How LA Mansion Tax Impacting Affordable Housing | Chris Tourtellotte

We have a very important update for you from the team of California Insider. We are starting a new YouTube channel where we're going to have the best parts of some of our episodes in a shorter format. We will also have our full episodes there going forward. Click on the link below and make sure you sign up to this channel because we're going to have a lot of new content there. You're going to see housing supply drop. Investors are no longer looking at City of LA because it's too risky. Why would you sell a property if you would have to give all your profit to the city? People say, your land's not worth much, right? Because of this tax at the end. So people were uneducated about this, the impacts of it and what it was, right? I use the word deceptive because it was called the mansion tax. But when they realized that, no, this applies to all classes of real estate, including affordable housing projects, you kind of go, oh, wait a minute, that's not a mansion tax. That's something different. My guest today is Chris Tortolat, Managing Director at Latara Development, a large real estate development company based in California. Today he'll discuss key challenges facing developers like the LA mansion tax, environmental review process, demand for different housing types, and the impact of policies like rent control. We have these housing allocations for each city. These are all rentals. Are we going to become more rental? Housing has become more popular. People want that kind of freedom. So the narrative has shifted a little bit. So you see all these regulations, all these issues that we're facing in California. The cost of housing has gone up. Some people have left the state. It's worth noting, though, there's hope. I think you're going to see people start to kind of move back to California. I'm Siamak Karami. Welcome to California Insider. Chris, it's great to have you on. Welcome. Thank you very much for having me. I appreciate it. I'm excited. So let's talk a little bit about the mansion tax. You guys are involved in development across the state, and you have a lot of information how development works, and we're desperate for housing, right? We are. Yeah. So we want to talk to you about, we want to start with the mansion tax. They were supposed to do this mansion tax in LA, and it was going to generate $900 million, but somehow we're generating only $150 million. Can you tell us more about this mansion tax? I can. So the mansion tax, which is now Measure ULA, that passed in 2022, and really it was very deceptive. So the mansion tax was actually put on the ballot through a referendum. So somebody went out and got all these signatures. They got enough signatures to qualify. It was on the ballot, and all they needed was greater than 50% of the vote of the populace, and it passed. And I say it was deceptive because it was called the mansion tax, right? So you read that, and you think, this is going to impact rich people who own mansions, right? The tax is 4% of the sale price over $5 million, then it goes up to 5.5% over $10 million. So people looked at that, and they said, oh, wow, yeah, they can pay, right? What they didn't realize is that the mansion tax applies to all product types. So it applies to apartments. That could be affordable housing. We at Latera build a lot of market-rate housing that has affordable in it. It applies to hotels, office buildings, malls, shopping centers, right? All of it. So I say it was deceptive for that reason, and it's really had some unintended consequences. So I'll give you an example. We could build at Latera 150 apartment units, and that would cost roughly $90 million, right? That's about $600,000 a unit. So you can build that project for $90 million, and let's say that's 150 units. And in that project, there's 30 very low-income units, right? This is 50% of area median income. So that's $800 for a two-bedroom. This is much-needed housing. However, you build it for $90 million. Let's say five years later, you sell that property for $100 million, right? That's over a five-year period. All of a sudden, the city of LA says, thank you. Your $10 million profit, you owe me $5.5 million, right? Because it's based on the $100 million sale price. So you have to actually pay the city of LA $5.5 million. Now, let's say that same $90 million project, you sell it for $80 million. Why? Interest rates are up. When interest rates rise, real estate values go down. So that is pretty consistent with what's happening today. So now you build it for $90 million, you sell it for $80 million. You lose $10 million, and the city of LA says, uh-uh. You owe me 5% of $80 million. So you actually have to pay the city of Los Angeles roughly, call it $4 million, 5.5% of $80 million. So in addition to your $10 million loss, you're paying the city of LA close to another $5 million. So it's pretty brutal. And I say it's the unintended consequence, because now we have these investors, both in California, nationally, and globally. And they're looking at the city of LA, and they're redlining. And they're saying, we're not going to take that risk. Why are we going to invest