New Jersey's High-Rise Sprinkler Retrofit Proposal

Michael L. Ticktin, Esq.

Chief, Legislative Analysis

Department of Community Affairs

PO Box 802

Trenton, NJ 08625

RE: PRN 2007-297 – High Rise Suppression – Proposed Changes to N.J.A.C. 5:70-4.3, 4.7, 4.17

December 9, 2007

Dear Mr. Ticktin,

I am writing to express my opposition to the above captioned proposal. The negative effect that this proposed amendment will have on housing affordability in New Jersey – on the order of $200-$400 per unit – has been amply communicated to the DCA.

In exchange for a negative affordability effect, only negligible safety increases would be achieved. This proposal clearly runs counter to Governor Corzine’s stated goal of increasing affordable housing in the state.

I am deeply troubled by the fact that this proposal is being driven by the fire sprinkler installer’s union; clearly a self serving conflict of interest. The union members will profit off the backs of New Jersey’s honest landlords and hard-working, working class tenants.

In a testament to this proposal’s ill-considered nature, the strangest of bedfellows, the New Jersey Apartment Association and the New Jersey Tenants Organization, have joined forces to oppose this amendment.

New Jersey is already one of the most unaffordable states in America to live in, let’s not make it any worse. I respectfully request that the Department of Community Affairs not adopt the proposed amendments establishing the retrofit requirement.

Very truly yours,

Rosey

New Jersey's Unaffordable Housing

Gubna Corzine promised upon taking office to create or rehab 100,000 new units of affordable housing in the garden state, as New Jersey is known.

I received today an article from the Newark Star Ledger with the headline:

Corzine: Cost could hinder affordable housing effort

Advocates say they're frustrated with governor over lack of plan

Guess how many units have been created by the Gubna, go ahead guess. If you guessed zero, nada, zippo, zilch, bubkes, the big donut, you’re correct. In fact, the Gubna has increased the cost of housing, just like his predecessor James “I’m a Gay American” McGreevey, by passing idiotic laws that make it more expensive to do business in NJ. The most obvious of which is the 1% hike in the sales tax. Besides clobbering the poor, this tax makes everything landlords have to buy more expensive, so they have to raise the rent (if they can) to cover increased expenses.

His predecessor passed several revisions to the laws governing the handling of security deposits, and window guards. Window guards are designed to prevent toddlers from falling out of windows when their crack-head mothers aren’t paying attention. The law is so complicated that even PhD English professors cannot understand it, much less implement it properly. Perhaps that’s a positive, since state employees generally are way below the PhD level, so they can’t understand the laws they’re supposed to enforce anyway.

The security deposit law is designed to keep landlords from taking tenant’s security deposits when they are not entitled to. A well meaning law of course, but only dishonest landlords do this anyway. The pros know and obey the law. We actually like giving back security deposits, because it means the tenant has done everything they are supposed to, paid all outstanding charges and left the place neat and clean. I’d much rather have that than a trashed apartment and $950.00 that I have to spend putting the apartment in order.

Because the law places onerous administrative guidelines on the handling of security deposits, it has become much less profitable for banks to handle these accounts. The result is that savings banks, the ones who normally pay the most interest, just got out of the business, leaving only the large commercial banks. Since this business is less profitable, the banks pay very little interest. My accounts, currently at Commerce Bank, only pay 0.75%. Compare that to money market funds that pay around 5%. The law mandates that the money must be in one of these accounts, so tenants literally can’t earn any interest on their money. Thanks McGreevey. It also raises the administrative costs, because large landlords need more manpower to deal with the related clerical tasks.

I have come up with several suggestions to help make rental housing more affordable in New Jersey:

1) Lower property taxes for multifamily buildings of 5 units and up.

2) Drop the fire-sprinkler nightmare law pushed by none other than the fire-sprinkler installation union lobby.

3) Eliminate (redundant/burdensome/all) inspection fees, such as DCA 5-year inspection fee, non-lead free unit fee, municipal inspection fees, Certificate of Occupancy and fire alarm inspection fees.

4) Give additional tax incentives (besides depreciation) for landlords who renovate their properties.

5) Simplify security deposit and window guard laws made more complicated by the McGreevey administration.

6) Fast track approvals for new multi-family developments (or rehabs) that meet certain criteria.

7) Provide grants and/or tax incentives for landlords who install energy or water saving improvements such as furnaces, insulation, windows, toilets, showerheads, sub-meters, etc.

8) Provide an energy/utility assistance program for landlords who provide, heat and/or hot water and/or cold water and/or cooking gas to their tenants as part of the rent.

9) Give property tax rebates to the landlords, who actually pay the taxes, as opposed to the tenants.

10) Speed up the eviction process. Eliminate eviction blackouts.

11) Roll back the state sales tax increase.

12) End government corruption.

13) Make sure the Gubna doesn’t survive his next car crash.

14) Elect a Republican to the Governor’s office next time.

Evicting Tenants

This is an article I wrote for the September 2007 Issue of Broker Agent Magazine, North Central New Jersey Edition.
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A few months a ago you sold a multi-family property to a client. The client calls you up in a panic: one tenant hasn’t paid rent and the client doesn’t know what to do. How do you advise them?

New landlords are often squeamish about evicting tenants, they “Feel bad” throwing someone out of their home. First piece of advice is “Get over it.” You are a landlord now and evicting tenants is part of the business. Just as boxers can expect to get punched in the nose as a matter of course, landlords must expect to evict tenants periodically.

When you don’t pay the phone bill, the phone company turns off your phone. When your tenant doesn’t pay their rent, you must turn off their apartment.

The eviction process is how you turn off a tenant’s apartment. This is a legal procedure, which must be done according to the law. Each county has a tenant landlord court, and your case must be handled through this court. Never harass a tenant to leave or attempt to evict them by yourself. This is known as a “Self Help” eviction, and you can get in big, big trouble for doing it, so don’t.

Since this is a legal procedure, you will need an attorney; don’t try to handle this on your own. You must find an attorney in your area that is experienced in tenant landlord court, and represents landlords exclusively. Do not hire an attorney that “Dabbles in real estate” or handles only residential closings. You want an attorney that goes to tenant landlord court several times a month, specifically to represent landlords in eviction proceedings. You can find one by calling the Property Owners Association at 732-780-1966 or the New Jersey Apartment Association at 732-992-0600 and asking for a referral. Or you can go to your County’s tenant landlord court at 8:30 AM on any business day and snoop around for one.

When do you file for eviction? I file for eviction on the 10^th of the month. Rent is due on the first of the month. Tenants get a five calendar day grace period after which a late fee is added. If rent is not paid by the 10^th, you know there is a problem. I fax a list of tenants in arrears along with the amounts outstanding and their address to my attorney, who files on my behalf.

I then send tenants a notice telling them that my attorney has filed court papers, and I enclose an invoice which will at this point include base rent, late fees, county filing fees, and attorney’s filing fees. Hopefully you have a lease in place that spells out these charges and specifically calls them “Additional Rent.” Occasionally this will be enough to get the tenant to pay, but normally not. It usually takes four to six weeks to get a court date. The tenant will get a postcard from the court notifying them of the court date. This may motivate them to bring their account current.

If not, be prepared to show up in court with the books and records pertaining to all tenants you will be opposing. Be sure to ask your attorney what else you may need, such as building registration forms. If you do not have all required documents, you may be forced to default and re-file. Upon arrival, both the tenant and the landlord or his representative must check in with the court, or face default: dismissal of the case.

Before or after check in, the judge will give a speech advising both parties of their rights or a court administrator may play a video for the same purpose.

Next, you will have an opportunity to negotiate with your tenant. Let your attorney handle this. I recommend you give the tenant no more than two weeks to bring their account current. At this point they will be two months in arrears, longer if you did not file aggressively on the 10^th. If you give them longer than that, they most likely won’t catch up, and you will be forced to evict them anyway. Any extra time you give them anywhere in the process will become free rent. If you come to agreement on a payment plan, this must be documented in a legal document called a stipulation. If the tenant fails to uphold their obligations outlined in the stipulation, a judgment for possession is automatically awarded to the landlord.

