MacFarlane Real Estate, Inc.

I recently met with a potential client who was served a “3-day notice to pay rent or quit”…which happened to be improperly served…which came after a 60-day notice to vacate had been served two weeks prior…which happened to have been rescinded days later by the attorney…MY POINT IS THIS: the Rent Stabilization Ordinance of Los Angeles (aka “rent control”) is complicated enough, but throw in Rent Escrow Account Program (REAP) regulations and someone is bound to foul things up.  There are many victims when attorneys, property management companies, housing authorities and tenants are playing with bad information.  By the way, in the example I mentioned above, the property was just recently taken back by the bank (current owner) from a delinquent owner (original landlord/lessor).  Sound familiar in today’s real estate climate?

Based on my discussion with the potential client, I thought I would share one important piece of information when it comes to evicting tenants in Los Angeles when the subject property has been accepted into the REAP program.  Among the many legal steps a landlord must take before, during and after an eviction action, REAP introduces a handful of other considerations.

Prior to initiating an eviction action against a REAP tenant, the landlord must request verification in writing from the Los Angeles Housing Department (LAHD) that the tenant has not paid rent into the REAP account.  LAHD must respond within three (3) business days.  The landlord shall not initiate any actions to evict on the basis on nonpayment of rent without making this inquiry.  Naturally, if the landlord receives confirmation that the tenant has paid the rent to LAHD, no eviction action shall be initiated based on nonpayment.

A common question in the minds of many property owners familiar with the Rent Escrow Account Program (REAP) is what are the REAP funds used for?  Many owners assume the funds will be used to assist with funding the rehabilitation work necessary at the property.  This is partially true; however, the property owner must meet certain qualifications before the money will be used for that purpose.  In addition, the Los Angeles Housing Department (LAHD) deducts a non-refundable administrative fee of $50.00 for each individual rent payment made to LAHD per month, per unit.

Below are scenarios where LAHD will consider the withdrawal of funds by the owner from the REAP account, upon review hearing by the LAHD General Manager (Los Angeles Housing Department - Rent Stabilization Ordinance - Section 1200.00, et seq.):

1. When such release is necessary to prevent a significant diminution of an essential service to the building, including utilities, trash services, security, pest control, and managerial services as required by state law.  When a request for such release is not supported by the tenants, the burden is on the landlord to show financial hardship preventing payment of such services beyond a mere negative cash flow for the property.

2. When necessary for the correction of deficiencies including, but not limited to, those that caused the building/unit(s) to be placed in REAP.  When a request for such release is opposed by the tenants, the burden is on the landlord to show financial hardship preventing the correction of deficiencies beyond a mere negative cash flow for the property.

Within twenty-one (21) days of receipt of a request for release of funds, the General Manager will hold a hearing to review the owner’s request.  In situations posing imminent health and safety threats, the General Manager may order the release of funds without a hearing or on shortened notice.

LAHD goes to great lengths to state that a request for release of funds shall not be considered if based solely on negative building cash flow or the owner’s inability to obtain a loan.  This leads property owners to believe that LAHD is more concerned with the overall financial capabilities of the property owner, as opposed to the financial condition of the specific property at issue.

REAP is a fairly new program and no substantial precedence has been set on this issue.  In short, it appears that LAHD is limiting its REAP account withdrawals to owners who are financially unable to proceed with the necessary repairs on their own.

Once a property is formally accepted into REAP, an escrow account is established by the Los Angeles Housing Department (LAHD).  Rent payments from tenants of the property may be deposited into the escrow account.  Interestingly, the tenants are not required to pay their rent into the REAP escrow account.  However, the City of Los Angeles may seek a court order forcing the property owner to remand any rents received from the tenants while in REAP.  The City of Los Angeles can only seek this relief if: 1) the units have been in REAP for at least six months; and 2) an average of less than 50 percent of tenants in the building have been paying into REAP on a monthly basis.

Each month while the property is in REAP, LAHD will provide the property owner with an accounting for all rents paid into the REAP escrow account and any deductions.  Once a property is removed from REAP, a full accounting of rents paid into, and deductions taken from, the escrow account will be provided.  All rent money deposited into the escrow account and not expended will be returned to the legal owner of the property at the time the property is released from REAP.  If there is an ownership, foreclosure or control dispute and an objection to the release of the funds is filed, LAHD will retain the funds until the dispute is resolved either by court order or private agreement.

I will cover LAHD-mandated rent reductions while a property is in REAP and situations when a property owner is allowed to make withdrawals from the REAP escrow account in later posts.

As mentioned in previous posts on the Rent Escrow Account Program (REAP), once a notice accepting the property into REAP has been mailed to the landlord, the property owner has fifteen (15) calendar days to appeal the REAP acceptance.  The appeal must be submitted on the appeal form provided by the Los Angeles Housing Department (LAHD) and must include the specific grounds for appeal and the names, current rents, and rent due dates of all tenants subject to REAP.  The property owner (appellant) must provide the specified amount of copies of the appeal request when submitting the appeal.  If no appeal is filed, the property is automatically accepted into REAP.

At the appeal hearing (often combined with the General Manager’s Hearing), typically the property owner, the tenants and any enforcement agency or other related party will be in attendance.  Parties are given the opportunity to present documents, written declarations and any other evidence relevant to the proceedings.  Preparation by the property owner in advance of the appeal hearing is crucial.  The hearing is a valuable opportunity for a property owner to tell their side of the story and potentially halt REAP acceptance.  Therefore, every effort should be made to present a thorough case.

