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Limited Housing Supply and Costs

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Overview

Rental property owners and developers are easy targets to blame for California’s newest round of housing affordability issues and shortages. It is unfortunate because the misguided blame may lead to significantly harsher regulations over the industry in the coming years—regulations that will likely serve to perpetuate and exacerbate the problem in the long run.

California’s Housing Shortage and Affordability Problems

The problem is well documented. California does not have enough housing to meet demand. In fact, according to a recent independent report by the State’s Legislative Analyst’s Office, the State produces 100,000 fewer housing units than is needed to meet demand.1 Supply and demand economics are therefore in full force here in the State. When everyone is competing for the same limited supply of housing, costs are going to go up.

But supply and demand is not the only driving force creating affordability and shortage problems. Community resistance to housing, stringent environmental policies, lack of fiscal incentives for local governments to approve housing, limited land, lack of incentives for developers to build, burden some government regulations, long and difficult permitting process, and the high cost of building all serve to constrain new housing construction.2

And it is not just the popular and dense coastal urban areas of California that are impacted by the current shortage. As people get priced out of major cities, they begin to migrate inland; ultimately creating a supply and demand problem that in creases housing costs, rents, and prices in sub urban and other inland areas.

The shortage and affordability issues create widespread problems for all Californians, and those seeking to move here. Rents become unaffordable for more and more people. People are forced to move further away from where they work, or move out of state completely. It discourages people from living in California, which not only impacts the State’s economy, it keeps California businesses from attracting the most qualified people to work for them. Rental property owners also feel the squeeze because local governments and State lawmakers begin passing laws aimed at regulating the rental and construction industries.

What the Experts Recommend

In 2015, the Legislative Analyst Office (LAO) provided recommendations to the California Legislature about how to begin addressing California’s housing issues. In sum, it told the Legislature that it needed to pass laws to help facilitate the development of market rate housing in coastal areas. The LAO followed up with a report in 2016 after certain tenant advocacy groups expressed concerns that building market rate housing will not help low-income tenants, and that the Legislature should focus on regulations that help low-income tenants, such as stronger rent controls. The LAO’s response was swift and clear:

“Many housing programs—vouchers, rent control, and inclusionary housing—attempt to make housing more affordable without increasing the overall supply of housing. This approach does very little to address the underlying cause of California’s high housing costs: a housing shortage. Any approach that does not address the state’s housing shortage faces the following problems.”3

The LOA went on to state voucher programs, rent control and inclusionary housing programs only help select few, while doing nothing in terms of addressing the real problems. Forcing rental property owners to provide below market rate does not reduce or eliminate competition, the driv ing force of supply and demand economics. More over, forcing owners and developers to provide below market rate rentals ultimately discourages development and improvement of rental property.

Government’s Reaction to the Housing Problems

So how have the State and local governments responded to the housing shortage? To begin with, in 2017, the Legislature introduced over 130 housing related bills, nearly 50 percent more than typical legislative years. Among the bills are ones that help generate funding to build affordable housing and remove obstacles to development. Then there are the ones that seek to regulate the rental property ownership and development industry.

On the supply side, a few bills are aimed at increasing funding to build affordable housing. ACA 11 (Caballero) imposes a quarter per cent sales tax to generate yearly funding for middle-income earner housing. SB 3 (Beall) is a 3-billion-dollar one-time State general obligation bond to build and rehabilitate low-income housing. SB 2 (Atkins) would impose a $75 fee on all real estate recordings (with the notable exception that the fee would not apply to a single-family home sale), which in turn would generate a regular stream of funding for affordable housing. While these bills promote development of housing, none of them increase market rate housing.

On the regulation side, there appears to be a target on the backs of rental property owners, managers and developers. Both on the State and local level, rent control is on the agenda. Despite consensus among experts that rent control does nothing to solve the State’s housing supply problems, and actually leads to the development of fewer homes, and homes remaining off the market, lawmakers continue to target rental property owners for regulation. AB 1506 (Bloom) is probably the worst bill in years.

