Specializing in the Management of Apartment Buildings and Commercial Properties

Los Angeles Property Management Blog

Rent Control - A Cautionary Tale

Dean Sherry - Wednesday, August 15, 2018

One afternoon, a few years ago, I received a call from a guy inquiring about my company’s property management services. His said his name was Will Wright (name changed for privacy reasons) and that he owned a fourplex in Santa Monica, CA near Santa Monica College (SMC). He lived in one of the units and each unit was comprised of a one bedroom/one bath mix with all the fixings, including washer/dryer combos, central HVAC, modern appliances and parking!  He’d been saving up money to travel and wanted a management company to look after his property.

He also sounded like a good guy who needed help and I could already guess why, which was confirmed when he told me all three of his tenants had been students at SMC in the late 70’s, and have never left, and therein lies the issue. Although he occupied one of the units, it was still a fourplex so it wasn’t exempt from rent control and I could sense that the long-term effects of strict rent control policies have taken its toll on him.

I thanked Will for his inquiry, but told him I normally don’t take on a property under such circumstances and it wasn’t because I didn’t like him or Santa Monica- it was a simple matter of economics. I own the business and needed to stay profitable otherwise I’ll go out of business. I make my management fees on a percentage of the monthly rents collected and his rents were so far below market that I’d have to charge him a 10% management fee just to break even! However, I don’t know why, but something compelled me to take him on as a client anyway, it just felt like the right thing to do.

Will grew up near the property and he recalled the joy of growing up in such a great place back when Santa Monica was still a quiet, mom-and-pop type of beach town. Life was just simpler back then and he didn’t have to worry about his future, until his future suddenly came crashing down upon him.

Will Becomes a Rental Property Owner

Just after his 18th birthday, Will got a letter in the mail that he was being drafted into the Vietnam War and was to prepare for duty in one month.  His grandfather, in response to this, had then taken out a loan and purchased a parcel of land near where Will grew up and told Will he was going to build him a little apartment complex so he won’t have to worry about money or a place to live WHEN he comes home.

Thankfully, Will did return home two years later with a Purple Heart award, an honorable discharge and a war wound which left him partially disabled. He moved into the place his grandfather had built for him and started managing the property while enrolling into SMC and slowly trying to acclimate back into a normal life.

Rent Control – The Beginning to an End

Will was a good, responsible landlord. He raised rents when he had to, but only then just enough to offset his increasing expenses. He was close with his tenants and things were going well at the property until 1979, when the City of Santa Monica adopted rent control.

The little mom-and-pop beach town Will had grown up in was growing up itself and more and bigger companies were moving into Santa Monica, which brought in more jobs and more renters, which meant that the development of commercial and residential properties doubled but still couldn’t keep up with the influx of companies and people. Eventually, the flood of money and people coming into the City had created a housing shortage and as a result, a natural spike in rents threw the Santa Monica rental market out of whack. The City had no choice but to enact rent control to stabilize the housing market.

At the lowest point in 2015, the City set the maximum allowable increase at .004% and for Will, that translated to about a $5 monthly rental increase per tenant that year, while the annual allowable pass-through fees remained disproportionately low.  He was being squeezed by the City on the revenue side and couldn’t keep up with the increasing operating expenses. The financial strain was affecting his psyche too and one day, it happened – the pipes in his building virtually all burst at once due to a high rate of corrosion from exposure to seawater, and created a massive flood and that was the beginning of the end for Will.

A couple weeks after the incident, I went to visit Will at his friend’s house.  We went over some of his options and I suggested perhaps taking the units off the market as per the Ellis Act but he said that was for rich guys who could afford to do that.  The time and energy it would take for him to recover was just too much. He had taken out another loan a few years back and now he was under so much water, and his cap rate was so low that he couldn’t even afford to sell it!

Suddenly, Will pulled an envelope out of his pocket, handed it to me and said; “Here’s an advance on your management fees”. He then thanked me for everything and told me that he loved Santa Monica, and always will, but the City has abandoned him as a property owner and so now he has to abandon it. Then, he turned around and just walked away.  “Wait, Will, where are you going? What are you going to do? What about the property?” He turned around to face me, smiled, and said, “I’m going back to Vietnam. Life is much simpler there.” “Oh and about the property, do you want to buy it?” I said, “um, no, not really”, to which he replied, “I didn’t think so. Let’s just say I’m strategically defaulting on my loan. It’s the bank’s problem now”. He then straightened-up tall, gave me a military salute, turned around and left.

