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Legal Column, July 2003
By Rosario Perry, Esq.


OUTRAGEOUS GOINGS ON AROUND TOWN

Prop S Taxes Are on Their Way
All is quiet on the western front. that is, the Santa Monica Beach community front dealing with the Prop S School Taxes campaign (money to save our children from certain illiteracy). The war over passage of Prop S parcel tax was short lived and while bravely fought by about 10 people with $6,000, was apparently lost by about 30 votes. In other words, had 30 or so more people voted against the Prop S measure it would not have passed. Not since the days of the Japanese expansion southwards into Malaya and Indonesia after Pearl Harbor has our sleepy city seen such a push for dominance and control by an alien cabal. Of course we speak of SMRR (not Imperial Japan). You would have thought SMRR’s very existence was at stake in this election, and maybe it was. SMRR was bent on showing the rest of the City that its boundless power and control over our city is inexhaustible and unfathomable. And well it is. In an assault on City voters, similar to the kamikaze attacks of long ago, SMRR children, parents of children, union members (what are their interests?) and other assortments of people descended upon the unsuspecting populous of our city with $200,000 worth of campaign publications and multiple personal visits to each voter north of Montana, stressing that it was now or never for our school system. This was do or die for SMRR. Its sinew was on display, and maybe so was its capacity to control the political milieu.

Well, the deluge was cataclysmic, but then these 10 or so people with their $6,000 dollars in opposition almost won. That clearly shows that the voters do not treasure Prop S Taxes as much as SMRR wants its subjects to love them. Does this mean that next year’s perennial request for more tax money for the schools will not pass? Can SMRR do it again? How much political cache does SMRR have? All these questions will be answered as time goes by. However, it is interesting to note that even Imperial Japan ran out of steam as its power was depleted by over exertion.

Musical Shells, the Pea, and Bankruptcy?
Do you remember the old carnival game where the huckster puts a pea under one of three shells, and then has you bet that you can’t guess which one after he rearranges them? Well, the City’s Budget (or Budget deficit to be more precise) sort of reminds us of the shell and the pea game. What started out (according to City staff) as a small budget deficit, has now distended into a much larger one, but no one is telling us how much. The numbers are either $8,000,000 or $16,000,000, or more or even less. How is it that our City does not know how much they will need and how much they are in the hole? The next part of the shell game is what the City Council is going to do to cure the deficit, if anything? The SMRR dominated Council seems to feel that they will just borrow the money and move forward with their tax and spend policies. Is our City headed for bankruptcy? No one would have contemplated that was possible two years ago, but today, no one would controvert such a possibility with the same amount of conviction. Why do we worry about such a possibility? First, taxpayer’s revolt. The homeowners of this city have had about enough of excess taxes and will not vote for any more, be it for Libraries ($72,000,000) Police /Fire Buildings ($68,000,000) Rand Corporation Land (what ever that will be? — $53,000,000) Community Corp Low Income Housing ($???,000,000s) or the Pier, Streets, Schools, and whatever other disasters SMRR wants to pawn off on the Voters. Second, This means that the majority of future taxes will fall on the single family homes and commercial property. These venues are not going to take the load. If we do fall on hard times, as is suggested in the Economy section of this article, then there will be very little income for the City to tax, and the budget deficit will grow exponentially.

UPDATE ON RECENT STATE BILLS OF INTEREST

As we reported in the last edition, the State legislature has declared war on the state’s Housing Providers. There have been a series of bills introduced by certain legislators, which if passed into law (effective January 1, 2004) will make owning and operating an apartment building that more difficult. Lets follow their progress from last month: AB = Assembly Bill and SB = Senate Bill. Here we go:

AB 831 (Goldberg): Unlawful Detainer
This bill extends the time to answer an unlawful detainer complaint from 5 days to 10 days, plus other amendments making it more difficult to evict tenants. As of June 5, 2003 (at the third reading) the measure failed to pass. Goldberg has made a motion to reconsider, update next issue.