It essentially allows all cities and counties in the State to adopt the strictest forms of rent control on all types of housing. Currently, under the Costa-Hawkins Act of 1995, newly constructed units and single-family homes are protected from rent control. Moreover, owners of controlled units are able to raise rents to market rate when a vacancy occurs.

Bloom’s bill would remove all of those protections, allowing local governments to control even vacant units (a form of rent control called “vacancy control”). Owners would be required to keep their rents artificially below markets forever.

Rent control, especially the most severe kind like vacancy control, makes building rental units cost prohibitive. Owners cannot make money off of them, so investors stop investing. Owners of current rental units eventually get out of the rental business because renting property be comes unprofitable. Ultimately, rent control increases the housing shortage problem, which then in creases competition and costs, and makes housing even more unaffordable. It also encourages legislative bodies to adopt additional restrictions on rental properties.

Assembly Member Bloom has since pulled his bill back for this year, but promised to bring it back next year with some amendments.

Several members of the Legislature that seek to repeal the Costa-Hawkins Act or amend the Act to severely injure the important aspects of the Act join Assembly Member Bloom. Tenant groups are using AB 1506 as a plat form to organize and demand changes in several laws.

Inclusionary housing mandates are also back on the table. Inclusionary housing mandates force developers to build affordable housing units as part of a larger market rate development without the requirement of the government providing density bonuses or sufficient cost offsets. Without offsets, the costs associated with the “affordable units” are borne by the property owner and possibly the other tenants.

Again, the more burdensome development is, the less investors are inclined to develop. These kinds of mandates, as noted by the LAO, do nothing to address the housing shortage.

Locally, there are several communities considering adopting rent control regulations to address affordability issues. Rent control is a hot topic, promoted by well-organized tenant advocacy groups. It will continue to be discussed, and ultimately, some communities will cave. Communities that ordinarily would not have given a second thought to regulation a few years ago have recently considered rent control. Concord and Burlingame are just two of many examples that considered rent control. Other cities are “strengthening” rent control laws.

This past April, the City of Long Beach considered adopting an ordinance that would permit every tenant to use the same credit report for 90 days. One significant explanation to adopt the ordinance is the cost of credit reports is simply too expensive.

If rent control and inclusionary housing mandates have not captured your interest, the State administration, notably the Department of Fair Employment and Housing Council (DFEHC) has proposed three significant regulations that should affect every property owner and manager.

Occupancy limits have not changed in decades. If the DFEH draft regulation becomes law, owners and managers could not discriminate against tenants that want 15 occupants in a three-bedroom, nine occupants in a two-bedroom, and six occupants in a one-bedroom rental unit. Owners would no longer be permitted to advertise that a rental unit has a living room, dining room, and kitchenette because those rooms could be used as a bedroom.

The second draft regulation would sharply limit an owner’s/manager’s ability to refuse to rent to previously convicted felons. Our concerns are legitimate.

We are liable and subject to forfeiture and nuisance abatement laws for criminal activity on our property; we have the “unequivocal” right to deny registered sex offenders to “protect a person at risk or for some other reason.” We have the legal duty and moral obligation to keep tenants and property safe. And on top of all of this we would be required to understand how to consider a new legal standard… we would have to establish a legally-sufficient justification relating to criminal history information by proving that our screening standards are substantial and legitimate and nondiscriminatory without any guidance as to what those terms mean. We would even be required to understand the “nature and severity” and the appropriate amount of time that has passed since conviction and we are not given any specific guidance as to what those factors mean.

Finally, one very topical issue DFEHC is considering is adopting a regulation concerning emotional support animals. Unfortunately, the proposed regulation does not curb rampant support animal fraud. It does not adequately address verification requirements including: 1) assessment by a licensed medical or mental health professional; a prescription by a licensed professional; the need for the animal does not need to be current; and 2) the verification process does not discuss what additional information an owner can ask for and from what sources. The vagueness is concerning because of risk of asking the wrong question and the potential for a discrimination lawsuit. We are also very concerned that the draft regulations do not adequately consider the quiet enjoyment of other tenants, nuisance issues, and the safety and health of other tenants.

