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Legal Column, January 2003
By Rosario Perry, Esq.


ECONOMIC PREDICTIONS FOR THE YEAR 2003?

As the familiar tune asks "How much is that doggie in the window? The same questions are repeated over and over again, "How much is my property going to be worth?" The answer to that question lies in the question: What is the general overall economy going to look like? But it may be that the worse the economy does, the better the real estate market will become. In other words, the question for investors today is not what the economy is going to be in 2003, but rather, is the economy going to do better or worse than real estate investments. Thus, real estate in 2003 might be a contrarian investment. This would be a double blessing to those who hold it, safety in being able to hold assets in a stable investment to avoid loss, and increased income and value during the coming year to provide equity growth.

From a reading of the different issues set forth in this article, only one thing is really clear, and that is that no one knows where the economy is going. There is great uncertainty everywhere. The tremendous increase in the price of gold shows this uncertainty and worry on a global scale. What is clear is that real estate (and housing construction) is the engine that is driving this economy at this time. It was this way in 1989 as well before the real estate crash. What's the difference between then and now? There are many similarities between the time of the last crash and today, the presidents, the Iraq war, the pressure on oil prices, inflationary concerns, and mostly uncertainty. No one could be faulted for believing that there will be a crash in real estate prices once again. Many people argue that real estate falls each 10 years, and we are about 2 to 3 years over that 10 year cycle.

We don't believe that guessing about falling prices is the answer however, Perhaps, a different approach is needed to better deal with the coming economy. Our approach is to ask "What is the best investment for our money given all concerns?" The only three choices are keep your money in real estate, keep your money in gold, or keep your money in cash. When seen in this light, real estate clearly looks to be the safest and best investment. It is surely like a fun house ride, once you pick your ride and you are on it, hold on tight and hope for the best.

We have spent some time this year in various articles trying to predict what the economy will look like, and what that economy will be doing to your property values. Overall the sum and substance of our guessing has been that real estate will stay strong and that no matter what the general economy will be doing, rental real property will be far and away the safest place to keep your money. Nothing has happened since last issue to change that wild and crazy opinion. While it maybe that the general economy will get hit with a downturn or even a recession, that weakening will only result in lower interest rates on mortgage loans, a lowering of the price of goods and services needed to run an apartment building, and a stable if not falling property tax. [The only inflationary costs would be liability insurance— discussed below]. Thus, in our belief, the future will bring a lowering of costs to run the apartment building and a stable rental income. Will this bring about an increase in the sale prices of apartment buildings? We don't think so, at least not in the type of increases we have been seeing over the past years. The recession or fear thereof in the coming year, will act to stabilize prices and maybe even to bring them down.

Clearly people in Santa Monica will need to continue to rent. Home purchasing is not an option. California home buyers took a bit of bad news in October 2002 when the%age of buyers able to afford a median-priced home in the state dropped by six%age points compared with a year ago. The California Association of Realtors' (CAR) housing afford ability index in October 2002 stood at 30%, down six points from a revised 36% for the same month in 2001, and up only one point from a revised 29% in September 2002. The minimum household income needed to purchase a median-priced home at $322,730 in California in October 2002 was $77,700 per year (based on a typical 30-year, fixed-rate mortgage at 6.14% and assuming a 20% down payment). One cannot purchase a median-priced home in Santa Monica, although there are some condominiums available. While the medium priced home in Santa Monica is much higher, maybe $550,000, that means a buyer's annual income has to be around $130,000. Everyone who makes less and wants to live in SM has to rent. According to the Federal Government, households can afford to spend 30% of their income for rental housing, and often spend 40% or more. Thus to rent an $2,000 per month unit one (or a couple) needs to earn $60,000 to $70,000 per year. Clearly this is attainable for a working couple or shared apartment.

Thus, what we see is if there is a recession, and income drops dramatically, while many people will stop buying homes, most people will be looking to rent apartments. This seems to mean that apartment Buildings are a good hedge against inflation, deflation, and the uncertainty of the current world crisis. More of this below. This thought is supported by foreign investors (see below).

