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.￼
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.
If your business model relies on using workers that you classify as “independent contractors” the latest interpretation from the US Department of Labor should be of extreme concern you.
Hat tip to Attorney Tristan Pettit for alerting me to this.
I have written a number of post about the dangers of calling a worker an independent contractor when they met the definition of employee. Well that bar was just raised substantially.
Rather than the old tests, the new ones are fairly bright line:
Ultimately, the goal is not simply to tally which factors are met, but to determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).
But the ruling goes even further than is the worker dependent on the pay they receive from you. Below are a few paragraphs of the Department of Labor document worth noting.
If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer.
In sum, in order to inform the determination of whether the worker is in business for him or herself, this factor should not focus on the worker’s ability to work more hours, but rather on whether the worker exercises managerial skills and whether those skills affect the worker’s opportunity for both profit and loss.
The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business.
For example, investing in tools and equipment is not necessarily a business investment or a capital expenditure that indicates that the worker is an independent contractor.
So if the guy is a licensed electrician doing work for dozens or hundreds of other owners – pretty much he is a contractor.
However if you are paying a painter $10 an hour, or even $20 for that matter, and he works primarily for you – he is an employee and you would be well served to consider making him a legitimate employee or hire out a company that uses employees.
Remember too that if someone working on your property is injured your rental property liability policy will not cover them. Either you or they need to have a worker comp policy. And this risk is even greater than the DOJ coming after you.
This past week there has been a lot of talk about bedbugs on the Apartment Association online discussion group.
Bedbugs made a resurgence after DDT was banned due to its harmful effects on the environment and humans.
Diatomaceous Earth works well and is non toxic to mammals and in fact is feed to dogs, cats and even humans in some parts of the world to rid internal parasites like tapeworms. Therefore you don’t have to worry about toxicity to tenants.
Downsides of Diatomaceous Earth:
- It is a bit messy – white powder in the application area. This can be lessened by using a cattle duster or plant duster.
- It is not a fast as chemical based or heat solutions. The trick is to do a knock down with a pyrethrin based chemical first. Pyrethrins are semi organic, derived from chrysanthemum plants. They are alleged to be people and pet safe, have been in use for many decades and have little residual. The latter is great from a toxicity concern, but not so great at keeping bugs at bay.
- It is odorless. Why is that a downside? People tend to believe stinky products are more effective products.
If you are going to go the pure chemical route JT Eaton products work well and are consumer labeled. Apply the red one and then a week later the blue. Cyonara 9.7 is also currently effective.
[Update] Brian Peters sent me a message that reminded me that DNS has a good bedbug brochure that you can provide your tenants.
Do It Yourself Pest Control has a really good overview of how to effectively treat for bedbugs. They often, but not always, have the best prices if you are buying in quantity.
Here is a visual overview of how to treat for bedbugs
Many of you attended the Apartment Association’s Meeting earlier this month featuring employment law attorney John Murray.
Here is a link to the State of Wisconsin’s guidance on the issue. Most owners I’ve met that call their workers contractors fail on four or more of the test outlined in the guide. Failing only one of the nine tests will cost you substantially. This is why we use employees exclusively, except for licensed trades like electricians.
Under section 102.07(8)1 of the Wisconsin Statutes, a person is required to meet a nine-part test before he or she is considered an independent contractor rather than an employee. A person is not an independent contractor for worker’s compensation purposes just because the person says they are, or because the contractor over them says so, or because they both say so, or even if other regulators (including the federal government and other state agencies) say so. The nine-part statutory test set forth under s. 102.07(8) of the Act, must be met before a person working under another person is considered not to be an employee. To be considered an independent contractor and not an employee, an individual must meet and maintain all nine of the following requirements:
1. Maintain a separate business.
2. Obtain a Federal Employer Identification number from the Federal Internal Revenue Service (IRS) or have filed business or self-employment income tax returns with the IRS based on the work or service in the previous year. (See note below.)
3. Operate under specific contracts.
4. Be responsible for operating expenses under the contracts.
5. Be responsible for satisfactory performance of the work under the contracts.
6. Be paid per contract, per job, by commission or by competitive bid.
7. Be subject to profit or loss in performing the work under the contracts.
8. Have recurring business liabilities and obligations.
9. Be in a position to succeed or fail if business expense exceeds income.
Note: When requesting a Federal Employer Identification Number (FEIN) from the IRS, you must inform the IRS that you are required by Wisconsin Worker’s Compensation law to obtain a FEIN. A social security number cannot be substituted for a FEIN and does not meet the legal burden of s. 102.07(8).