Cover Story : A House Divided in Santa Monica : City’s Rebuilding Effort Seeks Delicate Balance, but Renters and Landlords Feel Like Losers
Despite a cacophony of construction sounds emanating from every corner of town, neither landlords nor their dispossessed tenants have anything to celebrate on this two-month anniversary of the quake that shook up Santa Monica in a big way.
The gloom is understandable: Anxious Santa Monica apartment owners wonder if money will be available for rebuilding as thousands of tenants scattered to the winds wonder if they will have a home to return to--at any price.
Since the Jan. 17 earthquake, the Rent Board and City Council have enacted, or are about to enact, elements of a rebuilding program meant to encourage property owners to repair or replace the nearly 2,000 apartments lost in the temblor, while retaining affordable housing. The rules have relaxed zoning and, to the dismay of renters, may lead to significant rent increases because the city has allowed landlords to pass repair costs on to tenants as a permanent rent increase.
For places beyond repair, the City Council agreed to throw its slow-growth zoning standards to the wind by allowing new apartment buildings to be the same size as before. They don’t even have to provide on-site parking.
“The city is really giving up a lot in order to encourage rebuilding,” said Planning Director Suzanne Frick.
The new policies may seem a relaxation of the Rent Board’s ironfisted rules that helped gain the city the sobriquet Soviet Monica. But landlords do not feel they have reaped a bonanza. They question the math of the city’s proposals and predict rebuilding won’t pencil out, even for many of those fortunate enough to have that as an option. An unknown number of apartment owners expect to lose their buildings to foreclosure because they won’t qualify for loans.
Meanwhile, the city’s dominant rent-control political group is showing signs of structural stress, too, its future measured in part by how many of the uninhabitable apartment units will be restored--and when. The units represent a small portion of rent-controlled apartments, although in a city in which a few hundred votes often decide who is elected to the City Council, each is valuable to tenants and politicians.
Further clouding the issue is a renewed threat to rent control from Sacramento. A bill concerning other rent control issues was amended last week in the state Assembly to include a provision that would gut Santa Monica’s tough tenant regulations by allowing rents to be raised to market levels upon vacancy.
At stake is the future of what is arguably the nation’s toughest rent-control law, which has remained in place for 15 years despite numerous attempts to weaken it.
The rent control law was adopted following a battle over wildly escalating rents in the beach community. The law became the foundation of a political dynasty that now holds five of the seven seats on the City Council, controls the school board and is essential to the success of state legislators who represent the city.
Thus it was no easy feat for the Rent Board and the City Council to do what does not come naturally for them--allowing rents to rise in the quake’s aftermath and wooing landlords.
The city officials “have a horrible, horrible dilemma,” said Steve Little, vice president of First Federal Bank, a locally based lender. “They want to put as many people back in those buildings as possible.”
Scared, angry, aghast at the prospect of higher rents and sad to be away from home, the displaced tenants are mostly absent from the dialogue, too preoccupied with finding new shelter and getting their belongings from unsafe buildings to show up in force at the endless public meetings since the earthquake.
Their outcry is expected to peak when individual rent increases and the permanent loss of units sink in. “Nobody understands the implications of the decisions,” said renter John Bodin, who ran his political consulting business from the now red-tagged Sea Castle, where tenants had an ocean view for as little as $500 a month. “The Rent Board may not understand the financial ramifications, let alone a displaced tenant.”
One of those who did attend a public meeting, longtime renter Sylvia Schniad, said she understood only too well that the new regulations were the death knell of rent control and “would change for all time the face and the character of Santa Monica.”
Actually, the face of the city was changed on Jan. 17 at 4:31 a.m.
Everyone has conceded that affordable housing will be lost because of the earthquake. The question is how much.
Asked if he thought 500 affordable units was a fair estimate of what would be gone forever, Rent Board attorney Anthony Trendacosta said, “If ultimately, at the end of rebuilding, 500 units is all that’s lost . . . we’ve done wonders.”
Rebuilding in Santa Monica is particularly tricky.
A tour of the city the day before the earthquake would have shown a pastiche of apartment building styles ranging from the elegant Art Deco of the ‘20s to the slapdash stucco of the ‘70s.
In an unfettered market, apartment houses wear out and are replaced. But Santa Monica’s regulations work against that because they invariably favor the status quo.
Although the Rent Board could keep rents low and be hard-nosed when owners wanted to upgrade in exchange for higher rents, it could not force owners to maintain their buildings beyond adhering to basic safety codes. And some landlords, saying they could hardly make a nickel as it was, did as little as possible to keep their places patched together--and crossed their fingers for luck.
For some of these owners and their tenants, the luck ran out when with the earthquake, which damaged scores of buildings that were held together by little more than spit and glue and rent control.