Foreigners Are Investing In U.S. Real Estate
Not to be undone, by locals, foreign investment in U.S. real estate has increased to $44 billion in 2001, up from $38 billion in 1997, according to a recent study released by NAR. The study shows that the huge flow of overseas funds into the United States real estate market provides benefits to American consumers in the form of job creation and cheaper mortgage rates for home buyers. Globalization and the desire by investors to diversify their portfolios have contributed to the growth in the real estate sector. Income-producing properties in the United States generally offer higher yields than similar investments abroad as well as an inflation hedge. Over the last 10 years, the value of existing residential properties in the United States has risen by a compound annual average of 4.2% as compared to 2.7% inflation, according to NAR economists.

Housing To Keep Economy Alive (Or Says NAR)
The NAR (National Association of Realtors) feels that the housing construction (apartments and condos and single family homes) will be the boost the economy needs to stay healthy through 2003. They claim that demand for housing in California and even across the nation is still strong. Clearly different regions have varying affordability rates. The High Desert was the most affordable region in the state with a 65% index (i.e. 64% of the people living there could afford to purchase a home in that location), followed by Riverside/San Bernardino at 45%. Santa Barbara was the least affordable region in the state at 13%, followed by Monterey at 19%. However everywhere people want to own their own.

At the National Association of Home Builders' (NAHB's) 65th Semiannual Construction Forecast Conference, NAHB Chief Economist David Seiders predicted that due to low interest rates (the lowest since the 1960's) the housing sector will continue to bolster the economy into next year, although the path to recovery is expected to be somewhat rocky due to uncertainty over war with Iraq, stock market volatility and weak consumer and business confidence. "The key shock absorber in the economy is excellent mortgage rates that have averaged around 6%. We look for rates to gradually edge up to 6.5% by the end of next year, which is not that big a deal," he said. Seiders recited that there are a record "new home" sales of 953,000 and starts and 1.34 million overall expected this year." He predicts further that next year will bring almost as many housing starts as this year.

Steady demand and low interest rates have kept sales in the Southland and San Francisco Bay Area regions of California alive and well in October 2002. Home sales in the six-county Southland region (Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties) experienced their strongest October since 1989, according to Data Quick Information Systems. A total of 29,048 new and resale houses and condos were sold in Southern California last month, up 13.1% from 26,092 in October last year, and up 10.8% from 26,216 in September 2002, according to Data Quick. Year-to-date 2002, 284,498 homes have been sold in Southern California, the strongest for the January-to-October period since 1989 when 286,515 were sold. A total of 9,474 new and resale houses and condos were sold in the nine-county Bay Area region last month, up 20.4% from 7,867 during the same month a year ago and up 9.4% from 8,662 in September, according to Data Quick. Year-to-date, 94,663 homes have been sold in the Bay Area, up 22.5% from 77,271 for the same ten-month period last year. The median price paid for a Bay Area home was $408,000 in October, up 11.5% from $366,000 in October last year, and down 1.4% from $414,000 in September.

C.A.R.'s Unsold Inventory Index (California Association of Realtor's) for existing, single-family detached homes for the third quarter of 2002 was 2.8 months, compared to 3.4 months for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate. The median number of days it took to sell a single-family home was 24 days in the third quarter of 2002, compared to 29 days for the same period a year ago.

Federal Reserve Says Economic Activity Down
Economic activity grew slowly in late October 2002 and early November 2002 according to Federal Reserve District Banks. Business conditions were described as soft or sluggish with some reported continued growth, but at a slower pace than in the previous survey period. Consumer spending varied among Federal Reserve Districts, with weak sales. Auto sales have clearly fallen in all districts. Service industry activity was generally sluggish. Manufacturing remained soft in most districts. The Residential real estate markets continued to be strong in the majority of Districts, the Federal Reserve said. Residential real estate markets remained "solid" but growth of new home construction has slowed. Both San Francisco and Atlanta reported some weakening in demand for homes in the higher price ranges. The New York, Chicago and Dallas districts indicated that residential markets were softening. In the Chicago and Dallas districts, cancellations of house construction contracts have increased.

