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Legal Column, November 2002
By Rosario Perry, Esq.

IS SANTA MONICA IN A REAL ESTATE BUBBLE?

How do we know if Santa Monica real estate prices are part of a bubble that sooner or later will explode? There are some indicators which we could look at to help answer this question. Some interesting factors to examine are: (1) the level of mortgage interest rates: (2) The percentage of price increase of property sale prices month over month. Dramatically high increases from month to month harbinger a run away market which is destined to collapse; (3) The number of units (or properties) on the market for sale at any one time; (4) The rent level of units. The sale price of property is directly tied into the fair market rent income. When looking at each of these factors alone then in unison, it appears that Santa Monica will not experience any bursting of property value in the near or distant future.

First: Today interest rates are lower than they have been in almost 50 years. This of course lowers the payments needed on similar sized mortgages, allowing all levels of income workers to buy homes or investment property. As interest rates climb, desire and financial ability to purchase property increases. Most commentators are stating that interest rates will stay low for the near and far future. Thus the bonus values sellers are getting based on the low interest rates will continue to make up part of the fair market value of the properties.

Second: While there is some slowing down or leveling off of property sales prices, this can be seen as a positive factor. Unlike the stock market where investors threw money in without any connection between real value and stock value, in real estate the properties are selling based upon actual or soon to be realized rental value (Costa-Hawkins rental increases). Thus the Santa Monica buyer is not an out of control type investor who soon will lose his / her property because over purchase, but rather a considerate, well thought out purchase.

Third: There are very few buildings on the market at any time in Santa Monica. Over the years whatever has been listed has been sold. Thus there is no build up of unsold properties. This keeps supply low and prices stable or upward.

Fourth: Rents while on the lower side of what we have seen in the last few years, are sta-ble (and are not falling). Thus past purchases made based on the then rental income are still hold-ing their value.

All in all, it looks like we will have continued strong value in real property sales. The only exception to this prediction might come out of an extended war in Iraq or further terrorist attacks in our country. What this will do to our economy is anyone's guess. During the last Iraq war our real estate values suffered sever losses and such a scenario could come again. Thus, if you are thinking of buying remember to buy conservatively. Don't extend your finances. However, Santa Monica rental property is almost recession proof, in that 75% of the rental units have not received a Costa-Hawkins vacancy decontrol rent increase, and thus rents of 75% of our properties are way below market. If the potential property purchase you are looking at can be supported based on current rents, and your rents are low, your building will never get into trouble.

RECENT CASES DECIDED:

Travis v. County of Santa Cruz, 100 Cal. App. 4th 609100 Cal. App. 4th 609þ(2002), recently decided by the Sixth District Court of Appeal. This case is a train wreck. It establishes an artificial statute of limitations on people's constitutional rights. Pacific Legal Foundation has donated its time to request that the California Supreme Court hear the case. ACTION has filed supporting letter with the Court at PLF's request.

Mistrial Declared in Rhode Island Lead Paint Suit
Rhode Island is a state that protects its housing providers. It has taken the position that lead paint is not the economic responsibility of the HP but rather of the paint companies which sold the lead containing paint knowing that it posed a serious health danger. Remember, in Europe lead was prohibited in paint as early as 1920's because of the known health risk. The U.S. paint industry was successful in bribing Congress not to impose a like restriction in this country from more than 50 more years. Sound like the cigarette industry? In Rhode Island the state sued several paint companies collectively for the cost of clean up of lead paint. These companies were: American Cyanamid Co.; Atlantic Richfield; ConAgra Grocery Products Co.; Cytec Industries Inc.; DuPont Co.; Millennium Inorganic Chemicals Inc.; NL Industries Inc. and Sherwin-Williams Co.

A trial was conducted before a jury, but a mistrial was declared after the jury reported it was hope-lessly deadlocked in the potentially multimillion-dollar case. The state was trying to hold eight former manufacturers of lead paint liable for lead poisoning in 35,000 Rhode Island children since 1993. If the jury in this first phase had found that the lead paint manufacturers had caused a public nuisance, the case would have moved into two more phases to decide whether the industry is lia-ble and how much it should pay in damages. The six-person jury was deadlocked after four days of deliberations and seven weeks of trial. Now, the state needs to retry the case again. In Santa Monica, the City is more interested in suing banks for user fees, than in protecting housing providers.

