May 15, 2019 - From the May, 2019 issue

An Open Letter to Scott Wiener: SB 50 Empowers Wall Street to Commoditize Housing By Right!

On May 9, state Senators Ben Allen and Scott Wiener (pictured) and Santa Monica Mayor Gleam Davis led a town hall on solutions to California’s housing crisis and SB 50 (authored by Wiener). Struck by an apparent lack of evidence to support the approach of the upzoning bill and wanting answers to practical policy questions raised by the mandate, Hydee Feldstein, a retired bankruptcy and commercial finance lawyer who now serves as vice president and co-chair of the Land Use Committee of the P.I.C.O. Neighborhood Council, penned an open letter to Senator Wiener identifying alarming, and legally well-crafted, pocket-lining loopholes that she believes would permanently impact, if enacted, communities across California. She asserts: “SB 50 harms existing residents and favors the intrusion of nameless, faceless capital into our homes, whether owned or rented.” Feldstein notes in the letter that Senator Allen listened and responded to constituent concerns raised at the town hall with his commitment to oppose SB 50, unlike Senator Wiener, who left the town hall after sharing his talking points.

Scott Wiener

​"Who doesn't understand that the deck is stacked against homeowners, tenants, future owners and renters whenever and wherever investment capital pools dominate housing?"—Hydee Feldstein

Dear Senator Wiener, 

My approach to SB 50 is based on respect and on the assumption that we are both acting in good faith. However, I believe the impetus behind SB 50 seeks to maximize real estate investment capital in California. SB 50 treads heavily on California’s social and financial future and provides rocket fuel to speculative real estate and financial markets­—the same markets that boomed and then crashed so badly in or prior to 2007-2008.

Intended & Unintended Impacts of SB 50

Hours have been spent digesting the complex provisions of SB 50. It is doubtful that legislators and analysts understand the impact and unintended consequences. The inescapable conclusion is that SB 50 is not about affordable housing at all, but about providing scale, standardization and certainty to securitizations and financial markets. To the extent that SB 50 is about housing supply, its provisions are designed to maximize the creation of housing supply that is inventory-bound for global capital markets and to minimize the type of housing supply that is the result of good planning and socially-functional residential neighborhoods.

Home ownership represents the vast bulk of what wealth is left for working and middle class homeowners and is the most common wealth creation entry point for working and middle class individuals and families, particularly those of color. Homeownership, tenancy, and small landlord wealth creation are the pocket that global capital wants to appropriate for itself and there is no question in my mind that is what SB 50 (as well as other bills like SB 330 and AB 1485) accomplishes.

Losers Under SB 50 As Currently Drafted:

Tenants and individual landlords also stand to lose under SB 50. By its terms, SB 50 claims to exempt rental property for a long lookback period, but the information database necessary to enforce these provisions does not exist. Even if it did, what about structures developed within the relevant period of time and held as vacant land? There is no timeframe for the demolition of structures to convert the parcel into vacant land, and that is a big loophole. 

Small or individual landlords (like me currently) often rely on rental income to live and, out of sheer economic necessity, are responsive to the normal supply and demand fluctuations in the housing markets. In a down market, like the one we experienced in 2008-2011, "mom and pop" landlords necessarily lowered rents in response to vacancies. The development, securities, and securitization markets have no such constraint. Rents for new developments remain stubbornly high and occupancy rates consistently low, often for years after completion when rental rates are determined by the yield and cash flow promised to investors.

These markets have deep pockets and patient capital, so unlike an individual owner facing mortgage, tax, and insurance payments, as well as the need to fund living expenses, REITS and securitizations create units that will sit on the market until they attract the high rentals promised to investors or until they are washed out by a crash and emerge on the other side of Chapter 11 bankruptcy proceedings, reorganized or sold, but still in the hands of investment capital.

Our differing perspectives may originate from our different work experiences. I spent at least 25 years of my 30-year career practicing law in the financial markets (both as a boom-period banking, finance and financial markets lawyer and as a bust-period business, finance and financial markets bankruptcy lawyer). 

My intent is NOT to attack you personally or ascribe bad motives to your persistent support of these types of bills. It is possible that you have been persuaded and hold the honest belief that more housing supply of any type is a way to fix the homelessness crisis or the housing shortage. But I am writing to make a public plea to you, 120 legislators, and Governor Newsom to recognize that SB 50 is not a path out of a housing or homelessness crisis at all. Indeed, it would result in massive displacement, create greater wealth disparity, and build zoned housing that is increasingly segregated by economic class, social standing, wealth, and creditworthiness.

