Web of Misery : The ‘Bricks’: Big Profit in Slum Decay

They come to Los Angeles by the hundreds every day, not all of them legally. Lured from impoverished, often war-ravaged homelands by images of a bountiful America, most want for little more than a better place to live.

Most do not find it.

Immigrants with minimum-wage skills arriving from Asia or Latin America typically end up settling in Los Angeles’ cheapest and oldest housing--one of 43,406 apartments found among the more than 1,500 aging brick buildings that dot the city core.

State of Disrepair

Hundreds of these buildings, in neighborhoods such as Westlake, Highland Park and Koreatown, have slid into filthy disrepair over the years, leaving untold numbers of cramped, decaying hovels, many of them little larger than jail cells.

Yet for such residences, even those with crumbling walls and dripping ceilings--places where rats scuttle across the floors and drug dealers prowl the hallways--there is a surplus of tenants who will pay more than half their monthly salaries in rent.

“People come to Los Angeles to work,” observed Gary Squier, the city’s housing coordinator, “and they’ll live anywhere they can to do that.”

Which is why slums have become a growth industry in Los Angeles.

An insatiable demand for low-income housing combined with skyrocketing property values have given rise to a shadowy corner of the real estate market in which Los Angeles’ most decrepit apartments have become among the most sought after, The Times found in studying some of Los Angeles’ most notorious slums.

So limited is the supply of low-income housing and so strong the demand for it, according to officials and tenants alike, that owners often need not worry about keeping up their brick buildings--which are simply called “bricks” in the trade--to keep them fully occupied.

In the vernacular of slums, the process is called “milking the cow”--squeezing the rent out of apartment buildings without regard to their condition or that of the people living in them.

For the less-than-scrupulous investor, slums offer a plethora of financial and legal loopholes, weak or non-existent state regulations and ample opportunity for rent skimming, pyramiding scams, insider loan deals and bankruptcy fraud, The Times found.

For the people who inhabit the slums, the options are considerably narrower. Around the corner and down the street from some of the city’s more opulent neighborhoods, thousands have no choice but to live under Third World conditions.

Numbers tell part of the story. Rents have gone up an average 110% citywide since 1980, leaving better, once-affordable units out of reach of the very poor. Moreover, most new apartments in Los Angeles are built for the middle and upper classes.

So, as vacancy rates for all rentals in Los Angeles have increased over the last several years--from 2.8% in 1977 to 4.3% in 1987, according to one city report--vacancies among the lowest-priced inner-city apartments have, by all estimates, dropped to near zero as the poor compete for a dwindling supply of bottom-line housing.

And with fewer affordable apartments available, more of them have become overcrowded. Units designed 50 years ago to house one or two people now frequently accommodate extended families, whose members must sleep and eat in shifts for lack of space.

The Los Angeles City Council passed a law in December, 1986, making it a misdemeanor for a landlord to overcrowd an apartment. But according to officials, tenants and slumlords, the law is rarely enforced. That, they say, makes for a mixed blessing: fewer tenants are kicked out on the street, but the buildings continue their downward slide from overuse and lack of maintenance.

Indeed, the percentage of “substandard” rental units in Los Angeles--those with gaping holes, non-working plumbing, inadequate heating and the like--jumped from 14.5% of the available rental stock in 1977 to 23% last year, according to a report prepared for the Community Development Department. There were 166,512 substandard rental units of all kinds in Los Angeles as of last year, two-thirds of which needed “massive” rehabilitation, the report said.

Some Are Well Kept

To be sure, many old apartment buildings have been kept up by their owners and continue to offer decent housing to those who can least afford it. And, at the same time, a multi-agency Slum Housing Task Force formed by the city in 1980 has aggressively targeted the worst buildings and prosecuted their owners.

But officials point out that hundreds of other aging apartment houses not bad enough to concern the task force have fallen even further into disrepair amid a flood of immigrants and city inspections that generally are conducted only when tenants complain.

