Hello everybody. My topic this month will not be similar to the typical “Los Angeles Housing Department bashing” or “REAP bashing” articles you have undoubtedly read in various apartment trade publications during the past 24 months. Rather, my discussion will provide a matter-of-fact explanation of LAHD’s administration of the REAP program (it is here to stay, unfortunately) and make specific recommendations that owners and management companies may adopt to avoid REAP altogether, or at least improve their position within the program.
The Nature of REAP
REAP is an acronym for Rent Escrow Account Program. It is an administrative program codified in the Los Angeles Municipal Code and implemented pursuant to certain Regulations of the Los Angeles Housing Department (“LAHD”).
In general, LAHD has jurisdiction to place a building having two or more dwelling units in the City of Los Angeles into REAP following the landlord’s failure to repair habitability violations.
REAP applies to all occupied apartment buildings located in the City of Los Angeles whether or not rent controlled. Its application extends to all sub-City areas which are a part of the City of Los Angeles, such as Venice, Encino, Van Nuys, Sherman Oaks, Hollywood, Chatsworth, etc. It does not apply to independently incorporated cities, such as Santa Monica, Culver City, Inglewood, Beverly Hills and Burbank.
When LAHD places a property into REAP, tenants are allowed to pay a reduced rent, which is typically 50% off their ordinary monthly (contract) rent. During the pendency of the REAP Program against a specific apartment building, the tenants have the option to tender their curtailed rent directly to the landlord, or alternatively to LAHD. In practice, nearly all tenants choose to pay it to LAHD, which then impounds the money into an escrow account that it maintains. After the tenant pays into the escrow account, the landlord (or any of the tenants) may thereafter apply to the escrow account’s manager for funds to repair habitability violations in the apartment building.
Adverse Effects of REAP
The most disastrous consequence of REAP is that the building’s owner, being deprived of his rents, may not have the financial wherewithal to pay the monthly mortgage. The catastrophic result: upon the rent reduction and impound of the remaining rent into the escrow account, the lender forecloses on the Deed of Trust and the owner loses his building.
But reduction of rents is just one of many adverse consequences that may befall an owner whose property has been placed into REAP. Four other such consequences are (1) LAHD records a “Notice of REAP” with the Los Angeles County Recorder against the title to the property (thereby all but preventing the refinancing or sale of the property), (2) LAHD assesses a $50.00 per month administrative fee for each unit in the building which has been accepted into REAP, (3) the owner can be prosecuted criminally for the code violations, and (4) under California state law, the State Franchise Board Tax prohibits income tax deductions for interest, amortization, depreciation, and tax in connection with the property because it does not comply with local housing codes.
REAP is Constitutional
There have been a number of recent Court challenges to the REAP program, but the most significant is the September 9, 2013 published opinion by the very liberal 9th Circuit of the United States Court of Appeals in Sylvia Landfield Trust v. City of Los Angeles. There, four landlords who owned separate apartment buildings brought a consolidated action against the City of Los Angeles after LAHD placed their properties into REAP. The Complaint alleged that the REAP program was unconstitutional and violated landlords’ substantive due process rights.
Unfortunately for the plaintiffs (and in turn, all apartment building landlords in the City of Los Angeles), the three judge appellate panel unanimously upheld the REAP program, ruled that it was “rationally related to a legitimate governmental purpose,” and affirmed the summary dismissal by the lower Court of the landlords’ case without a trial.
In reaching its determination, the Appeals Court explained that in response to a growing crisis of substandard housing, in the late 1980s the City of Los Angeles enacted REAP as part of the City’s “more vigorous stand against landlords of rental housing who allow their buildings to deteriorate to the point where tenants are living in substandard conditions.”
The federal appellate Court opined that one of the most important and fundamental duties a city can perform is to protect its residents from unsafe housing conditions. Relying on a 2001 finding of the California State Legislature, the Court observed that one in every eight dwelling units in the State was substandard and that unless health and safety problems are corrected, “habitability conditions generally deteriorate until the units become life threatening and uninhabitable and must be removed from the housing stock through closure or demolition.”
In rejecting the Complaint of the four owners, the federal judges commented that landlords may challenge the placement of their property into REAP through a hearing and appeals process.
The Complaint also alleged that LAHD violated the landlords’ substantive due process rights by placing their properties into REAP without providing adequate notice of property inspections or adequate opportunity to object at a hearing. The panel unanimously rejected that position by recognizing that there existed numerous communications between the City and the plaintiffs concerning the violations and that the REAP program was not arbitrarily or unreasonably applied to the four landlords before it.
The bottom line is that the REAP program, in general, has now been held to be constitutional and it does not constitute a denial of an owner’s due process. While landlords may want to dispute that determination, the Court of Appeal’s September 2013 opinion is the law of the land and the REAP program is here to stay.
Although other litigation is presently pending to overturn portions of the program, no State or Federal Court is going to abrogate it entirely even if parts are nibbled away. For example, on September 27, 2013, the Los Angeles Superior issued a Writ of Mandate (essentially, a Court Order) determining in the case before it, that LAHD’s across the board 50% rent diminution of the 60 units in the landlord’s apartment building was not sufficiently detailed to justify the reduction. In ordering the matter be sent back to LAHD for additional findings, the Superior Court implicitly upheld the constitutionality of the REAP program.
