Jan 07

Recently the Milwaukee Journal ran a series “Landlord Games” that inaccurately portrayed LLCs as being used simply to avoiding paying property taxes and fines.  The result is the Milwaukee Common Council is creating a committee to study LLCs and rental housing. Text of proposal. The rental industry is again, noticeably absent from those invited to the table.

View as formatted pdf with footnotes

Let’s agree that all property owners pay a cost when someone fails to pay their taxes or their property is foreclosed and abandoned.

The Apartment Association does not support bad actors. None of those owners featured in the Journal article are members of the Association.

Rather we see the importance of the city, and private investors working together to make rental housing, and therefore neighborhoods, succeed for the mutual good of both.

Rental housing is an important and integral element of Milwaukee. About 58% of the residents of Milwaukee are tenants. In some neighborhoods, such as 53233 the number of renters exceeds 97%. The success or failure of neighborhoods and rental housing are closely tied.

Rental Housing is the largest small business in Milwaukee with over $7 billion invested in Milwaukee. (MPROP assessor records October 2015) Rental properties account for well over a half billion dollars a year of economic impact, starting with $190 million in property taxes, sewer and water charges, maintenance, insurance and everything else that goes into running rental housing. The Census Bureau found the yearly median operating costs per unit for multifamily rental properties vary between $3,600 per unit for small properties and $5,170 per unit for large properties, adjusted to 2016 dollars. These numbers exclude interest and mortgage servicing.

Providing rental housing in older, poorer neighborhoods is difficult, challenging and unappreciated work. Many have failed, some are opportunists or worse, but the majority were simply overwhelmed financially and mentally by the task at hand.

Owners are impacted by the financial and social problems of their tenants, the high costs of maintenance and lack of capital to address those problems. It is not the owner’s lifestyle that contributes to insect infestations or broken windows, yet it is the owner and not the occupant that is accountable both financially and recently in the media.

Not only do private owners suffer these burdens. One only needs to look at the long history of failure among Milwaukee’s nonprofit housing providers. (see excerpt below) These groups had every advantage over the small private investor. They had significant financial resources, typically through Block Grant and other government funding and grants; they had well-paid and well-educated staff; they often obtaining properties without costs, and they had access to the best tenants on Rent Assistance. Nearly all of Milwaukee’s nonprofit housing providers failed financially.

These groups had every advantage over the small private investor. They had significant financial resources, typically through Block Grant and other government funding and grants; they had well-paid and well-educated staff; they often obtaining properties without costs, and they had access to the best tenants on Rent Assistance. Nearly all of Milwaukee’s nonprofit housing providers failed financially.

Or one could look at the Milwaukee’s Housing Authority budget to see the costs they incur housing low-income Milwaukeeans. Here too is an organization that gets Rent Assistance tenants, tenants who risk losing their housing subsidy if they fail to comply with the rules or pay their rent. HACM does not rent to the populations with bad histories, leaving the segment most in need of housing to the private sector.

Milwaukee should strive to encourage a successful private rental housing market in this once great city, but since the mid-1980s’ the city adopted a culture of hatred towards private rental owners. That has not produced positive results, but instead, discourages the right people from participating.

If Milwaukee rental housing became more sustainable, where people willing to invest their time and money were to make reasonable profits, it would be harder for the few charlatans to exist because of increased competition for available properties. An added benefit is more interest in investing in Milwaukee’s rental housing will result in an increase in values and therefore an increase in the tax base.

Alderman Witkowski, who is the co-author of this proposal, created a Local Business Action Team to help small business succeed. Rental housing is the largest segment of small business within the city and one that may have the greatest impact on the well-being of the city. With our half billion dollars a year of economic impact, a similar effort should be undertaken towards making private rental housing more successful.

Let’s look at the recent Journal Sentinel series on landlords.

This investigative reporting – using easily available public records – showed that the individual owners behind LLCs could be revealed and that other properties owned by these individuals or different LLCs could also be exposed. Changes in the LLC laws are not necessary, contrary to the assertions of Aldermen Murphy and Witkowski that bad landlords are operating in secret. The City Attorney’s office has recently been successful in having a receiver appointed for the various ownership entities used by inner city landlord

Within existing laws, the city could have caused most of the featured landlords out of business, through docketing and enforcing code enforcement fines, and foreclosing f tax delinquencies. For whatever reason the city allowed these owners to continue unabated.

Perhaps most troubling is the relentless attack on James H. Herrick, who works for Baird, that went as far as the Mayor calling for the guy to be fired. He is not a member of the Association nor known to us.

The Journal reports that inspectors show up and find basement doors illegally padlocked. In the article, the owner’s manager states he did this in an attempt to keep drug dealers from entering the property.

There is no argument that inoperable fire doors are an unreasonable risk to occupants. Clearly, this was a novice mistake made by someone who did not understand fire codes.

The correct response by DNS would be for the inspector to explain the problem and demand the owner’s rep immediately remove the padlocks. If the owner did not comply, the Department of Neighborhood Services has an essential services program where the city can contract a repair and then bill the owner.