Government to Increase Loan Amount
Allowable Under It's Programs
Fannie Mae last week announced that it will increase its single-family mortgage loan limit to $322,700 for 2003. The increase will allow about 210,000 more families to take advantage of savings provided by having a conforming loan, Fannie Mae said. At the current spread between rates for a Fannie Mae mortgage and a jumbo mortgage, these families will save up to $23,500 over the life of a 30-year mortgage, Fannie Mae said. Limits for multi-unit loans also will increase for 2003 as follows: two-family loans to $413,100; three-family loans to $499,300; and four-family loans to $620,500. Ginnie Mae has proposed to reduce lenders' requirements to make loans a move that will cut the cost of federally insured mortgages and increase home ownership rates. According to Ginnie Mae, the proposed changes stem from President Bush's June 2002 call to add 5.5 million minority families to the roles of homeowners by the end of the decade. While these moves are somewhat economically risky, the hope is that the changes will generate more sales and stimulate the economy.

Economic Outlook from James Hackett
James.W. Hackett is located in Santa Barbara and works for Bank of America. He writes a newsletter. His opinions are not to be construed the words of B of A. He is one smart economist however. He says the economy, which had looked like it was improving, got a setback with loss of jobs during November. The Bureau of Labor Statistics reported that nonfarm employment fell by 40,000 last month, while the jobless rate climbed from 5.7% to 6.0%. However, with a payroll base of nearly 131 million, last month's 40,000 loss represents little change, a trend that has now persisted for three months in a row. Nevertheless, the job market is cold. Manufacturers were still slashing payrolls in November [is this signs of recession] and retailers hired many fewer workers than normal. Phone companies, gas and electric utilities, and brokerage firms cut back on their staffs. Demand for temporary help also dropped for the second consecutive month after gains earlier this year. On the Good Side, Mortgage bankers expanded payrolls to handle the surge in refinancing, while insurance, health care, private education, management consulting, and the government all provided some insulation with new hires. Look for the week ahead to provide some relief.Consumers should start spending with the holiday season (moderate gain in November's and December's retail sales. [Question: what if those sales do not happen?]. Also anticipate some further improvement in the University of Michigan's survey of consumer confidence in the early report for December. What to expect in the coming months: Do not expect another interest rate cut soon. Do expect some reduction in inflation, with a drop in energy costs and only a small rise in "core" producer prices. The big events for investors will the economy, corporate earnings guidance, the weapons inspections process in Iraq, and the Bush administration's economic policy agenda. Investors will also watch the development of the administration's tax package as well as the realignment of the economics team following Friday's resignations of Treasury Secretary Paul O'Neill and chief White House economic adviser Lawrence Lindsey. The latest signs of economic weakening are likely to advance the case for additional tax cuts in 2003.

Economic Outlook from the Business Roundtable
A majority of The Business Roundtable (BRT) members, comprised of America's leading CEOs, are expecting weak GDP growth, declining employment and flat capital spending in 2003, according to a recent survey. These BRT companies have a combined U.S. workforce of more than 10 million employees and $3.7 trillion in revenues. The BRT survey of CEOs reinforces a series of economic data released over the past several months that indicates a mixed economic performance and an unstable recovery.

Even Santa Monica Is Having a Tough Economic Time of It
As reported by Jorge Casuso at The LookOut, the midyear budget review presented by the City's financial director Mike Dennis to the City Council last month was very negative. Dennis reported that Santa Monica faced a budget shortfall of more than $8 million in the next fiscal year and as much as $20 million the following year. However, not to be undone the City Council has agreed to spend 10's of millions on construction projects. There does not seem to be any fiscal restraint among the SMRR group. Not having to work for a living gives one the sense of what will be will be.