That being the situation, there are actions that owners and management companies can take to (1) lessen the likelihood that LAHD will place a building into REAP, and (2) reduce REAP’s impact if, perish the thought, the property is placed into the program.
Here is what I urge owners to do relative to REAP issues:
1. More than anything else, residential landlords who receive an “Order to Comply” from the City of Los Angeles relative to health, safety, or habitability violations should use their absolute best efforts to promptly satisfy and comply with all of the requirements in the Order. No property will be placed into REAP if the owner performs the required work by the stated compliance date or by any extended compliance date.
2. Be courteous to the City inspectors regardless of what his or her attitude may be toward you and no matter how much you might despise the inspectors. As the saying goes, acting politely to the man with a whip may lessen the number of lashings.
During the four decades or so that I have practiced real estate law, I have encountered numerous code enforcement inspectors who have high integrity and are nothing but professional. Hopefully, the inspectors of your buildings will be similar.
3. Stay in close communication with the housing inspector, and call for frequent inspection approvals as work is completed. If the usual inspector is unavailable, speak with his supervisor or the “Principal” inspector to advise of the status.
4. If you receive a letter from LAHD advising that your property has been placed into REAP, do the following:
A. File an Appeal on LAHD’s “Request Form” within 15 days after the REAP letter is dated. Failure to do so (and show up at the hearing) ensures that your property will thereafter be subject to REAP. That appeal will set in motion your right to contest the REAP referral before a Hearing Officer assigned by the General Manager of LAHD. The most recently appointed Hearing Officer is Beth Rosen-Prinz, who I have personally found to take her assignment seriously, as indeed she should do, but listen with an open mind to the owner’s position and render a fair decision consistent with the evidence presented to her.
B. Clear up as many code violations as is possible between the time you receive the REAP referral letter and the initial REAP appeal hearing. If you abate all violations before the hearing, the case will likely be dismissed.
C. Shortly after filing your initial REAP appeal, LAHD will notify you of your hearing date before a hearing officer appointed by LAHD (likely to be Ms.Rosen-Prinz). At the hearing, you and your counsel should act professionally and cordially. If you are fortunate, upon your request the hearing officer will continue the REAP hearing to allow you more time to abate the code violations. If you are really, really lucky, the hearing officer will dismiss the case at that time, or at least following a re-inspection which demonstrates full compliance.
The principal options available to the hearing officer are (a) affirm the Department’s decision to place the property into REAP, (b) continue the hearing to a later date so as to allow you time to remedy the code violations (or at least establish that you are making satisfactory progress in doing so), (c) lessen the tenants’ rent reduction to, say, 25% rather than 50%, (d) refer the matter to the Los Angeles City Attorney for potential criminal prosecution arising from the various code violations (another disastrous consequence of REAP), and (e) dismiss the case.
5. Arrange to have your general contractor, job superintendent and civil engineer present at the hearing, together with your attorney or other REAP consultant.
6. At the conclusion of the hearing, ask that hearing officer for a continuance in order to obtain additional time to comply with LAHD’s Orders. If you are successful in obtaining a return date (i.e., a continuance) for a follow up hearing on the REAP issues, consider it an interim victory. Absent a continuance, you can expect the hearing officer to issue her final determination within 10 business days following the completion of the hearing.
7. If you are unsuccessful and receive a notice that the hearing officer affirms the Department’s decision to place your property into REAP, immediately file a (second) Appeal on LAHD’s form, stating the detailed grounds for the Appeal. That Appeal must be submitted within 10 calendar days of the hearing officer’s written determination, together with a $150.00 filing fee. While it is unlikely that this second Appeal will overturn the hearing officer’s decision, owners would be wise to use the time to correct all code violations prior to the hearing on the second appeal. That will at least limit the amount of time that an owner’s property will be in REAP.
Most owners maintain their property in good condition and never face a REAP situation. But those who fail to care for their building in accordance with general health and safety standards may “REAP what they sow,” so to speak.
Let me make one final comment. The purpose of this article is neither to bash nor praise LAHD. l will leave that to other politically active commentators. Instead, my suggestion to AOA members is do your best to work within the system, rather than fight it. That is not to say that you should not attend landlord meetings which strategize against REAP or join political action committees. But if and when a REAP proceeding is brought against you, it is essential that you comply with LAHD’s code violation orders to the extent possible and not antagonize the inspectors.
Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 36 years. He has been appointed to periodically serve as a judge pro tem of the Los Angeles Superior Court and is a former arbitrator for the American Arbitration Association. He also testifies as an expert witness for and against other attorneys who have been accused of legal malpractice.
Mr. Alberstone has been awarded an AV rating from Martindale-Hubbell. An AV rating reflects an attorney who has reached the heights of professional excellence and is recognized for the highest levels of skill and integrity. You may Google “Dale S. Alberstone” for further background.
The foregoing article was authored on October 1, 2013. It is intended as a general overview of the law and may not apply to the reader’s particular case. Readers are cautioned to consult an advisor of their own selection with respect to any particular situation.
Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 1801 Avenue of the Stars, Suite 600, Los Angeles, California 90067. Phone: (310) 277-7300.