same as those that are filing evictions for disruptive behavior. Fifty percent of owners of 1 to 4 units report that over the course of two years, evictions for disruptive behavior are initiated for 50 percent of their units. This rate drops to 4 percentfor owners of 40 or more units. For all owners it is 13 percent. Ninety-three percent of owners have never filed a declaration of intent to evict with the Housing Department, and 3 percent of owners account for 60 percent of all declared evictions. Evictions for which a declaration of intent to evict is filed are over-concentratedin West Los Angeles (eviction rate223 percentof the City average),SouthValley (eviction rate 175 percentof the City average),and Central Los Angeles (eviction rage 139 percentof the City average). Evictions appear to be concentratedin the areasof the City where rents are highest. Seventy-sevenpercent of owners reported that evicting disruptive tenantsis difficult or very difficult.

ExecutiveSummary 17 Tenant Costs o o o

o

o

Cifywide, four-fifths of owners do not passeither the registrationor the SCEPprogram fee to tenants. Tenantsin 63 percentof RSO units pay additional costsfor specific utilities or services. Electric and gasutilities are the most frequentadditional fees,paid by roughly half of tenants. Fifteen percent pay for use of laundry facilities, 7 percent each pay for trash and water utilities, 4 percent pay for parking, and 3 percent for storage. Small owners are much less likely to increasetheir rents than large property owners rents are increased annually for tenants at 3l percent of properties with 1 to 4 units, compared to 77 percent who can expect annual increasesat properties with 40 or more units. The likelihood of annualrent increasesalso varies by region of the City. Rentsare raised annually at 52 percent of RSO properties in the Central region of the City compared to only 31 percent of properties in South Los Angeles, and 29 percent of properties in the North San Femando Vallev.

Property Maintenance o ¡

Fifty-seven percent of owners say that all maintenanceis handled immediately and preventive maintenance is practiced. Two-thirds of RSO units are reported by owners to be maintained at a level that is as good as, or better than, units that arenot under rent control, and one-third are reported to have a lower level of maintenance.

Reasonsfor Acquiring RSO Property o o

The most frequently statedreasonsfor acquiring RSO properties are: income from residential rents, retirement security, and as a residencefor self or family members. Nineteen percent of owners "fell into" the RSO rental housing market by inheriting the property, acquiring their property prior to the enactmentof the RSO, or simply because they did not know about their properly was under rent control when they purchasedit.

Debt on RSO Properties . o

.

o

Sixty-hve percent of the rent-stabilized housing inventory is encumberedby debt. The rate ofdebt-burdened property increasesas properly size increases- from a low of 60 percent for properties with 1 to 4 units, to 80 percent for properties with 40 or more units. Eighty-five percent of the units with a debt burden were financed between 2000 and early 2008. This is the interval when financing has often createddebt burdens that exceed rental income by substantial margins. Forfy-threeperòentof units in the RSO inventory have been purchasedsince2000, suggesting that 12 percent of the RSO inventory is burdened by debt that is the result of refinancing rather than purchase.

l8

Citv of Los AnselesRSOStudv

Profit and a ReasonableReturn on Investment o . . r o o

o

Almost two-thirds of RSO units produced a profit or broke even last year, and slightly over a third had a loss. The likelihood of reporting a profit increasesalong with ownershipsize. Owners of 1 to 4 units are more likely to report a loss than owners of 5 or more units. Less than a third of owners answeredthat their properties that are not under rent control are more profrtable than their properties that arerent stabilized. Owners representing over 70 percent of the RSO inventory report that they do not get a reasonableretum on their investment from RSO properties. Owners representing over three quarters of the RSO inventory say that rent increasesdo not keep up with operating costs. The owner at highest risk of having a loss will have 1 to 4 units, will have purchasedthe property in 2000 or later, will have acquired the property for a personal residence or to supply affordable housing, will posþone maintenance,and will have more than minimal numbers of tenants delinquent in their rent every month. Among all owners citywide, a third (32 percent) say they would still acquire their rentstabilized property, a plurality (41 percent) say they would not acquire the properly, and a quarter (27 percent) areunsure.

Providing Affordable Housing ¡

. ¡

Sixty-one percent of owners say that affordable rental housing is somewhat important or very important, demonstrating strong support among these equity holders for meeting housing needs. Only I7 percent of owners state that it is somewhat unimportant or not important at all to meet this need. Owners expresssupportfor a broad range of public sectoractionsto meet LA's affordable housing needs. The reason for this activist posture heard in a number of focus groups is that many owners believe that a disproportionate share of the citywide responsibility for providing affordable housing is falling on the shoulders of RSO owners.