Most tenants, fresh from the Third World and fearful of attracting attention to themselves, do not complain.

“The situation is far worse today than ever before,” said Barbara Zeidman, the city’s rent stabilization director. “For every terrible slum building the task force deals with, there are 10 others that a year from now will look just like it. They’re hard to catch.”

The problem is so amorphous that officials do not even know how many true slum buildings there are in Los Angeles. Zeidman placed the number at between 750 and 800, while Milford Bliss, chief of the city’s Bureau of Community Safety, put it at 200.

What is known is that few banks or savings and loans will finance the purchase of older, inner-city apartment buildings. This informal but widely held policy has spawned an environment in which nearly seven of 10 slum buildings are traded without the involvement of financial institutions, a recent city-sponsored study found.

Wary of the Risks

“There is no question that there has been a history of many institutions ignoring these (buildings),” said Barry Rubens, who has been a savings and loan consultant for 31 years. “I just don’t think they want to risk the adverse publicity.”

For those needing outside financing to purchase slum buildings, there exists a handful of opportunistic lenders who issue high-interest loans--and sometimes defraud those who get them, court records show.

The regulations governing these lenders, administered by a maze of bureaucratic state agencies, are weak in certain key areas. In some cases, there simply are no regulations.

For example, Congress and the California Legislature have passed various laws in recent years requiring that lenders disclose sometimes-hidden details about loans to the buyers of single homes and small rental properties. Sellers, by law, must alert buyers to defects in the properties they are buying. The same laws, however, do not apply to transactions involving apartment houses. That gap in regulation, critics contend, has created a market rife with deceit.

Exasperated by the system, City Atty. James K. Hahn and his staff in late March took action. The city, teamed with the Legal Aid Foundation and a private law firm, filed a massive lawsuit alleging that 142 defendants, including a respected savings and loan in Highland Park and A & B Loan Co., a little-known Inglewood-based private lender, have secretly conspired to control 11 slum buildings through questionable lending practices, front men, unsuspecting dupes and dozens of shell companies.

Unusual Agreement

On July 12, A & B, its president and nine related defendants signed an unprecedented agreement in which they promised to change their lending policies and force borrowers to repair slum buildings--or face losing them.

The agreement, which represented a partial settlement of the landmark lawsuit filed in March, was hailed by prosecutors as the first step in breaking what one attorney termed “the cycle of slum transfers.”

Whether A & B and others named in the city attorney’s lawsuit represent an anomaly, the tip of the iceberg or a group of passing acquaintances falsely accused depends on who is doing the talking.

Whatever the true picture, The Times in a two-month investigation found evidence showing that as far back as the mid-1970s, many of those named in the suit have repeatedly transferred between themselves some of Los Angeles’ most miserable apartment houses in a process that those in the trade call “churning.”

It is a convoluted and often lucrative process in which investors sometimes are as well-hidden as the profits they make, The Times found.

Use of ‘Straw Men’

Investors who hold mortgages on slum apartment buildings frequently arrange it so that they do not appear as the owners of record. In their place are “straw men” paid or duped into taking title.

Sometimes, to further insulate themselves from scrutiny and prosecution, investors create “shell” companies, listing as mortgage holders acquaintances or employees. The names of maids and pet dogs have even been used as property owners on mortgage papers.

As rent money is funneled to the investors, the presumed owners are socked with health and safety code violations, delinquent utility bills and back property taxes. Eventually, the buildings wind up in foreclosure, where the debts are erased and new “owners” take over.

The rents, meanwhile, continue to flow into the pockets of the investors who hold the mortgages and evade responsibility.

These buildings are sold frequently, sometimes several times a month, with a higher selling price each time. By boosting a building’s value, at least on paper, an investor can claim a larger deduction for property depreciation on his income tax.

What is clear is that in the process, thousands of impoverished tenants have come to be treated as an afterthought. Basic human needs--working plumbing, adequate lighting, sufficient ventilation--have been all but ignored.

