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Legal Column, June 2003
By Rosario Perry, Esq.

OUTRAGEOUS GOINGS ON AROUND TOWN

Well, this is quit a busy time for all concerned. Especially here in Santa Monica. With the war in Baghdad and all, most of our local politicians have been very busy passing City Council resolutions condemning it. And for good reason, SMRR clearly does not want the wave of democracy to spread too far and wide, what if such a political concept as "freedom" stated taking hold here in Santa Monica?

The police station is almost completed. It is probably the ugliest building in the City (or the County for that matter) and one wonders out loud how such garbage could be made to stack up on itself for such a great height. We are told that there is more to come (a parking structure) right next to the building. Look for that soon to be coming out of the grown. The total cost so far is estimated at $64,000,000.

The City is also moving ahead with its plans to build a new downtown library at a cost of approximately $72,000,000. We are starting to learn that the new library will hold only about 20% more books than the old one. Now one might ask why would the City spend some $72,000,000 to build a new library and tear down a perfectly good one for such small returns in books. Could it be that the library is not to be used for books? More SMRR edifice building, with City Taxpayers' hard earned cash.

After Prop I passed some 4 years ago, the SM City Council gave Housing Department the power to give Community Corp of Santa Monica up to 5 million dollars per project to develop low income housing with NO PUBLIC INPUT and NO COUNCIL REVIEW. The Department recently gave Community Corp over 4 million dollars to buy 3 empty lots at 15th and Broadway. They measure 150 x 150.

Not unexpectedly, the City is in the red to the tune of $11,000,000 to $15,000,000 dollars for this year's budget. Of course with all the cutting of services not one dime has been cut from the millions the city is giving to Community Corporation to build low income housing units, and all City employees get their usual salary raises. Neither has the city seen fit to cut back on its massive building plans. Clearly the city is headed towards a reduction in bond rating, which will result in much more money being spent for interest, and much less money available for city services. No one on City Council seems to know the importance of balancing a budget. We discussed (predicted) such a financial mess more than a year ago, and such a state is coming to pass).

RECENT SANTA MONICA LAWS OF INTEREST

Bootleg Units Revisited
Do you remember the discussions of about a year ago, where we worried about what the City would do with (or should I say against) bootleg units. Well, after some delay the City administration is moving ahead with a new law which is a mixed bag. Tuesday, April 22, 2003, the City Council approved a Staff Report from Building And Safety which proposed that an owner of any discovered bootleg unit be (1) allowed to bring the unit up to "habitable" condition and (2) be required to pay permit fees for the work to the tune of approximately $7,000 per unit. This is a very hefty cost for city permits, and together with the City required work, may make the "legalization" too expensive. Each case will involve independent considerations. We appeared at the public comment period in front of City Council on this issue, and argued on behalf Housing Providers that the preservation of low income bootleg units required no city permit fees and light "habitability" considerations. The Council always suspicious of Housing Providers' concerns, refused to give us an open hearing on the issue. We will continue with our arguments in front of Staff as they write the guidelines. We did get a nice write up in the Santa Monica Daily Press (Thursday, September 24, 2003 edition (See http://www.smdp.com) for our efforts. We were quoted as stating to City Council: " [T]here were probably more than 3,000 bootlegged units in Santa Monica, many of them 300 square feet in size or smaller. If the [Housing Providers] are forced to pay full price [$7,000 permit fees], the future of some of the affordable housing may be in jeopardy…."

However, on the good side of this coin, consider that this is your opportunity to make legal a bootleg unit. In this way, you will be able to count the income from this unit towards annual gross income for purposes of refinancing, or for purposes of sale. Traditionally, banks will not count into gross income, that money which comes from a bootleg unit. Thus the real income of the property is reduced (and thereby the real value of the property is reduced). With the current valuation on residential rental income at 12 and 14 times annual gross income one can see that adding say $500 per month to the recognized income will increase the property value some $75,000. That is not a bad return on investment in some cases. Now before anyone rushes to report themselves to the City, lets see what the final law will be. All in all we consider this new move a positive step by the City to preserve low income rental units and resolve a dispute between City and Rent Board which has been festering for over 20 years.