AB 1059 (Lieber): Retaliatory Eviction, Punitive Damages
This bill increases penalties assessed against a housing provider from $1,000 to $2,000 for retaliatory eviction. As of June 5, 2003 this bill has not passed, and has been referred back to the Judicial Committee of the Assembly.

AB1217 (Leno): Relocation Benefits
This bill has been amended since last we spoke, and as it reads now, it allows Cities to (1) require the housing provider to pay relocation benefits for Ellis Act evictions to all tenants, not just those who are low income (i.e. the very rich get their relocation fees too); and (2) eliminates residential hotels from the rental housing that can be Ellised at all. In other words if this bill passes, a city can prohibit residential hotels from going out of business under Ellis, and can require the housing provider to pay all tenants evicted under Ellis Act a relocation fee, rich and poor alike. This bill passed the Assembly and has had its first reading in the Senate.

AB 1256 (Koretz): Rent Control
This bill would abolish the Costa-Hawkins act, and place under rent control all buildings built after 1979, as well as buildings built before 1979. Nice. However, this bill was referred to committee on March 17, 2003 and has had no action since that time, leading us to believe that it will not pass this year. That is good news for us.

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 terminating 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. This bill passed the Assembly and has now had its first reading in the Senate. It might pass.

AB1361 (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. This bill passed the Assembly on May 15, 2003 and has been sent to the Senate.

SB 90 (Torlakson): Residential Security Deposit Refund
This bill requires a housing provider to include in the statement of deductions from security deposit, the actual receipts for the repair work which housing provider has deducted from the security deposit. 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 the tenant that information. This bill seems to require the hosing provider to do the repair work within 21 days. This bill passed the Senate in April 2003 and was sent to the Assembly. It was there sent to Judicial Committee on May 15, 2003. There has been no further action on the bill since then.

SB 178 (Cedillo): Rent Control
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 passed Senate on June 4, 2003 and was sent to the Assembly where it has had its first reading. It appears that it will pass.

SB 345 (Kuehl): Amendment to Costa-Hawkins and other Landlord-tenant Related Laws
This is Ms. Kuehl’s slap at housing providers. 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 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. 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, this bill has limited the ability of the housing authority to evict tenants for drug related crimes committed within the government owned apartment unit. This part of the amendment only concerns public housing providers. This bill passed the Senate and was sent to the Assembly. As of May 15, 2003 it is in committee and has been read for the first time.

WHERE IS OUR ECONOMY TODAY?
IS THERE A BUBBLE?

With all the bad news at Sacramento is there any brightness we can glimmer from the economy? What is new here? Greenspan is sort of new, he has said that the economy weakened in March and April 2003, but that it has “stabilized” now in June 2003. Hmm? He suggested that there will be a quarter point rate cut in June 03 by the Fed. If this cut comes about, it will not mean much to an already low 5.3 % fixed interest rate, 30 year mortgage (The interest rate on the 15-year mortgage is about 4.73 %). Friends have told us that they are getting 4% variable loans on multi family residential buildings (5 or more units) and at that price it’s cheaper to buy a building than to let the money sit in the bank. As for the business of refinancing itself, the Mortgage Bankers Association of America forecasted $3 trillion in mortgages would be written in 2003, topping last year’s approximate level of $2.5 trillion.