Gold Going Up and to Remain Strong
As yet one more indication of a weakening economy and a fear of the devaluation of the U.S. Dollar, gold is quickly moving up in value. Future for February is $364 an ounce (two years ago it was $250.00 an ounce. The U.S. Dollar is now equal to one Euro (down from .89cents at its strongest). The rise in gold is directly connected with the currency market, mostly notably the U.S. Dollar. Thus when gold is up the U.S. Dollar is down. The decline in the U.S. Dollar's value seems to be based on world fear that we will be suffering a recession and the fear that the U.S. may print billions of new dollars to get us out of a recession if one comes. This printing of dollars is a cause of inflation and lowers the dollars buying power. The world while afraid is not yet convinced that the U.S. of A. is not the place to keep their money. However, it is clear that the gold price's rise is a result of the fear of an inflationary growth in the U.S. money supply; the United States' $450 million current account deficit and its negative consequences for the U.S. dollar; a loss of faith in paper assets because of accounting and other scandals; the closing of hedge positions by major gold producers; and good old fashioned supply/demand considerations.

Is It To Be Deflation or Inflation?
Clearly the number one issue being discussed across the country is deflation. Our weak growth shows pressure to reduce prices, and all markets are very competitive. China has many state run companies which are getting privatized, but if they become unprofitable, they may be continued to be run by government infusion of money. This will create lowering of prices on the goods they sell and produce deflation. The newest bubble is the liquidity bubble. There is approximately one-half trillion dollars in savings alone. This could make the value of the dollar decrease, thus people who save cash in the bank, actually lose money each year.

Deflation has traditionally been defined as a decrease in the total supply of money and credit in the economy. Clearly at this time there isn't any deflation. The total U.S. money supply has been growing at a rapid rate for several years and has risen by around 7% over the past 12 months. In addition, the government has stated, ala Fed Ben Bernanke, that if deflation starts in our country, it will print more money and expand credit to businesses and consumers. The Government thinks it can print itself out of the problem. The promise to print as much money as necessary to stop deflation might very well make foreign investors sell dollar-denominated investments, such as Government Bonds. The other concern is that with so many people and companies in debt, there will be so many defaults and bankruptcies that the ability and the desire of lenders to make additional loans will diminish. Widespread debt defaults will lead to less lending/borrowing and therefore slower money supply growth (or perhaps even money supply contraction, that is, genuine deflation. Remember, the Government has stated that it will print itself out of the problem. This would devalue the dollar by increasing its supply should prices start to fall. Thus deflation in 2003 may not happen. However, when inflation is perceived to be an enormous problem (after printing too much money) then the Feds option will be limited.

Now, the Feds define inflation as a decrease in the price of goods. The CPI has risen however, at an average rate of 2.5% to 3.0% (yes, the Rent Board's calculations are wrong). Will prices continue to increase in 2003? Well, according to some studies, we may indeed see an increase in the CPI for next year. What is more likely than not, is that we will see inflation before we see deflation. Remember that the Fed has promised to keep interest rates low (even if they must purchase long term debt at such a discount that it keeps the rate low). What this might lead to however, is that no one will want to buy U.S. Bonds because the rate is being artificially kept low. A surge of inflation would be very harmful to those who have their savings in cash. Inflation is of course good for paying off loans borrowed with less expensive money.

Federal Reserve Chairman Alan Greenspan seems to support the inflation prediction. He testified in December 2002 before the U.S. Congress' Joint Economic Committee about the nation's economic outlook, spending most of his time discussing the role of the housing market in the national economy. "Stimulated by [low] mortgage interest rates . . . , home sales and housing starts have remained strong," Greenspan said. "Moreover, the underlying demand for new housing units has received support from an expanding population,. . . . Mortgage markets have also been a powerful stabilizing force over the past two years of economic distress by facilitating the extraction of some of the equity that homeowners had built up over the years. Greenspan states that people selling their homes or refinancing their home mortgages take out cash to spend on consumer items. This spending results in a stronger economy. However what he does not say is that this refinancing is creating more debt (which is inflationary) and may unstabilize the economy. He sees all this as good. However, 70% of the mortgage business is refinancing. So the extent of increased borrowing for spending purposes is dramatic. Greenspand estimates that 1/2 of all money taken out of real property on refinance goes to either consumer spending or home improvements. Neither of these types helps preserve income for the owner.

