November 2018 - Gupta Evans and Ayres

Why Speak to an Attorney Before Buying a Home?

November 5, 2018/in All Blog Posts, Real Estate/by Ajay Gupta

The professionals that you surround yourself with when purchasing a home all have a vested interest in your “closing the deal.” All the parties, including the broker, the mortgage salesperson, and the title company each get paid through commission. If each party is purchased this way, who is there to push the brakes and first ask if this is a smart decision? Or if the title is clean? How about if the financials make sense, or if there is an issue with the inspection that needs to be examined? Let the crucial role of the unbiased advisor be your attorney.

WHAT HOME OWNERS NEED TO KNOW

If you are a home owner who decides to rent out to tenants, there are a few items you should know. Do not become overanxious if you face the issue of a non-payment rent situation. This is actually the ideal eviction scenario. Evictions happen very quickly in California and can be viewed as only a step above the common traffic ticket. There is a separate court (depending on the dollar amount at issue) that handles the case and it can be resolved in about 30 days.

The next aspect homeowners need to understand is having a good solid lease for every period of time the tenant occupies. You should be familiar with a three day notice and a 30 day notice. If non-payment occurs, first make sure there was no physical/emotional impediment to the tenant and you have good reason to evict. Make sure to pass a notice quickly, as it communicates your seriousness and familiarity with the law.

CHANGES IN CALIFORNIA REAL ESTATE LAW

While there are clear cut laws, it is important to remember that real estate law is continuously being interpreted and evolving, and thus can leave room for some ambiguity. A good example is of my brother who had called from DC complaining about a neighbor who smoked marijuana during the early hours of the morning. The case becomes complicated because the tenant may have a legitimate reason to smoke freely in the building. He or she may possess prescription or medical permit to smoke marijuana, and if they cannot smoke within their own apartment, where are they going to medicate? If you push towards litigation, you may be seen as discriminating against individuals with a disability. You may find yourself, the landlord, negotiating between this negative interpretation and a tenant who is threatening for nuisance violations.

Candidly, the law is not clear on this issue. While California recognizes medical marijuana as a right, and something that is necessary, the federal government does not. A lot of discrimination laws originate from the Fair Housing Act and the America Disabilities Act—federal law. Some states do have specific laws that allow medical marijuana and command that landlords write this within their lease. The courts remain undecided.

The Stadium Proposals: Sometimes, Nothing is Better than Something

November 5, 2018/in All Blog Posts, Real Estate/by Ajay Gupta

As part of this year’s midterm elections, San Diegans will be confronted with two competing ballot measures focusing on what to do with the land surrounding the iconic SDCCU Stadium (formerly, Jack Murphy Stadium and Qualcomm Stadium). The first ballot measure is Measure E, otherwise known as “SoccerCity.” Measure E is sponsored by FS Investors, a privately held investment firm with offices located in La Jolla and San Mateo. The second ballot measure is Measure G, otherwise known as “SDSU West.” SDSU West is headed by a steering committee calling themselves “Friends of SDSU.” Friends of SDSU is made up principally of local San Diegans, as well as SDSU Alumni.

At a glance, the Soccer City Proposal (Measure E) and the SDSU West Proposal (Measure G) might appear very similar. Both proposals offer to tear down the current decaying structure of SDCCU Stadium and replace it with a sprawling complex that includes not only a modern sports stadium, but would also accommodate entertainment, residential, retail and office space. Both proposals also aim to create generous park spaces along the San Diego River.

Each proposal has received glowing endorsement from various important individuals and organizations. The Soccer City Proposal has been endorsed by San Diego Mayor Kevin Faulconer, whereas the SDSU West Proposal has received the endorsement of former mayor and current Chamber of Commerce President, Jerry Sanders. The SDSU West Proposal has also received bi-partisan support from liberal organizations, such asThe Sierra Club, as well as conservative organizations, such as the Lincoln Society of San Diego.