Bank of America v. City of Santa Monica, 9th Cir. 10-25-2002 No. 00-16355. Do you remember the politically motivated ordinance the City Council passed to prohibiting banks from charging ATM fees to non-depositors. Well, the City lost at the trial court level, and now has lost on appeal. The court of appeal holding that the Federal laws and regulations preempt the City's Ordinances. Thus the federal savings associations are allowed to charge ATM fees to non-depositors. Now what this means is that the Court will probably award these banks attorneys fees against the City in the amount of $1,000,000. Look for more on this topic soon. It is always nice to know that our City Council, always anxious to be in the political spot light to further their individual carriers have no compulsion to waste millions of dollars of tax payers money to further their own ends. Makes one understand the quote: "I'm all in favor of keeping dangerous weapons out of the hands of fools. Let's start with typewriters." (Frank Lloyd Wright (1868-1959)).

Drouet v. City of San Francisco, S096161 has still not been decided by the California Supreme Court. It has been sitting there for about seven or eight months. ACTION filed a brief with the Supreme Court in support of the housing provider in December 2001. The Court of Appeal held Drouet below, that retaliatory eviction defenses can not be raised by tenants in Ellis Evictions. If the Supreme Court overturns the Court of Appeal's decision, then it could mean tenants will be able to frustrate the housing providers' efforts to Ellis their property. ACTION's brief argued that the housing provider had a con-stitutional right to go out of business and any restriction on that right would amount to a taking of the housing provider's property. It is unconstitutional to force a housing provider to manage housing for tenants.

RECENT LAWS PASSED THIS YEAR

AB 1866 (Wright)— Housing: Density Bonuses
(1) This state law takes effect January 1, 2003. It deals with the states' attempts to push local cities into providing incentives to developers to build low income units. This seemly innocuous law could have far reaching effects in two important ways:

First, for Santa Monica builders, in that by providing some low income units in their development, they will lock in the maximum density possible. Thus the City's practice of reducing the number of units proposed below that allowed by the zoning law will come to an end.

Second, single family homeowners will now be able to build 2nd homes on their lots (granny flats) without going before the Planning Commission. Rather their applications must be processed over the counter. Look for many more 2nd units in the R-1 zones of our city. Oh, Joy. (This part of the law takes effect after July 1, 2003).

SB 1403 Kuehl's Latest Changes Effective January 1, 2003
Civil Code Section 1946.1. (b). An owner of a residential dwelling must give a 60-day notice of termination of tenancy in all Cities in the state, except for two cases: First, an owner can give 30 days notice if the tenant has only lived in the unit for less than one year, and Second, an owner can give 30-day notice if the tenant lives in a single family home or condominium and the owner has just purchased the property and intends in good faith to reside in the property for at least one full year after the termination of the tenancy. Notice needs to be posted and mailed or sent certified or registered mail.

Migden AB 2330 Changes Effective January 1, 2003
These are the most drastic, burdensome, and unnecessary changes of the year. The effort of these changes is not to cure problems, but to stop housing providers from collecting any security deposits whatsoever. It is an attack on the housing industry, and will simply result in the transfer of costs of repairs from those who do the damage to the good tenants who move in after them, who have to pay higher rents to cover the losses suffered by the housing providers.

Civil Code 1950.5. These changes apply to security deposit and move out procedures that the housing provider must perform. There are stiff penalties and thus the housing provider must follow these somewhat vague provisions as best as possible. The major change to this law effects (1) the timing of inspections of the tenant's unit upon the tenant's giving notice that tenant intends to vacate the unit; and (2) the notice procedures the housing provider must give to the tenant.