Apparent Impetus Behind SB 50:

Providing incentives to capital-starved areas has often been a tool of, but never should be a substitute for good planning.  SB 50 removes local control and any planning function entirely even though we are have no lack of capital seeking yield, leaving our homes at risk to investment markets—the same markets that boomed and then crashed so badly in or prior to 2007-2008—from timeshares to the zombie CDO mortgage lenders to what I have been informed is a more recent investment product, particularly attractive to investors in China: the NBO (Never Been Occupied vacant units intended to stay vacant as inventory held for resale or rental but only after appreciation targets are met. The vacant unit dynamic is playing out in the purchase of market rate starter units as in Houston and in the drama of the still half-vacant billionaires row in New York City).

Most of the provisions and amendments in SB 50 are industry-driven. By omission, the bill would permit single-family McMansions and compounds on lots zoned for single-family and duplex residences*. Citizens have a hard time believing Sacramento could possibly do something like this: eliminate density and otherwise upzone a low-density parcel, but not require a single unit of additional housing, encouraging McMansions and luxury, out-of-scale townhouses or rowhouses without any additional housing and without any affordability component. If you do nothing else, please amend SB 50 to ensure that no development is eligible for its entitlements unless the development at least doubles the housing supply that it replaces or for which a parcel is zoned. 

This is investor-driven and adds nothing to housing supply of any type. A bigger single-family house, for example, on a lot that used to have a duplex actually reduces housing supply, but maximizes the mortgage loan dollars that can be syndicated or securitized.At a bare minimum, SB 50 should ONLY apply to multifamily residential housing, and must exclude any single-family neighborhood project or single-family housing development to ensure there is an increase in housing supply in exchange for SB 50's density entitlements.

Inclusionary housing for affordable housing is full of success stories for residents, but removing the requirement for inclusionary housing be onsite is a nod to financial market investment pools. There is no developed market for mixed market rate/affordable residential projects, particularly not now that SALT (or the Federal Jobs Act and Tax Cuts Act) limited the tax credits for these projects. Including parcels that are two-thirds residential use and one third "non-residential" in residential neighborhoods is anathema to residents who favor mixed-use along existing commercial corridors—but there is an investment market for that type of development, gaining scale at the REIT level in particular in the 2016-2017 time frame.

Intentional or Unintentionally Permitted by SB 50:

A five-story, mixed use project with a liquor or grocery store, restaurant, gym, florist, or cannabis facility in the middle of a residential zone is unheard of, and yet that is what SB 50 appears to allow. And in the most undemocratic way by failing to preserve notice or review requirements for anyone. SB 50's provisions confer a windfall to developers without requiring any payment or fee.

Absence of Local Authority/Public Notice:

SB 50 overrides local control and fails to preserve public notice. Under the bill, local control would become a cafeteria-style menu of choices for developers to select from on a wildcard, parcel-by-parcel basis. Consequently, SB 50 would ensure that the investment capital and the financial markets always hold the dealer's choice and will always select the type of project based on what investment product will sell to the public (or the public's pension plans) at the cheapest pricing for capital.

The Winners:

The deck is stacked against homeowners, tenants, future owners and renters whenever and wherever investment capital pools dominate housing. SB 50 is anti-democratic and anti-citizen participation.

By the time of the next crash, speculators and investors will have exhausted enough housing inventory acquired since the last bust to emerge richer and better off. At least some of the investors, particularly in the NBO markets, will have cushioned their downsides with the acquisition of EB 5 Visas. 

Single- or two-family dwellings will be left with sunken property values in the crash that follows, and the market will again be ripe for funds and other long-term pools of capital to acquire property and hold as inventory for the greatest gain in the next cycle. Developers and investment professionals need new sources of supply to remain in business. That is precisely why Wall Street has continued to buy more real estate—but at the bottom starter home end of the market.

Interests Unprotected by SB5 0:

A residential community, whether urban, suburban, or rural, is made of more than just structures. Residents care about and need planning for open space, urban canopies, infrastructure, utilities, city services, schools, parks, evacuation routes, and other emergency plans. None of that really matters to absentee owners or REIT landlords, and, the fact is, SB 50 protects none of that. So even ignoring the issue of local control, SB 50 harms existing residents and citizens and favors the intrusion of nameless, faceless capital into our homes, whether owned or rented. Whenever vast amounts of residential real estate is commoditized and sliced up for sale on the global capital markets, Main Street loses and Wall Street wins big.