Background:

SDCCU Stadium, was the home of the San Diego Chargers from 1967 until their return to Los Angeles in 2017. Previously known as Jack Murphy Stadium or “The Murph,” the site also played host to the San Diego Padres from their inaugural season in 1969 until the completion of Petco Park in 2004. In the 51 years of the stadium’s existence, it has become a known quantity in many San Diegan’s daily lives. This is partially because of its significance as the primary colosseum for sports in San Diego and partially due to its central location in the heart of Mission Valley.

SDCCU Stadium currently sits on 166 acres of land between the 8, 15 and 805 freeways, which effectively makes the stadium the crossroads of San Diego. From Chula Vista to Mira Mesa; from La Jolla to El Cajon, most of the city of San Diego is within 20 minutes from SDCCU Stadium. It should be no surprise, then, that two rival proposals for the site have sprung up hoping to earn the voter’s approval in this year’s midterm election.

Big Picture: What’s the Difference?

When looking at the two proposals, the first thing you’ll notice is the length. The SoccerCity Proposal is over 600 pages long including all the exhibits. By contrast, the SDSU West proposal is only 12 pages long. Whereas the SoccerCity Proposal attempts to be specific and nuanced about its plans, studies and timelines, the SDSU West Proposal is vague and ambiguous as to how and when they are going to achieve their proposed goals. The SoccerCity Proposal purports to identify what, when, how and where building will take place, but the SDSU West Proposal more or less leaves those specifics to be figured out after their measure passes.

The most apparent substantive difference between the two proposals is in how each project will be funded. Proponents of SoccerCity have proudly boasted that their plan would cost zero taxpayer dollars. Specifically, the initiative stipulates, “No public funds, subsidies, public bond issues, or public or municipal financing will be used to pay for any of the development or infrastructure on the Plan Area.” Instead, financing for construction of the complex would be left to the contractors and builders who, “may use a variety of financing methods”. The funding component has unsurprisingly become a central selling point for SoccerCity as proven through the hundreds of television commercials boasting that SDSU West will cost taxpayers millions of dollars in public funding.

A nuanced analysis of the SoccerCity Proposal, however, makes it clear that it is in fact the City of San Diego that will be financing a large part of their development. Under SoccerCity’s Measure E, FS Investors and their associates would lease the land under SDCCU Stadium and the surrounding area (233 acres) from the City to the financiers of FS Investors for 99 years for “fair market value,” as of February 2, 2017. The reality is that it is the City of San Diego that would be “carrying the paper” on this transaction while the investors maintain possession just as a residential landlord does with her own property.

Perhaps the bigger issue with the SoccerCity Proposal will be in determining the “fair market value” as of February 2, 2017. Similar to the Pontiac Silverdome in Michigan, there is a strong argument that, the value of the property in question–prior to a plan for redevelopment being in place — is de minimis. SDCCU Stadium is effectively a nuisance because the costs to maintain the stadium far exceed the revenue the stadium may be drawing in. Consequently, the “fair market value” at which SoccerCity would lease the property from the City is bound to drop accordingly.

By comparison, the SDSU West Proposal directs the City of San Diego to sell the land under the SDCCU Stadium (132 acres) to San Diego State University at a price “the City Council deems fair and equitable and in the public interest.” Details on how the construction of the stadium would be financed are unknown at the moment, but the expectation is that San Diego State University will “tap California State University bonding authority.”

Proponents of SDSU West posit that there is a legitimate need for SDSU to expand its campus. SDSU has been at its current location since 1931 and has expanded significantly within that nearly 90-year period. SDSU’s current campus sits at roughly 283 acres large with a student body approximately 35,000 strong, making it the second largest university in the county behind UCSD. However, despite SDSU’s relatively large size, it’s growth has been lacking for several years, partially due to a lack of land to expand upon. Despite the fact that applications to SDSU have skyrocketed in recent years, SDSU’s admission rates have remained largely stagnant from 2007 to 2016, whereas UCSD’s admission rates have risen by approximately 36% in the same timeframeA major benefit of Prop G is that it would not only provide a new sporting stadium, but it would also provide much needed room for SDSU to expand and remain competitive. SoccerCity naturally disagrees with this position and points to several areas on or around the current SDSU site where the university can expand, but is simply choosing not to.

On SDSU West’s face, there is something comforting about having a pillar of San Diego oversee and manage the development of an area that is so central to San Diego. It is also comforting to know that the City Council would retain control of the sale price to SDSU. That said, the sale price is effectively all the City Council would control; once the land is sold to SDSU, SDSU owns it outright and the City loses much of its oversight. A further challenge, is SDSU West’s ambiguity surrounding the means for financing and the timeline, both of which are completely missing from the SDSU West Proposal.

Tell Us How You Really Feel!

I think there are certain things that lend themselves to a ballot measure. Those items are limited to discrete ideas where politics or special interests have made it nearly impossible for the representatives of the City or State to act responsibly and disinterested. For example, things that affect campaign finance, gerrymandering, giving elected officials raises, or even whether to increase or decrease taxes are all appropriate discrete issues to put directly before the electorate.

On the other hand, when the idea at issue is a development project of the scale and size of SoccerCity and SDSU West, which includes so many moving parts, a forced sale or a forced 99 year lease , a ballot measure is ridiculous. I did not read the whole 600+ page proposal by SoccerCity and neither will any of you. On the other hand, the SDSU West Proposal leaves far too much to the imagination for my comfort level.

The fact is that the City of San Diego is the entity most well-equipped with the resources and experience to oversee and develop the SDCCU Stadium, not the voters. You start by looking downtown, from the Ballpark to Little Italy; you can then expand out to the surrounding communities– the City has done this over and over again successfully. There have no doubt been set backs in certain communities, Barrio Logan and East Village for example, but those set backs are part of the City’s resume now and should not be viewed in a vacuum. Quite the opposite.

The political and financial underpinnings of each of the proposals are troubling as well. Regardless of whether you support SoccerCity or SDSU West, there will be a financial boone to either victorious party. That financial boone must be part of a process that is inclusive rather than exclusive. Put another way, neither SDSU West nor SoccerCity should garner a windfall just because they gathered a bunch of signatures.

From a personal perspective, I’m not a fan of soccer. I take the Jim Rome approach to soccer and, with all due respect to some of my close friends who may be reading this, I would rather undergo a root canal than watch soccer. That said, I am but one San Diego resident. The reality is that soccer viewership has been steadily growing and San Diego is one of the biggest soccer markets in the US, ranking 9^th overall.

That said, I do question whether a stadium is necessary or even warranted in that part of the city. That area is ideally situated for a mixed use, high density residential and retail expansion. With residential rental and housing prices going through the roof, that makes a lot of sense to me. Of course, some part of the area should also be used to address the growing needs of SDSU. Whether that includes the need for a stadium in that location is still up for grabs. A stadium in East Village probably makes more sense given the infrastructure already in place. As a keystone project, it could be used to revitalize East Village and bring in new developments. It could also be used to relieve the needs of an already overcrowded convention center.

At the end of the day, I hope that the San Diego voters remember that no on both is an option. Despite what has been advertised, this is not a choice between SoccerCity (Measure E) and SDSU West (Measure G). Rather, these are two proposals being pushed forward by competing special interests, each of which simply gathered enough signatures on their idea to put it before you—the voter—on the ballot.