First: Once the tenant notifies the housing provider that tenant intends to vacate the unit, the housing provider must notify the tenant in writing that the tenant has the right to a pre-termination walk-through (herein referred to as "PTWT") at a reasonable time, no later than two weeks prior to the date of termination. If the tenant does not request the PTWT, then the housing provider does not have to do the PTWT. How-ever, if the tenant requests the PTWT, then the housing provider must do it whether or not the tenant is present for the walk-through. Immediately after the PTWT the housing provider must tell the tenant what conditions exist which need to be repaired. The tenant then has an opportunity to do these repairs. [This raises issues of tenant doing alterations to the premises, which alterations are outlawed in the ACTION lease]. Immediately, at the end of the PTWT, the housing provider must give the tenant (or leave in the tenant's unit if the tenant is not present for the PTWT) a written "itemized statement specifying repairs or cleaning that are proposed to be the basis of any deductions" and "This statement shall also include the texts of subdivision (d) and paragraphs (1) to (4), inclusive, of subdivision (b)"

Second: Section Civil Code Section 1950.5 (d) and (b) (1) through (4) read as follows:

(b) As used in this section, "security" means any payment, fee,
deposit or charge, including, but not limited to, any payment, fee,
deposit, or charge, except as provided in Section 1950.6, that is
imposed at the beginning of the tenancy to be used to reimburse the landlord for costs associated with processing a new tenant or that is imposed as an advance payment of rent, used or to be used for any purpose, including, but not limited to, any of the following:
(1) The compensation of a landlord for a tenant's default in the
payment of rent.
(2) The repair of damages to the premises, exclusive of ordinary
wear and tear, caused by the tenant or by a guest or licensee of the tenant.
(3) The cleaning of the premises upon termination of the tenancy
necessary to return the unit to the same level of cleanliness it was
in at the inception of the tenancy. The amendments to this paragraph enacted by the act adding this sentence shall apply only to tenancies for which the tenant's right to occupy begins after January 1, 2003.
(4) To remedy future defaults by the tenant in any obligation
under the rental agreement to restore, replace, or return personal
property or appurtenances, exclusive of ordinary wear and tear, if the security deposit is authorized to be applied thereto by the
rental agreement.
(d) Any security shall be held by the landlord for the tenant who
is party to the lease or agreement. The claim of a tenant to the
security shall be prior to the claim of any creditor of the landlord.

Thus the above set out language must be included in the statement of repairs which need be given to the tenant.

Third: Section 1950.5 (f)(3) provides that the tenant is allowed to "remedy" the "deficien-cies" of the unit "in a manner consistent with the rights and obligations of the parties under the rental agreement" so as to avoid deductions from the security deposit. Now, does this mean that the tenant may make "alterations" or "paint" the apartment if it is needed due to their misuse? Maybe. However, ACTION's rental agreement correctly provides that the tenant is not allowed to make any alterations, painting, repairs, etc., and thus if such work is needed to correct deficien-cies they are outside of (in violation of) the "rights and obligations of the parties under the rental agreement." Without this prohibition in the ACTION lease however, the tenant would have the statutory right to do major work to fix major damage.

Fourth: The housing provider can use the security only to pay for repairs which were listed on the PTWT report. However, if new damages arose after the PTWT was made, then they can be repaired with the security deposit. In addition, if pre-existing damages existed which were overlooked (i.e. "not identified") during the initial inspection due to the presence of a tenant's possessions then the housing provider may use the security deposit to pay for these repairs as well. This seems to mean that if the housing provider overlooked the damage and the tenant argues that the tenant's possessions were not the reason for the over sight, that the housing provider cannot use the security to make repairs. This harsh rule must be modified to state that if the repair item overlooked could have been repaired by the tenant, then maybe the housing provider is prohibited from charging the tenant for its repair. However, if the item of damage was something which required major alteration or repair, and the tenant was prohibited under the lease from doing such work, then failing to include the repair item in the PTWT report has not injured the tenant. No harm no foul.

Fifth: The statute has changed the penalty for bad faith retention of security deposit from $600.00 to up to twice the amount of the security deposit. It is the burden of the housing provider to prove reasonableness of scope and amount of the charged repairs.

Required Action by ACTION: ACTION is in the process of once again changing its rental agreement to include the recommended language required by this amendment. In addition ACTION will prepare a written form for use by the housing provider in making a PTWT report.