The tenants and/or enforcement agencies may present proof that particular violations, although only discovered in potential units, are widespread and therefore additional units should be accepted into REAP.  Tenants and/or enforcement agencies will likely present photographs and reports produced during previous inspections of the property.

The property owner and/or his advocate may present proof that REAP is inappropriate because the violations at the property were caused by the tenants.  The property owner may also present justifications for avoidance of REAP based on the best interests, health and safety of the tenants.  The burden of proof falls on the appellant property owner to demonstrate his/her case by a preponderance of the evidence.

This is the property owner’s opportunity to enlighten the decision-maker.  The presentation must be fact-based, supported by evidence and to-the-point in order to be effectively persuasive.  Hiring an attorney to advocate on your behalf or at the very least provide guidance and assist in preparation for the hearing can be very helpful.

After a property owner receives an Order to Comply from the Los Angeles Housing Department (LAHD) listing the deficiencies at the property and demanding the required repairs, the property owner has a certain allowable time to make the repairs.  If the property owner fails to make the repairs in a timely fashion, the property owner runs the risk of being accepting into the Rent Escrow Account Program (REAP).

Once a notice accepting the property into REAP has been mailed to the landlord, the property owner has fifteen (15) calendar days to appeal the REAP acceptance.  If no appeal is filed, the property is automatically accepting into REAP.  If an appeal is filed by the property owner, he/she will have until the date of their General Manager Hearing to attain compliance (IMPORTANT: the property owner must obtain an LAHD “sign-off” before the General Manager Hearing date to prevent the property from entering REAP).

After the General Manager Hearing, a decision will be issued determining whether the property will be accepted into REAP.  This decision may also be appealed.  This appeal must be filed by the property owners within ten (10) days of the General Manager’s decision (IMPORTANT: this appeal does not grant the property owner additional time to comply with the repair demands).

If the propery is accepted into REAP, the property owner must follow a detailed procedure and timeline to ensure compliance and eventual removal from REAP.  Most importantly, all cited violations must be repaired, as well as any other known or discovered deficiencies.  Once the repairs have been made, the property owner must contact the REAP offices at (213) 808-8500.  A REAP representative will determine over the telephone whether the property owner appears to be ready for removal from the program.  If so, the REAP representative will request that the Outreach Contractor assigned to the subject property schedule a site visit with the property owner.

During the site visit, the Outreach Contractor will issue either a positive or negative report.  A negative report naturally means that the repairs are not sufficient and the property is still in violation.  A positive report means that LAHD will request that the property owner contact the Case Manager assigned to the subject property to schedule a final inspection to obtain a potential “sign-off.”

Once a positive report and “sign-off” are obtained, REAP will review whether there are any other outstanding orders or failed inspections on file with Building & Safety, Department of Health Services or the Fire Department.  Also, the property’s Los Angeles Department and Water and Power bill must be paid in full.  If there are no outstanding order or failed inspections and the water and power bill is paid, REAP will make a recommendation to the Los Angeles City Council to remove the property from REAP program.

If City Council adopts to remove the property from the program, REAP will issue a 30-day notice formally closing the REAP account and restore the rents to their original levels.  After the property is removed by CIty Council, the property owner is responsible for paying all REAP administrative fees, inspection fees, systematic code enforcement fees, legal preparation fees and two pre-paid annual inspection fees.  If tenants have made deposits into the property’s REAP account, these monies will be used to cover these fees.  Once the fees are paid, REAP will prepare a termination document and send the paper work to the County Recorder’s Office.

Too often, property owners drag their feet as they are uninformed regarding the requirements and procedures of REAP.  What could realistically take a couple months, many times can last over six months or longer.  Property owners must educate themselves on the REAP process.  No property owner plans on being accepted into the program, however in the event it does occur, a property owner needs to be prepared and/or seek the guidance of someone knowledgeable in the field.

REAP (Rent Escrow Account Program) is a program managed by the Los Angeles Housing Department (LAHD).  REAP is an enforcement tool created to ensure that Los Angeles property owners maintain their properties in a safe and habitable condition.  A property is generally placed into REAP after the property owner has been put on notice of certain violations in an Order to Comply from the Los Angeles Housing Department and the property owner has failed to take adequate and timely action to remedy such violations.

Property owners face grave consequences if their property is accepted into REAP.  Tenants may be required to pay their monthly rent directly to LAHD instead of the owner.  The owner will be subject to a per-unit monthly charge and fees for each LAHD inspection conducted at the property while in REAP.  Notice of REAP is recorded against the property’s title.  The owner is limited in how it may conduct evictions and rent increases–during and after REAP.

The number one priority of a property owner who has received an Order to Comply should be to hire a licensed contractor to review the Order to Comply and LAHD inspection reports and repair all violations.  If swift action is not taken, the property owner runs the risk of entering REAP.

The procedures a property owner must comply with in order to remove his or her property from REAP are complicated and can take several months, if not longer.  Once in REAP, beyond hiring a contractor to perform repairs, there are hearings, re-inspections, fee schedules, potential appeals and other restrictions and timelines to follow.  I will be posting a general timeline of responsibilities associated with REAP in the near future.

It can be beneficial for a property owner in REAP to consult with a real estate attorney familiar with the policies of REAP and the Los Angeles Housing Department.  

For more information on REAP, visit the Los Angeles Housing Department website.