I never heard from Will again. He just disappeared, defaulted on his loans and left the property in the bank’s hands. The tenants were now displaced and had to find new housing, and the bank eventually sold the property at a foreclosure auction to a local developer who no longer developed apartments due to shrinking profit margins, and ended up building a less-than charming four-unit condominium project. A large part of its reduced charm, aesthetics aside, was the selling price of the condos. Another four units that were way out of reach for those former tenants of Will’s or for many people clinging to rent controlled apartments. So, Unaffordable Housing replaced what could have been Affordable Housing had Will been allowed to raise rents to a fiscally sensible level.

In the end,Santa Monica’s strict rent control policy backfired on itself and added four more renters to the market while losing another good property owner.  Instead of win-win situation, we have lose-lose.

Will struggled to remain financially solvent simply because his tenants HAD been there since the 70’s and were still paying rents from the 70’s due to the City’s insistence on keeping the yearly allowance artificially low in the name of affordable housing.

The difference between the rent he actually collected and the rent he could have collected at market rate is called an owner’s “Loss to Lease”. The year I started managing Will’s property, his total Loss to Lease for that year was $45,000, which was about the same amount he could have used to re-pipe his building.

What are we to conclude from this? Well here’s where I net out: why CAN’T the City adopt a tiered rental increase system, instead of 3% across the board? In other words, those long-term tenants who pay the cheapest rent should pay a higher yearly increase than the newer tenants who are paying over-market rent. I think that seems like a good start to a more “fair and balanced” system.

Until economic fairness is added into hardline politics of rent control, we will continue to see owners who literally cannot afford to keep their buildings; and tenants left out in the cold and I’m pretty sure that wasn’t the intent of rent stabilization.

The above article was written by Dean Sherry, President of Duke Property Management. Dean can be reached at (310) 657-4256 or via email dean@dukepm.com. Please visit Duke Property Management’s website at www.dukepm.com.

View the original Article here

Property Management and Trust Fund Accounting

Dean Sherry - Sunday, April 13, 2014

What you need to know…
By Dean Sherry, President, Duke Property Management

Let’s say you are a real estate owner/investor and have hired a property management company to manage your apartment buildings. You sign a management contract and the company opens a regular business checking account with their bank. They begin managing your property and collecting rents and paying your bills.

However, did you know that by not setting up a trust fund account to manage your money, the property management company could be liable for not complying with the California Bureau of Real Estate (CalBRE) rules and regulations? In the eyes of the CalBRE (formerly known as the DRE), ignorance is not bliss and the consequences of an audit could be quite severe. Therefore, it’s important to know the legal guidelines to understanding trust fund accounting. It can only help make your life easier.

In terms of property management, trust fund accounting is predicated on the notion that the management company has created an agency relationship with a third party through a management contract and therefore has a legally-bound fiduciary duty to the owner(s) of the funds they are managing.

In other words, they are essentially holding the money from your properties “in trust for” you and thus must handle the money according to trust fund accounting standards. For the property management firm, this is much different than most other real estate transactions where money is held and managed by an independent escrow company. The management company takes this function upon themselves and they are fully responsible and accountable for your funds. This is why management companies need to practice trust fund accounting. Below are the major points you should know about trust fund accounting.

Setting Up a Bank Account

In order to do trust fund accounting, the management company must first set up a trust fund account with a bank. This account is usually used as the “operating account” into which rent collections are deposited, funds held and from which payments and distributions are made for, among other things, services, maintenance and repairs, loan payments, payment of taxes and distribution to owners. Many owners/investors should also have another type of trust account for their tenant’s security deposits and reserves. It’s critical to note that it’s legal to have one trust account to manage several properties held by the same owners or different owners, but I generally consider this a bad business practice due to the complexity of keeping accurate records. It’s best to have a trust account for each property, but it all depends on how you, the owner, want the management company to set it up.

However, none of the trust fund accounts can be commingled with the management company’s corporate accounts and they must be non-interest bearing accounts. Furthermore, although it’s much easier for record keeping and reporting to set up separate accounts, the most important thing is that the management company clearly identifies who owns what account and keeps accurate records for each property separately.

