Success with the Just & Reasonable Rent Adjustment Program in LA?

Question

Hello,

I'm considering a triplex for buy-and-hold in Los Angeles, whose current rents are 45% below market, but if you could raise rents, it would mean the difference between us having -$200 versus +$1500 in cashflow. With rent control laws in Los Angeles, as I see it, options to increase rents consist of:

a) Cash for keys. Offer cash for them to "voluntarily" leave. - not my first choice, unethical, needs cash

b) Get to do a 13% or 19% rent increase if rents haven't been increased since May 1977 or May 1976, respectively - I will find out if there are records going this far back in due diligence phase, if offer gets accepted

c) Operate with a loss or very low NOI for 1 year, after that we will be eligible to apply for a Just & Reasonable Rent Adjustment. - with this, we can potentially increase rents by up to 145% depending on a comparison with baseline 1977 level rent amount.

I have 2 questions:

1) If there exists these 2 other, legal ways to increase rent in a rent controlled area, why does it seems like the only option most investors consider is cash for keys? I get that it's fast and easy, all it costs is some cash. But have you ever considered the rent adjustment program? Did you know about it?

2) How likely is your application to the J&R Rent Adjustment program to be accepted or rejected? Has anyone tried this? If it were as easy as filling out a single (albeit very long) application, I don't understand why many more landlords aren't doing this to bring rents back up to market.

Thanks ahead for any insight!

Geoff Jaime · Answer

I have successfully implemented the program. You are obligated to provide the oldest verifiable operating statement (base year), which is adjusted into today's dollars (Using an LA City formula for inflation) and this is compared to your current year (yes with receipts, cancelled checks, bank statements, k1's etc), which can be significant.

Cash for keys is a good last resort, but not a good primary option.

Geoff

Cash for keys is a good last resort, but not a good primary option.

Geoff

Susan O. · Answer

Rent control is widely discredited by many if not most economists, and many housing advocates.  Rent Control is destructive and counterproductive in many ways, is very complicated to administer, and would have many unintended consequences.  Here are just a few of the concerns we have with allowing communities to impose Rent Control:  * Rent Control is a complete disincentive to investment in rental property. It obviously caps the return on investment for rental property, and when you cap the costs than can be recovered, you're going to get less of it -  in this case, rental property. * It's mind-boggling that after what we've been through in the housing market since 2008, that California would consider a bill that sends the message, "We don't want to develop, rehabilitate, or improve our housing stock."  * In addition to drying up investment in rental property, one of the worst effects of Rent Control is that it discourages property owners from maintaining and upgrading their property. Regulatory costs, property taxes, and costs for services will continue to rise, but the owner's rental revenue will remain stable, leaving a shrinking pool of funds available for maintenance and improvement. * Property taxes and other fees and regulations placed on rental property owners are already very high, and are rising faster than rent increases in many cases. Out of control property taxes and regulations are a big factor in the upward pressure on rents  and yet these costs aren't capped, only the income from the property is capped. * Municipalities stand to lose untold millions in property tax revenue, as rental property values will certainly drop if their potential earnings are capped. * We can only imagine the morass of bureaucracy it will take to administer Rent Control, housing will be forever taken off the market and it may encourage an illegal black market in Rent  Controlled units.

https://caanet.org/votervoice/

You can contact your local reps here to fight this injustice!!

Please pass this on to other investors and landlords!

Rick Albert · Answer

With the exception of Geoff's comment, I've never heard of someone doing this successfully. You start going down this path and you risk creating disgruntled tenants. They stop paying and now you have a bigger issue on your hands.

Are you saying these tenants have been in these units since the 70s or are you assuming? Most mom and pop landlords don't keep great records.

I don't like the cash for keys option either, but unfortunately it is effective. It is a lot of money, but cheaper in the long run, as it can take months or even years to evict a tenant.

Unless my client had experience in this, I would never advise a client to think they can pull this off.

Regarding cash for keys, there are creative solutions. For example, as the Seller to do it. If they don't have the cash, maybe after you release all contingencies, your Earnest Money Deposit is released early and the Seller can use those funds.

Steve Jones · Answer

I would also ask to see lease agreements and see if any tenants are violating their lease agreement.

If so there is an opportunity to raise rents or evict them.

I have done cash for keys in the past and don't see it as unethical at all...both parties are in agreement and both parties benefit!

Mingwen Cheng · Answer

That's what I was thinking too. The process sounds complex and time consuming, and can someone leverage the time for something that's more rewarding? I think the answer is YES in majority of the cases. In my case for a condo in LA, the break-even point that the city would allow is perhaps additional $200 per month, so that might not be sensibly worth it.

Mingwen Cheng · Answer

Hi Geoff, well done on the successful application.

In your experience, did you leverage debt services expense (aka mortgage expenses) in your application? That's pretty much the key driver to net operating costs for most landlords.

Appreciate your reply. Thank you.

Timur Salikov · Answer

You cant go back and retroactively increase rents.. If pervious landlord did not increase rents every year then that opportunity is gone. You can only do 3% moving forward. However I believe you can do a no fault eviction if you plan to move into that unit. You would have to pay up to 16k for relocation.

Christian Clark · Answer

I read thru a lot of the rules on this and it seems the "catch" is that you cannot use debt service as one of your expenses. I'm not exactly sure what this means but I think it means that your monthly principal and interest don't factor into the equation.

Success with the Just & Reasonable Rent Adjustment Program in LA?

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