The economy has now replaced the war in Iraq as the number one issue for Americans. The good news is that people are focusing on the economy, the bad news many people are fearful. Some are even predicting a 1930’s style depression. While it seems economic news continually worsens, I still believe in America’s resiliency. Last year it was the mortgage meltdown that captured everyone’s attention, and of course we knew that it had to trickle up to Wall Street. Fueled by a demand for profits, Wall Street gave away money to the Sub Prime Borrowers in marginal areas. The real problem was that Wall Street did not have a sense of the Real Estate cycles. Certainly the S & L’s saw it from the 80’s and 90’s. Wall Street was just another sucker looking for quick and easy profits from Real Estate loans because “Real Estate never goes down.”

Some are equating all this turmoil to the Great Depression of the 30’s. I agree that the economy has some major healing to do and I believe that the worst is not over, yet all is not lost and we probably will not see another Great Depression.

Unemployment is still relatively low, unless of course you happen to work for Bear Sterns or Countrywide.

As owners of apartment buildings on the Westside, we will be insulated from a lot of the mayhem that will occur. People need to rent now more than ever. Rents will remain stable, though I do not see rents going up like they did in the last five years. The key to our business is holding power, and as long as we have tenants that pay rent we will continue to hold on to our buildings for the next cycle.

I have had more lenders call me in the last three months seeking to place loans then ever before. When the economy was booming and lenders were making loans left and right they had no incentive to solicit apartment owners. Now that things have cooled a little bit in the single family and commercial sector more and more banks are searching for quality and seeking to make loans for apartment buildings. I have had calls from Citibank, Sterling Bank, Wamu just to name a few. One banker called me yesterday and said “Carl, we would like to finance your next deal because we like what you do, and like you, we want to be west of the 405.”

Yes, there is flight to quality but the good news is most of us in Santa Monica have quality. So I believe that on a local level we will weather the storm without seeing any significant drop in pricing. Properties will be harder to sell, and it will take a little more time. Buyers seem to have pulled back and our looking for steals. I keep telling buyers if you want to steal something, go to the Inland Empire, but be careful. In my book I would rather stay with quality here along the beach.

Now that I have talked about the cheery stuff, let’s look at the legislative landscape in Sacramento. Senate Bill 1299 is the worst bill to be put forward this year. Senator Migden from San Francisco is attempting to gut the Ellis Act. This SB 1299 would require that an owner in a rent control area to replace all the units that were demolished either onsite or nearby. The purpose is to ensure that there is no decrease in the number of rent control units (aka votes). The effect is to make it prohibitively expensive for owners to get out of the rental business. The bill also contains language that makes it clear that the Costa Hawkins prohibition on applying rent control to new construction would not apply. This bill would completely gut the protections the Ellis Act offers to owners in rent control cities. It would also be a major undermining of the Costa Hawkins Bill.

Migden is trying to piggy back on the recent Los Angeles ordinance which regulates rent control property that is demolished. In Los Angeles, if new rental units on that property are offered for rent within five years rent control restrictions will apply.

If the Ellis Bill has you smoking, then the next bill, Senate Bill 1598 from Padilla, will help you put it out. CAA is sponsoring legislation which would be proactive at protecting owner’s liability in the event that your tenants are subjected to second hand smoke. We all remember the asbestos scare, the lead base paint scare, now the mold scare, and the next big one is going to be second hand smoke. The City of Calabasas has recently passed legislation which would give the owners about five years to make certain buildings on their large properties non-smoking. That is fine when you have numerous buildings on a site, but for us in Santa Monica with relatively small buildings it is very difficult to control smoking within the units. This spot bill will take a lot of work before it is finished.

Some interesting information has come out of the preparation for this legislation. Smoking in California is not very popular, with just 16% of Californians identifying themselves as smokers. This is about 30% less than the national average. The survey in Calabasas found that the non-smoking tenants would pay more to live in a “smoke free environment.” I will follow the smoke signals coming from Sacramento and keep you apprised.

Assembly Bill 2019 would give residents of specific affordable housing units the right to sue property owners if the owner is going to sell the building and the tenants are at risk of conversion. This will be very difficult for certain affordable housing owners and will probably not apply to many of us. However it is another instance of government seeking to give rights to tenants to stop units from converting to market rate. It would have an adverse impact on the values of those properties because owners could be stopped from utilizing the full potential of there property.

AB 2533 from Assemblyman Keene. Current law requires persons with disabilities to be entitled to equal access to places where the general public is invited. Interference with admission to or enjoyment of those facilities creates civil liabilities. Complaints may be filed with the Department of Fair Employment and Housing by persons denied equal access. This bill would require notice to be provided to the entity allegedly interfering with a right to access before a complaint may be filed. This would give the owner a chance to remedy the condition before a complaint gets filed.

AB 2604 would prohibit cities from requiring their exorbitant construction fees until the date a Certificate of Occupancy is issued. Who knows maybe this will help the City of Santa Monica improve their onerous inspection process and encourage them to help you get your Certificate of Occupancy. No C of O, no fees. What a concept.

AB 2925 Davis (D-Los Angeles) is proposing to add new requirements to the purchasers of substandard buildings. This bill would require a person that acquires a substandard property to provide specific personal information and a plan for correcting the substandard conditions. The bill would provide stiff civil penalties for failure to comply. This would add another layer of complication to an already complicated process of fixing up old substandard buildings. In the past we used to just buy them and fix them up. Now when you buy them you are registering as a criminal and then you will be on probation even though you are not the one who helped create the substandard condition.

Well, you never know what a legislator will dream up. AB 2112 Saldana (D-San Diego) would require new buildings built after the year 2020 be zero net energy buildings. For purposes of this bill “zero net energy building” means that the building does not make any purchases from the electricity or gas grid on an annual basis. Thus, your building would have to have enough solar panels to completely power the building and to provide all the heat and electrical needs for the tenants without taking any energy from the grid. I suppose if you had a 4-plex on four acres of land in the desert you could probably do this with enough solar panels. Unfortunately, in the metropolitan area where we have buildings shading others there is no way possible to comply, even if the technology improves tenfold. A bill like this could stop new residential construction in 12 years. Chances are slim that it could pass but you never know about Sacramento. Maybe we should introduce a bill which would require Sacramento to pass only “zero net damaging bills.” This would mean that Sacramento would have to give us something for everything that they took away.

I will keep you apprised on other developments in Sacramento as we watch these bills wind through the committees.