our money into the city of LA and build these great apartment projects that have affordable housing, when 5.5% of the gross could be 100% of the profit? Gone. So it's really an unintended consequence. So in this past, people said, well, we're not selling. Why are we going to sell to the extent they can avoid it? And so that's why you saw the gross receipts from this tax be much lower than what they thought. But even worse than that is the fact that you're going to see housing supply drop, because investors are no longer looking at the city of LA, because it's too risky. It's a big problem. So they don't want to develop anymore, because they have to charge more. But they don't want to develop, because it's too risky. It's very risky, yeah. It's a risky endeavor, when one of your biggest partners is now the city. They're your biggest silent partner, right? They come in at the end, and they could take all your profit. So why would you do that when you can go to Texas, Arizona, or some other state? Now, there are other jurisdictions, not city of LA, right, in LA County, where there is no transfer tax. This is specific to the city of LA. But there are other jurisdictions that might be evaluating a similar tax. I think they're going to find that it doesn't make sense. And I think a lot of them are realizing that there's unintended consequences. So I think, you know, city of LA is going to be, I think, regretting that a few years from now. Is this why, then, the transactions froze? It's kind of what we're hearing, because they were proposing it would be $900 million of receipts from this tax, but then now it's $150. Yeah, transactions have froze, because why would you, right? Why would you sell a property if you would have to give all your profit to the city? Or maybe, maybe you're already out of the money. Interest rates are up, right? And that's another reason why transaction volume is down, is because interest rates are up. But why would you sell if you have to give 5.5% of the gross? It's not 5.5% of the profit. Now, that I could live with, right? It's 5.5% of the gross sale price, which could be all of your profit. So that's problematic. It's worth noting, though, there's hope. There's something called the Taxpayers Protection Act. Are you familiar with that? Have you heard of this? We've been hearing it. Some of our guests have told us about this. Yeah, so this is interesting. It got enough signatures. It will be on the November 2024 ballot. And what the Taxpayers Protection Act does is it effectively states that no cities can increase taxes or fees without getting a two-thirds vote of the general populace. So a two-thirds vote of the city. And there's a look-back provision. So if it passes this November, and I think it will, then what happens is any tax increase at the local level over the past two years is gone. And it has to go back to the ballot and get two-thirds vote of the populace. Now, Measure ULA got about 57%. People were uneducated, too, and it got about 57%. They wouldn't get to 67%. So I think the TPA, I think it will pass. And it's slated to be on the ballot this November. So that gives us some hope. So people were uneducated about this, the impacts of it, and what it was, right? They were very uneducated. And again, I use the word deceptive because it was called the mansion tax, right? That clearly implies that the tax only applies to mansions, right? But when they realized that, no, this applies to all classes of real estate, including affordable housing projects, you kind of go, oh, wait a minute, that's not a mansion tax. That's something different. With outside investors, or whoever that wants to buy a property, are they also considering that when they sell, they have to make this 5.5%, right? Yes, it's going into their pro forma. So buyers now are putting into their pro forma that when they sell, they're going to owe another 5.5%. So what does that mean? It means land values go way down, right? Which is another reason you're not seeing as many transactions, is because it has driven down land values. And a lot of these are mom-and-pop businesses. Maybe a son inherited a site from his dad, and they've owned it for generations. And he goes, yeah, I think I want to get out of this business. He hires an architect. They put together a site plan, and he goes, wow, I could build 100 apartment units here. There'd be some affordable housing. It'd be great. But the next thing you know, he goes to try to sell it, and people say, your land's not worth much, right, because of this tax at the end. And he will have to pay the tax, too, because it will impact his property. So he has to pay the tax, and then a new buyer has to pay it when they develop and sell. Exactly. But then doesn't it increase the cost of the housing anyways? So if you come in as a developer, and you develop 100 units, then you will probably add the cost, this 5.5% to each unit, right? Well, effectively, in order to make your pro forma work with this transfer tax, you will have to obtain higher rents, right? You will have to obtain higher rents. Now, the reality is the market sort of sets the rents, right? The market kind of determines what rents are going to be. And how does the market set the rents? Supply and demand. It's all supply and demand. If you want to lower rents, you have to increase supply, right? We have a supply-demand issue here in California, and it's really, it's Econ 101. We've got a lot of demand and not enough supply. And what Measure ULA just did is it inhibited new supply. We keep hearing about this, like, there's a lot of demand, there's not enough supply. We also hear that some people are leaving the state, there's more people leaving than coming in. For some reason, the housing is, there's still demand. What's going on? What are your thoughts on this? Yeah, well, California's a great place, right? Don't get me wrong. I mean, we've got amazing weather. We've got some of the best universities, right, in the world, in California, a great quality of life. People want to be here. Good restaurants, bars, nightlife. I mean, there's much to love about California. You and I live here, right? The issue is there just hasn't been nearly enough supply. So even though demand might inch down a smidgen, right, and it's really not that much, the supply is so low that there's just so much catching up to do. So even that little bit of change in demand is not offsetting the fact that we're really supply-constrained in California. Why is the supply low? Good question. There's a few reasons, but it's very, very difficult in California to build housing projects. Very difficult and long. So let me kind of walk you through it. There's something called CEQA, which is the California Environmental Quality Act, right? And CEQA requires that local governments evaluate and disclose potential environmental concerns for all development projects and mitigate them or avoid them to the extent possible. Okay, that sounds reasonable at first glance, if you think about it. But let's sort of dig into it a bit more, because I think CEQA does need to be reformed. First of all, there's a timing issue here. So to get through the CEQA process, it can take two years. Just for the CEQA document, there's something called an environmental impact report. That can take two years to prepare to do the studies. It gets circulated for public comment, and then you have to be heard in front of a city council or a planning commission. So that's a two-year process. So let's say you own a site. Takes you about three months to prepare the application. Then you submit it. Then two years to get through the CEQA process, at which point you'll be heard by planning commission and or city council. And then you have another year to go through what's called plan check. You're advancing architecture drawings, submitting them to the city. They're giving you comments. That's quite slow. And then you have to build the projects, right? And that can take two to three years. So now you're at like six years, right, from start to finish for a housing project. I mean, to put it this way, and we have an 18-month-old baby, so now I measure time kind of in her age. And I'm thinking, if my wife had a baby when we started a new project, she'd be six years old by the time it opened, right? That's a really long time. It took us four years to get 573 units approved in Burbank on a big project. It's now under construction. It's great. We've got a lot of affordable housing in it, too. It's a great project. But turning back to other issues with CEQA, right? So we talked about the time. So what do you study in CEQA, right? You might think at first blush, well, are you studying pollutants in the air or contamination of groundwater, or what are you studying? And the answer is, a lot of what you're studying are things like the shade and shadow that you're building will cause others. Sound, so during the construction process, are you emitting too much noise, right? So there's a noise component to it. Traffic is a big one, right? Like, what are your traffic impacts going to be, and how can you mitigate those? And so the issue is, project opponents, all they need to do is find another consultant that disagrees with the CEQA study that you put together on, say, traffic or noise or whatever it is. And these consultants are pay to play, right? So you can find them out there. And they can just say, no, we disagree. We think there are significant impacts related to traffic, for example. And then they can sue you. They can sue your project. And this happens, by the way. I could give you some examples, but people are out there looking for projects to sue under CEQA. And it could be something like the red-tailed gnat catcher migratory bird many years ago might have nested in this location or something, right? And so they can put forth that type of an argument in an effort to litigate your project or slow it down. And in fact, we've had that happen. Could be unions, could be other groups of people, and they do this. And then somewhere along the way, you meet with them to try to address their concerns, right? And you go in there thinking, you want to talk about the red-tailed gnat catcher and what's really happening? Or are there ways we can mitigate noise or traffic? Or what can we do to appease your concerns? Because we're collaborative. We want to build great