ACTION’S HAPPY NEW YEAR PRESENT TO YOU

By Rosario Perry

Well, ACTION has done it! It has filed its federal lawsuit against Santa Monica Rent Control. It is entitled ACTION and Mathew Millen v. Rent Control Board of Santa Monica. For those of you who wish to better understand the lawsuit’s theory we have set forth an explanation in the following paragraphs. (Click here to see the actual text of the complaint.)

First, the lawsuit seeks to declare only part of the law unconstitutional. However, because it may be too hard to separate that unconstitutional part from the rest, the entire law may have to be re-written. In any event, based on our research no less than 60% of the existing units which have not had a Costa-Hawkins increase are occupied by wealthy tenants who do not need rent control protection. Put another way, of the approximate 20,000 housing units whose rents are not yet up to market under Costa-Hawkins , more than 60% of them (12,000 units) are occupied by non-qualified tenants. These 12,000 units’ rents must be brought to market whether or not the tenants vacate. The lawsuit seeks to have the court declare the law unconstitutional under the 5th Amendment because the law protects wealthy tenants with low rents. Such protection has no legitimate state interest.

Second, and as a separate cause of action, ACTION is also alleging that the entire framework of rent control is unconstitutional because it does not accomplish its legitimate goals. In Santa Monica Beach v. Santa Monica Rent Control Board, this same argument was raised and rejected by the California Supreme Court. ACTION is going to present this argument to the federal courts.

A particular type of taking involving the 5th Amendment to the U.S. Constitution, deals with the regulation of land (as opposed to the more traditional eminent domain version). This type of taking is called regulatory taking of property. A regulatory taking of property occurs when either one of two things happens: First, when government regulates the use of your property, with­out substantially advancing a legitimate governmental interest in doing so; or Second, when the governmental regulation of the property is so severe that it deprives the property owner of any real economic use of the property. In Lingle v. Chevron U.S.A. Inc., (a case currently before the U.S. Supreme Court which should be decided in mid 2005) the legal issue is whether a commercial rent control law passed by the State of Hawaii promotes a substantial state interest. The lower court struck down the Hawaiian law as unconstitutional, finding no substantial state interest. If a regulatory restriction is challenged under this test (no substantial governmental interest being served by the challenged law) then the law is said to “effect a taking” regardless of how much money the owner is making or losing. In other words this test deals with the justification (or lack thereof) for the law, and not how much money the property owner is losing because of the regulation.

So, the question in our lawsuit will be: “Is Rent Control (or any part of it) a regulatory taking under, making it a violation of the 5th Amendment (i.e. because rent control serves no legitimate governmental purpose)?” Lingle v. Chevron is the first case before the U.S. Supreme Court that squarely presents this issue as it deals with Rent Control. All other cases dealing with rent control which have made it to the U.S. Supreme Court discussed rent control under different provisions of the U.S. Constitution, such as due process violations or equal protection violations.

ACTION does not want to wait until Lingle is decided before filing our lawsuit, due to the uncertainty of a definitive outcome of the court’s decisions. ACTION hopes that the federal court trial judge will look at the cases previously decided by its own Court of Appeals decisions. In ACTION’s pending lawsuit. ACTION will maintain that there is no substantial state interest in protecting rents of tenants who are wealthy. ACTION believes that even though rent control can arguably be justified as providing a legitimate state interest when limited to protecting the poor, the law is still unconstitutional since the burden of providing affordable housing for the poor is placed solely on the housing providers. The government collects taxes for social welfare from the entire community; it is their responsibility and not the select group of housing providers to deal with this social burden. ACTION believes that the current rent control law has artificially kept rental rates high due to the shortage of supply caused by providing wealthy people holding onto low rental units in Santa Monica. Many of these units are not even occupied full time by the wealthy tenants, said tenants using the units for vacation homes or extended hotel rooms. If these wealthy tenants were forced to pay market rates, they would give them up (because they do not need them as housing) and that would return a great number of units to the market. This would in turn increase the supply of the available units, and lower the rents. Thus ACTION believes that Rent Control is not solving the affordable housing issue; it is exacerbating it. Pure common sense. Not only is there no legitimate governmental purpose for providing low rents to wealthy people (which thus makes it an unlawful taking of private property and a violation of the Fifth Amendment), but by providing these units to wealthy tenants, it encourages them to hoard unused units, and defeats rent control’s intended purpose.