Airbnb and Short-Term Rentals in San Diego: The Ban that Never Was

November 1, 2018/in All Blog Posts, Real Estate/by Chris Evans

You have likely seen the signs around town — “Neighborhoods are for Neighbors, Not Vacation Rentals.” This phrase has become the mantra of “Save San Diego Neighborhoods,” the lead organization pushing back against San Diego’s rapidly expanding short term rental market. Save San Diego is an organization fighting to stop the “illegal conversion of San Diego homes to short-term vacation rentals.” In doing so, Save San Diego has been pushing the San Diego City Council to impose significant regulations with respect to short-term rentals such as Airbnb.

Mounting such a fight, however, has not come without its challenges. The primary group pushing back against Save San Diego to try and keep San Diego’s short-term rental market alive and thriving is “Share San Diego,” a coalition of San Diegans in support of short-term rentals. Naturally, Share San Diego is strongly supported by short-term rental companies, such as Airbnb and HomeAway. Short-term rental units generate nearly $300 million annually for San Diego homeowners and an additional $200 million for the surrounding businesses. For perspective, the San Diego Padres—San Diego’s only professional sports franchise—generated only $266 million in total revenue for all of 2017. Obviously, there is a lot at stake when trying to regulate an industry of this size.

Despite resistance from Share San Diego and other proponents of short-term rentals, Save San Diego looked like they achieved victory back in July and August of 2018 when the San Diego City Council voted to outlaw vacation rentals in secondary homes, limiting short-term stays to one’s primary residence only.

The victory, though, was only temporary.

In response to the City’s decision to regulate short term rentals, Share San Diego put together a referendum petition that garnered over 62,000 San Diegan signatures in support of challenging the regulations. The petition forced the City to either rescind the ordinance or to have a public vote on the ordinance. On October 22, 2018, as a result of the referendum, the San Diego City Council made its choice and voted 8-1 to rescind the newly minted short-term rental ordinance—the ordinance that the Council passed barely three months earlier.

The repeal of the short-term rental regulations marked a significant win for Share San Diego, Airbnb and other proponents of short-term rentals. Yet, while Share San Diego may be leading on the scoreboard as of today, Save San Diego and other opponents of the short-term industry will undoubtedly continue to advocate for new regulations. Consequently, the repeal of short-term rental regulations has created tremendous uncertainty with regard to how the City of San Diego will look to regulate short term rentals going forward, if at all, and poses the question of what in fact is best for San Diego.

How Did We Get Here

In March 2017, San Diego City Attorney Mara Elliott issued a memo wherein she determined that “any use that is not listed in the City’s zoning ordinance is prohibited.” As a result, because short-term rentals are not listed, it was concluded that the San Diego Municipal Code does not permit short-term rentals in any zone in the city—residential, commercial or otherwise. At that point, the issue appeared cut and dry—short-term rentals are illegal and, therefore, should no longer be allowed. Not quite. Despite this memo being issued, Mayor Kevin Faulconer’s office chose not to declare the short-term rentals illegal and instead decided to wait for regulations, which caused the “mini-hotels” to continue spread throughout San Diego.
The City Attorney’s memo and the fact that short term rentals continued to be permitted by the Mayor’s office created a vacuum of uncertainty that the San Diego City Council was forced to address.
On July 16, 2018, the San Diego City Council voted to outlaw vacation rentals in secondary homes, limiting short-term stays to one’s primary residence only, so long as the rentals do not exceed six months out of the year, the owner applied for a permit and paid an annual fee of $949. Notably, the regulation did not include any exemption for the areas of Mission Beach, where 44% of the homes are estimated to be short-term rentals, or Pacific Beach—areas that include a total of over 3,100 short-term rental homes.
On August 1, 2018, after a five hour long hearing where opponents of the regulation voiced their concern, the San Diego City Council reaffirmed its July 16^th decision. This put the new regulation on course to become effective in July 2019. The reaffirmation of the short term rental ordinance was viewed by Share San Diego as “a massive loss for both property rights and the tourism industry in San Diego” and a decision that “will leave thousands of short term rental hosts without a lifeline and even more small business crippled with losses in revenue and traffic.”
Backed by Airbnb and HomeAway, opponents of San Diego’s short-term rental ordinance organized to fight the new regulations—lawsuits were threatened, testimony was heard, organizations were formed and, ultimately, a referendum petition was circulated with goal of forcing San Diego to revisit its controversial short-term rental regulations.
On August 30, 2018, Share San Diego’s referendum seeking to overturn the short-term rental ordinance collected signatures from more than 62,000 San Diegans. Only 36,000 signatures were needed.
On October 8, 2018, Share San Diego’s referendum and its 62,000 signatures were certified by the San Diego City Clerk. The certification presented the San Diego City Council with two options: (1) rescind the short-term rental ordinance; or (2) place the ordinance up for a public vote at a future date, likely in 2020.
On October 22, 2018, the San Diego City Council voted 8 – 1 to rescind the July 16^th short-term rental ordinance. Given the delay a 2020 public vote would bring, in addition to the potential of incurring millions of dollars defending lawsuits filed by opponents of the ordinance, rescission of the ordinance and starting over was the preferred choice for both opponents and proponents of the regulation.
The City now has the option of adopting a new set of rules within the next year, but such rules would have to be substantially different from the ones that were repealed. What set of regulations would be “substantially different” is yet another unknown

