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Speculators Turning Small Santa Monica Rent Control Properties Into Single-Family Homes, Report Says

Bob Kronovetrealty
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Santa Monica Convention and Visitors

By Jorge Casuso

June 3, 2019 -- As Santa Monica real estate prices skyrocket, speculators are rushing to convert small rent control buildings into single family homes, according to a study released by the City last week.

The revised report, updated Thursday, found that nearly 30 percent of the properties being withdrawn under the Ellis Act were filed by applicants who have owned the property for less than six months.

The State law was passed in 1985 to allow owners of rent controlled buildings to exit the rental housing market.

"It is clear that speculation is playing a role in the Ellis Act withdrawals occurring in Santa Monica," according to the report prepared by Keyser Marston Associates (KMA).

Many of the buildings have been converted into single family homes, a trend that "has reduced the rent-controlled housing supply in Santa Monica by a relatively significant amount," the report said.

Between 1986 and 2016, approximately 99 buildings totaling 241 rent-controlled units were replaced by single-unit dwellings.

One third of the 272 units removed during that period were in buildings with four or fewer units.

Of those, nearly a third were converted into single unit dwellings, and 29 percent were converted into condominiums.

The trend of converting smaller buildings has been accelerating, according to the updated report.

In 2017, the last year covered by the addendum, 25 buildings totaling 101 units were withdrawn. Of those 53 units were in 19 buildings with four or fewer units.

The rapid move toward single-family conversions comes after the City's zoning code was recently updated to discourage condominium conversions on lots zoned for multi-unit dwellings, which also allow single-unit housing, according to the report.

It also comes after the Santa Monica real estate market began heating up in 2013, the report found.

A pro-forma study of three properties converted under the Ellis Act found the owners likely reaped profits ranging from 34 to 46 percent.

"The anticipation of profit of this magnitude acts as a significant incentive for the sale and redevelopment of existing residential properties," researchers concluded.

Other high-priced rent control cities across California are grappling with the same issue as speculators take advantage of the Ellis Act to convert smaller properties.

San Fraancisco lawmakers have tried to amend the Ellis Act to impose a minimum period before an owner can withdraw a property, but real estate interests have successfully thwarted the proposed legislation.

KMA's report recommends two ways to stop the trend, one legal, the other financial..

An ordinance could require that any Ellis conversion include as many or more units than were removed.

The other would be "to acquire small rent-controlled buildings that are at risk of filing for Ellis Act withdrawals."

There are 54 potentially vulnerable properties in the Downtown area alone, the report found.

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