It wasn't a reckless thing to write. Back in February, the consensus had the funds rate ending this year somewhere near 3.1 percent, all-in commercial borrowing costs drifting from the high fives back toward the low fives, and industrial cap rates compressing thirty or forty basis points on the strength of it. Lenders wrote extensions against that view. Sponsors sized capital calls against it. A lot of 2019 and 2020 paper got another eighteen months on the theory that eighteen months would be enough.

Eight months in, the funds rate is 3.50 to 3.75. It hasn't moved since December. At the July meeting, the committee held 9 to 3, and all three dissents were for a hike.

And the number that was supposed to deliver the cut is being rebuilt. The Fed's preferred inflation gauge is PCE, personal consumption expenditures, which the Bureau of Economic Analysis calculates, and most of us outside the rates desk have never had much reason to think about. Wednesday's report will be the last one prepared under the current formula. The agency is changing how it handles computer software and accessories, since AI demand has done strange things to those prices, along with investment and legal services. BEA revisits its methodology regularly, usually in the fall, so there's nothing improper here. Economists put the effect at a tenth to three tenths off the reported number. PCE sits at 3.7 percent today.

That revision lands about three weeks before the FOMC meets on the 15th and 16th of September, with a new dot plot, in an administration that has been loud about wanting rates lower.

None of it is the number we borrow against.

Commercial real estate doesn't price off the funds rate, and it doesn't price off PCE. It prices off the 10-year and SOFR, plus a spread set by the lender. And while the industry watched the front end, the long end moved in the opposite direction. The thirty-year touched 5.34 percent on August 17th, the highest it's been in nineteen years. The ten-year printed a twenty-month high of 4.75 that same week. Two-thirds of the 392 people Bloomberg surveyed on the 19th expect the ten-year to be above 5 percent by year-end, a level it has barely reached since 2007.

Treasury is now at least doubling its long-maturity buybacks to $4 billion next quarter. That is a lot of institutional effort focused on a single number.

The ten-year is three things stacked on top of each other: what the market thinks short rates will average, what it thinks inflation will average, and the term premium, which is what an investor demands for holding duration through whatever happens next. Term premium is where doubt goes.

Ease the front end while inflation runs near 3.7, and the long end doesn't follow you down. That isn't a forecast. It's a description of the last six weeks. The front end sat still, and the back end sold off.

Whether the revised print reads 3.4 or 3.6 is, for our purposes, a rounding error. The people who set the long end also read the methodology notes.

Run it at the loan level, because that's where this stops being commentary. The Mortgage Bankers Association counted $875 billion of commercial mortgage maturities in 2026, roughly 17 percent of everything outstanding, with another $652 billion behind it in 2027. Most of that is 2019 to 2021 paper. Coupons in the low threes, sized against a ten-year under 2 percent.

A borrower with a 3.25 percent coupon coming due this fall isn't refinancing at 3.25. Today's quotes run from about 5.7 percent on the strongest multifamily credit to the mid-sixes on CMBS, and the older suburban office is wider than that or isn't quoted at all.

The sizing test has changed too. In 2021, the binding constraint was the loan-to-value ratio. In 2026, it's debt yield, net operating income over loan amount, so the lender's question isn't what the building is worth; it's what it earns against the dollars. Both tests get harder when the long end rises.

A quarter-point cut in September would help one group: the floating-rate borrower whose loan is SOFR plus a spread. That's real money, and we shouldn't wave it off. It does nothing for the fixed-rate maturity, which reprices to the ten-year, and the ten-year has spent this summer going the wrong way.

So what changes in how we underwrite?

We stopped modeling exits off the policy rate. Every refinance assumption in every hold gets tested against the ten-year now, and we test it high. Wrong in that direction costs a reserve. Wrong in the other direction costs a capital call.

We're having the amortization conversation with lenders eighteen months out instead of ninety days out. A lender with time to work is a different party than a lender staring down a maturity next quarter.

And on the buy side, the seller whose whole plan was a cheaper 2026 refinance is the seller we want to be talking to. Not because anyone enjoys that. Most of them are capable operators who bought a good building on a rate that didn't hold.

The Bureau of Economic Analysis can change the recipe. The Fed can cut, hold, or hike, and in September it will do one of those in front of a fresh dot plot. None of it moves the maturity date on a loan signed in 2021.

That's the number to put on the wall. Not the inflation print and not the funds rate, but the day the note comes due, and where the ten-year is standing on that day.

We believe we see what the market has already done, and it isn't telling anyone to wait.

— Christopher C. Rising

CRED iQ’s July numbers put overall CMBS distress at 10.91%, up from 9.97% in April. Delinquency, the number everyone quotes, rose 24 basis points to 8.68%. Special servicing rose 42 basis points to 10.38%. That was the largest single-month move of the year and nearly double the delinquency move. Loans are going to special servicing ahead of default. Some are tied to an upcoming maturity, some to a cash-management trigger, and some to a borrower who picked up the phone before he had to. The servicers aren’t reacting to a credit event. They are getting in front of one.

The office sector is where it shows up hardest: 16.65% distress, roughly 53% above the market average, with special servicing doing most of the driving. Office delinquency alone hit a record 12.34% in January. None of that will surprise anyone who has sat in a workout meeting this year. The calendar underneath it gets less attention.

$76.6 billion in CMBS hard maturities land in 2026, fixed-rate debt at maturity, plus floating-rate debt with no extension option left. Include everything extension-eligible, and the number is $146.2 billion. Thirty-nine percent of the hard maturities sit in the fourth quarter.