Rent Control Regulation 3304 "Absentee Tenants"
The first indications concerning the "absentee tenant" regulation is positive. There have been about 20 applications filed so far with the Board (not counting Douglas Emmett's 17 or so to be filed) and they have been set for hearing within 30 days of the filing of the petition. Don't forget that you must follow the Board Regulation's procedure exactly as it is set out in the instructions: i.e., a 10-day notice to the tenant on Board's form and then the filing of the petition with the Board itself. Getting important information about where your absentee tenant actually lives may be difficult in some situations. However, in many situations it is as simple as calling the local title insurance company and asking them to search pubic records to see if your tenant owns a home. Always do a search on the internet for the tenant's name. Some tenants have webpages about their real homes and lives and work. There are many public record sources that can be checked from the convenience of your own computer or telephone.

The applications we have seen so far, show overwhelming evidence that the tenant is absentee. There might be as many as 3,000 of these units. Everyone we talk to has one or two tenants who use the apartment for an office, or second apartment to visit on weekends. And why not? At the ridiculously low rents that they are paying, they can afford the luxury.

RECENT STATE OF CALIFORNIA BILLS OF INTEREST

On another negative note, we must understand that the State legislature has declared war on Housing Providers statewide. There have been a series of bills introduced by certain legislators, which if passed into law (effective January 1, 2004) will make our lives much more difficult and expensive. Lets review them here: AB = Assembly Bill and SB = Senate Bill.

AB 831 (Goldberg): Unlawful Detainer
This bill would require a court to restore a defendant in an unlawful detainer action to possession who has been displaced pursuant to a writ for possession executed as the result of fraud, mistake, clerical mistake, inadvertence, accident, surprise, or excusable neglect. Furthermore, this bill seeks to extend the time that a tenant must answer an UD complaint from 5 days to 10 days. Finally, this bill seeks to extend the time that a tenant must vacate his/ her apartment after a writ of possession has been issued, from 5 days to 10 days. [Goldberg has agreed to amend the bill so that (1) current law allowing tenant 5 days to vacate after writ will be extended to 5 "business days"— weekends and holidays do not count, and (2) current law allowing 5 days for tenant to file a response to a UD complaint will stay the same in the new law for UDs alleging that the tenant has used the premises for an unlawful purpose which poses an imminent threat and danger to the health and safety of others and the complaint states facts supporting that assertion; but in all other cases, the time limit for tenants to respond will be extended to 10 days (i.e., for non payment of rent). Talk about confusion and complications. Of course no mention is made about the extra rent loss to the owner that results from the extra 5 days to respond and 5 days to leave. That amounts to an extra 10-day rent loss over and above the rent losses now suffered by Housing Providers already.

AB 1059 (Lieber): Retaliatory Eviction, Punitive Damages.
Should the cap on punitive damages be increased from $1,000 to $2,000? This bill seeks to assist tenants who have been the subject of a retaliatory eviction by increasing the limit on punitive damages that may be awarded in these cases from $1,000 to $2,000. As initially introduced, this bill was much broader in dealing with the subject of landlord harassment by prohibiting landlords from engaging in specified acts with malice. This has all been deleted. If you remember this was the bill that copied word for work the Santa Monica Tenant Harassment ordinance.

AB 1217 (Leno): Relocation Benefits
Amended as of April 21, 2003. This bill adds the following words: "© Diminishes or enhances any power in any public entity to mitigate any adverse impact on persons displaced by reason of the withdrawal from rent or lease of any accommodations." The purpose of this addition is to give the City the power to require relocation benefits to be paid to tenants no matter what their financial income status is. Under current law, only low income tenants are entitled to receive relocation benefits under an Ellis eviction. This bill also reaffirms the right of an owner of a residential hotel, as defined in Section 50519 of the Health and Safety Code, to withdraw guest rooms or efficiency units under Ellis, without interference from the City. This bill is set to be heard for vote in committee on May 5, 2003.

AB 1256 (Koretz): Rent Control
An act to amend Sections 1954.52 and 1954.53 of the Civil Code, relating to rent control. This bill would abolish the Costa-Hawkins act, and place under rent con-trol all buildings built after 1979, as well as buildings built before 1979. This bill was referred to committee in March 2003, but has not moved forward. It does not seem to have support.

AB 1384 (Maddox): Pre-termination Inspection
Clarifies existing law which requires a landlord to notify a tenant of his or her right to request an initial inspection of the rental unit prior to terminat-ing a tenancy by providing that a landlord is NOT required to give such a notice or perform the inspection when the landlord has served on the tenant a three-day notice to pay or quit.