Many of the larger banks have some sort of real estate treasury management division and are well-versed in the legal requirements of trust fund accounting, per CalBRE. However, there is a caveat; some banks do not provide this type of “in trust for” accounts and the local branch agent might tell your management company they just need a DBA account and a trust agreement to get started. This is wrong. The company will need, in the very least, their legal business documents and a signed management agreement. It all starts with choosing a bank that provides trust fund banking and who can assign your property management firm a personal customer service representative that is knowledgeable about this type of banking.

Record Keeping / Software Reporting

As I had previously mentioned, it’s vital to keep separate and accurate records for each property under management, even if there is only one trust account. All that data entry can be cumbersome and costly for the management firm. Using technology to automate this process makes it much easier for the company to create and enjoy a streamlined process of bookkeeping and accounting, which better serves the owner.

Most commercial management software solutions have trust fund accounting systems and can easily integrate with the management company’s online banking system. For example, for account receivables, many companies use an online payment system like PayLease to electronically collect rents. The PayLease transactions can then be automatically synced with the management company’s bank, which in turn, can also integrate with their property management software. The end result is that it saves them time doing data entry and money on payroll and greatly increases the accuracy of the financial reports. They can then focus on providing their clients with better customer service.

As long as the management software is compliant with trust fund accounting, the management system the firm uses will enable them to meet the CalBRE reporting and reconciliation requirements, including, but not limited to:

  • Ownership/Property Reporting
  • Tenant Info / Rent Roll
  • General Ledger/Transaction Reporting
  • Balance Sheet & Financial Statements
  • Bank Statements & Reconciliation Report

Most property management companies are well aware of the requirements of trust fund accounting. However, there are always some companies that aren’t managing your funds the way they’re supposed to. If you care about your real estate investment(s), don’t let your management company expose themselves to noncompliance accounting practices. You don’t want the CalBRE auditing your management company’s accounting and thereby risk a state or federal audit of your own funds. It’s just not worth it.

For more information, please refer to:

View the original Article here

How to Increase Water Efficiency & Lower Utility Bills

Dean Sherry - Thursday, March 6, 2014

With the current water drought in California getting worse each passing day, it is vital for landlords to take the necessary steps towards conserving water and energy. To that end, we recommend reading this article by Beth Clymer on How to Increase Water Efficiency & Lower Utility Bills from the Buildium Property Management blog site.

As a property manager, why should you care about water efficiency? One reason is that it’s good for the planet. The other is that it’s good for your bottom line. The fiscal, environmental, and moral reasons for water efficiency and conservation are clear enough, so this post will cover the steps for making water efficiency a reality across your properties.

Read More

Get the Scoop on Security Deposits

Dean Sherry - Wednesday, January 22, 2014
This is a great article by Stephen Fishman on the Top 10 Tax Deductions For Landlords from the Buildium Property Management blog site. No landlord would pay more than necessary for utilities or other operating expenses for a rental property. Yet millions pay more taxes on their rental income than they have to. 

Why? Because they fail to take advantage of all the tax deductions available for owners of rental property. Rental real estate provides more tax benefits than almost any other investment. Often, these benefits make the difference between losing money and earning a profit on a rental property. Here are the top ten tax deductions for landlords. Click here to read more.

How to Keep Good Tenants

Dean Sherry - Thursday, October 24, 2013
Retaining good tenants in your property can be more challenging than finding reliable tenants in the first place. Continuing with the same people in your properties is hugely beneficial for you as either a landlord or a property manager, as it prevents void periods where the property is empty and receiving no rental income. It also reduces the amount of time and paperwork dedicated to each property, due to the fact that the current tenants do not need to be continuously regulated and checked in the same way new tenants require.

Here are some pointers to help keep your tenants happy and encourage them to stay in your property. Read more.

Want to learn more? Visit the All Things Property Management blog, a one-stop destination for folks interested in learning more about managing real estate. Tune in for next week's installment of The Pulse.

Duke Property Management

1040 S. Robertson Blvd
Suite B
Los Angeles, CA 90035

Office: 310-657-4256
Fax: 310-657-4486

Email: info@dukepm.com

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Duke Property Management, Inc., Property Management, Los Angeles, CA

Duke Property Management

1040 S. Robertson Blvd Suite B
Los Angeles, CA 90035

Office: 310-657-4256
Fax: 310-657-4486

Email: info@dukepm.com