Instead, the inspection supervisor chose to placard the building and force 50 families out onto the street. Closing a 50 unit building would not have been the DNS response had the property been located on the Eastside, Bayview or the Southwest side. In these more affluent neighborhood they would have compelled a solution that kept the tenants safely in their homes.

But this building is in a poor, minority neighborhood.  The city’s response was harsh as it typically is in these neighborhoods. The DNS employees who acted out of spite towards the owners and a disregard of the tenant population, instead of attempting to protect the homes of 50 low income, primarily minority tenants, should lose their jobs.

The 50 unit building remained closed for a couple of months. It is no surprise that the building ended in foreclosure and sold at a distressed price due to this.

The owner’ use of single property LLCs, in this case, were an advantage to the city. Because the owner had his properties in separate LLCs, this allowed only this one to be foreclosed upon, instead of all 13.

It is a lending industry practice in larger real estate deals to require single asset entities to separate liability from one project and others with a similar ownership interest.

It would actually be in Milwaukee’s best interest if every investment property was in a properly segregated LLC. That way a failure at one property would not have a domino effect and bring down perhaps dozens or more other properties that are under similar ownership.

Then the Journal and Mayor put pressure on Baird, Herrick’s employer, placing his job in jeopardy. What advantage does the city receive in this? If he loses his job, his remaining properties will likely fall into financial problems as well, resulting in more boarded buildings, displaced tenants, and distressed sales.

Similarly, what did the city gain by the public attack on NBA basketball star Devin Harris? While it may have been expedient in causing the payment of some fines and taxes, overall it sent a clear warning to others with capital “Do not invest in Milwaukee. If you fail, you will be ridiculed and perhaps lose your career.” Similar results could have been obtained with a private conversation with Harris, thereby not discouraging outside investment.

Journal article on non-profit failures

West End joins a list of other nonprofit housing organizations that have failed in the last 10 years, including Walker’s Point Development Corp., East Side Housing Action Coalition and Community Development, and the Westside Conservation Corp.

 

Dec 31
The rental industry needs to be more active legislatively.
The first step in legislative action is knowing who your elected officials are and sharing your concerns.  Here is a link to find yours.
Oct 27

An update:

The bookmarked link we used yesterday, the one we used for years to look up DNS records no longer works today.  The link from the Assessor page to DNS no longer works in a meaningful manner.  Using the city site to find owner information for screening purposes does not return the phone number, just the information found on the Assessor’s site.  Plus it takes a lot of clicks to get to.

Yesterday we called an inspector who met with us two weeks ago to sign off an order because the order showed as open in the city computer system.  First thought – the inspector failed to sign off the order.  It has happened before with this inspector.

 
The inspector’s response was enlightening, if not scary.  It seems DNS recently replaced their computer system with a new one that works so poorly that they must do everything by hand, as in paper and pencil by hand.
 
I asked ‘What was wrong with the old system?’  His answer, ‘Nothing, it worked fine.’
 
So then I asked the obvious why.  His answer – The Mayor demanded the change. I thought it odd that a mayor would be dictating database software, sounds more like the job for IT. The inspector speculated that the purchase of the new, nonfunctional system was the Mayor returning a political favor.
 
Glad to see the original HeathlCare.gov* programers landed on their feet. 😉
 
Seriously though if you have completed orders from the City of Milwaukee you should check to make sure the status in the city system is correct.  If not, call 414-286-2268 and ask that a supervisor fixes the problem. You do not want to have an open order for say a smoke detector,complete the order and then have a fire with that order remaining open, or you fixed a broken step but it remained open and now someone tripped there.
 

* The GAO report on the failure of the original HealthCare.gov

http://www.gao.gov/assets/670/668834.pdf

Apr 30

I wrestled with sharing The New Shame of the Cities as it is written from a political, anti-Democratic perspective, but found it so valuable that I decided to post it anyways.  Neither party is exempt from bad actors.  Read this from an apolitical view and you will find an equal value.

Milwaukee is prominently portrayed in the article, but the in-depth analysis of what happened to Detroit bears a fitting resemblance to our city. Replace Detroit and with Milwaukee in the passages below.  I think you will find it matches our reality too much.The 352 footnotes are as insightful as the story. Some links in the footnotes are stale, but the articles are available by searching the target site.

Maybe it is time to invite the Institute For Justice to Milwaukee.  The Institue For Justice fought a major rental housing inspection case in Red Wing MN

Hat tip to Richard for sharing it with me.

