Most of this applies for California at large, but I am specifically interested in Santa Monica, West Hollywood, Beverly Hills, Los Angeles. Does anyone have a primer they could share or are willing to answer the questions below?
- "Cash For Keys" - This is a common moniker for buying our tenants currently residing in rent-controlled buildings. 1. What are the biggest hurdles in this process? 2. What is the average cost to buyout a tenant? What is the appropriate formula to determine what to offer
- "Costa-Hawkins Law" - Anyone understand how this works? Does this law codify the following things: (1) Post-1995 Construction is exempt from Rent Control, (2) Units that are under rent-control can "reset" to market rental rates when tenancy changes? Assuming the tenancy change is legal.
- California Rent Control - (1) Limits Rent Increases to 3% or less in a given 12 month period, (2) an additional 1% or less in a given 12 month period for each utility that the landlord covers. Also, there are a ton of unique rental increase rules depending on various capex projects but to keep this thread focus, I'll ignore those for now.
Purpose - I'm considering purchasing some 4 to 16 unit building(s). Most areas I'm looking at are exhibit some form of the rent control mentioned above. One avenue to circumnavigate the rent control law is to incorporate "Cash for Keys" to get rents to roll to market. Would love to hear anyone's experience with this in any market, not just, Los Angeles.
Here is a link for basic info on the cash for keys policy. http://hcidla.lacity.org/buyout-agreements. In short, though, basically it's a way for the city to monitor what Landlords are doing, to make sure they aren't trying to pull a fast one on unsophisticated tenants. This has become more poignant in recent years due to a larger % of landlords now becoming institutional in that market, or that are more sophisticated (read: private people/families who have worked in CRE).
For the Costa-Hawkins Law, I can't speak to this comprehensively, but in effect it voids a municipality's ability to enact 'vacancy control' (i.e., rent charged for new TT's), and only allows them to enforce rent control for existing tenancy. This is in part what gave rise to the cash for keys concept.
I'm not sure if you're asking anything on the third point, but that looks right to me in my experience. However, I don't believe any of these really apply to large, institutionally managed properties which were opened 1995 or later, as you mentioned.
EDIT: I forgot to reply to your 'how much?' question on the buyout, but in my experience there isn't really a defined amount. Believe that you just have to disclose it and give them time to research it. If anyone else has seen a specific calc/methodology though I'd be interested to hear it as well.
It;d be easier to help if the question was more specific but if you're looking for just general knowledge I may be able to help a little...
really really varies. Basically you have to make it worth their while to leave. I've seen $10k-$100k. I've seen someone pay $750 for a $3k unit. You can't expect to pay them $50k, that will get eaten up in two years then they'll have to move again. Really depends on how below market their lease is and the tenant's situation.
no idea.
It depends on the city. I think it's either the lesser of 3% or county CPI or something like that. I also think some cities are different and I don't think Venice is included at all because it's its own incorporated city. Definitely going to want to spot check this answer..
anyways not a ton of help but hopefully you learned something from my response to #1
Wasn't there a guy in NYC who got millions?
Edit: Found the link https://nypost.com/2014/03/02/hotel-hermit-got-17m-to-make-way-for-15-c…
Thanks everyone for comments so far.
MonkeyWrench - Since there's yet to be an answer so far as to the appropriate price to pay, I'll take a stab. It seems like the formula would be the same as any value-add capex project where ROI > Current Cap Rate (or in other words, accretive to current yields).
Example - Assume a building in West Hollywood was purchased at a 4.0% Cap Rate. If current rents increased $500 from $2500 per month to market rents of $3000 or $6000 per year, the landlord should offer no more than $150,000 (an implied 4% ROI). Now, obviously, a prudent landlord would offer far less than this in order to generate an accretive yield, but I see this as the point of indifference from a decision standpoint. Other extenuating circumstances could change this calculation as well.
itsanumbersgame - You're right on the County CPI point. It looks like West Hollywood and Beverly Hills increased by less than 3% Y-o-Y due to using County CPI. I believe it's L.A. County uses 3%.
I think the cash-for-keys business model is viable. However, I get concerned that a prolonged negotiation could occur with unruly tenants that are aware of the leverage they hold.
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