And the slums have slid ever more deeply into decay.

Most of the apartment buildings in Los Angeles that have come to be regarded as today’s slums went up in the first 30 years of this century, during an economic boom of incomparable proportions.

Agriculture was flourishing. There were jobs on the railroads and in the oil fields. The tuna canning industry was burgeoning, as was the movie industry. To find workers, local civic leaders campaigned in the Midwest and New England, trumpeting Los Angeles as a nirvana of fragrant orange groves and endless summers.

In 1890, 50,393 people lived in Los Angeles. By 1910, the city’s population had leaped to 319,198.

Building With Bricks

To house the trainloads of newcomers, investors erected dozens of apartment buildings in and around downtown. Because clay was more plentiful and cheaper than timber, the buildings were made of brick. In 1912, local kiln operators were turning out more than a million of them a day to meet the demand.

Held together with soft mortar and without steel reinforcement, the bricks formed the walls of three- and four-story apartment houses that were more functional than luxurious. Fashioned on a smaller scale after Eastern tenements, the buildings typically featured central courtyards and shared hallways, steam heat, high ceilings and fold-down Murphy beds.

Brick construction continued unabated until March, 1933, when the Long Beach earthquake struck, killing 120 people. Many of the victims were crushed by brick walls that shook apart in the temblors.

Within six months, state officials had passed laws that effectively did away with the construction of unreinforced masonry buildings. But it was not until 1981 that Los Angeles passed laws requiring the strengthening of the city’s 8,000 brick and cinder-block buildings.

Although owners generally have had to be prodded into taking corrective action, Carl Deppe, Earthquake Division chief for the city’s Department of Building and Safety, said few have grumbled about shelling out the $3.50 to $6.50 per square foot it costs to make a residential brick structure earthquake safe.

“They know there’s a good return on these buildings,” Deppe said. “They’d rather improve than demolish.”

Asking Prices Rise

As rents have risen in Los Angeles, so too have the asking prices of slum buildings, despite the deteriorating condition of many. Three or four years ago, slum buildings were selling for about four times their gross rents, according to those in the business. That means that if an apartment house generated $100,000 annually, a buyer could expect to pay about $400,000 for it. Today, that same building would sell for $600,000.

Even at such prices, slums remain a bargain for real estate speculators priced out of the Valley and the Westside, where apartments can sell for as much as 12 times annual gross.

There are also tax incentives for those who buy or invest in slums. While the 1986 federal Tax Reform Act did away with depreciation provisions that made investments attractive in other residential properties, it retained substantial tax credits for low-income housing.

Still, there are pitfalls for those who get into the low-rent apartment business with legitimate intentions.

Several owners interviewed for this series of stories complained that overzealousness on the part of city officials makes the job of maintaining or rehabilitating an aging apartment building all but impossible. Almost universally, they say that the task force, made up of representatives from the city attorney’s office, Fire, county Health Services and Building and Safety departments, unfairly holds new owners liable for code violations that developed under previous owners.

Claims of Success

The task force, which has grown to include five full-time assistant city attorneys, has sent landlords to jail on 57 occasions since 1981 and claims credit for having brought to code 4,000 substandard rental units.

“If they like you, they’ll give you all the slack in the world,” said one embittered owner, “and if they don’t, they’ll send you to jail for a burned-out light bulb over an emergency exit.” Task force officials say they do their best to apply the laws evenly.

One owner who is not resentful of the city’s efforts but who has had troubles of a different sort is Bill Carson, a former aerospace worker who saw low-income apartment buildings as a way of paying his children’s college tuition.

Carson, 58, whom city officials hold up as a shining example of a conscientious, low-income landlord, bought his first building around 1974. Today, he owns 15 of them, and controls 500 apartments.

