SANTA MONICA RENT CONTROL BOARD
REINSTATES REGULATION 3304 HEARINGS

After a somewhat stormy session in court, the Rent Control Board has won it right to restart hearings under Regulation 3304. Petitions will once again be accepted by the Board, from Housing Providers who believe that their tenants are not in primary residence of their units. If the reader remembers, when such a condition exists, the Housing Provider was able to raise the tenant’s rent to market rate. Under the new regulations, the market rate rent will have to be set by the Board, and not the Housing Provider. The Board was enjoined by the Court from hearing Regulation 3304 petitions, due to a lawsuit brought by a millionaire tenant who was upset that his pied-e-terre rent went to market.

TIME FOR YOUR YEARLY
RESIDENTIAL RENTAL TUNE UP

Each year, and at the begining of each year, you should take your building in to the think factory for an inspection and tune up. You do it with your automobile, so there is no reason not to do so with a building. What does the year beginning tune up and inspection look like? Well, obviously you don’t bring your building anywhere, but you do re-think how you are managing it, and how you should manage it in the coming year. What can you do to improve your operation, and what should you do to protect your investment. Here are the big 10 issues to think about and take action on:

One: Inspection and Detection
Do a walk-through at least one time each 3 months. What is the condition of your building? Do you know? When was the last time you looked inside each unit? Are there leaks? Mold growing? Paint peeling? Fire detectors plugged in? Heater and stove working correctly? Your tenants may not tell you. However, you will be liable for these defects if they are not immediately corrected.

Two: Asset Protection
Should you change the ownership of your building to an LLC or Limited Liablility Partnership? What would happen if you were sued for $5 million dollars? Could someone collect that much money from you? Would you have anything left? What about your family and your estate? What happens to your children and spouse if you were to die? Does Uncle Sam get too much of your wealth? How much do you want him to have? We here in Santa Monica have wonderful asset protection and estate planning attorneys who can discuss with you the ins and outs of ownership. The old family trust instrument is old news, and outdated technology. It is not enough to protect you from the avarice of modern day litigants and their attorneys.

Three: Repair and Regeneration
If you see something in need of repair, fix it and fix it quick. If a tenant breaks something within his apartment, fix it, don’t fight with the tenant as to whom is responsible. Once it is fixed, you can sue the tenant in small claims court for the cost of repair. The County Health Department, in its quest to terrorize Housing Providers, will require remediation of lead base paint, if and only if, the paint is peeling from the walls, doors, window seals, etc. If you want to avoid costly and unneeded lead base paint work, keep your building free of any peeling paint. Fix wobbly handrails and stairs. All doors and windows must have locks that work. Front doors need dead bolts and lock in door handles. Broken locks mean that the Housing Provider is responsible for break in by burglars (rape and theft). Don’t get caught having to pay thousands of dollars for a tenant’s semi precious stones because you didn’t want to spend $50 on to repair a broken lock.

Four: Fair Market Rents
When you have a vacancy ask for and get fair market rents. Do not under-rent your aparatment units. The biggest problem with many owners is that they wish to quickly rent their vacancies and are afraid to ask top dollar for their units. The Santa Monica Rent Control Board has recently put out a 3-year study of the rental rates collected by Housing Providers throughout our City. The study divides the City into zones (A through G), and calculates the lowest, middle and highest rents collected. Each and every unit rented is listed in the study, along with the number of bedrooms. The study is invaluable for brokers and owners alike. Don’t rent your next vacancy without consulting this study. Your unit is worth more than you think it is. Click here to see the study at the Rent Control Board site (See January 8, 2004).

Five: Written Rental Agreement
Each and every tenant in your building should have a written rental agreement. Never allow any tenant to gain occupancy without first signing the rental agreement. Be sure to give the tenant the lead base disclosure sheet and the Lead Base Paint Pamphlet. It is a federal crime to rent a unit and not give the lead paint disclosure. The disclosure is a separate sheet of paper, however ACTION incorporates it into its form lease. Do not use a Los Angeles rental form for Santa Monica units. Use the ACTION form. If you have existing tenants how do not have a written rental agreement, then be sure to send them an ACTION rental agreement, whether they sign it or not. Tenants cannot be required to sign a rental agreement if they do not have one, but a Housing Provider can establish the written rental agreement as controlling for some purposes by sending it to the tenant. The Rent Control Board regulations state that you may not evict a tenant for a violation contained within a rental agreement that the tenant has not voluntarily signed; but there still are many economic protections that a Housing Provider acquires by sending the tenant an ACTION rental agreement.