AB 1361 (McCarthy): Non-Residential Security Deposits
Non-residential security deposit refund within 30 days, not two weeks. This bill was referred to committee in March 2003, and is set for hearing May 6, 2003.

SB 90 (Torlakson): Residential Security Deposit Refund
Existing law requires the landlord, within three weeks after the tenant vacates, to furnish the tenant, by personal delivery or by first-class mail, an itemized statement indicating the basis and amount of any security received and the disposition of the security. This bill would revise these provisions to require a landlord to include a receipt for any labor or material the landlord has paid for and has deducted from the security. If the receipt lacks certain information about the person or entity providing the labor or material, the landlord would be required to provide it that information. The bill would establish specific methods by which a landlord could may satisfy his or her obligation to provide the above-described information and remaining security, if any, within three 3 weeks. As of April 23, 2003 this bill seems destined to pass senate. As proposed this bill might require the OWNER to actually do all repair work within the 3 weeks, so that bills and receipts for that work are available to be sent to the tenant.

SB 178 (Cedillo): Rent Control
An act to amend Section 1954.53 of the Civil Code (Costa-Hawkins), relating to rent control.Costa-Hawkins prohibits cities from imposing requirements on developers to construct deed restricted units as conditions to approving new construction or rehabilitation of existing units. This bill would specify that Costa-Hawkins, does not prohibit cities from (1) requiring low income deed restricted units to be built and (2) to enforce rent controls on units built or rehabilitated pursuant to the cities inclusionary zoning requirements. This bill is a major change to Costa-Hawkins , and probably will result in unforeseen results of much higher density in cities, and fewer new construction projects being built. This bill seems destined to be passed by Senate.

SB 345 (Kuehl): Amendment to Costa-Hawkins and other Landlord-tenant Related Laws
First, for all owner occupancy terminations starting January 1, 2004, (i.e. where the owner evicts a tenant to gain occupancy of the unit) the rent for that unit shall be the same rent as the evicted tenant was paying, for a period of 5 years starting from the date that the owner first moves into the unit, no matter how many vacancies occurred after the owner vacates the unit (note normally, the owner must stay in the unit for at least one year). Under existing law, an owner who vacated a unit after a year would have to rent that unit at the old rent. But after the that new tenant vacated, the owner could go to market rent. Here Kuehl is making the owner keep the rent at the initial rent for a full 5 years after the owner first occupied the unit. This Kuehl bill does not apply to most condominiums. Second, this Kuehl bill freezes the file of all UD lawsuits filed for 60 days after judgment is entered against the tenant. This is an attempt to stop Housing Providers from finding out if the new proposed tenant who is applying for an apartment has been evicted from their last apartment. Each OWNER should have a proposed tenant fill out an application about these details and if they lie the OWNER can evict for misrepresentation on the application (See ACTION rental agreement). Third, the Kuehl bill seeks to require a plaintiff to now attach to the complaint the following documents: (a) a copy of any notice of termination served on the defendant (b) a copy of any notice served on the city (with proof of service on the city) [remember, in SM we are required to serve a copy of a 3-day and 60-day notice on the Rent Board. We must now attach a copy of that document in our complaint-more traps for the unwary. (c) any proof of service of the notice served on the defendant or any public entity, (d) any written rental agreement or lease regarding the premises, and (e) proof of registration with any local rent stabilization entity. These new requirements will create havoc with unlawful detainer lawsuits, and in the case of Owner Occupancy Evictions, and even technical violations might result in the same owner being precluded for 4 years from trying to evict that tenant again. Clearly, Kuehl is trying to complicate the eviction process to such an extent that it becomes almost unworkable for the average OWNER to evict a tenant. Fourth, a tenant may cure the non-payment of rent default by tendering to the OWNER the rent due at any time prior to the beginning of UD trial. This is one of the major changes in landlord tenant law for over 150 years. The tenant may do this only once every two years, and only if the tenant has resided in the unit for one year. Fifth, showing her true drug loving colors, Kuehl now has limited the ability of the housing authority to evict tenants for drug related crimes committed within the government owned apartment unit. While this part of the amendment only concerns public housing providers, it shows the extent to which Kuehl is going to stop all evictions. If she intended to do so, she could not start the destruction of rental housing within our state in a more effective manner. She is Public Enemy Number One to housing. This bill is set for third reading, and if it passes it will go to full Senate.

SB 515 (Kuehl): Amendment to SLAPP Statute
However, it does not seem to be going anyway, and is totally confusing. Not a housing issue for now.