Can this lawsuit succeed? Many detractors state we should not file the lawsuit at all. It is a waste of time and money. Well, the correct question to ask is this: “If we do not file this lawsuit what should we be doing instead?” Or as better expressed long ago: “It is better to light one candle than to curse the darkness.” Thus, ACTION is not guaranteeing victory, but ACTION is guaranteeing action. We are here to make things happen, and we cannot do that if we do nothing. This lawsuit will pose very important questions to the court: Why should Housing Providers subsidize wealthy tenants’ rents? Why should a city be able to force a subsidy just to get the political support of wealthy tenants?

We do not know what the U.S. Supreme court will do in Lingle v. Chevron, but we do know that there will be no opinion issued before approximately May or June 2005. We also know that time is money and we need to move as quickly as possibly. To waste six months for an opinion that may not resolve the question would be a crime.

THE ECONOMY IN 2005?
Should You Refinance To A Fixed At This Time?

There are many views as to what the new year will bring. There seems to be a consensus among those who predict such things as the future economic health of our county, that the years 2004 and 2005 are/will be much like the years’ economy of 1994 and 1995. We here in Santa Monica remember 1994 as the year of the earthquake (January 17, 1994) which shook up not only the local city bureaucracy but the housing market as well. But others remember the 1994-1995 years as those of stock market prosperity. Clearly, the real estate market was on the rise as well. Inflation was low and interest rates were on the way down. Will 2005 bring higher, same, or lower interest rates for the real estate encumbered investors? Most people would state that rates are going up. There is strong support for this position, no doubt. The U.S. dollar has fallen about 30% since 2001 against the Euro. However, it is still higher (stronger) against a basket of foreign currencies than it was in 1995. Thus we have been here before. Household mortgages are at an all time high, no doubt. However, so is home ownership, and those that pay mortgages not only avoid rent payments, but get tax deductions as well. The politicians know what happens if they hurt the home owner, and thus there is another reason mortgage interest rates will not go up dramatically.

Many owners are re-financing from variable rates to fixed rate mortgages to put their loans where their beliefs are currently located. However, there is a contrary philosophy, which states that interest rates are only going up next year 1/2 percent more. The thought is that since inflation is at the stand still, the only thing that could drive up interest rates would be the falling dollar, and the U.S. Government’s need to attract more investors from over seas to buy the billions of dollars in U.S. 10-year Treasury bonds which the government sells each month. The higher interest rate believers maintain that foreigners are no longer attracted by U.S. bonds, and if we are going to get them to buy more in the future, we need to raise the interest rates we offer them. As the interest rates increase on U.S. Treasury bonds so does the interest rate on real estate mortgages. Many variable mortgages are tied to the U.S. Treasury bond (usually an average of the last 12 months interest).

Before you go out and re-finance your low variable rate for a higher fixed rate loan, you might want to consider another view point. And that is that foreigners are not going to abandon buying the U.S. Bonds for a number of reasons. First there is the stock market. A strong stock market encourages foreigners to invest in Bonds. The prediction for 2005 is an across the board upward growth on all stocks. If this happens, foreigners will not abandon U.S. bonds then the Federal reserve rate will stay around 3% for 2005. The U.S. treasury bond will continue to trade around 4.5%, and all this even if the U.S. dollar falls to $1.40 to $1.50 against the Euro. Second, is the idea that the European countries will try to deflate the Euro so as to keep in competition with the U.S. Dollar. If that happens the dollar will not be losing as much value as against the Euro, and the U.S. Dollar will be more attractive to foreign investors. Third, there will be low inflation in 2005 (say 2% as in 2004). There is the idea that the global economy is getting better for all people around the world. And that this continued global competition which will keep inflation low (i.e., prices of good will stay low because of global competition). Under this theory free trade among countries (China included) creates the lowest possible prices for goods and services, and yes, Adam Smith in The Wealth of Nations (1776) was right all along. Thus in inflation stays low, interest rates are not going to increase much more than we have seen. And, finally Fourth, the U.S. Dollar may be increasing in value against the Euro and other foreign currencies. Bush has stated that he will try to increase the value, and prior to his speech the Dollar gained in the market. It just could happen that with a better economy in our country, and tax revenues going up, our dollar will rise in value as well.

So before you trade in your 3.5% variable for a 6% fixed, you should take another look at the big picture. In any event you should wait for a few months to see if interest rates level off before giving up such a tasty loan rate.