projects and work with the neighborhoods, and we do that. But oftentimes, we'll leave this meeting, and the conclusion is they want money, right? They want some sort of an extraction. And you kind of walk out of there going, what about the red-tailed gnat catcher? That was the issue, right? And so that kind of shows you that people are abusing CEQA, right? They're taking advantage of it. And that's not helpful. That's not helpful for building a house. And does that delay the process? I'm sure it increases the cost, right, when you have to pay that. It does. Yeah, it increases the cost. Time is money. In development, really, the most significant thing is time. So you could have interest expense, taxes, carry costs, whatever it is. Construction costs are rising. So it does. It adds time. It takes that long to get a project approved and then built. You can see why we're so underserved from a supply standpoint. And then that's why rents are so high. Before we continue, we would like to thank Shen Yun for sponsoring this channel. I lived in China for two years and experienced two different Chinas. One is the China we know now, unfortunately with communism. And the other is ancient Chinese culture with 5,000 years of history, strong values, ethics, and morality that has been lost. Shen Yun Performing Arts is reviving this 5,000 years of Chinese traditional culture. It takes you back in time to magical world of ancient China with a unique blend of brilliant dancing, beautiful costumes, and legends coming to life. Go to Shenyun.com to find out the schedule and theater information. It's a lifetime experience you don't want to miss. It's so inspiring. It makes me want to go dance. Breathtaking. I was very impressed. I'm taking my program and I'm going to mention it on the news because I think it's a great performance and people should see it. What I loved about the show was the authenticity of it. It was taking me on a journey. Exceptional. The technique involved that. The thousands of hours of training. People just float. Everything was exact and then they worked to the exact moment and it was beautiful. You go away feeling with a smile in your heart from it. Have to come. Life-changing. Make sure you see it. Don't wait. Get your tickets now. Chris, another thought that some of our audience members and experts have brought to us is that we are densifying a lot of our neighborhoods. We are developing a lot of housing. What are your thoughts on that? I think it's great. I think we should build more housing near transit. I'd love to see more walkable environments. I'd love to see housing near transit so we can get people out of their cars. When you think about the CO2 emissions from vehicles driving and traveling around, it's actually quite bad. It would be better for the environment to get people to live within walking distance of transit or where they work or shop or spend their time. I'm an advocate for more dense housing in these urban infill environments. What about a lot of people complain that now we're seeing all these apartment buildings going up. Yup. They're not also affordable. We are told this is affordable. We are doing all these developments. What are your thoughts on that? They end up being luxury apartments, right? There's an element of truth to that. There's a lot of development that's going on now. And like I said, it's really the market that sets the rent. So it's not as if a developer says, well, the market rent is $3,000. I'm going to charge $3,500 because you couldn't get that rent, right? So the market sets the rent and that's driven purely, purely by supply and demand. The other thing to keep in mind is that it's very expensive to build housing anywhere in California, right? We talked about the time component. Construction costs have escalated at a really rapid clip. And then cities are imposing pretty high fees, right? School fees, park fees. There's offsite infrastructure to support utilities and curbs, gutters, sidewalks, streets, right? All this investment goes into these projects. So by the time you're done, it's very expensive. And so you've got to think about how does that become economically viable? And the only way it can become economically viable is by kind of maximizing your rent, right? To make it work. And inflation hasn't helped. Higher interest rates certainly haven't helped. It's made it much more difficult for developers. We take a lot of risk, right? It's a very risky endeavor. So there needs to be some ability to have some upside. And that's just become harder and harder to accomplish as time's gone on. Some of these units are affordable, right? Yep. And what's the small portion of each development? What portion is it, generally? So yeah, good question. It depends on the city. Each city has its own requirements as it relates to the percentage of affordable, as a percentage of the total number of units. So for example, we have 862 units that we're going to build at the former Fry's Electronics site in Burbank. Right? Phenomenal market. Great city. We love Burbank. In the city of Burbank, it's a 15% requirement. A component of that is very low. A component of that is low. But it ends up being a lot of