If you can not agree on a payment plan, and the tenant will not agree to move out, you must go in front of a judge in an attempt to be awarded a judgment for possession. Once a judgment for possession is awarded to the landlord, an application for a warrant of removal should immediately be filed by your attorney. Within two weeks a warrant should be issued and posted by a court officer. You are then eligible to lock out the tenant three business days later. You should schedule the lockout as soon as you are eligible.

A lockout cannot occur on weekends or holidays. Snow days can cancel lockouts. Some counties have a two week moratorium on lockouts straddling Thanksgiving and Christmas. So it is very important to be aggressive throughout the eviction process, especially once the leaves start turning colors!

You tenant will probably be gone by the time the court officer comes to lock them out, but sometimes they are still there! You will need to change the lock (sometimes the court officer can do this for you for a fee), and secure the windows. You must leave the apartment as is for ten days. Within that period, the tenant can pay all outstanding charges and reinstate the lease, although that is unlikely. You must allow tenants to reclaim any possessions left behind within the 10 days.

Pricing Commercial Buildings I

This is an article I wrote for the July 2007 Issue of Broker Agent Magazine, North Central New Jersey Edition.
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A client calls you and says they have a 12 unit apartment building they would like to sell. You have never been involved with a commercial transaction before; you panic. What do you do? First tell them that you would love to help them and that you need to do some homework. Ask for a description of the building and say that you will call back. The most important part of making the transaction close, just like a residential deal, is pricing the property right from the get go, so potential buyers won’t be turned off.

So how do you price an apartment building? Well there are several methods. For two to four unit buildings, they are financed as residential properties, and they price the same way, by comps. Five units and above are considered “Commercial” for the purpose of financing, but buildings up to six units trade a bit like houses, so comps are still important in pricing. Over six units, buildings start pricing for their investment value, and a different approach is required.

The most important method is to price using CAPITALIZATION RATES, or “Cap Rates.” Cap Rate is defined as the rate of return used to derive the capital value of an income stream. The formula is Value = Annual Income / Cap Rate. (1) Value equals the theoretical market value of the property, and the price around which it should sell. The annual income in this case is NET OPERATING INCOME (NOI), or income minus expenses, prior to financing. The Cap Rate is expressed as a percent, usually in the range of 6% to 12%; of course deals can be priced outside this range under special or extreme circumstances.

The first step is to determine what is the correct Cap Rate to use. The best way to do that is to ask someone knowledgeable, either another agent who deals in commercial property, or better yet, a mortgage broker who deals heavily in commercial mortgages. It is important to make contact with a commercial mortgage broker, since they can help you to determine the maximum amount the bank will lend on the property, and therefore the maximum amount the property can sell for. And one will be needed during the transaction anyway.

Once you have determined a cap rate, you need to calculate the income and expenses; using Microsoft Excel is the best way. You will have to work with the owner to figure these out. First you need a rent roll. The rent roll should contain the apartment number, the size in total rooms, the current tenant name, and the current rent. For any vacant units, use the last rent, or the maximum allowable rent if the unit is rent controlled. Add all the rents up to get a total monthly figure, then multiply by 12 to get an annualized figure. Add to this any other income such as from laundry or vending. This is the TOTAL GROSS INCOME (TGI).

You will need a number for vacancy and credit loss. The bank will use 8% in their calculations, the recent nationwide average is 10%. Many brokers will use 5% or less, to make the building attractive, but a savvy buyer won’t believe it. Don’t use less than 5%. To calculate the vacancy figure, multiply TGI by the vacancy percent. Subtract the vacancy from TGI, and you get GROSS OPERATING INCOME (GOI).

Next, ask the seller for the following annual expenses: Taxes, Insurance, Utilities and Superintendent’s Compensation. You will also need a number for maintenance; since many owners may either under spend or under report this number, it is best to use an estimate such as $500 per unit per year. It is also customary to have a reserve for repairs and replacement of capital items such as the roof or boiler. $500 per unit per year is also a good number for a reserve. Now add up all the numbers to get the TOTAL OPERATING EXPENSES (TOE).

Subtract TOTAL OPERATING EXPENSES (TOE) from GROSS OPERATING INCOME (GOI) and you get NET OPERATING INCOME (NOI). Divide NOI by the Cap Rate and you get the building value.

Here’s an example. Let’s say the average rent is $750, multiply by 12 units, and the monthly rent roll is $9,000. Multiply by 12 to annualize, and you get TGI of $108,000 (this assumes no other income). For vacancy Multiply TGI by 5% and you get $5,400. $108,000 - $5,400 = $102,600. So your GOI is $102,600.

Assume the following expenses: Taxes $12,000, Insurance $6,500, Utilities $10,000, Super’s Comp. $3,600 (2), Maintenance, $6,000, Reserves $6000; TOE equals $44,100. Subtract TOE of $44,100 from GOI of $102,600 and you get NOI of $58,500.

Assuming our commercial mortgage broker recommends a 9.00% Cap Rate for the building, based on condition, area and the prevailing market, calculate the building value as NOI $58,500 / 9.00% = $650,000. You may want to add as much as 10% onto this value for “negotiation,” to get a suggested listing price range of between $699,000 and $715,000.


(1) Barron’s Dictionary of Real Estate Terms, 1993 Barron’s Educational Series, Inc.
(2) Assumes a part-time super getting a $300 a month discount off rent.

The Crap Starts Hitting the Fan

I witnessed what I feel is maybe the first piece of truly visible, close-to-home crap hitting the giant real estate fan. I went to both my buildings today, and saw that a 6 unit building two doors down is now boarded up. This was a pro board-up with a steel door and steel boards, a product I have never seen before. There was a shut-off notice from the water company for $790, about a single 2 month bill in my estimation.

So what happened? Well I assume that this building is in foreclosure, and the only thing that surprises me is the speed with which it happened. I saw this building turnover twice I think in the not quite fours years I have owned on the block. Each time it came up for sale, I looked into buying that building as well as the one right next door, but each time the price was too high so I didn't bother bidding or looking. It seems to me whoever bought it, obviously paid too much, bought at the top, and ran out of money. Ha ha!

I say “Ha ha” because people have been buying at ridiculous prices for years, so it was inevitable that this would happen. If it was a cold winter, we'd probably see more foreclosures. Meanwhile, on this short block, in a neighborhood that is both up and coming and has seen a dozen or so murders in 2006, there are three buildings going condo. The most expensive is asking $365,000+ per unit, I believe they have parking, but I haven't seen the units. Four doors down is asking $219,000 for what I believe is a four room railroad, no parking. Five doors down is asking around the same for similar units. At a recent open house, they were asking $159,000 for the same unit partially gutted, but unfinished. Seems like they are running out of money and panicking. I'm hoping to own most of the block sooner or later. I hope the market cooperates. I can hardly contain my glee...Bwahahahahahahahahaha!

Black Slime Away

Well, as luck would have it, my super was on her way over to show a few apartments, so she stopped by the complaning tenants apartment to check things out. The tenant wasn't home so she let herself in and checked out the bathtub, and reported back to me. She said she ran the water for a while and that there was no problem. The water was draining, there was no "Slime," and everything was fine.

On her way out, the super ran into the tenant and told her she didn't find anything. The tenant said that it was it was, "No big deal."

So what was that all about?

Black Slime

I just listened to a voicemail from one of my tenants, claiming that “Black Slime” has rained down in her bathroom, and that the water comes out of the spigot “brownish”…She was “Out of the country for ten days,” important that she let me know that she was traveling abroad so I’ll think that she is worldly and cultured. Also good to know where they are spending their money, although she has already paid her January rent in full and on time.

 

I returned her call, only to get voicemail. The super is heading up that way to show some vacant units, so I asked her to check it out. I’ll be down there tomorrow, so I need to know if need to buy anything from Home Depot before I head out, such as Draino for her to drink, or rat poison to sprinkle on her cereal. 

