Estate Plan for
John & Betty Casper
BAMBI VERSUS GODZILLA–
The animated film in question starts off with cute little Bambi grazing in a field. Peaceful music plays. Not a care in the world for this innocent little deer. The credits role for a minute as Bambi continues to nibble at some grass. All is well in the life of this adorable little creature. Suddenly, an enormous reptilian foot crashes down from above and stomps our little friend, flat as pancake. The end. Wait... what just happened? Sounds like a prank put together by some high school kids, right? Perhaps something created by the “You Tube generation”? Point in fact: Bambi Meets Godzilla was made in 1969 by Marv Newland. It has since become an animated classic. If you ask me, though, it sounds like ol’Marv had a little bit too much time on his hands. In thinking about this month’s topic, I had the feeling that a lot of our readers were feeling more than a little sore after Proposition 98 failed to pass. A feeling that was akin to seeing the light at the end of the tunnel, only to have the tunnel collapse. After all, it was the most exciting initiative for property owners since Proposition 13. Also, consider the fact that the ACTION Apartment Association was originally created to fight rent control in the Los Angeles region. So, there was huge excitement from our end. We were on the brink of a “New Age”. But sadly, on June 3rd, the scaly and slimy foot of Godzilla came crashing down on Proposition 98. And just like cute little Bambi, our beloved initiative got smashed flat as a pancake. What happened? What now? Well, let’s talk about it.
Let’s start with “just the facts.” Proposition 98 was an initiative on this past June’s California ballot that addressed two major issues concerning property rights: eminent domain and rent control. Regarding eminent domain, Proposition 98 would have made it so the government could only seize private property if there was a legitimate public (and taxpayer owned) good to be gained. I’m referring to roads, parks, hospitals, etc. Also contained in the measure was rent control deregulation for apartments. In other words, rent control would have been slowly phased-out, one tenant turnover at a time. Once a tenant moved-out and a new tenant moved-in, the landlord could begin charging real market rents and that unit would no longer be subject to rent control law. Although there were many more details to it like removal of Just Cause eviction protection, etc., that was Proposition 98 in a nutshell. Pretty straightforward, right? Well, remember that giant reptilian foot?
Proposition 98 was the “White Knight” for apartment owners and for victims of often shady eminent domain practices. It was a bright and bold message to the government. It said: “I should have the right to own property without the threat of being bullied and I should have the freedom to manage my property so that it is financially beneficial. When I think of Proposition 98, I recall the movie, Mr. Smith Goes to Washington. Remember that one? It is a truly great story of a man who stands-up to government corruption with nothing more than the purity of his ideals. I think a lot people like that kind of story. It inspires the moral courage to face injustice. So what went wrong with Proposition 98? Well, a lot of things. I will give you the highlights. The single most important factor in Proposition 98’s demise was Proposition 99. Once it went public that 98 would be on the June ballot, a group of special interests— both in and outside of government— quickly drew-up their own version of eminent domain reform. But there was a catch. Actually, there were a couple of catches. First, Proposition 99 dealt only with the issue of owner occupied properties, i.e. houses. It would amend the constitution so that a home could only be seized if some fraction of the land was thereafter used, however small, for public works. It did nothing to protect business and apartment owners. In fact, upon closer examination, Proposition 99 did not even protect home owners. But Proposition 99 was supposed to protect home owners, right? Well, consider this: under current law, the conditions necessary for the government to employ eminent domain are so vague that there is little, if anything, to stop them. That’s why so many people on both sides of the political fence believe eminent domain reform is way overdue. Basically, if the government decides it wants a new shopping mall on a particular piece of land, and your home is on the land, they will find a way to get you out. Period. Proposition 99 did nothing to actually change the definitions and conditions of what are needed for property seizure. In short, Proposition 99 did nothing more than keep “business as usual.” Strange, isn’t it? To put it bluntly, Proposition 99 was put on the ballot for the sole purpose of confusing voters into keeping up the status quo. It was Politics 101— the easiest way to beat your opponent is to steal their position and bend it to your advantage. Why did Proposition 99 supporters do this? Because eminent domain, as it stands, is BIG business. This is because real estate development