Relocation v. Buy-Out, Los Angeles Landlords' Two Ways to Fair Market Rent
I preface, eviction moratoriums aside, Los Angeles residential multi-family landlords under rent control only have 4 ways to get tenants out of their unit and get higher rents (1) tenant voluntary moves out; (2) tenant is evicted for cause; (3) tenant accepts a lease buyout (aka Cash for Keys; or (4) the landlord substantially remodels the unit and pays relocation fees*
* This is contingent on the applicable local municipal code, read more below.
This blog will focus on Options 3 and Option 4, out of order.
Briefly, the difference between relocation and buyouts comes down to one factor: voluntary. Usually a relocation is not voluntary, a tenant is required to move and accept some pre-determined amount of money to move and can be evicted if they do not move as required. A buyout is when a tenant is not required to move but agrees to move for a sum of money negotiated between the landlord and the tenant(s). However, when you tender buyout offers usually the local municipality requires a disclosure be served to the tenant with the buyout that shows the going relocation amounts.
There are very few instances in which a tenant is required to permanently relocate and it varies by locality. Usually a tenant is required to permanently relocate and receive a relocation fee when (a) an owner or owner family member moves in, (b) the owner has permits to demo the unit or building, (c) government order requires the tenant to move out or (d) "substantial remodeling" of the unit requires the tenant to be relocated for at least 30 days. This last option is what I deem an alternative to tenant buyouts for those looking to rehab their apartments. The above are considered no-fault just cause evictions.
"Substantial remodeling" under California state's rent control, Civil Code § 1946.2 is defined as
"the replacement or substantial modification of any structural, electrical, plumbing, or mechanical system that requires a permit from a governmental agency, or the abatement of hazardous materials, including lead-based paint, mold, or asbestos, in accordance with applicable federal, state, and local laws, that cannot be reasonably accomplished in a safe manner with the tenant in place and that requires the tenant to vacate the residential real property for at least 30 days. Cosmetic improvements alone, including painting, decorating, and minor repairs, or other work that can be performed safely without having the residential real property vacated, do not qualify as substantial rehabilitation."
Now, not all localities allow this as a basis for a no-fault just cause eviction. However, I have found that the following do have this- Glendale, Inglewood, Long Beach and Beverly Hills (this one is very layered). This may change from time to time and I will update this blog if and when it does. They key to substantial remodels is having the permits issued.
Los Angeles City has a very interesting loophole- while a landlord cannot pull out a no-fault just cause eviction to substantially remodel, if the permit's Tenant Habitability Plan (THP) requires that a tenant be relocated for at least 30 days the tenant on their own can request to receive permanent relocation in lieu of returning to the unit. A landlord could let a tenant know their right to exercise this option. It is very likely a tenant is not going to want to move all of their stuff to a new place only to have to move it back. And if anyone knows anything about construction, 30 days is not always just 30 days. This is an alternative to a buyout and the relocation is already set by the City.
To partake in the above there are specific steps a landlord must take and include the application of landlord-tenant law for required lease termination notices.
Tenant Buyout (Cash for Keys)
Los Angeles City is known for the "Cash for Keys" program and the name has stuck. Landlords may tender a buyout offer to a tenant(s), with the most up to date required LA City disclosure. The landlord must then notify the City that the landlord has tendered such an offer. If the offer is accepted, the landlord must file the actually agreement with the City as well. There is a bit of paperwork for the landlord to do, not including the actual back and forth with tenants.
Many other localities now have their own set of guidelines and disclosures to do tenant buyouts, some such localities are LA County, Inglewood, Santa Monica and Culver City, just to name a few.
Here are some things I have learned in dealing with tenant buyouts.
You are planting the seed. Tenants don't always jump at the chance of getting a lump sum of cash, however once you tender an offer to a tenant they will remember the money. I've seen a lot tenants turn down an offer right away and then return months or a year later and want to negotiate again. Once you give them the offer you plant the seed and down the line when they may need money, which often times they do, they will likely surface again. I do planned out follow ups with tenants to make sure the seed is still there.
Tenant gossip is not a bad thing. Tenants talk, we all know that. But tenants talking actually gives some validity to your offer and further keeps the idea in their head. Let's say you have an 8 unit apartment with cash on hand to buyout 4 tenants. You proceed to offer 4 tenants buyouts. Those 4 tenants talk to each other about the buyout. A few things can happen:
(a) a tenant you didn't even offer a buyout to approaches you,
(b) the tenants try to collude and jump up the price, only to find out the landlord is limited in funds so then they scramble to get those funds while they are still available,
(c) the tenants talk to each other and tell each other what they think they want to hear while secretly working out details of their buyout with the landlord.
Tenant gossip is great leverage as tenants will tell me what their neighbors are thinking, intel I'd otherwise not have.
Tenants behind on rent have an incentive. Evictions are my least favorite thing. I will make an effort to avoid an eviction for a client when possible. They are tedious with tenancy advocacy groups upping the cost and uncertainty of any case. Coupled with tenant friendly judges, it's cut against the landlord. But, if a tenant is behind on rent or is a well documented nuisance, they have some skin in the game- no one wants an eviction on their record.
Tenant buyouts pencil out for longterm owners. Nearly all apartments in which a landlord would engage in a buyout are old buildings built between the 50s-70s that have not only rent control on them but are in desperate need of rehabilitation. A unit rehab usually will have a life cycle of its own anywhere between 10-20 years depending on the extent of the work and materials used. The cost of the rehab itself is spread across many years, but usually expensed out the first year (I am not an accountant so don't quote me on any tax info). However, the cost of the actual tenant buyout will be recouped in anywhere from 1-3 years in the form of increased rent. If you are a longterm owner or if you are trying to get a higher price per door on sale, a tenant buyout in which you move in a higher paying tenant or deliver vacant on sale is usually worth the buyout funds.
Landlords have to get creative if they want to up their ROI. So many buildings' cash flow is choked by artificially low rents on rent controlled units that have not kept up with the market. Relocations and buyouts offer landlords two viable solutions to get their rents up. While both require patience, if they pencil out they are worth the effort.
Often times landlords don't want to deal with the required paperwork and hassle of going back and forth with their tenants. There are other outfits out there that will do a "no fee unless the tenant moves" kind of deal. The issue with them if they don't get immediate response from the tenants after a few close in time efforts they bail on the entire thing and they often do not know the law. I am here to see through from beginning to end and get your paperwork in order in the event you have to evict a tenant who has not vacated on time despite proper notice. Call me today about my flat fee tenant relocation/ buyout services.
If you are a landlord with questions about this topic or other landlord-tenant law you may contact me by phone at (818) 306-0686 or by email at firstname.lastname@example.org
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The information in this post is for general information purposes only. Nothing on this post should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship.