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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.

Housing Affordability

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White House Toolkit Points to Local Barriers to Affordability Crisis

In September the Obama Administration weighed in on one of the seminal issues impacting local communities and one with which our industry finds itself struggling again—housing afford ability.

What might surprise you is that the message from the White House was not directed at property owners. The Housing Development Toolkit (avail able on the whitehouse.gov website) opens with this: Over the past three decades, local barriers to housing development have intensified. The accumulation of such barriers—including zoning, other land use regulations, and lengthy development approval processes—has reduced the ability of many housing markets to respond to growing demand.

The toolkit discusses in specific detail the costs that these barriers impose on local households, the economies and even the environment as well as their role in exacerbating gentrification and income inequality. This is a welcome message from the Administration.

As many of you are experiencing firsthand, the issue of housing affordability increasingly dominates local news and policymaker debates. Beyond the statistics, low- and moderate-income families struggle to find housing that meets their needs at a price they can afford. This is an issue in the usual suspect markets on the coasts, but also in places like Austin, Texas; Nashville, Tennessee; and Colorado Springs, Colorado.

While this current crisis is not breaking news, the scale and scope of the problem seem greater than in previous cycles as does the intensity of the advocacy efforts by tenant-rights’ organizations.

Last month a few NAA affiliate offices and events were picketed by protesters and, in one case, an Association Executive was personally the target of an advocacy campaign. The White House efforts could not come at a better time.

What many advocates seem unwilling to acknowledge is that the seeds for our current crisis were sown long ago in local land development and use policies. As the Housing Development Toolkit notes, when the recovery from the 2008 recession began, many communities were not positioned to take advantage:

In a growing number of metropolitan areas, the returning health of the housing market and vibrant job growth haven’t led to resurgent construction industries and expanding housing options for working families, due to state and local rules inhibiting new housing development that have proliferated in recent decades.

There is also of course the added complicating factor of stagnant wages. No- or low-wage growth is hard enough in markets where demand is “normal.” It is downright dangerous in the growing list of markets where exorbitant development costs and red-hot demand accelerate rent increases.

The toolkit goes on to describe a number of excellent policy options available to local governments to streamline the development process and increase apartment housing supply. Nearly all are positioned as incentives to development and even mandatory inclusionary zoning is described in both mandatory and voluntary terms but the toolkit’s recommendation tilts more towards voluntary incentive for IZ like density bonuses or streamlined approval processes. Rent control is not on the list of policy recommendations.

While not on the list of policy recommendations, the toolkit does make a case of sorts for source-of income protection for Section 8 voucher holders, characterizing a property owner’s choice not to participate in the Section 8 program as “discrimination.” We will continue to respectfully disagree with the Administration on this and stand in support of the freedom of a private owner to take on the responsibilities, and burdens, that come with accepting Section 8 vouchers. NAA has been a vocal, aggressive champion of this program for decades, including its voluntary nature.

Also missing from the toolkit is a strategy for fighting NIMBYism (Not in My Back Yard) that pervades in so many jurisdictions. Truth-be-told, many of the hurdles put in the place of apartment development were put there by NIMBYists who would sacrifice anything to prevent more supply of apartments. More and more local governments, with help from private sector employers, non-profit organizations and others, are standing up to these forces. Those efforts must be replicated around the nation if we are ever to make a dent in this affordability challenge.

Nothing in the toolkit is earth-shattering; however, the focus and emphasis it places on local governments and their central role in the affordability crisis are extremely important. Our hope is that local governments listen and future Administrations make the same commitment.

Make sure to mark your calendars for the 2017 NAA Capitol Conference and Lobby Day on March 7-8, 2017. Our goal is to create another record-breaking event, bringing in more advocates to reach all 535 members of Congress. Registration opens in early November.