Ivpecrs oF THERgNr SrReruzanroNORDTNANCE oN THEOurcouns or ApeRrvrpNTINVESTMENTS Rental Units Under the RSO and the Operation of the Rental Housing Market o

.

The RSO inventory of units can be divided into thirds: a third are on properties with 4 or less units, a third are in properties with 5 to 19 units, and a third are in propeties with 20 or more units. Building size is largely a function of the period in which a building was constructed - in

ExecutiveSummary 19

. o . o . o

earlier eras, small buildings were the mainstay of rental housing. Fifty-one percentof RSO tenantsmoved into their current unit within the past 5 years,2l percent5 to 9 years ago, and 23 percent 10 or more years ago. Turnoverrates have declined since 2000. The rate of turnover in buildings withZ to 9 dwelling units was a little lower than the rate for buildings with 10 or more units. Rates of tumover are a little higher in the newer portions of the Los Angeles stock that are not coveredby the RSO than in RSO units. From 2000 to 2006, rents increasedmost in the areasthat had the lowest rents in 2000. Increasesin rents since 2000 are mainly attributable to the increasesobtained upon vacancies.

Impacts of the Annual Rent Increase Ceilings .

. ¡

In the 1980'sand since 1999 (but not from 1990 through 1998),the RSO ceilings on annual rent increaseshave limited rent increasesfor sitting tenants to levels below market-rate increasesin the LA region. The annual percentagerent increaseallowed under the RSO exceededor roughly equaled the percentageincrease in national rents during 23 of the past29 years. Over the past eight year period, annual rent increasesunder the RSO exceededmarket rent increasesin 15 of 23 metropolitanareasin the U.S.

Performance of Investments in Multifamily Housing o

. . o

.

r

o

About a quarter of all units in buildings with five or more units have been purchasedìn 2005 or later. This is very significant becausethe recent purchasersoperateunder much larger debt service loads than longer-term owners. From 1999 through2006, apartmentthe salesprices tripled, from an averageof $40,701 to 8127,484. In 2007, apartmentvalues decreasedby 4 percent. The averageannual compounded rate of appreciation (compounded annual growth rate or CAGR) from 1999 to 2006 was 15.4percent. However, over the longer period from 1990to 2007,the CAGR was 4.7 percent. From 2000 to 2005, even an apartment with a fixed net operating income stream increased substantially in value becausethe market value of an income stream increased becauseof the decline tn capitalization rates for apartment purchases. There are signif,rcantdifferences in the price of apartmentsbased on location, size and age, but that the rate of appreciation from 1999 to 2006 has been similar for all apartmentsregardlessif thesedistinctions It does not appear that the RSO has had a significant impact on the averagerate of appreciation of apartment buildings. The rates of appreciation and increasesin values are similar among buildings that are covered by the RSO and buildings not covered by the RSO, and higher in the City than in other comparison communities.

20

Citv of Los AnselesRSO Studv Basedon Assessor'sdata,RSO propertiesin the City of Los Angeles had the second highest rate of appreciationout of 40 metropolitanregions. Basedon CoStar data,the greaterLos Angeles areahad a rate of appreciationthat was exceededby only 8 of the 40 metropolitanregions in the U.S. Apartment values are highly dependenton capitalization rates. If capitalization rates increaseby a few percent, a substantial pofion of apartment owners could be left with sharply reduced or even negative equities in their buildings that could not be solved by City policies or the market. The rate of retum on apartment investments is linked to when the investment was made. Owners who purchasedprior to about 2003, paid prices for their apartmentsthat are low relative to the current market value of their units and are likely to be low relative to current net operating income levels. These owners have substantial cash flows, unless they have obtained larger mortgages and, thereby, reduced their cash investment. On the other hand, recent purchasersare in a radically different position. A substantialportion of these owners have incurred mortgage obligations that leave little spacefor cash flow or increasesin investments in maintaining and renewing their properties, making them wlnerability to minor fluctuations in expensesor rental income.

CoupnrusoN oF Los ANcpLESRENTSresnlzerroN ORDTNANCE wrrH OnomeNcESrN OrHERCALTFoRNTA CrrrES Brief Perspective on RentRegulations in California ¡

o

Currently, 10 jurisdictions in California have apartment rent stabilization ordinances Berkeley, Beverly Hills, East Palo Alto, Hayward, Los Angeles,Oakland, San Francisco, San Jose, SantaMonica, and West Hollywood. The California Legislature passedthe Costa-Hawkins Rental Housing Act in July 1995, which provides for vacancy decontrols on rents subject to local rent control ordinances.