HOW GOES OUR ECONOMY?

With all the bad news on the state legislative level, one may ask why own an apartment building at all? Clearly the powers that be, are trying to drive all good OWNER out of the business. Perhaps there is a plan among Kuehl and her cohorts to take over ownership of apartment buildings altogether and make them state owned and controlled. What better way to secure a stronger voter base to promote their own political self interests, than by filling apartment buildings with low income tenants who vote your political ticket. For instance, if one studies LA city government it is clear the City has that plan already in motion. The City of LA has sponsored many non-profit organizations (top heavy with employee salaries) and these agencies go around buying up apartment buildings at deep discounts with City money, after the City Building and Safety and Housing Department puts these buildings into their REAP program (alleged building code violations). This one-two punch has been in operation in LA for many years. First the City comes in with a long list of required repairs, most of which are unneeded or tenant created defects. The OWNER overwhelmed with the scope of repairs and the short time limit to make them, falls behind. The building is then placed into the City's REAP program where tenants are told not to pay the owner any further rent, and the owner loses his rental income stream. Next, the owner falls behind in mortgage payments, there is no money to make repairs. Finally, the OWNER in desperate straights, sees the non-profits low ball offer as salvation. A neat trick, which sounds like a federal RICO violation.

Is there a silver lining to all this distress? Well the general economy as we all know is in a funk. The War in Iraq (and the run up time to the beginning of the war) has created unsteady times for all. The lament is nationwide and universally similar. The Conference Board announced lately that the U.S. leading index decreased 0.2 percent. The leading index declined for a second consecutive month in March 2003, but the information available so far in April suggests that these declines will not continue. The leading index has been fluctuating around a flat trend since December 2001. The flatness in the leading index suggests that U.S. real GDP growth will stay in the 2-3% range for now. As long as economic growth is constrained in this range, the labor market cannot improve. The coincident index has been essentially flat in recent months with gains in income and sales offset by weakness in employment and industrial production. With economic growth at or slightly below potential, the coincident index is unlikely to grow strongly.

Half of the ten indicators that make up the leading index decreased in March. The negative contributors to the index— beginning with the largest negative contributor— were building permits, average weekly initial claims for unemployment insurance (inverted), interest rate spread, real money supply, and index of consumer expectations. The positive contributors (from the largest positive contributor) were vendor performance, stock prices, manufacturers' new orders for non-defense capital goods, and manufacturers' new orders for consumer goods and materials. Average weekly manufacturing hours held steady in March.

The Federal government ran up a deficit of $252.6 billion in the first six months of the 2003 budget year, nearly twice the total for the same period a year earlier. The total deficit so far this fiscal year, from October 2002 through March 2003, compares with a shortfall of $131.9 billion a year earlier. Government revenues were down by 6.1 percent to $825.2 billion for the six months in comparison to the same period a year earlier. That partly reflected lower tax revenue from the listless economy. Individual income tax payments totaled $372.1 billion, representing an 6.8 percent decline from the previous year. Corporate tax payments plunged by 43 percent to $44.6 billion. That sharp drop reflected in part the impact of business tax cuts enacted last year and weaker profits, the Congressional Budget Office said. Federal spending for the six months totaled $1.08 trillion, a 6.6 percent increase from the corresponding period in fiscal 2002. The biggest spending categories so far this budget year are: Social Security, $249.3 billion; programs of the Health and Human Services Department, including Medicare and Medicaid, $246.5 billion; military, $180.9 billion; interest on the public debt, $160.6 billion. For the entire 2002 budget year, which ended Sept. 30, the government ran up a deficit of $157.8 billion, ending four consecutive years of surpluses. For the month of March 2003, the government produced a deficit of $58.7 billion. That was based on revenues of $120.4 billion and outlays of $179.1 billion. The deficit for March, however, was smaller than the shortfall of $64.2 billion recorded for the same month last year.

The U.S. House of Representatives just passed a $2.2 trillion budget, bringing federal spending up to about $25,000 for every family in the nation. The Congressional Budget Office estimates that deficits over the next 10 years will reach $1.2 trillion. The Financial Times gives a $1.5 trillion estimate. And Goldman Sachs puts the number as high as $4.2 trillion. Meanwhile, the states face huge financial problems. They're cutting back on police, libraries, roads— just about everything— in an effort to close the $100 billion gap between revenues and expenditures. "State governments are under siege," says the President of the National Conference of State Legislatures. New York faced a "doomsday budget," say the press reports. How come the states are forced to cut back...while the Feds keep expanding? Fed governor Ben Bernanke explained last summer: "We have a technology called a printing press...!" The states can't print money; the feds can.

