AN UPDATE ON LEGISLATION AFFECTING ENERGY USAGE IN AND SAFETY OF BUILDINGS IN LOS ANGELES

In the past two to three months, both the State of California and the City of Los Angeles have enacted measures affecting a large number of buildings locally.  The impact of the legislation will be pronounced, although implementation thereof will be spread out over a number of years.

AB 1103 Is Out

For the last couple of years, we have been faced with potential compliance and disclosure requirements with regard to energy usage in certain commercial buildings in the State.  That legislation, AB 1103, produced a lot of controversy.  It was made applicable at first to sales and leases of certain types of single-occupant structures with large floor-space square footage.  The size of buildings requiring the disclosures was then reduced, making it applicable to a greater number of structures.  As its scope was about to be extended even further, to single-occupant buildings with less than 5,000 square feet of floor space, it became clear that its enforcement would be problematical.  The California Energy Commission (“CEC”), the regulatory agency in charge, decided to re-evaluate what should be the scope, and timing of implementation, of measures for these smaller locations and so the CEC postponed compliance dates.

Finally, rather than try to modify the existing legislation, the CEC drafted and the State Legislature enacted legislation scrapping AB 1103 entirely, effective as of January 1, 2016.  What will replace it is at the moment unclear.  The legislation involved, AB 802, provides for rules to be developed over the next year and to take effect January 1, 2017.

In the meantime, the City of Los Angeles is working on its own energy disclosure regulations.  Those pertaining to city-owned buildings are targeted to be put into place sometime this year, while those for privately owned buildings (at least ones having over 50,000 square feet) are expected to come into effect in 2017.

Ordinance 183893

The City of Los Angeles has ratcheted up its retrofit requirements by passing Ordinance 183893, enacted with earthquake concerns in mind.  There are two programs.  One addresses so-called “soft-story” buildings, multi-story structures with weak and/or open-front wall lines (most notably those with “tuck-under” parking).  The other focuses on “non-ductile concrete structures,” older concrete buildings which were not designed to withstand major lateral force movement in earthquakes.  The types of properties affected by each such program, and the compliance deadlines, are described briefly in the two attached publications from the Los Angeles Department of Building and Safety (“LADBS”).  These were among the items covered by Raymond Chan, currently the head of the LADBS, when he was a guest speaker this past November at Joe Cobert’s Real Estate Finance class at UCLA Extension.

For more information and advice on specific properties, feel free to contact Joe and the Firm.

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YOU THINK ALL RESIDENTIAL LANDLORD-TENANT DISPUTES ARE THE SAME AND BORING? NOT THIS ONE

Our focus in this piece is a trial court case for wrongful eviction entitled Follingstad v. Lama, filed in San Francisco about three weeks ago.  That lawsuit, at first seemingly like many others brought over the years by tenants who believe that they were ousted unjustly, is anything but typical.  It is fascinating because it features so many real estate topics right out of today’s news.

The case arose amid the enormous surge of property values and rising rents currently taking place in the Bay Area.  Besides the whole subject of lack of affordable housing and the growing economic/power disparity between landlords and tenants in strong California markets, the Follingstad lawsuit has a little of most everything.  Most notably, it brings into play the dynamics of all of these topics:

1. a long-term tenant in a rent-controlled unit;
2. an illegal unit in the building;
3. the tenant’s pre-eviction listing of her unit with short-term rental giant Airbnb; and
4. a rather suspect landlord who had recently purchased the building involved.

Follingstad had been paying $2,145 per month for an apartment in what was ostensibly to the outside world a duplex.  As a multiple-unit property, it would be covered by San Francisco’s rent ordinance and would therefore be subject to rent control.  That ordinance currently limits increases in monthly rent as to rent-controlled units to 1.9% during the present year.

Like the regulations in the City of Los Angeles, the San Francisco ordinance excludes single-family dwellings.  Remember that; it is key here.

Enter Lama as the new owner of the property.  Immediately, Lama as landlord issues to Follingstad a “notice of change of terms of tenancy” providing for a rent increase from $2,145 to $8,900 per month — more than 300%!

But wait!  It turns out that the other unit in the property was not lawful.  It was an illegally converted and unpermitted “in-law” unit.  Lama, a “sneaky” but crafty investor, took the illegal second unit — then unoccupied — off the market and declared the building (which also has a garage) to be a single-family house.  (To add to her approach, Lama actually removed the toilet and kitchen sink from the second unit, making it “uninhabitable” under state and local law.)

