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Legislative Update - June 5, 2018

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On Friday, June 1, the local Long Beach Rent Control Ordinance proposed did not garner enough signatures to be turned in. What does this mean? The Rent Control Ordinance will not be on the November ballot. However, they still have until July 30 to collect signatures so please remain vigilant and let us know of locations where they are actively asking for signatures. Thank you for all you have done and will continue to do.

Other Bills:

AB 2364 (Bloom) – Dead – Bill that would have imposed rent control on property owners that decide to go back into business within 10 years.

AB 2618 (Bonta)
– Dead - Would have required anyone who manages residential AND commercial property to obtain a state run certificate program after completing a state supervised education class.

AB2343
– Is being amended – will update as we learn more.

AB 2925 (Bonta)
– Dead – Would have imposed a just cause mandate if property owner serves a 30- or 60-day notice to terminate for all residential AND commercial property.

 

California Housing Crisis: Part 2

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Editor’s Note: This is Part 2 of a three-part article. Part 1 appeared in the May Apartment Journal and Part 3 will appear in the July issue.

III. Attracting Big Business Without Accounting for Big Housing Demand Is a Big Problem.

For years, local governments have been luring big businesses to their cities and counties through tax breaks and incentives, without equally investing in housing to meet demand. In San Francisco, for example, city leaders have successfully lured big tech companies like Twitter, Dropbox, Salesforce, Zendesk, Airbnb, Lyft, Uber, Pinterest, Yelp, and even Google to set up shop right in the heart of the City through tax breaks and other development incentives.15 Before that, in the early 2000’s, it was biotech companies. But while politicians have been successful in luring well-paying jobs in droves, they have failed, and miserably at that, to account for population growth and in creating or facilitating the development of housing to accommodate the city’s housing needs. By the numbers, the Bay Area has added half a million more jobs than housing units since 2011.16

Statewide tax break incentives pose similar problems. The State recently approved $91 million in tax breaks as part of the California Competes initiative, which provides incentives for 114 companies to bring jobs to various parts of California.17 Sounds great until the statewide job growth exacerbates California’s housing problems.

Then there’s government’s incessant fawning over Amazon. Almost every major city in America is competing for Amazon’s new headquarters (including, of all places, the San Francisco Bay Area). The bids that are being discussed are jaw-dropping.

Chula Vista, California, for example, has offered $100 million worth of property and 30 years of property tax breaks, with no plan to develop more housing to accommodate the influx of 50,000 new jobs.18

Fresno, California, however, might be on to something with its controversial yet novel Amazon proposal. It proposed no tax breaks, but promised to funnel 85 percent of all taxes and fees generated by Amazon into a special fund for housing and other infrastructure.19 The catch was that Amazon got a say in how the taxes were to be spent.

Regardless, Fresno’s “build to play”20 proposal was a reasonable one because it required the development of housing to be more or less commensurate with job and population growth.

Although Fresno’s proposal was ultimately rejected, the approach was noteworthy because it approached job recruitment and growth with housing in mind.

IV. “Local Control” Is Why Sacramento Will Be the Location of the Next Big Housing Crisis.

Local governments argue that repealing Costa Hawkins will give them back “local control” to address their own housing needs. It is these same governments that blame rental housing owners for housing affordability problems, which they argue justifies why they should have the power to rent control all rental property. In fact, “local control” means local governments can choose to neglect their housing responsibilities while taking actions that create housing affordability problems, and then blame property owners when affordability problems and housing short ages actually occur.

Take what’s happening in Sacramento as an example. Sacramento is the fastest growing city in California.21 It also has one of the hottest housing markets not just in California, but also in the country.22 On top of that, rents are rising faster in Sacramento than any other part of California;23 some say it’s the fastest in the nation.24 Housing supply is low, while demand is high, and the population keeps growing.

But how did Sacramento go from “cow town” to “wow” town.25 More importantly, what are city leaders doing about meeting Sacramento’s housing demands?

It is no secret that a mass exodus from the Bay Area to Sacramento is in full throttle.26 But Sacramento leaders have also been working overtime to offer tax breaks and incentives to attract new businesses to the region. Just recently, Sacramento agreed to give Centene, a health insurance company, $13.5 million to establish headquarters in Sacramento. Ironically, the money they are offering to Centene to produce jobs in the area comes directly from old redevelopment funds—funds that used to be reserved for affordable housing production! 5,000 jobs are expected to be generated from the deal.