Comparison of Annual Rent Increase Standards ¡ o

o

Currently, most of the municipal rent control ordinances in Califomia tie allowable annual rent increasesto the percentageincreasein the Consumer Price Index (CPf . Questions have been raised about whether the CPI should be used to determìne allowable annual rent increaseson the basis that it is based on the market basket of goods purchased by an averagehousehold, which differs substantially from the basket of expenses associatedwith operating aþartment buildings Under some rent control ordinances,annual apartment operating cost studies have been used to determine allowable annual rent increases,instead of the CPI. However, the outcome of these studies are largely determined by the CPI, becauseestimatesof increasesin a substantial portion of apartment operating expensesare based on the CPI, becauseactual data is unavailable.

ExecutiveSummary 2l .

Annual rent increasesin cities that authorize afixed percentageannual increase (San Jose, Hayr,vard,and Beverly Hills) have exceededallowable annual increasesunder the RSO.

Allowable Rent Increases For Apartment Owners Who Pay For Master Metered Gas And/Or Electricity .

o

o

Under the Los Angeles ordinances, apartment owners who provide master-meteredgas and/or electricity are permitted additional arurualrent increasesof one percent for each of these services that are master-metered. In fact, there is no connection between the annual master-meteredincreaseauthorized by the Los Angeles RSO and the actual cost increasesassociatedwith the provision of master-meteredgas and electricity. Some of the other jurisdictions with rent control provide apartment owners with additional allowances for master-meteredgas and electricity, but link theseadditional rent increasesto an estimate of the averageincreasein the cost of those utilities or provide for passthroughsof cost increasesbased on individual building applications.

Comment on Proposals for Lowering the Annual Allowable Increase for Seniors and/or Disabled Persons on Fixed Income ¡ ¡

.

There are no provisions in any California rent control law that provide for lower annual rent increasesfor low-income households, senior or disabled renters. Judicial precedent in regard to the constitutionality ofrent control provisions that place greater limits on the allowable rent increasesof protected classesof tenants has been mixed. Rent control provisions that provide for low rent increasesfor protected classesof tenants (low income, seniors and the disabled) may result in discrimination against these classes in the selection of tenantsby apartment owners.

ttBanking" Rent Increases o

¡

Under most rent stabilization ordinances,but not the Los Angeles RSO, apartment owners may "bank" allowable annual rent increasesif they are not implemented in the year in which they are permitted. Somejurisdictions limit the amount of banked rent increasesthat can be implemented in a single year and/or place a ceiling on the total amount of increasesthat can be banked so that tenants who have benefitted from banked increasesare not suddenly faced with steep rent increases.

Rent Stabilization Programs - Administration Fees o

Registration fees vary greatly among the different California cities with rent control laws. Higher fees are in effect in cities that once had vacancy controls (pre-Costa-Hawkins) and still require annual registration of rents and reporting of rents for new tenants.

22

Citv of Los AnselesRSO Studv

HousINc Menrpr

DyNaTr,TIcS.DEVELOPMENT FINaNcINc. AND GRowrH TRENDS

Production Trends for Mariret-Rate and Affordable Housing Projects .

o o

. ¡

In the past 5 years,about 23,000 new apartmentunits have been completedin Los Angeles County, an averageof 4,500 apartmentunits completedper year. The bulk of theseunits have been producedin Downtown, West Los Angeles, and the SanFernando Valley. Housing production in Los Angeles through 2006 was strong; permits were issued for over 4,300 large structurestotaling over 100,000units. Due in part to slow production in the 1990s,production of both market rate and affordable housing in the city has not kept pace with the needs associatedwith the City and region's growing population. While the housing market has cooled considerably and now standsfar below its historic highs, ownership housing is still far from affordable. This lack of affordable ownership product has placed additional upward pressureon rental properties by keeping demand for rental properties strong.

The Dynamics of Production of Market Rate and Affordable Housing o The high cost of land in Los Angeles, coupled with basic costsof constructionlabor and materials, add up to a cost structure such that market-rate rents will greatly exceed a rent level that would be affordable for many families. For apartments,capitalizationrates have fallen from more than 8.5 percent in 2001 to close to 6 percent in2006, and have remained near this level until relatively recently. Many owners who have assumedmortgages for rental properties duriúg this decadehave found that the debt service associatedwith their property has consumeda larger share of their cash flows than was the casefor properties purchasedin the preceding decade. Los Angeles' housing market surge has altered landowner expectations,resulting in an escalation of prices for land and parcels in previously lower-cost areasthat would ordinarily be most conducive for the production of affordable housing on a cost basis. Since 2002, new housingbuilding and constructioncostshave risen by about 23 and27 percent, respectively, far ouþacing the 16 percent rate of inflation in the economy during this time. Development Financing . o

The market for construction finance is an important determinant of the ultimate costs that a housing developerfaces. Financing terms that result in lower financing costs might make it possible to achieve affordable minimum rents even in the face of rising construction costs. LA City policy makers can help create more attractive financing options that would reduce the costs of construction.