What Are We Yelling About?!

When addressing the importance of the short-term rental market in San Diego, Share San Diego and other opponents of the short-term rental ordinance focus largely on the undeniable economic benefit that short term rentals bring to San Diego and property owners. Short-term rental hosts are of the position that they should have the right to use their properties as a way of supplementing their income. In addition to the direct supplemental income a property owner garners from renting their home short-term, the community itself receives an economic boost.

Specifically, in October 2017, Alan Nevin of the Xpera Group published a study focusing on the economic impact of short-term rentals in San Diego. The study concluded that short term lodging in the City of San Diego generated almost $500 million in spending ($300 million direct and $200 million indirect and induced spending), $700,000 in sales tax revenue and over 3,000 jobs[1]. San Diegans earned $5.2 million over Labor Day weekend alone as they hosted 15,000 travelers. For comparison, as stated above, the San Diego Padres generated $266 million in total revenue in 2017.

A common counter to the economic benefit that short-term rentals bring to San Diego is that the benefit is coming at the expense of San Diego hotels. However, the Xpera Group’s report concluded that not only do the majority of short-term renters stay seven nights or longer (i.e. longer than a typical hotel stay), but short-term rental nights made up only 2.7% of hotel nights in San Diego. Of that 2.7%, the report further concluded that the short-term rental nights did not pull from hotel nights because of the cost and location of where the short-term rental nights occurred. The conclusion, as set forth in the Xpera Group Report, is that the short-term rental market “has had a minimal or negligible effect on the hotel market.”

As a result, opponents of the short-term rental market and those that want to regulate the industry (i.e. Save San Diego Neighborhoods) shy away from trying to diminish the economic impact of the short-term rentals. Rather, the main argument put forth by proponents of short-term rental regulations is essentially that short-term rentals harm the character and stability of neighborhoods in a way that is inconsistent with City Planning and negatively impacts San Diego residents.

As posited by Save San Diego Neighborhoods, short-term rentals disrupt San Diego communities by creating businesses in areas that were designed and intended to be purely residential communities. Unlike even monthly rentals, a short-term rental involves significantly more moving parts and, more often than not, a different type of customer. The infrastructure (i.e. roads, law enforcement, garbage collection, utilities, community maintenance) needed to support a vacation renter, short term or otherwise, is fundamentally different than that which is required to support a residential tenant. When the frequency of vacation renters is drastically increased through short-term rentals, the strain on the communities’ infrastructure is exacerbated. At some point, the strain will become too much. Similar to the SDSU Mini Dorm issue, the character of neighborhoods and the stability of communities are necessarily and unavoidably jeopardized, or at the very least, transformed, by the proliferation of short-term rentals.

