Page 60 - AAGLA-JULY 2022

Feature Story
Impact of Elimination of Redevelopment Agencies
A dwelling unit is basically comprised of six things: (1) land, (2) labor, (3) materials, (4) permits and (5) fees, and (6) return on investment. If you want “affordable housing” in other words, below cost housing, you must decide which of these items you are willing to give up. Increasing density would lower the cost of land per unit for example, but not all folks are on board with that. Each of these six have their own constituency. In 2011, the California Governor and Legislature eliminated redevelopment agencies (RDA’s). Because of the ability of RDAs to reduce or even eliminate land costs, RDAs provided over 40% of the affordable housing in California. To date, nothing has replaced the RDA, and as one might have predicted the housing affordability problem has only gotten worse. A state senator predicted this at the time of the vote!
As previously mentioned, the cost of land and improvements have increased far faster than wages. Rents for a one-bedroom apartment are more than $2,000 per month in many Los Angeles neighborhoods. This means a prospective tenant would have to make over $75,000 per year to qualify under the 30% income coverage factor. As tax and regulatory changes over the last 40 years have driven much of the private capitol out of the rental housing business, “mom and pop” rental property investors who were are the majority of rental property owners in California and have been particularly hard hit. Since the 1970’s, government at all levels, with the guidance of Wall Street have waged war on small rental property owners, and as the “moms and pops” exited the rental housing market, they have taken their money with them.
Back in 1970, a taxpayer could deduct taxes, interest and expenses from as many properties as they owned from their ordinary income, Form W-2 wages, which encouraged investment in rental housing. Today investors can only deduct from two pieces of property. Add to this the loss of accelerated depreciation, which is a business accounting tool. Then we saw the inability of a developer to deduct front-end construction costs related to a project. This deduction was replaced with the insane “tax credit allocation committee.” Getting a project through this
committee can take years, and often comes with certain “strings” attached that add even more project costs. The Internal Revenue Service has even altered rules requiring depreciation on many repairs rather than simply allowing for the deduction of them. Taken together, this makes real estate less attractive financially. Which, by-the-way, is just what our good friends on Wall Street had wanted.
Impacts of Local Rent Regulations and the 401(k) Plan
Then if those financial changes weren’t enough, as the housing market became more constricted, local governments, responding to tenant complaints piled on with rent control and expensive rental housing regulations. Evicting a tenant in Los Angeles today can and does often take over a year! For an apartment that rents for $1,500 per month, legal fees and other costs necessary to evict a tenant today could easily exceed $30,000! There should be a binding arbitration process for mom and pop owners in the unlawful detainer process. No lawyers on either side, a legal arbitrator in place of court should decide these matters. The rights of both sides would be protected.
So where did all those housing investment dollars go? The 401(k) plan, which was a part of the Revenue Act of 1978 and other Wall Street investment plans are siphoning off dollars that once went into housing. For many the idea of owning an apartment building or even a single-family home is no longer attractive. The true villain in the mix here is Wall Street. Real Estate was once considered the most effective way to create generational wealth and save for retirement for average people. Today more families are choosing the stock market and other non-real estate investments. As you might expect, the resulting wealth gap has been growing during this period of time. Our friends on Wall Street; however, are doing just fine!
Government has proven itself inefficient at developing housing and easing the crisis. Things like rent control and an onerous eviction process discourage private investment in rental housing. Some estimates put the disinvestment in rental housing at over 40%. Government adds various costs in addition to time. This vilification of rental property
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