Rent control, price control, affordable housing mandates for new housing, tenant screening, use (or abuse) of credit reports, and occupancy limits represent just some of the major issues we are confronted with today. We hope you will join us in supporting the industry.

As one notable industry leader has said: join us at the table or you will be on the table.

June 2017

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While it was raining cats and dogs in May, I found it hard to think about the fact that it is actually Spring. Then along came the sharks off the Long Beach coast to take the place of the rain. Now, I must confess that I like sharks and have been on two shark feeding dives in Tahiti—which I enjoyed. In fact, one of my bucket list items is to dive with Great White Sharks along the Great Barrier Reef—in a cage. So, I don’t mind taking risks but there is a limit to just how far I will go.

That brings me to a different kind of shark. One that I will call the Legislative Shark. This shark has some of the same traits as those who swim in the ocean. They are slow and methodical in nature and can appear almost docile if you are not aware of their behavior, since they don’t reveal their intent until the time is right. Then, they can attack quickly, take a bite out of an innocent bystander and leave you again without any reservation only to look for another victim.

Of course my analogy is in reference to our recent success with AB 1506. Then the word of a Just Cause Eviction Ordinance that just passed in San Jose. Now AB 1506 will surface again and we need to be better prepared to fight this bill even harder. But the ordinance recently passed in San Jose is not good news for our industry and the renters rights advocates are firmly latching on to this news and hoping that more tenants will join in the fight for rent control. Are you ready to join in the fight against this yet? If not, there is no time to wait and we need to make sure that ALL of our owners/landlords are members of AACSC to help us in this effort. So if you know of owners who are not members, please make sure to let them know that AACSC is the Association to join and is the one organization that lobbies on their behalf.

AACSC is actively creating programs and making suggestions to improve and increase our visibility with the Long Beach City Council and within our surrounding territory. Be part of the change and stay aware and involved.

On another front, we are happy to report that the Redondo Beach group is going strong and adding members to their monthly networking group. If you are looking for a new group to add to your networking list, this is a great choice. They meet the first Tuesday of each month at the American Legion facility on Camino Real in Redondo Beach. I know I’ll be back and hope you will join us there.

Next, be sure to look at our Trade Show flyer and get your booth reservations in early. This is sure to be another sell out. We will once again be at the Long Beach Convention Center, but in a NEW location—the Arena, also known as the Pacific Ballroom! This is a great spot and we are excited to announce this.

We are also changing things up this year for our Annual Awards Breakfast. Along with a GREAT theme, we will be updating and professionalizing our judging criteria. Beginning this year, we will be sending out the applications for awards and the judging will NOT be in-house. EVERYONE is eligible to be nominated; yes, that means non-members, too! Be sure to fill out ALL of the information on the application as any incomplete submissions will not be accepted. I have been judging for other state award ceremonies around the country and it is a great way to show off what you are doing for the industry, so polish off your pens and get ready to show the best side of your accomplishments.

Finally, I hope that you had a safe Memorial Day weekend and we want to extend our appreciation to all of those who have sacrificed so much for our liberties. One final mention is to the family of former Long Beach Mayor Ernie Kell who passed away on April 29th. The outpouring of love for him and his family was wonderful and he will clearly be missed by so many.

Educational Importance

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At a meeting I recently attended with Long Beach Mayor Garcia, he discussed the City’s study and recommendations for the production of affordable and workforce housing. Based on what he shared at that meeting, I am confident that the Mayor is on the right track; his study was filled with fantastic ideas that will go a long way toward solving some challenging housing issues if enacted. Some highlights include: dedicating City resources to support the production of affordable and workforce housing; providing regulatory relief and more rapid entitlement procedures; offering first-time home buyer programs; allowing and incentivizing the use of shipping container construction for housing; approving the use of micro units; supporting the development of accessory dwelling units; and reducing parking requirements for affordable housing projects near transit. Noticeably absent from this report was any language related to negative concepts like rent control or REAP.