Six: No Subletting and No Absentee Tenants
Do not allow your tenants to sublet if you have a written rental agreement against subletting. No exceptions. Do not allow the existence of an absentee tenant whether or not you have a written rental agreement. If you do have an absentee tenant, file for rent increases under Regulation 3304. The Rent Control Board is back in business with the hearings under these regulations. If a tenant imposes a subtenant upon you by filing a Domestic Partnership Agreement with the City, there is nothing you can do. However, you do not have to accept money from the domestic partner subtenant, and by refusing to accept the subtenant as a tenant, you protect yourself against that subtenant trying to remain in possession after the tenant vacates.

Seven: Vacancy Increases Under Costa-Hawkins
Remember when a tenant no longer lives in a unit as his primary residence, and there is a subtenant in possesion, you may increase the rent to market rate, as long as the subtenant moved in on or after Jan 1, 1996. This is true, even if you allowed the subtenant to live at the unit. Don’t ever allow a turnover of the unit without raising the rent to market.

Eight: Tighten Up Your Paper Work
Remember before you enter a tenant’s apartment for inspection or repair you must serve on that tenant a written 24-Hour Notice Of Entry. If you can, give the tenant more than 24 hours. The notice should be personally served, or if the tenant is not at home, then posted on his door. Mailing a copy to the tenant is a good idea as well. Keep a copy of the 24-Hour Notice in your file. If the police are called by the tenant because you are in their apartment, the first thing the police ask for is a copy of the 24-Hour Notice. On the back of your copy, write the time and day you posted and mailed the notice. All requests for repairs from the tenant should be requested in writing and kept. If the tenant orally requests a repair, send a confirming letter to the tenant that he has orally requested the repair. Keep a copy of the tenant’s rent checks, and all letters and other documents that he sends you, good or bad. Especially keep the initial rent check from the tenant showing the amount of security and rent that tenant paid. Keep it all in the tenant’s file. Remember, the Lead Base Paint Disclosure form which you must give your tenant, must be signed by the tenant and kept by you (under Federal Law) for 3 years after the tenant vacates. The Federal Government has fined Housing Providers as much as $10,000 for violations. If you have a tenant who has not signed a Lead Base Paint Disclosure, give them one and the book now, and get the signed copy back for your records. If a tenant refuses to sign the disclosure, it is grounds for eviction.

Nine: Excess Rent
Be sure that you calculate the correct rent for all your tenants each year. Double check your rents against the Board’s published MAR’s for your property. In addition, remember that if you are going to collect the tax pass throughs, you must give your tenant a copy of your tax bill showing the various school taxes that were shown. You should keep a copy of the rent increases and tax bills with your handwritten notation on when and how you served it on the tenant. In later years, when the tenant alleges that he never got the tax bill with the rent increase notices, you can bring out your file which shows proper service. Also remember if you are going to serve your own 3-Day notices to cure or quit, all such notices must be served on the Rent Control Board within 3-Days of service on the tenant (all notices except 3-Day notices to pay rent or quit). If you do discover an excess rent calculation, immediately consult your attorney and make arragments for reimbursement to the tenant.

Ten: Tenant Harassment Ordinance— Watch Out….
The City Attorney is still keen on enforcement of the Tenant Harassment Ordinance. Most complaints arise out of service of 3-Day Notices which are not properly supported by the law. Due to the unfairness of the Rent Control law, not every evil has a remedy. Your tenant may be doing something which you disagree with, but that is not justification for service of a 3-Day Notice. Also, be very careful how you address your tenants. An angry word here or there, may bring a hot letter from the City Attorney’s Office. While ACTION is currently in litigation over the Tenant Harassment Ordinace, we have not yet won. Thus we must live under the burden of this terrible City law. Entry into your tenant’s apartment against his will can be disasterous. Better to serve the tenant with a 3-Day Notice To Cure or Quit for prohibiting entry and evict him, than to force your way into his apartment.

OUR ECONOMY AND SANTA MONICA VALUES:
SHOULD YOU BE A BUYER OR SELLER?