TIPS TO THE WISE OWNERS:
NEW YEAR’S TUNE UPS

With the beginning of a new year, each Housing Provider should take stock of his or her building and tune up their operations. There are a few mistakes that have been consistently made by owners in the past, and with the coming new year, this would be a fine time to correct them. Here are a few of the more outstanding issues:

Anniversary of January 17, 1994 Earthquake
We are in striking distance of the big quake’s Anniversary. Just a short reminder and word of wisdom to you all. The major injury occurring to victims of the earthquake last time, was cuts on the hands and feet due to broken glass. After the quake, people got out of bed, walked around their homes in bare feet and used their hands to pick up or remove broken glass. If you buy one present for yourself this season, make it a pair of strong slippers, and keep them by your bed. Wear them whenever you get up. And if there is another quake do not pick up glass. Leave it there. If you want to do something for yourself, take yourself outside (wearing your slippers and warm clothing) and just look for a coffee shop that’s open. Or better yet, just roll over and go back to sleep until it gets to be daylight.

Mold Containment
Mold is still the number one problem for Housing Providers in Los Angeles County. Mold creates a problem when a tenant’s apartment is exposed to its spores. Before you allow a plumber to open up a wall to look for leaks, make sure that the area around the to be made hole, is encapsulated with heavy plastic sheets to contain the spores. All too often a plumber, in looking for a leak, opens a wall inside the apartment unit, and spores infect the entire room causing thousands of dollars in unnecessary remediation.

Insurance, Mold Tool
Shop around. Once you have insurance, you’ll be tempted to stay the course unless something happens, but you may be able to lower your premiums simply by shopping around. If you can’t lower them, at least you’ll feel good knowing you got the best deal. Direct writers of homeowners insurance include American Express (800-535-2001), Amica (800-242-6422), GEICO (for auto, home or boat insurance, 800-841-3000) and USAA (for members of the military and their families, 800-531-8100). They do their selling over the phone and if you qualify, you’ll save, big time, on the commissions. Even with a great policy, you might be able to drop your premium further with one of the ideas given here.

Raise your deductible. Some insurance companies will drop you if you make more than two claims in a year. Make sure your insurance covers you for catastrophes and plan on picking up the cost of everyday expenses. Raising your deductible from $250 to $500 might shave 12 percent off your premiums. Raise your deductible to $1,000 and your savings might double.

Three-Day Notices to Enter for Repairs
An owner needs to understand and use the 3-day notice. All too often, we hear that an owner cannot gain access into a tenant’s unit for purpose of repair, because the tenant refuses to allow the worker access. The owner is not relieved of his or her obligation to make repairs if the tenant refuses access. Rather the owner must do the following: First, prepare and serve a 3-day notice to cure requiring tenant to allow owner access some time after 3 days of service of the notice. Second, prepare and serve with the 3-day notice, a Notice of Entry to Make Repairs, stating a day and time after the 3 Days period expires. Third, and finally, go with the repair person on the appointed time and date and seek entry for repairs. If the tenant refuses entry, do not contest the refusal, but immediately file a lawsuit for eviction. It is a violation of both State and City laws for a tenant to refuse an owner entry for purposes of inspection or repair.

Hoarding
All too often a owner will allow a tenant to hoard junk and trash inside the tenant’s apartment. Hoarding is against the State and City laws. It creates a fire hazard, health hazard, and nuisance for the other tenants at the property. If you have a tenant who hoards material, promptly give that tenant a 3-day notice to cure or quit.

3-Day Notice to Pay Rent or Quit
All too often we see a owner using the wrong 3-day Notice for collection of rent. ACTION has the correct forms for your use, and no one should use an incorrect form. If you do, your lawsuit may be dismissed and you will have to start all over again, giving the tenant the opportunity to pay rent once again. A correct 3-day notice must contain certain information. Also, it must tell the tenant where and how she/he must pay the late rent. Do not allow a below market rate tenant to pay rent late. All too often we hear the owner state that if a 3-day notice is served the tenant will simply pay the rent. If the tenant does not pay within the 3 days, the owner does not have to accept the rent pay­ment offered AFTER the 3 days has expired. If the tenant has a history of 3-day notices, the court will be even more reluctant to give the tenant a break after the lawsuit is filed. Remember also, that the easiest way to evict a problem tenant is for non-payment of rent. All too often we hear owner complaining about how horrible a tenant is, but then hear that the tenant is habitually late in pay­ment of rent, but the owner does not take the effort to serve 3-day notices. That is bad business.