is BIG business. Just look at the development in the Los Angeles region over, say, the last 10 years. It has been tremendous to say the least, particularly with condos and retail. Developers require the cooperation of government officials to get their projects off the ground, just as politicians rely on Developers with deep pockets to finance their campaigns. I’ll let you draw your own conclusions about how and why this causes problems. Sadly, greed was behind Proposition 99. Conversely, Proposition 98 would have radically upset the unjust balance of power that a select few have come to enjoy. In the true spirit of Democracy, Proposition 98 would have ushered in a whole new era of rights. I’m not whistling Dixie when I say; Proposition 98 was the fast lane to “power to the people”. If many people agreed that genuine eminent domain reform was desperately needed, then where did Proposition 98 go wrong? Here’s the deal—the campaign against Pro. 98, for the most part, focused on the controversial issue of rent control. That was the political weapon that Proposition 99 proponents wielded. It’s simple. Tenants love rent control. Owners hate it. It is a tragic irony that every economist in the country worth their salt agrees with the apartment owners. Let’s be honest though, who wouldn’t want to live in, say, Beverly Hills, and only have to pay a fraction of real market rents? The reality is though, that in the long run, rent control is just bad business all around. Even for tenants. Shocking, but true! You can flip open any “Intro to Economics” book and it will tell you that rent control just plain doesn’t work. Not for either side. There just happens to be more tenants than owners. And more of those tenants and their sympathizers turned out on Election Day. Who can blame them? The sponsors of Proposition 99 scared voters into believing that Proposition 98 was motivated by pure “greed”. Plus, their campaign had more money (donated by Developers, ahem), so they could yell their message louder. Are you beginning to see the politics at work here? Yes, rent control became the red herring issue so that the Proposition 99 camp could keep eminent domain laws in tact. It was about eminent domain all along but it was rent control that motivated the people to vote against Proposition 98. And like when Michael Corleone discovers that it was his brother Fredo who betrayed him in The Godfather, Part 2, the failure of Proposition 98 “broke our hearts.” Now that we’ve covered the good, the bad, and the ugly, let’s dust ourselves off a bit and talk about the, “What’s next?”
These are strange times. It’s a very tough economy climate for many; with more trouble ahead— the credit crunch, the mortgage crisis, the energy crisis, and a war. Bad news has quickly become the only news. Also, we’re in an election year of historic proportion. And who really knows how that’s going to change things? In the midst of all these troubles, Proposition 98 was a legitimate piece of reform that would have improved the quality of life for everyone. Now that Proposition 98 is gone, how do we weather the storm in our little corner of the sandbox that we call the Westside?
Alternatively, you may sell and do that 1031 exchange you’ve been contemplating. The market is ripe with a capital “R” for smart investing. Maybe it’s time you “go for it.” On a final note, and something that I’ve suggested in a number of past articles, is to Go commercial! Commercial properties are not subject to rent control. Yes, it’s just you and the “invisible hand” of the free market. Santa Monica apartment owners typically have held onto their apartment properties for appreciation, now that there is no appreciation in the near future, many investors are looking to get out of apartments and into better cash flow investments. Typically, the after tax return on equity for Westside apartments is approximately 2-2.5%, while NNN investments are producing 6-7.5% returns. Some of these NNN leases are for 20-30 years with annual increases and are corporate guaranteed. You buy the property with the credit tenant and lease in place and do not have to worry about management as tenants pay the property taxes, insurance, and maintenance. Often times the properties are brand new which means higher depreciation and fewer taxes to pay. Beautiful, efficient capitalism!
Rent control is outdated, misguided stuff. It puts a serious strain on owner/tenant relations. It discourages development and creates housing shortages. It makes owners out to be the villain, when the reality is that most are decent, hard-working people who face the same economic challenges as everyone else. The same applies to eminent domain. Small business owners should be able to live without the constant fear of seizure. With rent control and eminent domain here for the foreseeable future, it is important for property owners to stay current with the issues that affect them. If we continue to vocalize our basic rights, it is only a matter of time before the general public will realize the true source of greed in our otherwise wonderful city.
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