Lama then moved into the premises rather than renting out the now single-unit house.  This may have been the flaw in her otherwise clever scheme.  Why?  Because that made the eviction one predicated upon “owner move-in” instead of one for nonpayment of rent; and San Francisco, like Los Angeles, requires a “relocation payment” on an owner move-in whereas there is no payment required where the tenant has failed to pay the rent or is evicted for other “just cause.”  San Francisco’s relocation payment is $5,551 per tenant (plus $3,701 more for each tenant who meets the ordinance’s definition of “senior” or “disabled”).

The case is pending and, besides the issues described above, potentially raises some interesting questions.  For example, what would have been the outcome had Follingstad stayed in occupancy and forced Lama to pursue an unlawful detainer?  What if Lama had used as her ground to evict Follingstad the latter’s attempt to rent out the unit on a short-term basis through Airbnb (alleging that this was an unpermitted attempt to sublease)?  What would have been Follingstad’s rights if Lama had, instead of moving in, re-rented the building to a legitimate lessee as a single-family house?  Is there any possibility that a court would decide that the eviction was improper because it was unconscionable or, at least, inequitable?

In a hot rental market, there may be other cases arising which will address some of these open questions.  We at The Joe Cobert Report will let you know what happens in Follingstad as well as other cases which deal with some of these open questions.

RESIDENT APARTMENT MANAGERS AND THE NEW LEGISLATION REGARDING “SICK LEAVE”

Many readers of The Joe Cobert Report have already heard or read something about the recent California legislation relating to “sick leave”. That legislation, entitled the “Healthy Workplaces, Healthy Families Act of 2014” (the “Act”), applies to virtually all full-time and part-time employees who work on at least 30 separate days in an employment year and entitles them to one hour of paid “sick leave” for every 30 hours worked.

If you are not yet knowledgeable about all the details of that legislation particularly all the records to be kept and rules to be adhered to, we recommend that you contact one or more of the numerous top-level labor lawyers and/or human resources people in Southern California. They are devoting considerable time these days explaining how the Act impacts various businesses and how labor practices and policy manuals need to be revised in order to comply when July 1 rolls around. Why are we writing about the Act in this newsletter? Because we believe that a certain group of our readers are involved in the apartment sector and need to consider specifically the Act’s effect on employment of resident (that is, on site) managers. If you are involved in this property sector — as an investor, a property owner or an officer or principal of a property management company — you need to read on.    The Act Applies Here To begin with, there is no doubt that all or nearly all on-site managers are employees subject to the protections of the new Act. However, a number of the duties and procedures pertaining to on-site managers of multi-family properties and situations they encounter in performing their work differ from those in many other fields of employment. In particular, resident managers have job functions requiring them to divide their home life and personal time and, unlike others who choose to work at home for convenience, they must be at the premises at various times as part of their jobs. Some Key Issues and Questions To Be Addressed Consider these six items:

1. When the employee is a resident manager who works largely from home and tells the employer that he or she needs some time to care for a sick parent or child living with the employee, how does one clearly distinguish which hours are “on the clock” and counted toward computation of sick leave and which hours are merely “personal” time? What documentation will be sufficient to address this concern?
2. What if there are two cohabitants (spouses or otherwise) in an apartment unit who essentially share the on-site management tasks, how do you allocate the hours of employment so as to calculate the entitlement of each to sick leave?
3. Sick leave payment under the Act is to be paid at the employee’s hourly rate when the leave is taken. For those resident managers who receive total or partial compensation by credit against rent due, will that impact the calculation of hours for which the employee accrues “sick leave”?
4. Many resident managers are “on call” in the event of emergencies. If the owners continue to have an “on call” policy, will the hours counted for sick leave computation include any of the “on call” time? Will the clock start running at the moment the emergency call comes in or prior thereto when the manager is “available” in case of such a call?
5. The Act provides that an employee choosing to utilize “sick leave” does not have to pre-arrange the time with the employer (although it is preferred if the employee can provide notice early on). Nor does the employee have to line up a replacement in the event that he or she is going to utilize accrued sick leave. What should owners and property management companies acting on behalf of owners do to be prepared in the event the resident manager takes sick leave with little or no notice? If there is no co-manager, what latitude does the employer possess to cover for the absent manager? Would the situation be different for smaller apartment buildings than for complexes of 16 units or more (as to which California law mandates a resident manager)?
6. The Act requires the posting of certain notices about the sick leave rules at a “conspicuous place” on the property where the employee works. If there is no separate room on the premises which has been set aside as an office specifically for use by the resident manager of an apartment project, what locations qualify as “conspicuous places” for these purposes? What enforcement is there going to be on this and are there going to be penalties for supposed non-compliance?