MORE MOLD FOR YOUR CONSIDERATION

Remember, prevention is the best cure for mold, and quick clean up is the next best defense. Thus inspect for mold and for the causes of mold. Housing providers should do interior inspections of their tenants units at least once every six months. Look for mold on shower walls, ceilings, under the building, on window frames, any where water can enter or sit for long periods of time. Mold and water (moisture) are best of friends. You can buy a simple instrument that measures for mois-ture at the local hardware store. Why not have one on hand when doing your inspections? Many housing providers have reported success with dehumidifiers installed in tenants' units, which dry out the air and remove the moisture from the units. However, such a cure is not needed unless mold is found and cannot be removed with other less intrusive methods. If however, a tenant has a damp closet due to poor construction design then the housing provider should consider a full time dehumidifier which runs 24 hours or placed on a timer.

A small electic heater has been used by other housing providers to dry out the unit's moisture, however there is always a fire danger in using electric heaters, clothes being placed too close to them, or electrical wires shorting out. Better not use heaters and stick to dehumidifier.

Let's review some facts. Mold is not a disease and is not as dangerous as asbestos. However, as the current designer crisis, it has been blown out of proportion. Mold can be cleaned with over the counter bleaches and specialty products sold for the particular purpose. Therefore, don't bring out the military if mold is discovered in normal places, like showers etc., just get some one to clean it up. Many housing providers balk at paying a clean crew to clean up a tenant's apartment shower. Do it anyway. If you want you can later sue the tenant in small claims court for the money spent to clean up after them. However, uncorrected mold in a shower will cause the housing provider more economic loss than simply going in and cleaning it up twice a year. Always use gloves and masks and other protective clothing, as the clean agent itself is caustic.

Mold usually grows out of doors and drifts inside the unit through doors and windows. If it come in contact with water it can start to grow. Thus the first line of defense is keeping all surfaces dry. As you can see, leaking pipes create a haven for mold growth. Such areas are doubly dangerous because they are usually within the walls (or under the floors) and the growth cannot be seen. Thus, always be on the look out for leaks and excess water usage (water bills higher than normal).

The most common problems with mold is that it causes some people to experience flu-like symptoms (like running noses, teary eyes, chest congestion); allergy like symptoms; fatigue and / or in some rare cases bloody noses. Here are some common sense ideas: (1) Fix all leaky facets, inside and outside. Clean up all standing water. (2) Replace mold infested absorbent material, but just clean off hard surface areas; (3) place drip pans under water machinery (like air conditioners, and refrigerators; (4) be especially careful with bathrooms (avoid carpeting them). Be sure that all windows work and that the tenants are directed into opening the windows when taking showers or baths. If the bathroom has no window, then hotwire the fan to the bathroom light switch so that when the lights go on the fan runs. Many tenants do not turn on the fan because of the noise, and the shower moisture builds up. Be sure that the fan works and that the filter is clean. Consider installing a new and larger fan than the existing one. Most builders skimped on fans when constructing the building, and these old fans are under powered. Be sure also that the fan actually exhausts to the outside of the building.

HOW STRONG IS OUR ECONOMY NOW?

According to the United States Conference Board, all indications are that for September 2002 consumer expectations are declining slightly. Are we exhausted or just getting our second wind. Sales are down, new orders for manufacturers' goods are down, and economic growth shows weakness country wide. Unemployment seems to be growing, and the reported numbers do not indicate the number of unemployed who are no longer eligible for benefits (i.e., those who have been unemployed so long that their payments have run out). Also, commentators have indicated that the Government may be playing with the numbers somewhat, trying to ease the psychological crush on the public of disappointing results from month to month.

Interest Rates Up or Down

The question all would like answered is where are interest rates going? Some commentators (based in the Stock Market) are arguing that low interest rates are not helping the overall economy. This seems to be sour grapes more than learned wisdom. Low interest rates clearly are help-ing real estate buyers and sellers. Given the shaky economic condition of our country and the political uncertainty abroad, it does not seem likely that interest rates are going up in the near future. Indeed, it appears that market conditions are actually pulling the interest rates further down. How low can it get? It is in new lows territory now, so no bottom seems to be the order of the day. Freddie Mac lists the current average interest rate on mortgages at about 6.3% per annum. There will be no rate change until November 6, 2002 (the day after the elections) but if there is a change it will be downward. For all the ill will the pundits are pouring on the low interest rate drive, the overlooked issue is all the money home owners and property owners are saving in interest rates. Remember, interest payments are money poured down the drain. Lower interest means direct savings to consumers. With the deflation of all other commodities in our economy since the January 2000 downward slide, it is only logical that interest rates (like all other commodities) should cost less as well.