Thus, we see that a major part of the housing industry (which allegedly is driving the economy at this time) is made up of borrowed funds. Clearly, we are increasing our national consumer debt beyond good limits. This could result in the loss of property in a major economic downturn.

Europe Is Helping The Feds with Their Own Rate Cuts
The European Central Bank has finally cut interest rates by 50 basis points in December 2002, after 13 months of inactivity. While Alan Greenspan was busy reducing U.S. interest rates, the European Banks were not having any of it. Europe is having the same problems as the United States. By cutting its rates however, it makes U.S. Bonds more attractive, and encourages Europeans to invest here.

What Happens If a War In Iraq?
War is not good for the economy, to those who say it is, tell them to invest their son. However, if war can be avoided, we could see next year more positive developments for us, like a drop in oil prices. Clearly the total money spent on oil impacts our economy (and the world economy). The Oil Bill for the world's global consumers has almost doubled each time we approach a Middle East war. With the fear of the 1990 Middle East war, oil sales spiked up to 800 billion from 400 billion in before confrontation. The present situation is almost the same. In the middle of 2000, our total oil bill was approximately 875 billion dollars. It dropped to 475 billion at end of 2001. However, in 2002 the bill is up to 660 billion dollars as of July 2002 (on an annualized rate). Clearly this hugh increase in cost is slowing our global economy. Concerns about another Iraq and Palestine/Israel war are keeping oil prices artificially high. With peace, we would expect to see oil at $20.00 a barrel. There are a lot of similarities between 1990 and 1991 and now. If the analogy continues to hold, our big recovery year will be one year after the war in Iraq is over, or one year after the threat of war has passed. This could be late in 2003 if there is no war at all. The year after the Iraq war saw 15% growth rate, we might expect 10% in 2003 if there is no war. Growth rate will help our economy, create jobs and be beneficial for all.

Mold and High Cost of Insurance Issues
According to the Foundation for Taxpayer and Consumer Rights, insurance companies are creating an insurance crisis by reducing the supply of homeowner's insurance so they can increase premiums to "exorbitant levels." The taxpayer advocacy group said insurance companies are "reeling from massive investment losses sustained in the wake of corporate collapses and the recession" and argued that the government should "use all options— including regulation, litigation and legislation— to rein in the insurance industry and protect consumers from insurance company abuse." What is clear is that local apartment owners are feeling the pinch of dramatically increased insurance premiums. These premiums are eating into any profit that is brought about by Costa-Hawkins. The insurance industry states that it is sick of mold. California, Florida and Texas are having insurance availability issues, due primarily to the cost of mold-related claims. Mold repairs cost Texas insurers more than $850 million last year compared with no claims just a few years before.

A report, "Risky Business: Insurers' Increasingly Risky Investments in Corporate America Cause Insurance Premiums to Skyrocket," published by the taxpayers group charged insurers with being "blinded by greed" and jumping "headlong into the stock market bubble." The group said it reviewed the financial records of 10 insurance companies and found they "lost a combined $271.1 million in 2001-2002" as a result of investments in WorldCom, Enron, Adelphia, Global Crossing and Tyco— companies that have experienced well-publicized financial woes. The 10 companies studied were Allstate Insurance Co., Auto Club of Northern California, Auto Club of Southern California, Farmers Insurance Exchange, Fireman's Fund, Liberty Mutual Insurance Co., Mercury Casualty Co., Nationwide Mutual Insurance Co., State Farm Mutual Auto and the United Services Automobile Association. The group says that these companies now want to increase insurance premiums to pay themselves back for the losses they incurred in the market.

Higher Cost of Housing Results from Zoning Restrictions
According to a new study published by the Washington, D.C.-based Cato Institute, "Has Zoning Hurt Affordable Housing?" the United States isn't facing an affordable housing crisis, but rather the high cost of housing is caused by zoning and other land-use regulations. "The majority of homes in this country are priced— even in the midst of a supposed housing affordability crisis— at close to construction costs." The conclusion is that "zoning and other land-use controls are more responsible for high prices where we see them." The report's conclusion is what we have been seeing in Santa Monica since rent control came to power. "If policy advocates are interested in reducing housing costs, they would do well to start with zoning reform. Building small numbers of subsidized housing units is likely to have a trivial impact on average housing prices (given any reasonable demand elasticity), even if well-targeted toward deserving poor households. However, reducing the implied zoning tax on new construction could well have a massive impact on housing prices."