affordable units, which is great. Each city has its own requirement. It usually ranges from, call it, 10% to 20% of the total unit count as affordable. And when I say low or very low, that's a percentage of area median income. So basically, there's a calculation that says a tenant can't spend more than 40% of their income on rent. And then they take the area median income and they reduce it for very low or low by a certain amount. And that's how you sort of get your rents for those affordable units. So then these new housing comes into this community and ideally will lower the rents because there's more housing? Yeah. There's more supply. And I've had some lively discussions on Twitter and other platforms with NIMBYs, right? Not in my backyard. Why does more supply lower rents? And I go back to Econ 101, right? Supply and demand. And they intersect. And that's your price. So then these apartment buildings start competing with each other and offering incentives and discounts and free rent concessions and things like that. So the more supply we can bring online, the lower the rents are going to be. So we actually have some of our audience members, Californians, and some people who live in Burbank and they own businesses there, they've actually told us about this project you're working on. And they're frustrated because they're concerned that 1,000 units in that area might congest the area. There's already a lot of traffic. And some people have really, when they bought into a community, they kind of bought in for those single family homes and the environment and what are your thoughts on that? Yeah. It's a good point. And this is an issue and a discussion that we have with constituents and stakeholders pretty much for every project we build. In the case of Burbank, Burbank is in a housing crisis. In fact, the city council has set a goal to build 10,000 housing units. They're very undersupplied. Only a couple projects have been built in Burbank in like 30 years. At the same time, there's 150,000 jobs in Burbank, only 40,000 households. So it's like three and a half jobs for every house, which is pretty remarkable. So the city of Burbank for sure needs more housing. The city council has acknowledged that. And so the city council actually created a vision, right, in the planning department of where this housing should go. The site that we're talking about is the Fry's Electronics site near the Hollywood Burbank airport. Why is that a good site for housing? We're directly adjacent to the Metrolink station. So what we want to do is get people out of their cars. A lot of people are driving into Burbank every day. They're working and they're leaving, right? That's not good for the environment. This project is literally next to a transit station. It'll be connected to the transit stop. It's walkable to the Hollywood Burbank airport. So that's a great amenity for folks. And then you're right by a lot of office, right? There's a ton of office buildings and you're very close to Netflix, Animation, Short Drive to Disney and Warner Brothers and Nickelodeon. And so it's really a great location for housing. And so from our perspective, we think about where can we bring housing that's near transit, that's walkable, and what can we do to help make the community happy? In this instance, one thing that the city really got excited about is the amount of very low-income units that we're going to have in this project. So we're providing, this will be the largest number of affordable units in one project in the history of Burbank. So we've got a lot of low-income housing. So that's good for the area. And Burbank is really far behind on their RENET figures, Regional Housing Needs Assessment. The state of California looks at cities and they identify where they are in terms of production of housing and how much housing do they need over what period of time. And those cities that are not building enough housing are getting penalized. And Burbank has been identified as one of those cities that really needs more housing quickly. So it's evident that Burbank needs more housing. The question is where? When are people going to be happy with a big project like that going up? And I think if it's right near transit and it's near office and it's walkable, it's hard to get much better than that from my perspective. For you guys to develop single-family homes versus apartment units, condos or apartment rentals, what's the difference? Is one better than the other? Good question. It depends on the location. So we think about it in the context of really more of a suburban product. So if we're in a suburban area and within California, what does suburban even mean, right? But let's say it's Riverside, the Inland Empire, right? That was one of the fastest population growth parts of the country by far because a lot of people left the expensive cities like Los Angeles and San Francisco and they wanted more space and they're working remote, right? So they said, geez, I can get twice as much space with a yard. Maybe they're having kids or they have a dog and have attached, you know, two-car garage, whatever. So if we're building product out in, say, Riverside, and we are right now, we build larger units that tend to be lower density. If we're building, you know, a project in an urban infill environment where we're space, we don't have the space to do that. We're often building something denser like apartments. So we think about it more from a geographic standpoint. And if we can, we build lower density product in areas where it works. And that's just more suburban. So financially, it doesn't make a difference for you guys which type it is because some people said, okay, when you build these dense units, you make more money, right? Is that true? Nah, I mean, it's only true to the extent that, let's say you're buying an acre of land, you know, in Burbank or Santa Monica or wherever, right? On an acre of land, let's say you can fit 12 single family homes, right? You might be able to fit on that same acre of land, 100 apartments. And so you want to densify that for various reasons. You know, one of them is we need more housing. So it might not make sense, you know, to put 12 single family homes there. The other thing is markets are efficient. So if the zoning allows for 100 apartments, the owner of that site, right? When they go to sell it, they know in their head, they've already talked to appraisers and brokers and city planners or whatever. They know that that can support 100 units. So they're not going to sell it to somebody who's going to build 12 because you could pay more if you're building 100 units. So the price of land will go up. And based on what you're seeing, so we've been covering the state, you know, we have these housing allocations for each city. From what it seems like, what's coming down is more apartment housing. And then some of our audience members, they look at things and they say, okay, you know what, these are all rentals. Are we going to become more rental users? Is that how it's going to look? What are your thoughts on that? Yeah, I think yes is the answer. And part of that is just a trend in this post-COVID world. People want more freedom and flexibility. They don't necessarily want to be tied down to an apartment. In fact, there's a very popular new product type called BTR, build to rent, or you may have heard SFR, single family rentals. And what people are doing is they're building townhomes and single family homes, a subdivision, a community like what you might envision one of the big public home builders to do, and they're renting them out. There's a ton of demand for that. It's one of the most popular product types right now from an occupancy standpoint and rental rate growth standpoint. People want more space. They want the yards. They want the attached garages, but they don't want to buy. So that's a very popular product type. So even in single family homes and townhomes, you're seeing more and more people renting. You also don't need the down payment, right? And you also have flexibility. Let's say you want to move or whatever, right? You're not tied down to it. So it is true that renting has become more popular, and I think there used to be almost a stigma, right? Like the American dream was you owned a home and you built equity in it. Now the younger generation is kind of saying, I don't really want to be tied down to a home. I like the ability to move around and not have to worry about selling my house. People want that kind of freedom. So the narrative has shifted a little bit. So you think the demand from the people, from the consumers, is causing this shift to renters more, right? I do. I think it's more the demand. I think that's exactly right. I think it's the demand. I think if you're in an urban environment, people really don't want condos. I think that's part of it. I think you want to have dense apartment buildings. I think that's what works best. You want to maximize the unit count. And then I think even as you go more suburban, it's sort of a mix. A lot of people like the rental product, and then it depends on interest rates, right? Right now, we're in a period of time where interest rates have risen faster than any time since the 1980s. So when you have mortgage rates close to 7%, for example, it becomes a lot more expensive to own a home than to rent. I think over time, as interest rates drop, you'll see more people wanting to buy homes. So part of it is connected to interest rates as well. Chris, another question, since you're a developer, you're in this market, and you guys develop a lot of units. That has come to us, is that some of these projects, they don't need to have parking. And what happens is that it's impossible to not have a car in Southern California. Maybe in some areas in San Francisco and other areas, you can do that. But then people end up parking in that community, in that neighborhood. So you bought a single family home, and now there's a big apartment complex next to you that doesn't have parking, and they're going to park in front of your house. So this is upsetting a lot of people. It is. What are your thoughts on that? There's sort of two competing lines of thinking on this when we go to get a project approved, right? The reality is, today, most people have cars, right? Now it's different in Los Angeles, in Orange County, for example. Pretty