A few years ago, Carson acquired a 27-unit building on Rampart Boulevard near MacArthur Park. It was erected in 1928 and falling apart. Carson budgeted about $25,000 to bring it up to code, he said. It took him four times that amount to do it.

“You’ve got to pour money into these things,” Carson said. “A lot of people who get into them just don’t realize that. Nobody tells you those sorts of things going in.”

No one is required to.

‘Sophisticated’ Buyers

As the laws were written over the last decade, according to state and federal officials, it was felt that buyers of income-producing properties invariably were “sophisticated” and did not need the kinds of disclosure protections afforded buyers of private homes and smaller rental properties.

“The attitude in the Legislature is that business is the big guy and big guys can take care of themselves,” said Sen. John Seymour (R-Anaheim), a former president of the California Board of Realtors. “The reality is that if you’re a neophyte getting into these kinds of transactions, you might find yourself getting undressed rather quickly.”

There are other laxities in the law that leave open opportunities for fraud involving apartment house transactions. California’s limited partnership laws, for example, make it impossible for an honest investor to check who may be behind the partnership. General partners must be listed with the secretary of state’s office, but limited partners do not have to, allowing unscrupulous businesses to hide their true owners.

Or consider appraisers. When someone enters into a contract to buy a home, the lender invariably requires an appraisal to ensure that the amount being loaned on the property is in line with its actual value.

At least 18 states certify appraisers and periodically review their work to make sure that appraisals are not falsely inflated or otherwise fraudulent. In California, appraisers are not regulated by the state, although there is legislation pending.

Title insurance companies, which ensure that consumers hold clear title to the properties they buy, are in a similar boat. There are no laws in California requiring that property buyers have title insurance. And even when they do, there is nothing in the books that says a title insurance company must conduct a thorough examination of a property’s title history before issuing that policy.

Hidden Loans

The result has been financially disastrous for some apartment house buyers who have ended up assuming loans that were not disclosed to them when they took title.

Often as not, records suggest, those buyers are immigrants who many be particularly ignorant of the financial complexities of buying an apartment house. As Zeidman of the city’s Community Development Department puts it, there is often a “cultural differentiation” when it comes to immigrant landlords and city regulations.

“Frequently,” Zeidman said, “non-native owners do have a great deal of difficulty understanding the scope of the housing laws in Los Angeles.”

That differentiation has generated more than a little animosity among established owners of brick apartment buildings, some of whom blame newly arrived foreigners--both tenants and landlords--for slum conditions.

The attitude of Steve Melnyk, who owns five low-income buildings and who, like Carson, is regarded by officials as a model low-income landlord, is typical. As he puts it:

“You rent to a nice couple and four or five days later, you get a call that the toilet’s stopped up; they’re using it as a garbage disposal. So you send the maintenance man over and he comes back and tells you, ‘Holy hell, the place is wall-to-wall mattresses.’ There are six or eight people living in a combination living room-bedroom. They don’t know how to use shower curtains and the water goes down and caves in the ceiling in the apartment below.

‘To Hell With It’

“After the fifth time, the landlord says to hell with it. I can’t afford to keep fixing this. I spent all my capital buying the place.”

There is no question that the slums are becoming more crowded and, at the same time, more expensive to live in. Even at $275 to $350 per month, the going rate these days for a 425-square-foot, one-room apartment, many newcomers making the minimum wage or on welfare cannot afford to pay the rent by themselves or even with a spouse’s second income.

A rent stabilization review released by the city last year found that in 1977, poor families in Los Angeles--those with annual earnings of less than $10,000--paid out 37% of their income in rent. By 1987, 60% of the average poor family’s income was going to rent.

Despite the demand, few banks have been willing to issue loans on slum buildings.

Melnyk said he noticed a change after the 1971 Sylmar earthquake, when the issue of unreinforced brick buildings was raised anew.

“After the quake, all these lenders started backing off because they were all afraid of financing potential piles of rubble . . . and because they didn’t know what kind of seismic ordinances the city was going to pass and how much it was going to cost them,” Melnyk said.