Sacramento was also one of several hundred cities to offer incentives to Amazon to build a new headquarters and bring in 50,000 new jobs. In fact, local governments in the Sacramento area offered Amazon more than $500 million in job grants, land donations, and infrastructure financing to lure the online behemoth to the region. None of the proposals were tied to the development of new housing.

Blaming property owners for high rents, therefore, is misguided and misplaced, when city leaders are making decisions every day that exacerbate the housing shortage problem, while neglecting to to offer incentives to Amazon to build a new headquarters and bring in 50,000 new jobs. In fact, local governments in the Sacramento area offered Amazon more than $500 million in job grants, land donations, and infrastructure financing to lure the online behemoth to the region. None of the proposals were tied to the development of new housing.

The city has made numerous other recent decisions to grow the area without considering its housing needs. The city just built a new NBA arena for the Sacramento Kings. “[I]n the 26 months the complex was under development, $530 million in real estate transactions took place in a 10-block radius around the arena, more than 80 new businesses moved downtown, and neighborhood employment jumped 40 percent.”27 A rail yards project is in development,28 as well as discussions about a riverfront district project on both sides of the Sacramento River.29

Sacramento is also hoping to be the home of a new Major League Soccer team. Subsidies for hotels, a science museum, an aquarium, and a new convention center are also either in the works or being discussed.30

Mayor Darryl Steinberg has vowed to make Sacramento a center for jobs, and is unabashed in his bid to attract high-tech startups.31 City leaders have even changed Sacramento policy to allow staff members to offer financial incentives to large companies interested in relocating to the Sacramento area.32

This kind of city growth should be commensurate with big investments in housing development. But Sacramento is barely lifting a finger to require new housing development.33 It’s making the same mistakes the Bay Area made.

Blaming property owners for high rents, therefore, is misguided and misplaced, when city leaders are making decisions every day that exacerbate the housing shortage problem, while neglecting to contribute toward the development of new or affordable housing.


V. Rent Control Removes Units from the Market and Drives Up Costs.

According to a recent Stanford University study on the effects of rent control, there are 30 percent fewer rent controlled units in San Francisco than there were when rent control went into effect in 1995.34 "Rent control exacerbates the housing shortage by pushing landlords to remove supply of rental housing," Rebecca Diamond, author of the Stanford study, stated recently.35 The study goes on to show that for every six percent decrease in housing supply, rent prices increased by seven percent.36 The study is in line with previous reports, including by the American Community Survey in 2012, showing that San Francisco has a staggering 30,000 vacant units at any given time.37 Some owners keep units off the market while others convert their properties to ownership housing.38

Rent control proponents argue that these studies show that owners should be prevented from converting their properties to ownership housing and should be heavily taxed for keeping units vacant.39 But more regulation and burdensome controls over rental housing will only serve to squeeze more rental units out of the market while chilling development. The Stanford economists suggest government subsidies, tax credits, and building more affordable housing as workable solutions.40

Editor’s Note: This is the end of Part 2 of 3. Part 3 will appear in the July issue of the Apartment Journal.

Ron Kingston can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

No portion of this article may be reproduced or copied without the permission of the author (Copyright © 2018 CALPCG).

 