much everybody drives. You go to like, let's say you live in the Gaslamp District of San Diego, or you live in San Francisco, it's actually pretty common to walk to work, right? So it kind of depends on where you live. In Orange County, in Los Angeles, everybody has a car. So if you're going to build an apartment project, and let's say you don't have enough parking, how are you going to rent a two-bedroom, even a two-bedroom with one parking space is tough. If you have two roommates, you walk in there, and you each have a car, they go, ah, you only get one space. You're going to go somewhere else, right? So you have to have enough parking. Now, 10 years from now, I don't know how long from now, we're going to have more self-driving cars, autonomous vehicles. And when we live in that world, I do think less and less people will have cars, and more cars will just be circulating through the system, right? And I think that as a result, we will see parking ratios come down, right? And they already have with the advent of Uber, and Lyft, and ride-sharing. That's become more common. But today, as we sit here today, we try to have one space per bedroom on every project we build. A three-bedroom can have two, but a studio has one parking space, a one-bedroom has one parking space, a two-bedroom has two spaces, and a three will give two, too. So that's quite a bit of parking. Are there any other regulatory things that are out there that are causing the supply of housing to be low in California? So we talked about project approval timelines in CEQA. That's a big one. We talked about taxes and fees, right, the mansion tax. I'd say the third is regulatory concerns, right? And so there's a big hot topic right now on rent control. So on the November 2024 ballot will be the Justice for Renters Act. This is the third time rent control has been on the ballot in California. Prop 10 was on the ballot in 2018. Prop 21 was on the ballot in 2020. In both instances, it lost by 20 points. Roughly 60-40 each time. So Californians have really loudly and clearly said they don't support rent control. They don't want the government stepping into their home and saying, we're going to tell you how much you can rent your house for. And if your tenant leaves, we're going to tell you how much you can raise rents on the new tenant, right, or each year. So this is something Californians don't want. Price controls don't work. Let me give you an example. This is an example I give people often when we're talking about rent control. A lot of people might think this is a good thing because it's going to cap. Because a lot of people cannot afford the rent because the rents went up significantly. You're right. Rents went up significantly, and we need to solve that. And my answer to how we solve that is we need more supply, right? And economists agree that supply and demand are what determine rent. So we need more supply. So what we need to do is make it easier for developers to build. Here's the issue, and I'll give you a couple examples. Rents, let's say that you're capped at raising rents 3% a year, right? But your operating expenses, insurance, taxes, interest expense are rising at 8% a year. All of a sudden, you own a property and you have negative cash flow. That doesn't make any sense, right? I'll give you an example outside of the context of real estate, and then we'll come back to apartments specifically. Let's say you make briefcases, and it costs you $20 per briefcase to make. You're selling them for 30, so you're making 10 bucks a briefcase. All of a sudden, the state of California says, we got a briefcase problem. You have to sell your briefcases for 18 bucks. You're going to go, well, what are you going to do? Let me ask you. So you could make them for 20 and sell them for 18 in California. Or you could go sell them at market in other states. What would you do? Definitely go to another state. You have to, right? I mean, it's a business. You can't operate your business when you're losing money. It just doesn't make sense. Or we'll do it, and we lose money, and then we cover it on the show. Yeah, yeah, exactly, exactly, right? So that's really what price controls are. And so to kind of give the viewers a little bit of some background, there's a law in California. It's called Costa-Hawkins. This went to the California Supreme Court. And basically, it prevents local governments from instituting rent control on any project built before 1995. And so rent control means a government can't tell you how much you can raise rents each year. And when a tenant vacates, you can set rents at whatever you want, right? That's called vacancy decontrol. And so this new ballot initiative, Justice for Renters, which is very similar to the two that already failed in 2018, 2020, will allow local governments to institute whatever rent control they so choose. And that'll differ depending on the market. In Irvine, you probably won't see, you might not see anything. In Santa Monica, you might see some very, very robust rent control of 3% per year. Plus, if a tenant vacates, you can't increase rents to market, right? Whatever it is. And as a result, you're going to see much less new housing. And