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

 

 

 

 

December 2017

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Sometimes it is nice to just connect with others to help out in a pinch. This is just what AACSC did in light of the hurricanes in Puerto Rico and Florida. I must begin by thanking a very special member, Bonnie Stern, and Steve Shaw, who is a Board Member and Rotarian. Bonnie’s idea was born at the library, who said that even reading something to take your mind off of the devastation can be a good thing. She could not be more correct and now boxes and boxes of books, many for children, are headed to a new home. Thank you Bonnie, Steve and the Rotarians for helping us connect. And a BIG thank you to Sylvia Hopper from Friends of Signal Hill Library for the offer—it is a great way to give back.

As we end the year, this is also the best time to talk about how you are going to approach 2018. What are your goals, what NEW things do you want to achieve and how will you be a better owner, manager or supervisor at the end of 2018 than you are today? Moving forward in your career takes time and thought. I love a good journey, but I have always had in mind the direction I want to go. As the Cheshire Cat said, “If you don’t know which way you want to go, then it doesn’t much matter which road you take.” Well said, but you are still following a path—the question now is “to where”?

One determining factor to consider is this: do you want to attend live classes or do you want to take online classes? This is where our NAA Visto Courses can help you even when you cannot attend a live course. In fact, I mention this now because you can receive 20 percent off of online courses when you go to www.GoWithVisto.org. Use the code AFF20 to get your 20 percent discount. Buy one course or buy in bulk and start enhancing your career today. The offer can also be found in the NAA Units magazine.

But the final entry to this year is unfortunately not ending with a bang, that is, unless the words Rent Control are being uttered. We don’t know how this will end but we do know that this is not in the best interest of our tenants. Too bad that the tenant groups are sending an uninformed message. So it is up to us to make sure that our tenants know that a rent control ordinance will not help them but will do just the opposite. It is our responsibility as multi-family owners to protect our industry. NOW is the time to get involved, to support this industry — YOUR industry, YOUR investment and YOUR retirement. 2018 will be a year in which our industry will correctly inform and educate about the realities of and the cost of rent control. My wish for 2018 is that we bring EVERY OWNER to the table to fight this fight. It is not for others to do, but for each of us to contribute to the industry we love.

I wish you peace for the holidays, safety for your loved ones in their travels and the spirit of grace and understanding for those who are not as fortunate.

A Thanksgiving

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Over the years, I’ve seen Thanksgiving celebrated in a number of different ways. The Thanksgiving holiday was pretty traditional at our house when I was growing up. My parents or my aunt and uncle would host dinner, and between our two families plus grandparents, it was a pretty full house.

The dynamics changed when all the kids started to get married. There were new faces at dinner, and along with them came new foods and traditions. Things changed even further when friends joined and the meaning of Thanksgiving expanded beyond our close knit family. It also expanded past being just about the traditional meal and a nice visit when some friends would stop by after they had been to the local homeless mission to serve Thanksgiving dinner to people who were struggling in ways that we never had to.

I’ve come to see Thanksgiving as all of these things. It gives everyone a chance to give thanks for all that they have, whether it’s family, friends or food. It also gives us all a chance to give thanks by extending our hands to others.

Can we embrace this idea of being generous and giving to others as land lords? I think so. I think it’s just as important for us to be generous business people as it is for any local business. In fact, we have the opportunity to make our giving more personal than most businesses, if we direct our efforts toward our tenants.

However you choose to do it, I think you’re doing a wonderful thing any time you make the effort to give back to your community. That’s a tradition we should never change. To me, the Thanksgiving holiday is the low-stress holiday. It’s a day about family, friends and community with minimal commercialism. It’s my favorite holiday.

Regulatory Bills Affecting New and Existing Housing

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On April 5 your Association leadership joined with leaders of other independent California NAA affiliates to meet with their legislators in Sacramento to discuss several important bills of special interest to owners and managers of residential rental housing. The largely unspoken underlying theme, of course, is what legislative action may be taken to address the obvious and growing California “housing crisis”—too few homes for too many people with too few private or public resources to address current needs as well as a gigantic backlog of unmet need. The repeal of the redevelopment law—both cursed and praised—left a huge billion dollar hole in tax pro ceeds dedicated to construct and improve low and moderate income housing. The disappearance of that sustainable source of funding has fostered a number of proposals for replacement, some modest and others bold. It also has generated a call from some quarters for more and severe regulation of ren tal housing. It is with that backdrop that your leader ship approached this year’s Lobby Day in Sacramento.