15 Marissa Lang. “Companies avoid $34M in city taxes thanks to ‘Twitter tax break.’” SFGate. Oct. 19, 2015. Web January 2018.
16 Liam Dillon. “California lawmakers have tried for 50 years to fix the state's housing crisis. Here's why they've failed.” Los Angeles Times. June 17, 2017. Web January 2018; see also Dillon. “What you want to know about California's failed housing affordability law.” LA Times. July 5, 2017. Web January 2018 (“Bay Area is adding hundreds of thousands more jobs than homes, which is driving up the demand for housing beyond what the targets had anticipated”).
17 Riley McDermid. “Here's what California paid to lure General Motors jobs to downtown San Francisco.” San Francisco Business Times. April 14, 2017. Web January
2018; see also Scott Olson. “Salesforce poised to receive city tax break on tower expansion.” Indianapolis Business Journal. August 2, 2016. Web January 2018.
18 Anna Hensel. “How 12 cities are trying to woo Amazon’s $5 billion.” Venture Beat. Heartland Tech Analysis. November 24, 2017. Web January 2018.
19 Id.
20 “Build to play” is hereby coined.
21 Randol White. “Sacramento Is Fastest-Growing Big City In California.” Capitol Public Radio. May 1, 2017. Web January 2018.
22 Linda Gonzalez. “Sacramento makes Zillow’s list of hottest housing markets for 2017.” The Sacramento Bee. Real Estate News. January 16, 2017. Web January 2018.
23 Angela Hart. “Rents are rising faster in Sacramento than any other part of California.” The Sac Bee. Capitol Alert. July 26, 2017. Web January 2018.
24 Josh Lyle. “Sacramento rents fastest rising in nation.” abc10. June 29, 2017. Web January 2018.
25 Patrick Sisson. “Sacramento, emerging from Bay Area’s shadow, becoming booming urban alternative.” Curbed. Property Lines, Real Estate. July 11, 2017. Web January 2018.
26 Erica D. Smith. “The Legislature did its part to fix Sacramento’s housing crisis. Now it’s your turn, Bay Area refugees.” The Sac Bee. September 19, 2017. Web January 2018; Katy Murphy. “Amid Bay Area exodus to Sacramento, low-income families at risk of being pushed out, study finds.” The Mercury News. November 22, 2017. Web January 2018.
27 Supra note 27.
28 Id.
29 Richard Chang. “Sacramento is either ‘unknown or misunderstood.’ Will that change in 2017?” The Sac Bee. Business & Real Estate. December 29, 2016. Web January 2018.
30 Ryan Lillis. “Big public subsidy coming for Sacramento riverfront museum.” The Sac Bee. City Beat. September 13, 2017. Web January 2018; Anita Chabria.
“Sacramento leaders OK convention center rehab – and want another tourist destination.” The Sac Bee. Local. May 30, 2017. Web January 2018; Foon Rhee. “Why Mayor Steinberg now owns Convention Center decision, for good or bad.” The Sac Bee. Opinion. January 30, 2017. Web January 2018.
31 Supra note 31.
32 Ryan Lillis. “Hey Amazon, Sacramento is ready to offer you financial incentives.” The Sac Bee. City Beat. October 24, 2017. Web January 2018.
33 Hudson Sangree. “Will Sacramento avoid another housing boom and bust?” The Sac Bee. Real Estate News. July 17, 2017. Web January 2018.
34 Katy Murphy. “Rent-control policy `likely fueled the gentrification of San Francisco,’ study finds.” The Mercury News. Business, Real Estate. November 2, 2017. Web January 2018.
35 Michelle Robertson. “Rent-control policies likely 'fueled' SF gentrification, Stanford economists say.” SFGate. November 3, 2017. Web January 2018.
36 Adam Brinklow. “Stanford paper says rent control is driving up cost of housing in San Francisco.” Curbed San Francisco. San Francisco Rent Control. November 3, 2017. Web January 2018.
37 Sarah Karlinsky and Kristy Wang. “Non-Primary Residences and San Francisco’s Housing Market.” SPUR. SPUR White Paper. October 21, 2014. Web January 2018.
38 Supra note 38.
39 Joshua Sabatini. “SF to explore taxing property owners who keep buildings, units vacant.” San Francisco Examiner. July 11, 2017. Web January 2018.
40 Supra Note 38.

 

 

June 2018

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As I opened my email to look over those things I needed to respond to, or action items to take care of throughout my day, I stumbled upon the news of the passing of Governor George Deukmejian. It is hard not to reflect on a person of his stature and his lovely wife Gloria. I was fortunate during the time he was Governor to meet him on several occasions. He was a kind and gracious man. Gloria and George were married for over 60 years, a rarity in today’s world and you could see the love they had for each other simply by looking at them. I also had occasion to meet and talk with Gloria in Sacramento at Junior League events while he was in office and she was just as warm and welcoming as he.

It is not often you get to meet people like George and Gloria, and I feel honored that I had that opportunity. I wish Gloria and his family the peace and solace they need during their time of grief and healing. He is one of those rare individuals that will truly be missed.

As we enter June, the wait is on for the outcome of the Long Beach Rent Control Ordinance. However, as was announced in mid-May we know that the repeal of Costa-Hawkins fight will be on the November ballot, so there is still another fight to be waged. AACSC would like to thank all of our members who are contributing to help fight for your rights. If you have not contributed yet, please hesitate no longer; your industry is under attack and we need every bit of assistance you can give to this cause. As such, I keep asking the question, what happened to the “Private” in Private Property Rights? Now is the time to keep the pressure on and make sure that your rights are protected, and AACSC is working every day to make sure that we are doing all we can to fight this fight. Come alongside and help us win this battle.

On a lighter note, I hope that you are all keeping up to date with The Beacon, our weekly e-newsletter, because we have added some NEW events, namely the June 27 Wine Tasting at 4th & Olive at 5:00 p.m. If you haven’t been there yet, this is an excellent chance to experience some great food and wine.