While the Mayor cannot speak for every member of the City Council, I can assure you he understands that ideas like rent control and REAP don’t work and have never worked—anywhere. I urge you to be supportive of these recommendations. They will benefit everyone.

I am planning to step up the efforts by AACSC to promote education as a key benefit of membership. We as landlords are missing opportunities and losing a substantial amount of income simply because we are not as knowledgeable about our business as we should be.

Have you ever watched an episode of Judge Judy where she is hearing a landlord/tenant case? I’ve watched a few, and the only time the landlord loses is if he or she did something dumb like forget to take pictures of a tenant-damaged unit, neglect to document repair costs, fail to have a required form signed, or fail to document the resolution of a dispute. It kills me. They lose easily winnable cases because of their lack of professionalism due to a lack of education.

Let’s never forget that owning rental property isn’t some get-rich-quick scheme. It’s a business like any other. You have income, expenses, regulations, emergencies, etc. Don’t expect to wing it and be successful. You need to know your business just like an accountant, realtor, doctor, plumber or just about anyone trying to run a business. If you don’t know what you’re doing, you can lose everything. No member of this Association should ever lose because they didn’t know how to do things right.

That’s my mission! I also think education can be used in other advantageous ways. For example: why don’t we negotiate a deal with the City of Long Beach where you take classes in exchange for a longer period between PRHIP inspections? Are you starting to see how education can pay off? We’re just getting started.

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.

A Tribute to Nancy Ahlswede

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As I stepped into my new office in September of 2013, I began to look around the office to get a sense of who was here before. It was a surreal feeling to walk among binders and binders filled with memos, emails and past magazines that were once under the authority of someone I knew had the hearts of this membership. After a few days of getting to know the staff and talking with some of the board members it suddenly dawned on me that I was not alone in this process. I was about to walk into the footsteps of a legend in the multifamily industry.

As the months went by and I began to meet more and more people, the comments started with this statement, “Oh, you are the new Nancy”. But I knew immediately that there was more to this Association than just being the “new Nancy.” Nancy left a legacy that will never be matched. She was a force to be reckoned with. It was clear that her devotion to this industry went beyond her position as Executive Director—it was her passion. When I finally met Nancy, we talked for close to two hours and when I left that meeting with her, I knew that I could always go to her to ask questions and get advice. As with anything in life, when the opportunity is not there any longer you always wish you had more time to ask just one more question or learn just one more tidbit that will help your organization.

Over the next few pages it is only fitting that we share some thoughts that come directly from those who loved and admired her the most. So, in her memory, we share these tributes.

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Ron Kingston was honored to give the eulogy at Nancy’s funeral. Here are a few excerpts from the eulogy:

Nancy—

Was a master collaborator who was result-driven. People from all walks of life would conclude that the solution that was reached when Nancy was involved in negotiations of an issue was always the best possible.

Had organizational skills that assured success. Just a few years ago, she was hospitalized during the annual trade show. That did not interfere with making the trade show extremely successful. This skill was passed on to her daughter, Katherine.

At times, I wondered if they should have considered installing a hide a bed or futon in the office due to the number of hours they would work.

Was the eternal optimist. Just three weeks ago she and I talked about her plans for her 70th birthday party which would be on a boat in the Long Beach harbor. And during that same conversation she was planning on how she would resume being with her family, Larry, Katherine, Chip, Jennifer and the three grandchildren—Cooper (who loves video games), Donovan (who loves sports such as flag football) and Nixon (who was just baptized).

Has a legacy that can never be forgotten. Each one of us should always remember that she would push forward during extremely difficult and challenging times.

Michael D. Pintek, Board Emeritus
We in the legal profession would refer to Nancy as a “Force Majeure” (a superior or irresistible force). The small acorn that was the Association 28 years ago, through the work and efforts of the officers, board of directors and membership, who were the roots, under the guidance, administration and dedication of Nancy, who was the lignin that held it all together, has grown into a mighty oak tree. Nancy’s star shined bright on all of us while enriching our lives and illuminating the path in front of us.