The furor these days is all over a few words used by Chairman Greenspan. In his monthly F.O.M.C. (Federal Open Market Council) statement, he allegedly reneged on his promise to hold interest rates low “for a considerable period” and stated now that he would only be “patient” about raising rates.” The statement (contained in a much longer and more ambiguous statement) was : “With inflation quite low and resource use slack, the committee believes that it can be patient in removing its policy accommodation.” (i.e, low interest rates). So everyone now believes that these few words were the opening shot to begin raising interest rates to new highs. However, the Feds kept the Fund Rate at a 45-year low of 1%. But what a furor it has been. This has led to a string of re-evaluations as to the late December year end proficiencies in the economic outlook for the coming year. As always, there are two very divergent groups, who have two very divergent opinions.

The good outlook opinion is characterized by Ed Yardeni of the Prudential Equity Group. Click here for his web page. Yardeni predicts prosperity for our country for the next 10 years. While he believes interest rates can go up a per cent or two in the next few years, he belives that the economy will be bolstered by increased consumer spending (fueled by last year’s tax cut some $58 Billion worth, and saved refinance money from home loans). The figures he uses are impressive. He predicts that the S&P 500 will rise to 1300 and the Dow Jones Industrials will reach 11,700 by the end of the year 2004. He believes also that the Fed budget deficit will peak at $500 billion in 2004 but will then start to be reduced each succeeding year. This might happen with the introduction of a Federal “consumption tax” in the near future.

Yardeni believes that 2004 onwards can be predicted by looking at the past, i.e., what happened to our economy from 1994 to 2003. Some similarities to mention: The dollar was quite weak during the first half of 1990’s and fell to the decade’s low during April, 1995. It has been weak again since early 2002 and could hit the current decade’s low sometime during 2005. (Thus those that worry about the dollar’s devaluation are forgettting that it happened before without economic distress, and it can happen again). Both 1990 and 2000 began with short recessions and were followed by lackluster recoveries. The Fed has lowered interest rates dramatically in both decades. Down to 3% in 1992 and 1% in 2003. Of course, both decades had an Iraq invation (Father Bush in January 1991 and Son Bush in March 2003).

So what’s the difference in the two decades? Yardeni states that it is the cost of commodities. In this decade these commodities are raising dramatically. Gold is at 410 an ounce and rising and oil is at $32.00 a barrel. And it is here that the opposition raises its voice to push for disaster. For even Yardeni states that the Asia is growing and needs fuel. China wants to create 8 million jobs a year, or as Yardeni states, it must grow by 10% per year, literally building a city the size of Houston once per month. That is tremendous growth and will require trememdous amounts of oil and other resources. However, Yardeni does not see this as requiring an inflationary result. He thinks that our government will counter inflation by raising interest rates (the Fed Fund rate of 2% by the end of 2004 and 3% by end of 2005). This raise in the Fund rate is all that is required to off set the inflationary pressures of increases in oil demands.

And what is the potential oil demand of China and other Asian countries? Even Yardeni admits it will be considerable. There are currently 1.3 billion Chinese and they used crude oil at an average rate of 5.5 million barrels per day— a record for China. This is up from 4.6 million barrels per day in 2002 and 3.8 million barrels in 1998. Yet, it is only one-quarter of the oil consumed in the United States, which has one-quarter the population of China. (There are 288 million Americans , using crude oil at the rate of 19.8 million barrels per day). Thus if China were to consume as much oil per person as the United States, there would be a 16 fold increase in the demand for oil which the United States currently uses. Even a partial increase along these lines would cause a tremendous increase in the cost of oil. On top of this economic inflationary pressure comes the continued devaluation of the U.S. dollar by the Feds. The government continues to print more money, increasing the M2 (actual dollars in circulation) by 6.5% each year. Gold continues to increase (as do other metal commodities). As James Grant (another economist and editor of Grant’s Interest Rate Observer) predicts, “In 2004, gold and silver will appreciate against the so-called strong currencies as well as the weak” Grant predicts that Jean-Claude Trichet (the president of the European Central Bank— somewhat like our Alan Greenspan) will move to devalue the EURO to stay competitive with the Dollar. Investors will buy Gold, to reach a safe haven from what Grant terms “competitive devaluation” between the various governments.

