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CES In The News

Los Angeles Business Journal
Monday May 22, 2006
Condo Conversions Create Quandary
By ANDY FIXMER
Los Angeles Business Journal Staff

When it came to his cozy Valley Village apartment, James Norton had a rare combination in Los Angeles: a quiet, safe neighborhood to raise his two sons and affordable rent.

Now his world is being upturned.

Norton, an eight-year veteran of the Los Angeles Police Department, and his roughly 80 neighbors are being evicted to make way for a massive condo development.

Even though he got more than $8,000 for his relocation costs, Norton says he won’t be able to find another rent-controlled, two-bedroom apartment in his neighborhood – or anywhere else in L.A. – for $760 a month.

“I’m facing at least double the rent,” he said. “Everything has more than doubled.”

The situation of Norton and his neighbors is becoming more and more common in Los Angeles, where land prices have shot up and rents can’t reflect today’s values.

In response, some apartment owners are converting their buildings to condominiums or razing their property to make way for a new for-sale development.

With cases such as Norton’s mounting, the L.A. City Council is beginning a series of hearings on whether to enact a moratorium on such conversions while the city decides how to protect its remaining stock of affordable apartments before they’re converted to high-priced condominiums.

It’s no wonder why apartment building owners want to go condo.

While the average apartment rent in L.A County is close to $1,500 a month, according to Novato-based rent tracking firm RealFacts, the median priced L.A. County condo is selling for close to $415,000, according to Melville, NY-based housing market firm HomeData Corp.

Put another way: A completely occupied 25-unit apartment building with units renting at the county average could be sold for about $4.5 million while the same property could be sold for nearly $10.5 million if the units were median-priced condos.

The pace of conversions countywide has only heated up as the gap between rents and condo prices has grown larger during the past five years.

Since 2000, more than 11,000 “rent-stabilized” apartment units – those apartments built in L.A. before 1978 where landlords are limited to raising rents 4 percent annually – have been converted to condos. The majority of those, about 7,000 units, were converted within the last 18 months. (The rent stabilization law doesn’t prohibit conversions.)

“And that’s only the rent-stabilized apartments,” said Larry Gross, executive director of the Coalition for Economic Survival, a group that helped bring about rent control in Los Angeles. “That number doesn’t take into account the thousands of non-stabilized units that have been taken off the market for conversion.”

Renters priced out
Roger Temple, owner of the Valley Village apartment building where Norton lives, said he loses money on the rental property every month. “It’s totally unrealistic,” Temple said. “I have a negative cash flow on every single one of these buildings.”

Temple said he’s replacing buildings that have structural and environmental problems with new condos that meet modern housing codes.

“There’s no way to bring these buildings to modern standards and make them safe,” Temple said. “I’m trying to keep the costs down so the units will be entry level housing.”

Proponents of allowing apartment building owners to raze their property or convert their units to condos say L.A.’s codes are already unnecessarily strict. For example, the city requires 51 percent of a building’s tenants to agree to a conversion before a project can proceed.

“The City of Los Angeles already has a de facto moratorium on conversions,” said Alan Nevin, the California Building Industry Association’s chief economist. “It’s next to impossible to get approval.”

Nonetheless, landlords can evict tenants under the state’s Ellis Act, which allows property owners to get out of the apartment business. Even so, landlords can face hurdles getting approvals to convert or raze their property.

At the same time, apartment building owners and real estate agents say the conversions give first-time homebuyers a “last chance” opportunity to get into an L.A. real estate market that is increasingly becoming out of reach.

A prime example is Forest Glenn, a 204-unit Winnetka complex where the owners are converting the two- and three-bedroom townhouse-style apartments into condominiums.

The owner, Forest Glenn Development Partners LLC, bought Forest Glenn about two years ago and has sunk more than $1 million into renovating the property, where units had been rent stabilized, in preparation for conversion.

While single-family homes in the neighborhood are selling for $660,000 and nearby two-bedroom condos are trading for $350,000 – the units at Forest Glenn range from $288,000 to $390,000 and the town homes are selling quickly.