Excess Rent
There are some owners who are charging the incorrect rent. It may be off by only $1.00 (or even less). However, the owner must seek to correct this mistake. The correct MAR is on line at the Rent Board’s web site, by property address. Every owner should check this site from time to time to be sure that the owner is not collecting excess rent. Remember that the correct rent (also called the MLRundefined Maximum Lawful Rent) consists of the scheduled on line MAR, plus $11.00 per month for registration pass throughs, plus lighting surcharges if available, plus school bond taxes the owner pays. If the owner is off by a very small amount, and the tenant fails to pay rent, the owner’s 3-day notice will be incorrect and the owner will not be able to evict the tenant for non payment of rent based upon that incorrect 3-day notice. The owner will have to recompute the correct rent, and then after giving the tenant credit for the over charged rent, serve a new 3-day notice. The owner gains nothing by waiting to correct the rent, instead of doing in now.

Additions or Amendments:
Written Rental Agreements
One of the least understood legal issues in rent controlled properties (any city) is: “Can an owner give a tenant a written rental agreement if the tenant does not have one?” and “What is the best way to handle this situation?” The law is clear that a owner may serve on a tenant a 30-day notice which contains a new written rental agreement, whether that tenant has an existing oral agreement or written agreement. After 30 days that rental agreement will be effective between owner and tenant, whether the tenant signs the agreement or not. However, the Rent Control Board has passed a regulation Chapter 9, which states that an owner cannot evict a tenant for a breach of a term which is contained in a rental agreement the tenant refused to sign. This regulation does NOT state that a owner cannot serve on a tenant a new rental agreement, or that the terms of the rental agreement are not binding for purposes other than eviction. Indeed, there are many economic reasons and legal ramifications that can be advantageously accomplished by the serving of a written rental agreement on the tenant. ACTION has a good rental agreement and a 30-day notice form for this purpose. In the situation where the tenant has an existing written rental agreement, the owner may want to consider amending only certain paragraphs, (such as deleting the attorney’s fees clause) rather than replacing the entire agreement with a new agreement. For the owner who happens to have a good written rental agreement in place, don’t forget that the Rent Control Law states that the tenant must sign a new agreement with terms substantially similar to that one, or move out.

Drop Box For Rent
Each owner should consider establishing a drop box on the property for the payment of rent. This is especially true if the owner has a tenant who habitually pays rent late. The tenant should be notified in writing that the drop box is the only place where rent can be paid. The drop box should be accessible at all times of day and night. The drop box can be a mail slot in the manager’s door or a storage room’s door, or a mail box mounted inside the building. The owner should keep inside the box blank copies of form 3-day notices to pay rent or quit. The owner should check the box on the 2nd of each month. While there, if any tenant has not paid their rent, the owner can fill out and post and mail a 3-day notice. Then the owner can return on the 6th of the month to see if the tenant has paid their rent. If not, the owner can then file a lawsuit for eviction. This method avoids the time delay accompanied by mailed rent, and the possible legal presumptions that the rent was lost in the mail.

Inspections
The city and state require the owner to know at all times the condition of the tenants’ apartment units. If a tenant fails to inform the owner that something is leaking or broken, this failure does not relieve the owner of responsibility. In addition, may leaks if caught in time, will save thousands of dollars in repair bills. Thus it is incumbent upon owner to maintain a schedule of walk throughs of their tenants’ units at least as often as once every months. Each inspection should be noticed by a writing served on the tenant 24 hours in advance (a greater advanced notice would be preferable) The correct notice form is available at ACTION’s offices. The owner or agent can walk through for the inspection. A check list should be used, with the time and date listed, along with the name of the person(s) making the inspection and the tenant or other person present. The check list should contain items such as: smoke detectors, space heaters, water heaters (if any), water pipes, stove, windows, carpets, painting/ walls, ceilings, floors. Any items in need of repair can be noted. The owner should make all repairs and not allow tenant to make any repairs. If the damaged item is the tenant’s fault, then the owner should still make the repairs and sue the tenant for reimbursement. The owner should never allow the tenant to make repairs, because the owner loses control over the material and work done to the building, and runs the risk that illegal material may be used by the tenant (such as illegal paints and varnishes, or non-tempered glass), and further that the work is substandard and will lead to more problems. The owner must never allow a tenant to make repairs and deduct the repair costs from the rent.