In Rent Control’s Wake, Santa Monica Shores Fetches $95 Million

Santa Monica’s largest apartment complex was sold last week in a deal that illustrates how dramatically the end of rent control in that city has affected the market for apartment properties.

Brentwood-based Douglas Emmett Realty Advisors paid $95 million for Santa Monica Shores, a two-building, 17-story complex that was built in the mid-1960s, according to Ron M. Pelleg, an independent broker who represented the seller, Santa Monica Shores Limited Partnership.

The transaction, anticipated for some time in real estate circles, was the largest apartment sale in the history of Santa Monica, according to Pelleg.

David S. Rosen, a general partner in Santa Monica Shores Limited Partnership, said he and co-general partner Lawrence Kates bought the beachfront property at 2700-2800 Neilson Way for $14 million in January 1971.

Despite the huge gain the owners realized in selling the property, Rosen estimated that the partners “probably lost about $50 million” over the years because rent control prevented them from garnering market rates from tenants.

In a twist suggesting the effect of rent control on property values, Emmett required that a significant number of the 532 units had to be vacant before it would consummate the deal, Rosen said. Vacant units increased the market value of the property because they can be rented out at market rates much higher than the rent-controlled rates paid by the buildings’ current tenants.

Effective Jan. 1, landlords in Santa Monica are permitted to raise rents to market levels when units are vacated--comparable to the “vacancy decontrol” system in the city of Los Angeles. Santa Monica’s rent control board refers to the system as “decontrol-recontrol” because, once a new tenant moves in, the landlord can raise the rent only once a year based on a percentage authorized by the city.

In anticipation of the sale, Rosen said, for some time the owners of Santa Monica Shores did not attempt to fill vacant units and in some cases paid tenants to move out to ensure that enough units would be vacant to complete the sale. He said the number of vacant units was “well over 100” when the property sold.

It was worth it for the owners to pay tenants $20,000 or more to leave, according to Pelleg.

“You can make that much up in less than a year” through rent increases, he said. The still-occupied units at Santa Monica Shores rent for $600 to $1,100 per month, but Pelleg estimated the vacant units will go for “at least $2,500 and up” after the renovations Emmett is expected to begin soon.

Even those rent figures could be conservative, he said, pointing out that developers building new apartments in Westwood and Santa Monica expect to get rents of $3,000 or more without the ocean views and beachfront location of the just-sold property.

An April 15 report by the Santa Monica Rent Control Board, analyzing rent increases at 910 units vacated in the city between Jan. 1 and March 31, showed that rents increased by 40% to a median of $775 on bachelor apartments, by 59% to a median of $1,000 on one-bedroom units, by 81% to a $1,397 median on two-bedroom apartments and by 91% to a median of $1,890 for apartments with three or more bedrooms.

The sale price of $178,571 per unit far exceeds the per-unit prices in many Los Angeles apartment markets but is well below prices paid for other premium properties. Emmett, for example, recently paid $30 million, or $270,000 per unit, for a 111-unit complex at 555 Barrington Ave. that Pelleg described as “one of the most luxurious properties in Brentwood.”

The purchase is the latest of several high-profile acquisitions by Emmett, which owns and operates income properties on behalf of investors, including a large portfolio of Westside office buildings.

This year the firm paid about $87 million for the 21-story, 245,413-square-foot luxury office building at 100 Wilshire Blvd. in downtown Santa Monica. In February 1998 it acquired the 712-unit Barrington Plaza in West Los Angeles, one of the largest apartment complexes in Los Angeles County, for about $100 million.