Special Suggestions For Apartment House Buyers

As part of their due diligence, investors seeking to buy apartment buildings with on-site management need to verify how much paid sick leave the on-site manager has earned but not used. Pro formas generated by syndicators now will have to take this accrued liability into consideration. Sellers of such complexes now must include this information on their books (as well as in every payroll stub given to the on-site manager with his or her salary check).

Additionally, think about this: Many apartment house buyers want to select their own on-site manager instead of the person the seller was using. Now, in doing this a buyer must inquire when the current manager last took sick leave. Why? Because the Act creates a rebuttable presumption that termination of an on-site manager within 30 days of that manager’s taking sick leave is retaliatory for the taking of such sick leave and therefore constitutes a wrongful termination.

  What Next On This Topic?

In preparation for the July 1 operative date of the Act, lawyers, HR personnel for various affected businesses and apartment associations around the state are scrambling to develop the forms and modify the language of standard employment agreements they have long been using or disseminating to their members or clients.

Joe Cobert has been working on this quite actively. If there are any amendments to the Act or regulations generated by the office of the California Labor Commissioner, Joe intends to obtain copies of same and to keep our readers updated.

We express our thanks to labor lawyer Richard Rosenberg of Ballard Rosenberg Golper & Savitt, LLP for his assistance with this article.

WHAT TO DO WITH EMPTY BIG BOX STORES

Big boxes proliferated from the late 1980’s until the Great Recession two decades later.  Economies of scale encouraged not only strong companies like Wal-Mart to commit to huge commercial square footage but so too did many which have since fallen by the wayside.  In multi-tenant shopping centers, demise of a big box retailer, its “going dark,” often resulted in the death knell for satellite stores which had drawn customers from the traffic frequenting the big boxes.

At first, landlords tried to fill the void by looking for other, healthier big box users, trying to induce them to come aboard with new leases or subleases for the empty, big box space.  While some were successful in this regard, many others saw the space continue to languish and even deteriorate.  The result was the commencement of the phenomenon of the “carve-up,” dividing the big box into multiple spaces for separate users.

This Firm has dealt with a number of carve-up situations and learned that they are not easy arrangements to accomplish.  If you or someone you know has a shopping center with this kind of problem, we at the Firm can highlight the kinds of issues they may face.  Those include:

1.    how to determine approximate rental rates and lease terms for new occupants of part of the big box space;
2.    how to deal with rent reduction requests by existing tenants in satellite stores, particularly if they have complained that the big box store was what drew them in initially and that they relied on the existence of that big box retailer for their survival;
3.    should the landlord begin to carve up space even before finding occupants for all of the former big box (i.e., make changes to the space, in whole or in part, on speculation);
4.    who pays for the carve-up (the landlord, new occupants of the former big box space or some combination);
5.    what to do if replacement businesses in the big box location fail to drive a large number of customers to the satellite stores;
6.    what concessions to make to new tenants;
7.    will the new tenants have significantly greater (or, at least, different) parking requirements or hours of operation than had been the case when the big box retailer was conducting business in the shopping center; quite a distance from the traffic on the surrounding streets;
8.    if the big box was deep such that a sizable part of its space is quite a distance from the traffic on the surrounding streets;
9.    will there be challenges with respect to the activities of new prospective tenants based on exclusive rights claimed by lessees of satellite stores; and
10.    will the new tenants’ construction require substantial expenditures for the common areas in order to comply with current building codes and, if so, who will pay for those common area expenditures.

As this phenomenon runs its course, The Firm will keep its readers informed as to new issues arising from these changes in the retail real estate sector.

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This email is a publication prepared by Joseph M. Cobert, A Professional Corporation (the “Firm”). The material provided is for informational and educational purposes only and should not be construed as legal advice. Any reader wishing legal advice from the Firm would have to make specific arrangements to retain the Firm with a written fee agreement. No reader may rely on this email as a representation by the Firm. Although the material is deemed to be accurate and reliable, there is no guarantee of its accuracy. The material contained in the newsletter is the property of the Firm and cannot be reproduced for any use without the Firm’s prior written consent. It  estate and other financial professionals only. It is not intended for consumer distribution.

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