This unique restaurant is owned and operated by Veterans, and everyone who works there is a Vetso come out and support the event. An added treat is that the owners are sommeliers (that’s someone who is a Ph.D. of wine), and you just might learn a thing or two about wine while networking with others in your industry. Seating is limited so call today to make your reservations.

Be sure to check out our calendar to stay up to date on all the events and start to think about who you would like to nominate for our 23rd Annual Saluting Our Stars Awards—there will be a new format this year, so dust off your cameras. We are going digital and looking for videos this year as your submission process. More info to come on this.

See you at 4th & Olive on June 27th, and as my 13 year old daughter would say, “Be a Nice Human This Month.”

Things are heating up...

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With the weather heating up this time of year also comes the heating up of tensions amid the flurry of housing bills introduced at the state level alone, not counting the outbreak in the local municipalities and ballot initiatives for each. It seems like every time we try to move on and progress within our industry, there are others who cannot help themselves into moving backwards— and extremely so. In the case of the manufactured housing crisis, that can only continue to erupt in a negative way when we allow constant intervention in the housing market to punish that market for something far out of the control of those invested in it. It’s that old definition of insanity—doing the same thing repeatedly and expecting different results.

Madness, indeed.

The people behind these draconian rent control initiatives seem to be preying on the emotions of the people, city after city, by instilling a false hope on the farce of lower rents by regulation (that actually does not happen)—and it’s because they know that most voters are busy being experts at what they do instead of being experts on rent control initiatives and what they do to housing communities and their economies (just recently we discussed how rent control in San Francisco cost the people of the city over $5.9 billion!). There seems to be an issue getting it through to these groups that all prices are rising—we, as neighbors who live in the same cities and state, are not in any way in control of that, nor are we in charge of the money supply or inflation, and we are especially not in control of the ease (or difficulties, rather) of getting new housing timely built.

Taking unilateral action against one area of our vast markets fixes nothing. It does, however, worsen the housing issues that hurts all of us in some way.

When you pay attention to the housing crisis, look no further than the cities across the country that have rent control and there you will typically find the highest rents and the highest homeless populations—doing the exact opposite of what proponents are claiming. Like many acts and ordinances, they are just cleverly named.

Some of the other bills/ballot initiatives being introduced, like “just cause evictions” (which also come with all rent control ordinances), actually protect bad tenants like partiers, drug dealers, and other criminals. The means of getting a bad neighbor out will be nearly impossible, causing even further problems with many good and responsible renters. Nobody wants to live next-door to violent or sick criminals, but these laws will make it so that housing providers are stuck with them causing good people to leave the properties and sometimes with little choice of where to go because the same problems will exist elsewhere and without remedy.

But these so-called “tenant’s rights” activists refuse to face the facts and don’t seem to care much about any of that. Immediately, your right as a tenant to live in a safer/better environment is diminished.

Each time we are faced with these new ordinances, we need to ask ourselves—who does this really protect? Does it protect all tenants or just a select group? Does it punish anyone?

We can change all of this and bring awareness to our communities. Nobody likes rising prices of any kind—just because prices go up certainly does not mean that profits go up. The price of taxes, insurance, utilities, contractors, and maintenance sup plies are continually climbing right along with the price of cars, homes and rents. Together, we can join forces to bring some common sense and pragmatism into our legislation and fight alongside each other without bickering over trivial things that do not really help the matter or our individual causes.

Here are some ways everyone can help: Talk to friends, neighbors and tenants about the unintended consequences of many of these ordinances if voted or signed into law. Donate to our PAC. We know that most people need to be at work all day and cannot take time off for some of these things they wish to fight—but other people do it full time, so we support them while they fight for simplicity and common sense.

Finally, when we issue Red Alerts, everyone can make a huge impact by calling our legislators and sending kind, simple emails to their staff and offices. Thank you for all your help!

Tax Reform

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Tax reform is front and center on the congressional agenda, and there is a real chance it will become law this year. The last comprehensive tax reform legislation was the Tax Reform Act of 1986 (TRA 1986) signed into law 30 years ago by President Ronald Reagan. We all remember how that bill devastated the industry for years, so it is imperative that we engage with policymakers to ensure a more positive outcome.

In the years since TRA 1986, legislation has changed the tax code—mainly at the margins—focusing on rate changes and other targeted pro visions while comprehensive reform has eluded policymakers.

The election of Donald Trump and continued Republican control of the Congress has changed the outlook for tax reform. One-party rule where reform is a priority for all of the key players has increased the odds that broad-based legis lation can become law.