However, here at home in Santa Monica things may be different. A local long time real estate broker, Vince Muselli, reports that Archstone Communities, the Englewood, CO-based apartment REIT, bought three buildings in Santa Monica (425 Broadway, 1455 Fourth St. and 1915 Ocean Way) for a total of 57,500,000. With those types of numbers, one wonders what is going on. Is real estate exempt from the hard times which seem to hang over the heads of all other areas of the economy? Well figures released in April 2003 (this month) by the U.S. Commerce Department showed that new homes were started at a seasonally adjusted annual rate of 1.78 million in March, an increase of 8.3 percent from February 2003's pace of 1.64 million units. National Association of Home Builders (a Washington-based trade association) said that this report "provides good news that the industry remained resilient through major weather gyrations as well as uncertainties related to the war in Iraq and a potential terrorist backlash. It's now clear that, in this year's first quarter, housing once again provided a solid contribution to growth in the nation's Gross Domestic Product." And that about sums up the economy. The housing market is the engine that keeps this country's economy running.

At a recent real estate trends conference held by the Urban Land Institute in Washington D.C. the message was that Real estate continues to be the favored investment despite rising vacancy rates and falling rents in the office and apartment markets. Real estate still appears to be the investment vehicle most able to withstand a variety of unknowns. Because real estate has consistently outperformed other forms of investment, investment capital continues to flow into real estate from a variety of sources, such as pension funds, foreign investment companies and private investors, with the sum total approaching $90 billion overall. The multifamily sector will remain a strong investment area, even though vacancy rates are up, due to steady population increases in the years ahead that will fuel productivity and generate demand for development to accommodate the growth. (The U.S. Census Bureau projects that the nation's population will rise by more than 60 million by 2025.) Where are these people to live? Well in our apartment buildings of course. Better, is the fact that population trends show that the LA area will increase in growth faster and greater than most other areas of the country. Furthermore, the West Coast is seen as safer than the East Coast because of terrorism concerns. Finally, job growth is seen stronger in LA area than in most sectors of the country. The nearly 80 million young people born between the early 1980s and 2002 have the potential to boost the apartment market demand in the years ahead, with demand particularly high for less expensive "class B" and "class C" space. The more expensive "class A" space is likely to become increasingly popular with empty-nester baby boomers who choose to rent, rather than own. We have both types of buildings in our City.
The Real Estate sector is so strong that even Alan Greenspan (Federal Reserve Chairman) is paying attention to its performance. He had a private meeting on April 9, 2003 with a select group of 23 brokers from large real estate companies around the country to tap their collective views on the state of the nation's local and regional housing markets. When you're hot, you're hot.

Back in the LA area, First Republic Bank reports that luxury home values in California climbed 3 percent last year, with Southern California values hitting some of their highest levels on record. Values in Los Angeles were up 3.6 percent in 2002 compared with 2001. Fourth quarter values in the city were up 3 percent from the previous quarter, driving average prices up to $1.34 million, the highest since 1992. David Mossler, of Mossler, Deasy & Doe in Beverly Hills, said the strength of the entertainment business and lack of inventory in Southern California continue to drive the luxury home market. "In West Los Angeles, there is great demand for quality houses that are well-priced, but I have buyers who can't find houses."

Economic Summary for This Month
What all the above means is that the economy is in a state of suspense. With high spending and low revenue, the government is printing more and more paper money. This decreases the value of the money, increases overseas currencies against the US Dollar, and makes owning stocks and bonds somewhat risky. Furthermore, keeping cash in the bank probably results in a 2 to 3% loss each year on that real value of those funds. The fact that gold is going up in value indicates that the dollar is going down in value. Real Estate single family homes seem to be holding their own in value, but there is a possibility that expensive homes will decrease in value with the worsening of the job market. Thus the only really fail safe investment for now is residential rental properties. Investment properties are insulated from foreign investment trends, and are not jeopardized by decreases in high end single family home sales. Indeed, as single family home values fall, more and more people are moving into rental units because they cannot afford the large mortgages. So with all the uncertainties that accompany poor economic times, rental income is the best place to put your money.


AN OPEN LETTER TO PRESIDENT GEORGE W. BUSH