With the creation of the slum task force in 1980, even fewer banks and savings and loans would make loans on unreinforced brick buildings, according to several long-time banking observers.

Running Out of Capital

“A lot of these buildings are bad risks; the foreclosure rates are very high because a lot of the people who get into them don’t have the capital to fix them,” said the chief officer of one locally based savings and loan. “And with the city coming in, demanding compliance with (the building and safety) code, a lot of these guys will simply walk away from the property, leaving you holding the bag if they don’t have the money to make the fixes.”

In this financial void, however, at least one savings and loan, Highland Federal, and several private mortgage bankers and brokers have found a lucrative niche. These lenders operate in what amounts to a financial frontier of fast deals and high leverage.

Highland Federal became one of the most profitable savings and loan associations in the county by issuing mortgage loans on old apartment buildings, precisely because so few other lenders would. Legally charging higher loan fees and higher interest rates than other lenders, Highland Federal has repeatedly issued large loans--some of them relatively risky third, fourth and fifth trust deeds--to several of the city’s most infamous slumlords.

Less-regulated “hard money lenders,” particularly A & B Loan Co. in Inglewood, have taken up where federal regulations have forced savings and loans to leave off.

A & B holds a California personal property broker’s license, a consumer finance lender’s license and a commercial finance lender’s license, all issued by the state’s Department of Corporations.

A personal property broker can make consumer loans but must take back as collateral an item of personal property--shirts and stoves are allowed--from the borrower. A consumer finance lender can make loans so long as the loans are secured by real estate or personal property. A commercial finance lender makes commercial loans greater than $5,000.

Incorrect Assumption

A loan applicant might assume that with so many licenses, A & B would be closely regulated by the state. The assumption would be incorrect.

In essence, California law stipulates that commercial loans of less than $5,000 and consumer loans of less than $10,000 are subject to extensive regulation. But there is literally no regulation when the loans are larger than those amounts.

“It is assumed that (these types of lenders) are lending their own monies so that is why they are not regulated like a savings and loan or whatever,” said Richard Murakami, the Department of Corporations assistant commissioner for financial services. “The thinking is that those who get large loans are sophisticated enough to know what they are doing.”

Clearly, not all of them are.

All too frequently, one high-interest loan after another is heaped on a slum building as the owner struggles to stay afloat financially. In the end, with no reserves left, the owner defaults. The building is handed off to yet another buyer with little more than the required low-down or no down payment. The new buyer lacks the money for major improvements, let alone maintenance.

And the slum slides ever more deeply into decay.

SLUMS--THE TERMS OF THE TRADE BRICKS--Used synonymously to describe shabby, brick apartment buildings.

CASH COW--A building that produces much rent, which invariably is paid in cash to hide owner income.

CHILLING THE BID--Rigging a foreclosure sale by falsely inflating the amount of outstanding loans or in other ways making the property so financially unattractive that a prearranged buyer is certain to win the bid.

CHURNING--Repeatedly transferring title on a building among a few buyers in a brief period.

HARD MONEY LENDER--Small, private loan companies that typically charge higher interest rates and fees and are often the last resort for borrowers who cannot get loans anywhere else.

LOAN-TO-VALUE (LTV)--Sliding ratio used by lenders to determine how much money they will lend on a building. For example, if an apartment building is selling for $500,000 and the bank’s LTV ratio is 70%, $350,000 will be loaned.

MILKING THE COW--Squeezing rent money out of an aging apartment building without keeping up the building.

SHELLS--Corporations that exist on paper only. Used to hide true ownership of slum buildings.

SINGLE ROOM OCCUPANCY (SRO)--Euphemism for Skid Row-type hotels, characterized by small rooms with no kitchens and with common toilet areas.

STRAW--Short for “straw man,” a middleman whose name appears on title to a building but who does not own it.

Times chief of research Tom Lutgen contributed to these articles.