Investment capital can be patient; it has the deep pockets to hold onto carefully targeted real-estate inventory through cycles and the resources to build the maximum permitted on any land held as inventory to maximize profit. SB 50 would create an investment bubble that would have not only decades-long, but in this case, permanent consequences in California when that bubble bursts. 

Real-estate investment bubbles are created, and have burst, whenever residential real estate is regulated to create securities for trade on the capital markets rather than to meet the needs of residents and well-planned development. SB 50 creates a global investment market out of phase with housing markets and in phase with investment and financial markets. Individual landlords, one and two family housing, and rental markets will be ground zero for the displacement caused by SB 50.

Lessons of 2008 Crash Disregarded:

California needs legislation to improve rental markets with rent stabilization protections, to build housing with affordability requirements in public-private partnerships or with not-for-profit developers, and to limit speculation by absentee landlords and lenders. The experience of many California homeowners between 2008 and 2011— who faced foreclosure due in large part to unresponsive mortgage holders who were, all too often, offshore securitization vehicles—will be repeated under the bubble created by SB 50's, except this time renters and homeowners will share that fate.

This particular bubble-in-the-making carries real dangers of losing forever our local historic places and our unique and diverse communities, none of which can be recreated once destroyed; hollowing out the home equity of our middle-class homeowners and retirees; and further distancing and marginalizing the unsheltered and the working and middle classes out of our central cities, while permitting the uber-wealthy to actually reduce housing stock to create compounds and McMansions, as Mark Zuckerberg reportedly did in the center of Palo Alto.

Boom cycles in real estate typically run for a bit over a decade. SB 50 coincidentally runs for about a decade and then expires. That adds another element of certainty to the capital markets. If the bust does not hit before then, the expiration of SB 50 will surely plunge the housing market into a correction. If the bust hits before then, no problem, because our sensitive communities will be available fodder in 2026 for the construction and densification SB 50 imposes (just in time for the 2028 Olympics in Los Angeles).

Our stable, diverse communities will devolve into homogenous bubbles segregated by wealth and class, and our cities will emerge with the scarring legacy of an unplanned crazy patchwork quilt of development. Spotzoning at for-profit developers’ whim will only yield luxury, out-of-scale development built as cheaply as possible. The problems will not emerge for years after construction, and these structures will endure as blight on the surrounding communities long after the investment tidal wave has receded. 

Alternative Solutions For California’s Housing Crisis:

You asked the audience in Santa Monica for ideas and solutions. At the same April 30 Town Hall cited above, Brad Kane, the president of one of the neighborhood associations sponsoring the event, talked about a list of solutions. I have a somewhat different list (below), but have adopted some of his as I found the data to support them.

The quickest and most promising in my opinion are a vacancy tax and a foreign buyers tax, which would return housing stock to residential markets or increase the cost to capital market buyers of keeping units vacant to drive prices up. The money raised could fund or subsidize some of the other proposed solutions for shelters and supportive housing or inclusionary affordable housing.

I am happy to speak at a town hall, by telephone, or in a private meeting with you or your staff. You have the responsibility, not only to your own constituents, but also to your colleagues in our state Legislature, to the Governor, and to the public trust to stop ducking these important issues and respond. SB 50 has gotten this far in stealth mode. This letter is an effort to start a public and constructive dialogue.

Hydee R. Feldstein
Los Angeles, CA

CC: Selected federal, state and local legislators, members of the press and concerned citizens

DISCLAIMER: Neither this email nor any other communication from me is legal advice, a legal opinion or any other rendition of legal services. I am communicating strictly in my capacity as a citizen and stakeholder volunteer. No one may rely on this or any other communication I send as legal advice. This is not a solicitation for legal services and you need to consult your own counsel for legal advice and accuracy. I am acting as a volunteer disseminating my perspective on aspects of the political landscape as I see them and am not acting or seeking to act as a lawyer, representative or lobbyist.

*Specifically, in jobs-rich or transit-rich areas, this bill is akin to "spot zoning" because the developer that bought a parcel from a single family homeowner can, at its discretion, choose whether to build any of the following: a single family McMansion with no additional housing component; a set of single family five-story (or more if "stacked" with other density bonus laws) townhouses, with up to 10 units without requiring a single unit of affordable housing or contribution; apartment buildings with market-rate micro units of any size with limited affordable housing requirements that can be satisfied by paying a fee or building a tiny bit of affordable housing offsite; multifamily buildings that, depending on how they are combined with other density bonuses or TOC, could rise up to 85 feet high in some areas without factoring in the cost of new infrastructure, safety evacuation measures, or increased services (trash, police, fire, etc).


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