RECENT CASES TO WATCH

Feldman v. Superior Court
Our very own Michael Koenig representing our very own Jan Feldman won a great victory at the appellate court level. However, the opinion was not published, and ACTION is requesting of this court that it publish its opinion since it is far reaching and helpful to Housing Providers. It deals with the Ellis Act. It states that the 6-month times rent penalty is the only penalty that a tenant can receive if the H.P. decides to go back into business two years after Ellising the property. Michael was successful in overturning Judge Terry Friedman's trial court decision which stated otherwise.

Travis v. Santa Clara County Decertified
At the request of Pacific Legal Foundation, ACTION filed a request with the California Supreme Court requesting that court to hear Travis v. County of Santa Clara. Travis, a published court of appeal decision, held that an owner could not attack a local law pre-empting Costa-Hawkins, if that owner did not bring a lawsuit within a very short time period after the law was passed. This in effect puts a statute of limitations on civil rights. Could you imagine a doctrine which stated that one could not attack a segregation law because it was on the books more than a year? Well, the Supreme Court decertified the opinion and agreed to hear it. ACTION may be filing an amicus brief in the near future, setting out our position on such a backward legal doctrine.

SANTA MONICA ELECTION RESULTS IN
RENT CONTROL CHARTER AMENDMENTS

Well, it's been another day at the polls with the SMRR backed Charter Amendment passing 65% to 35%. I sometimes wonder just who is out there voting for the Housing Provider's interest in these elections. Who are these 35% voters ? Where ever and whom ever they are, they are not being too effective in convincing the 65% majority of the ill effects of these amendments.

What are these amendments? Lets take them one at a time.

First, and worst, is the Revolving Door Tenancy Amendment.
This provision amends the Charter in two separate places. 1801 (d) Housing Services, and in 1806 (a)(2). 1801(d) expands the definition of Housing Service to include "the right to have a specified number of occupants." Now this should refer to the number of occupants which existed on April 10, 1978 for tenants in possession prior to January 1, 1999 (since that is the base rent date for amenities) but SMRR got it all mixed up is allowing the tenant to claim a base amenity right as of the date that that tenant moved into the unit. In other words, each tenant (no matter when that tenant moved into the unit) has a right to the same number of occupants as were allowed when that tenant moved in (and not referring back to April 10, 1978). This is shown by the second amendment 1806(a)(2) which prohibits a H.P. from attempting to evict a tenant for subleasing, if that tenant is trying to replace a departing tenant who was listed on the rental agreement on a one for one basis. This amendment destroys the NOI rent increase and decrease analysis and shows SMRR's total disregard for the law. Under this new provision a H.P. can "reasonably disapprove" of any proposed replacement tenant but must do so within 14 days from tenant notification of the new replacement tenant. Thus a remaining tenant can rent to as many new tenants as there were original tenants when the remaining tenant moved into the apartment. What can a H.P. do in the face of this provision? First, there is a very strong incentive for H.P. to rent to only 1 tenant to begin with. Second, the H.P. should dispute any replacement tenant with a full credit and criminal background check. Whenever possible, the H.P. should object to the replacement. Is economics a reasonable grounds for objection? Perhaps in certain situations. Don't forget, if at the base amenities date no subletting was allowed, then under the Board's NOI formula, extra tenants are extra expense, and to avoid that extra expense the H.P. should be able to reasonably disapprove any additional tenants moving into the building.