All the units put out of commission by the quake were affordable to low- and moderate-income people--the very folks who lost out in the aftermath of the Loma Prieta quake in the San Francisco area in 1989. A recent UC Berkeley study found that half the apartments lost in that earthquake were not replaced four years later. Affordable units were especially vulnerable because, the study concluded, government recovery programs favored an ideal victim whose dwelling is “adequate, conventional and replicable.” Middle-class homeowners fall into this category. Poor renters do not.
Many victims of the Loma Prieta quake, like those in Santa Monica, lived in “old, poorly maintained, overcrowded, structurally unsound buildings.” When study co-author Mary Comerio talks about the marginal economics of older, low-rent buildings in the Bay Area, her description could just as easily apply to Santa Monica.
The study recommends offering more loan money and other incentives to quickly restore affordable housing. That is exactly what Santa Monica landlords say is missing in the city’s plan, although they admit they got many more concessions than they might have anticipated.
“The staff has made a sincere effort to be fair,” said landlord leader Robert Sullivan, a property manager. “If the Rent Board had adopted all the staff regulations, things would be going a lot smoother.”
When the Rent Board met after the quake to set policies, its members knew what they had to do, but they would agree to go only so far.
They realized that a property owner who had to borrow a lot of money to fix up a damaged building needed the means to repay the loan. So, over objections of tenants who complained that they were being made responsible for the landlord’s property woes, the board voted to allow provable earthquake repair costs to be passed on to tenants through permanent rent increases.
Under the policies, the landlord’s cost of repairs would be amortized over 10 years, meaning rents in most cases would increase from a few dollars to a few hundred dollars. For example, if a landlord spent $100,000 to restore a 10-unit building, renters could expect to pay about $83 more per month.
The resulting rents still would be significantly below the rest of the Westside rental market.
Landlords would benefit because their property becomes more valuable upon resale if rents are high, but they would not make more profit for 10 years because of higher mortgage payments.
Despite the urging of the rent control staff, however, the board voted 3 to 2 not to include replacement of plumbing and electrical systems in the definition of earthquake repair--unless each and every pipe or wire had been damaged by the quake.
Property owners expect this ruling to interfere with their ability to fully finance repairs. Banks require the rents of a building to be enough to cover the expenses and would insist on the owner replacing worn-out plumbing before lending money in the first place. Lenders want the structure to be in as tip-top shape as possible, they said.
Although landlords bemoan this decision, it is not the biggest obstacle some of them face. For those whose buildings cannot be salvaged, the city’s requirement that all new residential construction include affordable housing looms as the biggest stumbling block to rebuilding.
The standards require builders of a new apartment structure to set aside 15% of the units as affordable housing--in this case accessible to a family earning 80% of the region’s median annual income (which for a family of two is $30,900). For new condos, 30% of the units must be classified as affordable.
Property owners said such requirements make it difficult to turn a profit or even obtain financing for construction.
In order to do major renovations, they would need loans beyond what banks and the Small Business Administration will allow to bridge the funding gap. Some have called upon the city to put a bond issue on the ballot to raise loan money, but city officials said that will not happen in June. And November, they said, might be too late because property owners have to arrange their financing in the next few months.
Property owner and manager Carl Lambert asked for relief from city officials: “The free market built these units and it is going to require the free market to rebuild them.”
In Santa Monica, as elsewhere, there is no archetypical landlord. Some people have one building bought years ago as a retirement investment. They live there and have small mortgage payments, if any.
These are the folks most likely to rebuild--if they have the wherewithal for a major construction project.
Others bought their apartment buildings in recent years and have big loans to repay and little or no equity because of declining real estate values. They might not qualify to borrow enough money to keep afloat and could lose their buildings to the bank. Banks would then have the structures repaired or, more likely, sell them at a discount to speculators.
Many fall somewhere in between, their financial situation as unique as a snowflake. However, walking away from their buildings or selling them for the land value alone (the buildings are worthless in their damaged conditions) would mean losing hundreds of thousands of dollars. In fewer cases, borrowing repair money may be a snap.
That is why it is so hard to predict what will happen overall.
“Everybody who can get a loan, who I know, is going to rebuild,” said landlord attorney Rosario Perry.
Property manager Sullivan concurred, saying most owners can’t afford to do otherwise and are scrambling to obtain financing.
Some city officials fret that owners may wait to see if the rebuilding rules are further relaxed months from now, but landlords consider such fears unrealistic. Sitting on a property is an option only for those who can make their mortgage payments without rent coming in.
Notably absent from the Rent Board’s and City Council’s policies has been a financial analysis of their impact, which makes it difficult to determine whether the guidelines will be effective. Officials said such an analysis would be difficult because each owner’s financial situation is unique.
Without a financial analysis, City Councilman Paul Rosenstein said, “We’re flying in the dark.”
Councilwoman Asha Greenberg agreed. “We can sit here and make policies until the cows come home. That’s not going to build us housing.”
At this point, city officials can only hope their strategy is the right one.