I'll back that up in a couple of ways. One, there's a 2019 study that came out of UC Berkeley, and in fact, another one out of Stanford. And those two studies analyzed other markets, like New York, where rent control was instituted. And they concluded that when rent control was instituted, new supply dropped 15%, right? Thus undermining the whole purpose of rent control. All of a sudden, housing supply goes way down. What does that mean? You're creating a game of musical chairs, right? There's very few units available in the market. They're all full. They're on rent control. And people don't want to leave. So you have this kind of game of musical chairs. It really is not going to solve the problem. What we need to do is create a lot more supply. There's a survey of like, I don't know, 700 investors and developers. And they were asked the question, if rent control passes in California, are you still going to build housing here? And the answer was no, we're going to go somewhere else. We're not going to build into a market where the government can control how much you can charge for rent, especially when expenses are going up. But yet, rent can't keep up. That's not going to attract capital. So investors are going to look at California, and they're going to go, no, we're not going to build there. We're not going to build there. So that just, unfortunately, it doesn't work. Now, I agree, rents are too high. I don't disagree with that statement. And I agree that we need to bring them down. So I'm aligned with those folks. What we don't agree on is the solution to solve it. And the solution to solve it is not to inhibit new supply. It's to create more supply. So you see all these regulations, all these issues that we're facing in California. The cost of housing has gone up. Some people have left the state. What are your thoughts on California and housing? Sure. We are and remain very bullish on California. We're long California. I live in California in West Los Angeles with my wife and baby. We love it. And I'm very bullish on the long-term prospects of California. We have very diverse demand drivers, right? Whether it's media, tech, entertainment, insurance, health care, leisure, and hospitality, there's a long list, right? And so there's great demand drivers, excellent universities, good weather. The universities provide good pools of talent for these companies. It's not a perfect state. We'll get into homelessness on an upcoming opinion piece that I'm going to do that maybe viewers want to listen to. We have an exciting news for you. At California Insider, we created a new product. It's called California Insider Opinion. This is where our insiders and experts across the state are actually telling you what's going on behind the headlines. When there is a breaking news, a big issue, important issue happening in California, they're going to come on the screen and tell you what's happening behind the scenes. And these are like 7 to 10 minutes of opinion formats where the guests are talking to the camera directly telling you what's happening. Let's get into the first one. We're in a housing crisis. And why are we in a housing crisis? And why are rents so expensive? Make sure to look at the description below because you want to sign up and you want to follow this YouTube channel and also sign up on our newsletter because a lot of these opinions might be very sensitive that some people in the social media platform may not like. So we're putting them in the newsletter on our website so you can have them. These opinions will actually help you understand the political and policy landscape of California. We highly recommend you follow it. That's one of the issues. But overall, we're bullish on California. We think that with some good common sense leadership and some good policies that will continue to bring in new housing supply, and there are many in the pipeline, and the governor's done a good job of adding some good legislation to help. I think that we're going to see more housing supply come online. I think you're now going to see kind of a reversion to the mean. Work from home is sort of settling out a little bit, right? And I think you're going to see people who move to Texas and they go, wow, it's like 100 degrees for four months in a row. And now, and even now, it's like freezing. They got to deal with that too. I think they're going to go, eh, I kind of want to move back, right, to California where it's walkable and it's sunny and go to the beach in January. I mean, this is a good life here, right? So I think you're going to see people start to kind of move back to California. And long-term, people have been saying for decades, should we invest in California? Geez, we're worried about regulatory risk and other concerns. They all missed out, right? People have done very well here. So we have a long-term focus on California. We're optimistic on California, and we're going to keep working hard to solve the housing crisis here. Chris Tortolat, Managing Director at Latera Development. It was great to have you on California Insider. Thank you so much for having me. And I like your suit, by the way. We've got good style. Excellent. Thank you.