Second, is the Family Revolving Door. 1806(b).
This provision was actually a SMRR misrepresentation to their supporters. It states that if a tenant's family member or domestic partner has lived in the unit for at least one year prior to the tenant dying or having to move out because of "incapacitation, then that family member or domestic partner can continue to live in the unit forever. This provision is not necessarily contrary to Costa-Hawkins, in that there is nothing in the Charter Amendment 1806(b), which states that the H.P. cannot raise the family member's or domestic partner's rent to market when the tenant vacates the apartment. Thus, this amendment was really a false promise to the tenants of Santa Monica to get them to come out and vote for other SMRR ballot measures. Don't be fooled by this one. Remember under Costa-Hawkins, when the tenant vacates and leaves behind a subtenant (or roommate or anyone else how ever they want to be characterized) the answer for the H.P. is to give that left over subtenant a 60-day notice of rent increase to market rent. Remember also, don't be a nice guy. If the tenant asks permission from you to allow a family member to stay and take care of them, gently tell them "NO." Remind them that the charter amendment elevates these people to tenants, and so is too onerous for the H.P. to waive the "no sublet clause" of the lease.

Third, is the Ellis Amendment 1806(a)(10).
This amendment seeks to impose a requirement on the H.P. who wants to Ellis his or her property, that they must "intend" to complete the Ellis eviction and intend to "go out of the residential rental business." Now this extra requirement is not found in the Ellis Act, and is totally illegal to add onto the Ellis process. It is an attempt to give tenants grounds to fight the Ellis eviction by claiming that the H.P. does not intend to go out of business or (perhaps) does not intend to stay out of business. Also, it is an attempt to give tenants who have moved out grounds to sue the H.P. for wrongful eviction under 1806 (e) if the H.P. goes back into business or if the H.P. does not complete the Ellis eviction process. If you are intending to Ellis in the future, be sure to consult your attorney and show her/him these new charter changes.

Fourth: The Trap for the Unwary.
The Filing of 3-day notices with the Board. 1806(d) requires the H.P. to serve on the Board any and all copies of the 3-day notice served on the tenant (except for non-payment of rent).

Fifth: Tenant Harassment.
This is actually a double-edged sword. A stupid amendment that actually helps the H.P. more than it helps tenants. It states in part that "Tenants . . . have the right to quiet enjoyment, privacy and freedom from harassment. . ." Well guess who the biggest violator of these rights are? Yes, other tenants. Next time you need to evict a troublesome tenant, quote this language to the judge as reasons to evict the offending tenant who bothers other tenants at the property. Clearly this will enforce the 1806 (c) grounds for eviction.

Sixth: Base Rent Protection. 1804(b).
After a Costa-Hawkins increase, the first rent charged will be the new Base Rent for the unit. This seems to put to an end the 5-year long battle about the right to set a lower rent after the first tenant vacates but keep the higher rent on record so that the H.P. can give the second tenant a rent increase to the original rent after the second tenant moved into the unit. The Board in the past has argued that the second tenant's rent is the new base rent.In other words, each new tenant gets a new base rent. For example, say the first Costa-Hawkins tenant rents a unit for $2,200. After a few months that tenant vacates. The rental market drops, and the second tenant rents for $1,800. What is the base rent? The Board consistently argued it was the $1,800, and we argued that it was $2,200. This amendment seems to say that it is the $1,800 since it is the first rent changed to the existing tenant. Some confusion is the second part of this amendment, which states that "the term initial rental rate means only the amount of rent actually paid by the tenant for the initial term of the tenancy." What does this mean? What is the "term" of a one-year lease, where the tenant pays on a monthly basis? The Board is trying to state here that the term is the one year, and that any reduction in rental payments over the year period actually reduces the base rent by averaging in these payments over this year time period. However, the wording is not precise enough to close the argument on that issue. Costa-Hawkins states that the base rent should be the first rent collected from the tenant (i.e. the amount of the tenant's first monthly payment). Thus, this issue will continue to be fought in court and Board hearings. The best way to avoid problems, is to give the tenant a month to month agreement and state that if the tenant stays 12 months or longer, that the owner will give the tenant a bonus. Some tenants might see this as a reduction in rent and thus attractive as a discount. However, the rent stays at the higher amount set in the month to month rental agreement. There are other ways to protect the base rent setting, but the reader is advised to consult his or her attorney prior to trying anything.