The fear here is that the U.S. will have to raise interest rates to attract foreign investors into buying U.S. Bonds. The U.S. currently raises the money it needs (it borrows it) by issuing U.S. bonds. However, these bonds are purchased mostly by foreign investors and foreign central banks. At the current time it is at an all time high of $1.108 Trillion dollars. To keep the foreign investment money buying U.S. bonds, the U.S. may have to raise the interest rates it pays these foreign buyers, and this in turn would mean the rates we pay on our mortgages to our local banks. Some see no alternative with the falling U.S. dollar, and inflationary pressures. Yardeni states that our economy will be just fine based on the “Kindness Of Strangers”, i.e., he expects that foreign investors should continue to provide a significant portion of the funds collected by the U.S. Treasury through the sale of government securities. He states that over the past 12 months through November, foreigners purchased $257 billion in U.S. Treasuries. That financed more than half of the deficit over that period. Asians, led by the Japanese, purchased $162 billion over the past 12 months. Two-thirds of the foreign buying of U.S. Treasuries over the past year is attributable to foreign central banks. A worrisome point overlooked by Yardeni is that maybe these foreign investors will stop purchasing U.S. Govenment bonds altogether. If this happens, the government will definitely have to raise interest rates to entice foreign investors back into the fold.

However, contrary to the naysayers, there is our own local economic and ACTION Board Member, Carl Lambert. He suggests that even if interest rates do go up, it will not negatively effect the value of Santa Monica (and Los Angeles County) apartment buildings. He believes that studies have shown that there are more than 13 million people who will move to L.A. within the next 10 years. Where will these people live, he posits? Well, they will want to live first and foremost in Santa Monica apartments and then in ourlying areas as second and third choices. However, we all know that Santa Monica and the greater Los Angeles governments are not allowing the construction of any new buildings, so we have the traditional economic model of short supply and large demand. This raises the value of rents and properties. Lambert says “Don’t panic, residential rental income (and single family homes) are still excellent long term investments. Indeed, the figures support his optimism. C.A.R. (California Association of Realtors) states that the median home price in California (for November 2003) was $386,760; and the highest (it was in Santa Barbara) was $735,000). Mortgage rates for the week ending January 15, 2004 were still very low: 5.6% for 30 year fixed, and 3.6% for one year adjustable. For December, 2003 median price was over $400,000 and it was up 20% from the year before. C.A.R. President (echoing our very own Carl Lambert) stated: “Demand for homes coninued unabated, propelled by mortgage rates that remained below 6% and an extremely low inventory of homes for sale.”

All data for the month of January 2004 shows continued grown in refinancing, new mortgages, sales, and price increases. However, Dan Denning, writing for the Daily Reckoning, sees things much differently. “How long can something stay historically high or low before it goes back to historically average?” As he continues: “The housing market today reminds me of the tech market in 1999. If you raised even a hint of doubt, you were laughed out of the room, humored, or patted on the head.” He believes that the rise in housing is nothing more than “a hyperbolic phase of a credit-induced bubble in the American housing market, and that it is going to have disasterous consequences for nealy everyone involved.”

So there you have it. Ruin or Riches? You decide. However, there are certain rules you can follow in your pursuit of real estate. First, don’t over leverage your purchase. You should be able to invest enough cash into he purchase of the property so that the current rental income pays all expenses and mortgage payments. Second, see if you can obtain a fixed rate mortgage. If you must get a variable, be sure to get one that has stops (or limitations) on how far the interest rate can increase in any one year. A one percent per year increase cap would be advantageous, so that if rates do go up dramatically, you will not be faced with overwhelming increases all in the first year or two. Third, remember, that the U.S. dollar is decreasing in value, and it would be better to keep your money invested in real estate than the bank. While some cash in the bank as a reserve is good money management, large amounts will only depreciate in value.

CASE OF MERIT

Camacho v. Mellet
Jan 29, 2004 (unpublished). This case holds that Housing Providers are allowed to use the SLAPP defense in certain situations when sued by Tenants. This case cites Briggs v. Eden Council (1999) for the holding that a Housing Provider is protected from suit for serving 3-Day notices, since such activity is prepartory to litigation. Civil Code 425.16. ACTION is currently on appeal on this very issue in its lawsuit against City of Santa Monica over the Tenant Harassment Lawsuit.