One of the other main policy arguments put forth by Save San Diego Neighborhoods is that short-term rentals drive up rental and housing costs for San Diego residents. As outlined in our prior article related to rent control, rents in San Diego have increased substantially over the last three years. The average rent in March of 2018 in San Diego was $1,887, which represented a 20% increase since 2015. The median cost of rent is simply much higher than the average San Diegan can afford, which is causing families to be pushed into suburban neighborhoods where rents tend to be lower. However, Save San Diego Neighborhoods argues the increase in short-term rentals removes thousands of otherwise available long-term rental homes from that market.

Similarly, from a homebuyer’s perspective, Save San Diego Neighborhoods argues the increase of short-term rentals is naturally drawing otherwise uninterested investors to the residential housing market. The average potential homeowner is then forced to compete with investors whose sole business model is based on valuations associated with vacation rentals. The California homeownership rate already lags around 10 percentage points below the national homeownership rate, 54.6% versus 64.2%. That means that Californians rent at a rate that is 10% higher than the national average. In a market where investors are already competing with primary residence holders for middle class housing, the ever-expanding short-term rental market provides yet another obstacle to middle class homeownership. Put another way, with the ease of short-term renting created through sites like Airbnb, what is to prevent Pacific Beach and Ocean Beach from becoming like Mission Beach where over 44% of the homes are used as vacation rentals?

The economic benefit cannot be denied and will continue to be the primary argument of Share San Diego and those in favor of short-term rentals in San Diego. Opponents of short-term rental regulations will not try to deny this fact. That is not to say, however, that the economic benefit cannot be outweighed by a more compelling interest. In this instance, that interest is preserving the character and stability of a community and preventing the fundamental, unanticipated transformation of communities.

Technology—Yet Another Layer

There is one other, overlapping reality to this ongoing short-term rental saga: technology. Similar to the taxi industry and Uber, short-term rentals existed long before AirBnb and HomeAway came along. Airbnb simply made short-term rentals much more accessible in the exact same way that Uber made ride-sharing so easy that it has become ubiquitous.

It is technology that has allowed the use of short-term rentals to expand throughout the world. In years past, without technology (read: Internet), the increase of short-term rentals in certain communities and neighborhoods may have moved at rate that allowed those communities to adapt and families to adjust. Now, the rapid expansion of short-term rentals at the rate seen by communities, such as San Diego, make it nearly impossible for those communities to keep pace and adjust appropriately.

The challenge, then, is not whether short term rentals should be regulated in San Diego, but, rather, how the short-term rentals should be regulated. Clearly, some boundaries need to be drawn in a way that allows residential communities and neighborhoods to support an increase in vacation renters. Both sides likely agree with this position.

However, government, especially at the local level, is extraordinarily poorly equipped to regulate technology. This is especially true in an emerging market where even those that are shaping the landscape of the technology cannot claim to have visibility beyond three or four years. This fundamental shortcoming is exacerbated by the political nature of the California housing market and the size of the short-term rental market. This does not even begin to address the legal implications of such a decision (another blog for another day). The technological component and the political considerations surrounding short-term rentals will make it extremely difficult for a local body of government, such as the San Diego City Council, to regulate.

To Sum It All Up

Share San Diego and Save San Diego Neighborhoods each present strong arguments in favor of their respective positions. However, the reality is that attempts by the City of San Diego to regulate the short-term rental industry will inevitably benefit one side over the other. Ultimately, because of the relative strength behind each side in this fight and the arguments each side presents, this matter is likely to be resolved through a ballot measure and public vote.

While the most recent short-term rental ordinance from July 2018 may have had a short life span, if any at all, the potential for compromise between the two sides—one that furthers each of their goals—is certainly within the realm of possibility and one that San Diego and its residents should strive to achieve.

[1] The 2017 figures increased from approximately $196 million in direct and indirect spending in 2015.