Well, this raises the age-old question: How low can interest rates go before they spike back up? How far will long-term mortgage interest rates plunge before they rise back up again? The buzz on the street is that it will not fall lower than 4% fixed rate 30-year loan. It is now at about 5.30%. However, if one looks back to the post World War II years, the rate was 3.5% for fixed 30 year mortgages. Can they get there now? Well, in Japan the 10-year Treasury is in the 1 percent range, the 30-year mortgage is in the 3 percent range and the five-year mortgage is in the 2 percent range. So do we get Japan rates here? Remember that Japan printed paper money in excess to stimulate the economy (it didn’t work) but the lending rates did fall dramatically. Here in this country the government is printing lots of paper (which is driving down the value of the U.S. dollar and increasing the price of Gold and the Euro). So while we get cheap money to borrow at low interest rates our U.S. dollar is not worth as much as it was a year or two ago. It has been estimated that the U.S. dollar has lost as much as 30% against the Euro. This has driven gold up to $369.00 an ounce, and has put the Euro up, so that one U.S. dollar equals 1.185 Euros. Two years ago one U.S. dollar was about .89 Euro. The loss has been almost 30 cents to the dollars. Quite a loss. What is happening, of course, is that the federal government is printing so much paper money that it is reducing the value of the U.S. dollar.

This loss of U.S. dollar value might come back to drive up the interest rates, because as foreigners stop investing in U.S. securities (government bonds) for more stable currencies, the U.S. Government must increase the amount of interest in our country to keep overseas investors interested in lending us their money. Thus there is (or used to be) a balance of sorts between the level of interest rate in our country (measured by U.S. bond rate) and the amount of investment we received from overseas. The amount of money the government received from overseas (in loans) helped pay for the high price of running our federal government. The Feds are required to keep the money flowing into this country (in loans) to have money to pay their federal deficit budgets. Therefore, the Feds might be required to raise interest rates even though the economy is not doing that well. This of course might start a drop in real estate values, and surely a worsening of our economy. Clearly the government does not want this result. At the present time, it has relied upon its printing presses to keep things afloat. However, if there is a mass exodus of foreign investors, selling U.S. dollars and putting their money into Euros for instance, then we are in trouble over here. Remember, too, that there is a trade imbalance, we are buying more foreign goods than we are selling to them. Thus, there are a lot of foreigners with tons of U.S. dollars in their hands, and there could be a currency crisis coming soon (maybe even this summer). If it gets real ugly, unemployment could continue to rise at a rapid rate, and these layoffs could mean people could not afford to own high-end housing. Real property prices could drop.

The new investment everyone is talking about now is Gold. Of course, gold has been the center of investment and savings for 5,000 years. However, it is being rediscovered at this time. Remember when gold was $850 an ounce? That was when Nixon was president. It started at $35 an ounce just before then, and was run up to $850 before falling back to $250 an ounce. Does that sound like the old stock market to you? Well it might be just another costly ride. Clearly gold is a conservative investment, but rarely do investors receive any interest from the gold they hold. Thus when one considers lost profits on the money they have invested in gold it is not the strongest investment opportunity. Many a fortune has been lost in gold. At best gold keeps up with inflation over long periods of time.

So what does this all mean?
First, we suggest that the gold of olden times could be the apartment building of modern times. What is more stable an investment and still produces a good income, than an apartment building? Remember, our advice, don’t pay more for an apartment building because the interest rates are lower now than they were a year ago. The lower interest rate does not mean that your rents are going up. Especially now, be sure to purchase buildings based on solid rental rates. To be conservative, plan on seeing market rate rents fall by 20% over the next year. What will that do to your cash flow? What we have been experiencing in apartment market increases in value, have been somewhat similar to stock market run-ups and gold run-ups. The only difference is that if purchased correctly, an apartment building will always produce some income to keep your investment safe. The less leveraged you are in an apartment building right now the better off you will be. Think twice before borrowing against your current buildings to raise money to purchase another one.

Second, be careful about investing in bonds; even with higher interest rate yields. If the dollar does continue to fall in value, and if inflation comes back to our economy, then the value of the bond will fall dramatically, wiping out any interest gain you have received. If there is a currency crisis then there will be inflation.

These are times where there will be dramatic movement in the economy. A well-purchased apartment building will be a great hedge against whatever the economy will throw at you. A poorly purchased building will be an anchor around your neck. Now is the time to exercise caution. If you have a building or two, and some money in the bank, think about sitting pat and waiting for this year to end.