NEW RESIDENTIAL PURCHASE AGREEMENT FROM CAR

The California Association of Realtors has published a new updated form residential purchase agreement for its members' use. This form is used by the majority of real estate brokers in the Los Angeles area, and if you are buying or selling property you will come into contact with it. So look for it. It is called Standard Form RPA-CA. The major changes to this form deal with the time limits for inspection and disclosure. What has been taken out altogether is the "approval by silence" method where buyers waive contingencies if they do not object in writing within a fixed amount of time. Now, the buyer must affirmatively approve or cancel the contingency, and if the buyer does not do so within the allotted time, then Seller must send notice to Buyer to fish or cut bait. If Buyer still does not respond, then Seller may cancel. This method does save buyer from rude awakenings caused by buyer's unintended forgetfulness, and in that way protects the buyer's interest. Of some importance is the change where Seller has a fixed time to deliver all disclosures (7 days) from acceptance of offer and buyer has 17 days from acceptance of offer to review them). However what is not covered is the situation whereby seller is late in delivering some of the disclosure documentation to buyer. Under the old agreement, buyer's time to inspect ran from the date of seller's delivery of each type of disclosure. Now buyer's investigation time period runs from acceptance of offer regardless of how late seller is in delivering disclosures to buyer. This will cause unfairness and games playing in the buy sell process. Buyers are encouraged to change the terms of the form agreement to provide a mechanism whereby their time to investigate runs from delivery of documentation to them.

Finally, all discussion about commissions are being removed from the contract. Buyer and sellers brokers will rely upon the MLS rules whereby listing a property in the MLS amounts to an offer by seller's broker to pay the listed commission to the buyer's broker. Or if brokers wish, they can sign a separate commission agreement between themselves at the time their clients sign the purchase agreement.

Remember, like all contracts, there is no "standard form" which you can sign without reading. Especially now with the changes to the CAR agreement. Each sale and each buyer or seller involves special considerations which must be written into your purchase contract. The CAR form can be amended to protect your interests, so feel free to do so liberally. Finally, do not enter into any type of agreement without consulting your attorney. Brokers cannot give legal advise, and should not be relied upon. An hour with your personal real estate attorney could save you a fortune.

SINGLE FAMILY SALES STILL GOING STRONG

The National Association of Realtors has reported that existing home sales nationwide for September 2002 have increased approximately 8% over August 2002 sales and over September 2001. Now, new construction home sales increased by almost 20% in September 2002 compared to Sep-tember 2001, with sales up about 1/2 percent in September 2002 over August 2002. NAR believes that these increased sales result from the lower interest rates, which produce mortgage payments only slightly higher than rents. Thus people can own almost as easily as they can rent. Given the choice the majority of Americans chose to own. Also, based on the reduced amount of apartment construction nationwide, rental rates are still high (supply and demand). All these factors contrib-ute to the increased number of Americans who are entering the home owners market. NAR pre-dicts that at year end there will be an increase of approximately 3% increase in home sales over the calendar year 2001.

New Housing Construction Up

The U.S. Department of Housing and Urban Development states that new housing starts have increased 14% between August 2002 to September 2002, and approximately 17% from September 2001 to September 2002. New building permits issued in September 2002 are 10% higher than those issued in September 2001. Thus all indicators are that the housing industry feels that new housing will be in greater and greater demand. The increased production is good for consum-ers, in that the additional supply will keep prices lower and in line with our economy. Comple-tions are 4% higher than this time last year. Again, a positive for home buyers.

Conclusion:

There are many positive aspects to owning and operating renting housing. Our industry is clean, green, and beneficial to all who live in our units. However our industry has many enemies, jealous of our successess and our ability to provide reasonable clean safe housing for thousands of renters in our communities. Those who would wish our industry destroyed, would wish it replaced with governmental owned and operated housing. Such attempts have been shown to be a dismal failure each and every time it has been tried in the past. Then there are our enemies who just want a free lunch, or a spring board to their own success by giving our wealth to those voters who would support the devil for obscenely cheap rents. All in all, our industry is under attack from many sides and many self-interest groups. If we are to prevail in this fight, we need to recommit ourselves time and time again to our principals. Free.