From The New Shame of the Cities

(1) Taxes:

Because of the middle-class population exodus caused by policies that inflamed race relations, Detroit’s tax base has been in free fall, leading city leaders from the 1960s onward to try repeatedly to regain lost revenue through tax increases.[55] Today, Detroit’s property-tax rates are the highest in America and generally twice as high as the overall average nationwide,[56] establishing a vicious cycle that continues to drive businesses away and cause taxpayers to relocate to the suburbs in still-larger numbers. By 2012, Detroit’s tax revenues—notwithstanding the high rates—were 40% lower, in constant 2012 dollars, than they had been in 1962.[57]

Another reason why Detroit’s stratospheric tax rates have resulted in meager government revenues is because of the city’s rapidly declining property values. Over the past half-century, the total assessed value of property in Detroit has fallen (in inflation-adjusted dollars) by 77%.[58] The median home price in Motown is now just $40,000, and many dwellings in the city’s most blighted areas sell for less than $1,000.[59]

The non-payment of property taxes has also become a widespread phenomenon in Detroit. In 2012, for example, some 47% of all homeowners in the city elected not to pay their taxes — mainly because the city’s cash-strapped government had failed to provide most of the basic services normally funded by such revenues.[60]

(2) Harassing Businesses:

In recent decades, the [people] in control of Detroit have cultivated an oppressive climate for small businesses by instituting a complex constellation of protectionist regulations.[61] In 2013, economist Dean Stansel conducted an “economic freedom” study that ranked the regulatory and tax climates of 384 U.S. metro areas, and found that Detroit placed 345th.[62] The Institute For Justice (IFJ) observes that the massive amounts of “time and money” that business owners must expend in order to comply with “all the regulatory requirements” of Detroit’s “stupefying bureaucracy” cause many aspiring entrepreneurs to “simply give up their business dreams.”[63]

Adds IFJ:
“Multiple inspections and inspection fees, incomprehensible building requirements, expensive, mandatory public hearings, arbitrary discretion by officials, and lengthy processing delays combine to discourage entrepreneurs from undertaking business ventures or improving existing ones. From sign taxes to restrictions on planting trees, the bureaucratic shuffle has gotten so out of hand that one business owner explained, ‘We operate on the basis that we just do what we want to do and the permits will catch up with us sometime.’”[64]

According to one survey, 56% of small-business owners in Detroit are unsure whether they are operating in full compliance with the law.[65]

Apr 19
Over on  the ApartmentAssoc at YahooGroups list Bill Lauer wrote:
Since we use conviction records as a screening criteria, it is important to consider this in the larger societal context. The disparate impact issue starts way before someone applying for an apartment. This is a simplified version of a much longer story. The sex offender issue is different so lets make that a different discussion.
 
For example, Landlords use felony drug records to screen.  We now know that drug laws were written to unfairly punish one group over another.  For example, the sentencing differences between powder cocaine and crack cocaine.  First offenders with powder cocaine, used largely by white people, often times got off with probation.  Offenders with the same weight of crack, used largely by Black offenders, went to jail or prison. This is where the disparate impact begins.
 
Another example is the criminal  differences between alcohol use, used largely by whites,  and marijuana, used largely by young liberals and Blacks.  http://www.cnn.com/2016/03/23/politics/john-ehrlichman-richard-nixon-drug-war-blacks-hippie/
 
We know that cops overcharge so that “deals” can be made later in the process.  Deals usually come with reduced charges with higher fines in exchange for little or no jail time.  If you don’t have the money, you sit in jail. We know that if you had  the money for a lawyer  you could beat the charges and stay out of jail.  If you didn’t have the money, well, you went to jail, because there was nobody that could make the deal.  And of course, what groups don’t have the money for good lawyers?
 
So now enter the  Heroin epidemic. The current form has been going on for about 10 years, about 6 in Wisconsin.  It is largely affecting white middle class kids.  They go to treatment a few times, they go to prison for possession, maybe theft, prostitution, and burglary.  They come out as felons who can’t go home to their parents, they can’t get a decent job, nor decent housing. This is the push behind a lot of these changes, now, at this time. You can’t give the white kids a special deal for their medical condition of addiction without applying that equally across all protected classes.
 
 Also, the industry’s response to being made more responsible for tenants behavior, [starting 20 years ago] coupled with easy access to  records through the Internet have had a long term, unintended consequence that we as an industry, really need to look at.  As Tim says below, this is nothing that was not predictable.  But we weren’t proactive, so now we get to be reactive.
 
The wave of change in the criminal justice system that this HUD letter represents has got a lot of momentum. Its 25 years in the making.  Coupled with the pressure of governments to reduce the cost of prisons, we’ll see a lot more change in the upcoming 5 years as America empties its prisons.  And they all need a place to live.
 
Bill Lauer
 
I mean….If you follow Ron Johnson’s career, who in a million years would have guessed that he would be calling for more drug treatment, more action, spending more money on junkie, on national TV in WAUKESHA???????  Sitting  next to Tammy Baldwin!

Bill is right.  But this is wrong.

Yes, the HUD screening directive is in response to a criminal justice system that appears skewed against racial and social minorities.

The method chosen to correct the underlying problem completely ignores the cause.  Rather, the Federal Government and the Administration made screening more complex and litigious instead of addressing unequal enforcement of criminal and municipal laws. Sure in the most egregious situations like Ferguson you see the government step in.

In general, this is another issue forced upon owners who were not the cause. This is a lot like the lead paint situation where the government permitted the use of a known dangerous product for decades, even requiring its use for some federally funded housing, before leaving most of the cost and legal challenges in the lap of the property owners.

So now owners will have to walk even more of a tightrope – rejecting far less applicants for criminal records may keep HUD happy, but then you have to deal with nuisance property concerns and worries that someone you put in may harm other tenants, employees or neighbors.


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