 

I shouldn’t say that, because I try to hold myself out as an example of a professional property manager, albeit one who focuses on the affordable housing sector, not the slumlord that people like to call me…

 

But you have to understand, at anyone time there are at least 10 to 20% of your tenants driving you crazy, while 80 to 90% just shut up and pay.  Guess which group this particular tenant is in.  Anyway, this is the same tenant who was away all last Summer (she’s a teacher), who was visiting her husband (!), who lives in the second city.  When she came back, guess what? Black slime!  At that time she refused to pay her rent and threatened me and informed me that it was a health hazard and that she was educated and didn’t have to live like that etc…Also, I found out, she had been letting her sister use her apartment, and her sister trashed it, clogged up the drains, and failed to report that the bathroom ceiling had collapsed from an earlier leak upstairs that was repaired.

 

Well I fixed everything as soon as she let me in to the apartment to do repairs,  which was after the Legal Aid attorney told her she couldn’t withhold rent and that by law she was required to give me a chance to make repairs.  Of course she didn’t, she called the office of code enforcement first, so they could write up violations.  When she finally let me in, the plumber pulled various hair braids out of the drain (clearly my fault), at my expense, which cleared up the black slime right away.  As for the ceiling, if someone had been home, or informed us that the apartment would be vacant for the Summer, or if her freeloading sister had reported the ceiling collapse, I could have taken care of that right away too. But no, it’s better to blame the landlord and call the city.

 

This is a tough business sometimes.  I’ve earned every freakin’ penny I’ve made and I deserve to be rich!

 

 

 

My Reply to Assemblywoman Vandervalk

Dear Ms. Vandervalk,

I believe the Governor's proposal to cap property taxes at 4% is a good idea and a step in the right direction. Alone it is not enough, because spending is clearly out of control, but at least there could be a reasonable cap on property taxes that is in the realm of actual inflation. I urge you to support this idea if and when it comes up for a vote.

Just so you know, my property taxes in 2000 were around $7200 a year. Although I sold that house in 2005, the current taxes on that property are around $12,000, that's an annual increase of about 11% per year!!!

The 2006 taxes on my current house are $11,600 up $1,100 in just one year or about 10%!!! This is unsustainable for middleclass folks.

Thank you for your hard work and attention to these important matters.

Rosey

Vandervalk Calls for Smaller State Govt. and a Fair School Funding Formula

I received the following e-mail form my state representative Assemblywoman Charlotte Vandervalk, a Bergen County, NJ Republican:

For the last five budgets, the problem has been the same, increased
spending. The priorities of the Governor and the Democrats are very wrong.
The state's work force has increased by 13, 886 state workers, a 23%
increase, in just the last six years, and the state budget has nearly
doubled to $30.8 billion. Republicans and nonpartisan groups, such as the
State Chamber of Commerce offered the Governor more than $2 billion
dollars in spending cuts for the State budget, but the Governor refused
even to consider them.

Our school funding formula is the real driving force behind our high local
property taxes, and it severely shortchanges our area. The State's own
financial data clearly show that while our residents contribute a
significant portion of the State's tax revenue, we do not receive a
commensurate portion of State education aid and that inequity is due
directly to the school funding formula. Unless the formula itself is
changed, there will be no meaningful tax relief for us.

I have had legislation in place for five years which would grant a basic
amount of state aid for every public school child, but it has been ignored
by the party in control simply because the current funding formula
benefits certain key legislative districts like Hoboken and Newark while
giving our school children virtually nothing. Contained in two bills,
A‑144 and ACR‑51, my proposal would reverse the diversion of
funds that has led to our high property taxes. Indeed, this is already
done in many states and would provide real property tax relief while still
allowing us to provide a quality education for our children. There are
many other possibilities for fair formulas, but to date, Trenton has not
tossed anything on the table even for discussion.

In the 2007 Corzine budget, TAXES WERE INCREASED BY $2 BILLION, SPENDING
WAS INCREASED BY 12.5%, PROPERTY REBATES TO HOMEOWNERS WERE CUT, AND OVER $300 MILLION OF "PORK" WAS PUT INTO THE BUDGET.

We, Republicans, although in the minority, offered budget
cuts which were dismissed. The list contained over $2 billion of items
with which most citizens would have agreed did not need to be in the
budget. But these judicious cuts, which would have negated
the need for any new or increased taxes or fees, were ignored by the
Administration and by the press. Several hundred million dollars could
have been saved and still can be saved simply by taking these suggestions.

Lovely Letter I Got From the Gas Company