Bob Luskin
I had the pleasure of working with Nancy for over 20 years. Nancy wan an amazing person. She has made the Apartment Association what it is today. Nancy will be missed.

Allen & Mary Ann Wood
Nancy lives on in our hearts and memories. Not only as a great lady who led the Apartment Association for so many years, but also as a very dear friend.

Sharon Coughlin
Nancy was definitely destined to be a leader of this organization that so generously devotes their time and energy in fighting for the rights of people in the rental housing industry both for owners as well as for tenants. Her amazing knowledge provided anyone interested in seeking a career in property management the understanding of how great it truly is to SERVE people. I was always amazed by her as a woman, a great mother and most of all a great leader to be inspired by.

Pat Thornton
I was shocked and saddened by this news. Brian and I always felt so welcome at the monthly meetings. She always had a ready smile and enthusiasm and the ability to spread hope and joy!

Grace Velazquez, GGB Properties, Inc.
Despite being a “new-comer” to the industry, Nancy took the time to get to know me and showed genuine care. Nancy’s passion was contagious and I hope that her legacy will live on.

Rebecca Moffett, A Better Property Management, and Past Board President, and Board Emeritus
Nancy was dedicated to landlords and their property rights and she always put them first. She was smart, well known, connected and knew how to work a crowd or a council meeting. She had intuitive gifts that were unparalleled with anyone I have ever known. She had great command of her job, of legislative bills and happenings, of other Asso ciations’ trials and tribulations, etc. Nancy knew everyone, never forgot a name and was a brilliant strategist. When Nancy spoke, you listened. She made sure everyone was well informed on all the issues and she listened to people to make sure that the board members could arrive at a consensus on most issues. She held everyone to a high standard which everyone wanted to meet and it was easy as we followed the lead of Nancy and the high bar she set for herself. She praised everyone on their good deeds, thanked volunteers with certificates and personalized plaques and paperweights. No matter what you volunteered for, you were acknowledged in many ways.

Sandra Feliciano, Broker
She was the reason I attended the CAM courses and received my designation. I appreciate all that she did for our industry. She will truly be missed.

Wendy Henning
What a “gal”...she made me feel like a long-time friend. I will miss her personality and gracious nature.

Virginia (Ginny) Ball
I so appreciate Nancy’s help in coming to Whittier on many evenings to help me start the Whittier Apartment Association. It is still going strong, but it is with her help that we got it “off the ground!”

Alejandra Kostuch
Nancy, the lady that always had answers no matter what it was about.

Coy Herring, Past President and Director Emeritus Through Nancy’s tireless and brilliant leadership we endured, survived and flourished. Through her abundant friendship we all were rewarded.

John & “Bub” Pratt, Past
Board President (1993-1994) I remember when the Board asked her to be Executive Officer. I believe that was 1991 when Phil Dauk was President of the Board and I was Vice President. Nancy was a tremendous help to our Association. She wore many hats for us as editor of the magazine, legislative advocate and executive officer. I don’t know how she did it all. Not to mention herding 20 or so cats (Board of Directors). She is certainly missed by all. Our sympathy to Larry and the family.

Evelyn Arnold
What a loss to our industry and to the world! Nancy was one of a kind who was always fighting for the rights of the small apartment owners and others. May she rest in peace.

Kelly Geonetta,
R.E.M.S., Inc. To all the people that she touched with her smile. To her family and friends. Thank you.

Gina Trinidad
Thank you Nancy for all of what you have done and for all the times you fought for us. You will be remembered and prayed for.


This has been a wonderful 28 years journey with you. It has been said that a person who is passionate about what they do, never works a day in his/her life. I thank you for the opportunity to be one of those people.”
Nancy Ahlswede, 2012

When you wake up tomorrow and each day following think of what you learned from Nancy. Think of what you will do that she taught you that you will continue to do. Let her inspire us to do better. Let her energy, ability, and forward movement not wane.

Larry would often times say “One of the things that I loved about Nancy was that she was the smartest woman that I ever knew.” – Ron Kingston

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