Legislators and their staff members were very cordial in making limited time available to address these important issues both in generality and specificity. We grouped to oppose several regulatory bills affecting both new and existing housing in juxtaposition with funding measures deserving of support notwithstanding their effect on taxes—a tough sell! As one might expect, we received mixed signals on the tax issue but largely favorable reactions on bills that we opposed.

At the top of bills to oppose was AB 1506 (Bloom), which would repeal the Costa-Hawkins Act, a significant 22-year old housing measure that excluded from rent control single-family homes and all developments built after 1995 (or earlier if a rent control ordinance exempted new construction from a specific point in time), while giving owners of existing housing stock in rent controlled communities the right to establish initial and subsequent rental rates. That 1995 Act was approved by the Legislature to put the brakes on local governments’ overreaching and strict rent control ordinances that were spreading throughout the State and negatively impacting the economy and the housing industry. Its repeal would usher in a new wave of local ordinances adopting the strictest forms of price and rent controls. The result would be catastrophic.

Following a similar regulatory trend are measures that would require inclusionary housing for moderate, low and very low income levels in all new develop ments. These include in varying degrees of specificity and detail: AB 1505 (Bloom), AB 915 (Ting) and SB 277 (Bradford). In many respects, the in clusionary housing requirements imposed on new construction are more onerous than a typical rent control ordinance because they require deed restricted occupancies based on income for up to 55 years or more.

In total, the regulatory approach to the housing shortage by keeping rental rates artificially below market necessarily reduces the income stream for improvements, maintenance and repair of existing units while, at the same time, negatively affecting the investment and development of much needed rental housing.

Money, money, money. Where to get the funds necessary to address all of California’s many needs? State funding priorities are like shifting sands in the desert.

Thanks to Proposition 98 and the education community, K-12 education funding takes the lion’s share right off the top of each year’s state budget. Everything else scrambles for second- or third-fiddle with barely more than a half of a loaf left. At this writing, the Senate is poised to vote and send to the Assembly a multi-billion dollar transportation mea sure to “fix” degraded highways and roadways through out the State. It constitutes a huge funding boost on top of an already very expensive State Department of Transportation. Where does housing fit in?

Without question, California needs more housing.

According to a recent report from the Assembly Housing and Community Development Committee, California has a housing shortage—we simply are not building enough homes to keep up with the high demand. This is particularly true for low-income rental units while middle-income households are priced out of buying homes. Over regulation, high development and permitting costs and a lack of consistent public funding have contributed to California’s housing shortage.

SB 3 and ACA 11 will help address California’s housing problems.

SB 3 (Beall) would authorize issuance of bonds in the amount of $3 billion to finance various existing housing programs. Bonds add more debt and are costly one-time affairs, not long-term sustainable, but certainly satisfy a near-term need.

ACA 11 (Caballero) would impose a 0.25 percent tax on all retailers to be placed in a newly created “California Middle Class Affordable Housing and Homeless Shelter Account” in the State General Fund for the support of local and state programs that assist in the development or acquisition of housing.

We support these bills not only because their passage will lead to a much needed boon in housing development, but also because these bills focus on building homes through bond and sales tax money instead of targeting the rental housing industry for regulation such as rent control and just cause for tenancy.

The State must continue to address the housing shortage problem through investing in affordable home development and rehabilitation, rental and homeownership assistance and community development. Targeting our industry with more regulations and eliminating rental property owner rights and protections such as under the Costa-Hawkins Act and Ellis Act will serve to drive up costs, force rental property owners out of business and reduce incentives to build, maintain and invest in more badly needed housing.

Our industry representatives did an outstanding job presenting compelling reasons to oppose AB 1506 and AB 1505 (Bloom), AB 915 (Ting) and SB 277 (Bradford) and support SB 3 (Beall) and ACA 11 (Caballero).

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