ExecutiveSummary 23 o

o

o

o

o

.

o

During Los Angeles' last housingboom, institutional investors(hedgefunds, opportunity funds, and private equity funds) became important players in construction finance, serving as equity partners on some deals and offering favorable interest rates compared to those offered by commercialbanks. Institutional investors have largely exited the market for construction finance during the current credit crunch, causing underwriting standardsto tighten as commercial banks are left as the primary and dominant construction lender for multifamily projects. Tighter underwriting has reduced the pool of creditworthy borrowers, meaning there are fewer developers that will be deemed sufficiently creditworthy to warrant the extension of a construction loan. (The higher standardsfor creditwofhiness are also affecting rental property owners seeking to carry out major renovations or expansionsthat lead to greaterdensity.) Consistent with market rate projects, affordable housing projects faced more expensive construction and permanent debt, with prices rising about one-half of a percentagepoint in the secondhalf of 2008. Financing for affordable housing typically involves the public sector, where subsidies are used to fill the gap between rents set at levels that are affordable for lower-income households and the projects' debt service payment obligations for land purchaseand construction property management. The recent economic slowdown and credit crunch have had major adverseeffects on the public subsidies for development financing, such as the Federal Low-Income Housing Tax Credit (LIHTC) program. In California, the adversetrends in finance have outweighed the decline in construction and building costs associatedwith the weakening housing market. Given that most affordable housing projects are difficult to pencil in the most bullish of market conditions,the rising interestratescoupledwith the loss of significant low-cost equity capital is likely to seriously hinder the pace at which these projects are built.

Policy Options for Producing Market-Rate and Affordable Housing o

. c o

c

Inclusionary Zoning - Include housing that residents can afford as part of market rate development. Couple inclusionary zoning with cost offsets such as permit streamlining, density bonuses,parking requirement relief and others to achieve revenue neutral, or near-revenue-neutral,outcomes for developers while adding affordable units. Housinig Choice Vouchers - Use housing choice vouchers (commonly referred to as Section 8 vouchers) to ìncreasethe revenuesgeneratedby affordable rental projects. Regulatory Relìef - Streamline entitlement or approval processesto reduce the burden of carrying costs for affordable housing projects that are on the margin of profitability. Creative use of "Non-traditional" Land - Identifl"'non-traditional" land that has the capacity to be developed into housing. Areas to consider include: a) parking lots, b) blighted properties and c) obsolete industrial land that will not result in the loss of sustainablejobs. Inventory of Developable Parcels - Create a databaseof and provide information about parcels that the City is most interestedin seeing developed. Use this inventory to focus

24

Citv of Los AnselesRSO Studv developmentinterestand identiÍ! thosecommunitiesin which the City will actively support development. Expedite Recycling of Blighted ProperQ - Streamline the condemnation and eminent domain processesfor blighted properties to provide incentives for current landowners to either sell their property or clean and redevelopthe property in a timely fashion.In some instances,this can produce new multifamily units (either market rate or afforclable); in others, it will enhancethe community's characterand make it more conducive to housing and other investment. Protect Affordable Units - Direct public funds to either purchaseaffordable units with covenantson the brink of expiration or incentivize the owners of theseunits to continue to provide their units at affordable rent levels. Affordable Housing Land Bank - Develop an affordable housing land bank that is controlled by either the City or a non-profit whose mission is to provide and preserve affordable housing. Internal Cross-Subsidy -Promote the development of projects where the subsidy originates from intemal cash flows, namely mixed-income and mixed-use projects. Development Fees - Establish development fees for residential, commercial and industrial construction projects that increasethe demand for affordable housing. New development should be partially accountable for the affordable housing needs that are created. Link Property Owners with Affordable Housing Developers - I,363 RSO owners reported in the survey that they are definitely interestedor might be interested in redeveloping their properties at higher densities with affordable or rent-controlled housing included in the new development. Contact these owners to securetheir permission to releasetheir names to affordable housing developers so as to identiff a large inventory of sites for potential use by the affordable development community.