“This is the best thing to happen for first time buyers,” said Elaine Golden-Gealer, who is the listing agent at Forest Glenn and has represented numerous apartment building owners switching to condos. “There’s almost no other way to get into the market.”

Still, Golden-Gealer admits few if any of the original tenants buy their units. At Forest Glenn, she said, the developer had even given tenants a number of incentives to buy.

The developer allowed tenants to use their security deposits and relocation money – which ranged from $5,000 to $8,000 – toward the down payment. Tenants got first crack at any unit in the complex and could relocate to another unit within the complex while theirs was being remodeled.

Despite the incentives, there were few takers. “A lot of times, people who are renters can’t get that value as a condo,” Golden-Gealer said. “They always think it’s over priced.”

Nevin contends about 3 percent of tenants in converted buildings stick around to buy their unit. Of those buying the remaining units, three-quarters were formerly renters.

“It’s absolutely not a case of losing units in the inventory – the inventory size stays the same,” Nevin said. “You’re just moving renters into an ownership position.”

Elected officials are concerned, however, that apartment conversions could worsen L.A.’s affordable housing crisis by decreasing the number of rental units on the market.

Councilman Ed Reyes, who chairs the city council’s Planning and Land Use Management committee, worries that with the city’s home prices out of reach of most families, that vast numbers of residents could be displaced.

“While we understand the need to protect property rights, we simply cannot ignore the fact that more and more middle-class and working-class Angelenos are being forced out of their homes,” Reyes said. “We must consider all options and that’s what these hearings are all about.”

Few limits
Cities from San Francisco to San Diego are grappling with the same problem, but even adjusted for population L.A. now leads the state in evictions due to rental properties taken off the market.

The apartment conversion initiative is just one of a number of proposals the city is undertaking to maintain a supply of affordable housing.

Recently, the council put a moratorium on converting single room occupancy hotels, which provide cheap housing for the poor, into market rate apartments and condos.

Among other efforts, the city is stepping up its role in building subsidized rental housing for low-income families and considering an ordinance that would force developers to include some level of affordable housing at market-rate projects.

Last year, there were 586 buildings containing close to 5,000 units in L.A. County that were taken off the market under the Ellis Act.

Once emptied, those properties – some functionally sound apartment buildings – can either be converted to condos or be razed to make way for a new condo development.

While San Francisco has been trying to curb Ellis Act evictions and enact some protection for renters, Los Angeles has been slow to respond and has fewer limits on what property owners can do with their apartment buildings.

Some cities in L.A. County are already putting some restrictions in place. In Beverly Hills, for example, the city annually limits condo conversions to 0.5 percent and demolitions to 1 percent of its total apartment stock.

L.A.’s affordable housing advocates want a demolition and conversion moratorium while the council studies how the loss of rental housing is affecting the city.

Gross, at the Coalition for Economic Survival
, said he’d like the city to make it harder for landlords to subdivide their rental properties for condominiums, especially in areas with already high housing costs or in buildings with elderly and disabled residents.

He also wants the city to require landlords to build replacement housing for being allowed to raze or convert their buildings. “These are all based on what other cities have done,” Gross said. “These aren’t some crazy ideas – they already work in other cities.”


But proponents of the conversions say that by not allowing for apartment conversions, building owners can’t raise money to fix-up their properties, which can lead to run-down and unsafe buildings.

“The inventory continues to rot,” Nevin said. “No one can afford to fix up their apartments so the units just continually go down hill and that’s why you get a slum.”

However, critics argue it’s a stretch that limiting conversions leads to slum-like conditions. Not addressing the issue could change the character of the city, they say.

“If we don’t stop this activity right now, and figure out a more equitable way to deal with this issue, the face of L.A. will change forever. The diversity that gives this city its strength will not exist in the future. We are going to be a city strictly of the wealthy,” Gross said.

For Norton and his two sons, that possibility has already become a reality. The family will likely have to move out of the neighborhood where Norton’s sons have grown up and where most of their friends live.

“Nobody thinks about renters’ rights,” he said. “People who have been living here for decades, we have no way or right to fight for our homes.”


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