At this stage of the process, House Republicans are taking the lead on reform. While President Trump made a number of proposals during the 2016 campaign, it is House Republicans who have put forward the most detailed plan. Entitled “A Better Way Forward for Tax Reform,” the House GOP released a “blueprint” for reform last summer, which is the starting point for their internal discussions. The blueprint would:

• Reduce the top tax rate on LLCs, partnerships, S Corporations and other pass-thru entities to 25 percent from 39.6 percent;
• Tax capital gains, dividends, and interest at a maximum rate of 16.5 percent;
• Replace depreciation with immediate expensing of all investment except for land;
• Eliminate the deduction for business interest;
• Eliminate like-kind exchanges;
• Eliminate the Low-Income Housing Tax Credit; and
• Repeal the estate tax while retaining stepped-up basis for inherited assets.

It is important to note that while the Blueprint appears to eliminate the Low-Income Housing Tax Credit (LIHTC), there are good indications it may be put back into the House GOP proposal.

As the most developed tax reform product in circulation at the moment, the Blueprint is the centerpiece of conversation around tax reform. However, it is not yet legislation, and there could be significant changes made before an actual bill is introduced.

Moreover, the White House and Senate still need to flesh out their own proposals. There is much time to go before a reform agree ment is reached, if at all, and we can expect the details of any agreement to change several times along the way.

For our part, the apartment housing industry’s primary objective in reform is to support legislation that promotes economic growth and investment in rental housing without unfairly burdening apartment owners and renters relative to other asset classes. To this end, we are pushing lawmakers to ensure the following priorities are reflected in any bill that moves forward.

Tax reform must protect “flow-through entities” (e.g., LLCs, partnerships, S Corporations, etc.), which are the dominant business structure in our industry.

Under this model, a firm’s earnings are passed through to the partners who pay taxes on their individual tax returns. Accordingly, Congress must not reduce corporate tax rates financed by forcing flow through entities to pay higher taxes by subjecting them to a corporate-level tax or by denying credits and deductions.

It is also a priority for the apartment housing industry to maintain “like-kind exchanges” where property owners can defer tax on the gain on sale of an asset if, instead of selling their property, they exchange it for another comparable prop erty. These rules encourage property owners to remain invested in the real estate market. Such an important tool for investment must be maintained in a reformed tax code. Notably, with the exception of land, the expensing proposal in the House Republican Blueprint provides for de facto like-kind exchanges.

Tax reform should also take care to preserve investment incentives. Borrowing is a central part of how apartment housing is financed (a typical development project could be financed with 1/3 capital and 2/3 debt and the tax code has long provided a full deduction for interest). Indeed, without business interest deductibility, the cost of debt financing would increase and shift many real estate business models. This would inhibit devel opment activity at a time when we face significant affordability challenges.

Policymakers should also take care when making changes to cost recovery rules like depreciation so they do not harm real estate investment. Apartment buildings are currently depreciated on a 27.5-year schedule. While House Republicans are proposing to allow buildings to be immediately expensed, others have suggested extending the current law depreciation period. This would surely lead to reduced development and invest ment and ultimately undermine real estate values and stifle job creation.

Finally, protecting the Low-Income Housing Tax Credit (LIHTC) is a priority for the apartment housing industry. The LIHTC is the central vehicle producing housing for moderate- and low-income families. We are in a period of crisis in housing affordability and need stronger incentives like the LIHTC to effectively respond. This program must remain a vital part of the strategy to address our nation’s housing needs.

You will notice some overlap between what is being proposed, at least in the House GOP Blue print, and the apartment housing industry’s priorities. It is important to remember that policy makers are truly looking to reshape how taxes are levied in this country and that perhaps what they propose could effectively replace what is in the tax code now and keep the apartment housing industry whole. We remain open minded on this point as we continue to press for our top priorities and evaluate in detail what tax reform proposals mean for our business.

Every member of the apartment housing industry must be engaged in the advocacy campaign on tax reform. That means contacting your members of Congress and communicating our message.

Changes to the tax code will impact all of us, and it is our responsibility to ensure whatever reform is passed does not harm our ability to provide housing to one-third of the nation. To learn more about how you can get involved in shaping the debate, contact Peter Fromknecht at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and take our Advocacy Interview at http://re.spon.se/OTmUtG to see who you might know on Capitol Hill! Your relationships with lawmakers and your willingness to act on those relationships will make the difference between success and failure on tax reform.

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Contact AACSC

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California Southern Cities
333 W. Broadway St., Suite 101
Long Beach, CA 90802
(562) 426-8341

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