What separates the loans that make it from the ones that don’t isn’t the size of the balance. It’s debt yield. Trepp went back through the 2024 and 2025 maturities and found that loans paying off on schedule averaged 13-14% debt yield, while those that failed to refinance averaged closer to 9%. Of the 2026 hard maturities, $27.3 billion, about 36%, sit at or below 8%.

9% should stop you for a second. That is a building with real cash flow. It covers fixed-rate debt in the sixes without much trouble, and those loans are current. They pay every month, right up to the maturity date, and then they stop.

The reason is that debt yield is loan-to-value with the appraisal taken out of it. Divide the cap rate by the debt yield to get the LTV. At the 5.5% cap rates of 2021, a 9% debt yield was a 61% loan, and nobody thought twice about it. CBRE’s H1 survey now quotes Class A suburban office in Chicago between 10 and 12.5%, and double-digit caps on Class B and C product are common. At those numbers, the same 9% debt yield means the loan is at or above the value of the building. The property still performs. The equity is gone.

So the new lender sizes to its own minimum debt yield, comes up short of the existing balance, and somebody has to write a check to cover the gap. On a building worth less than its own debt, nobody writes that check, and it is hard to blame them. That is how a performing asset produces a maturity default, and it is why the file reaches the servicer before anyone has missed a payment.

None of this surprises the regulators. The 300%-of-capital CRE concentration threshold has been in supervisory guidance for two decades and has been an active priority again these past two years. Community banks still carry 40 to 60% of total credit exposure in CRE, often without much geographic diversification, which is why a number of them are moving early. Some are putting it in their own earnings calls. Preferred Bank told the market in July that it had three non-performing loans totaling $60 million that it expected to resolve in the back half of the year, and its chairman was candid that each one sits in its own bankruptcy proceeding, so the timing isn’t entirely the bank’s to control. That is a lender publishing its workout calendar six months ahead. It probably won’t be the last.

Here is the part that seems to get missed. A loan moving to special servicing is not a legal event. It’s an operating problem wearing a legal document. Workout counsel can restructure the note, and an appraiser can mark the value, but neither one can lease the building, run the P&L, or execute a business plan on the asset while the paper gets sorted out. The banks and servicers that move through this fastest will be the ones who already have an operator lined up before the transfer, not after.

This is the line of business we have been working hard to build at Rising Realty Partners, because we see the hard facts, and we believe we see what’s coming. A lender does not need just more workout advice from a consultant who preaches from the sidelines. Banks with distressed commercial real estate issues need asset-level execution once the keys are handed over. If you’re watching your own book head toward that 8% debt-yield bucket, the conversation worth having isn’t with your workout attorney first. It’s about who actually runs the asset once the special servicer picks up the phone.

Sources: CRED iQ July 2026 CMBS distress data (Commercial Observer); Trepp Spring 2026 Quarterly Data Review (via CRE Daily); CBRE H1 2026 U.S. Cap Rate Survey; Preferred Bank Q2 2026 earnings call (7/22/26).

Four or five minutes later, the real question shows up. It’s always the same one. What does it pay in year one?

We’ve said the first sentence ourselves, in rooms where we were the ones raising the money. It’s the version of this business where you sound like an operator instead of a bond buyer. But the second question is the honest one, and right now it’s the only question this market is actually answering.

Where the money went

The Fed has held at three and a half to three and three-quarters since the spring. Coming out of June, half the committee’s dots pointed at a hike rather than a cut. Ten-year near four and seven-tenths, thirty-year above five, and the futures market sitting close to a coin flip on a hike next month. Between oil and Hormuz, nothing about inflation has settled down. Nobody is promising cheaper money.

What surprises people who haven’t looked lately is that the transaction market isn’t frozen. It’s busy. Volume ran roughly $293 billion in the first half — up about a third year over year, the strongest first half since 2022. Lending came right along with it, bank originations up sharply and debt funds up more than half.

So the capital is moving. The question is what it’s moving into.

Data centers up something like 200 percent. Senior housing up nearly 100. Net lease up double digits, the industrial piece of it closer to 30. Three entity-level take-privates carried a good share of the second quarter on their own. And with all of that going on, the all-property price index moved less than a point while cap rates drifted higher.

Volume up a third. Price flat. Those two numbers don’t sit together unless the market is buying one thing in bulk, and it is. Contracted income. A data center lease, a net-lease coupon, a public company’s whole rent roll bought below its own stated value. None of those is a business plan. Every one of them is a bond with a roof on it.

The arithmetic

Prime industrial trades around a 5.2 cap, up thirty basis points or so on the year. Secondary and value-add product trades six to seven. The gap between prime and secondary has widened out to roughly 150 basis points in most markets.

Nobody hands out 150 basis points for being clever. That gap is a price quote on the work — on the vacancy, the rollover, the roof, the eighteen months when the building doesn’t pay what the model said it would.

Then there’s the debt. Permanent money is running five and three-quarters to six and a half depending on the asset. Transitional money, which is what you actually need if you intend to execute a business plan, is nine to eleven all-in, three to six hundred over SOFR, at sixty-five to seventy-five percent of as-is value.

Run that through. A stabilized building at a six cap with perm debt in the sixes is about flat on leverage. The same building at a six and a half with a bridge loan at ten is negatively levered for the entire life of the plan. You pay every month for the privilege of doing the work, right up until the work is finished.

Five years ago the debt was cheaper than the cap rate and the lender paid you to take the risk. That’s over. The lender charges for it now, and the equity has done the math.

What the families are actually asking for

We buy multi-tenant light industrial at Rising Realty Partners, so we watch this from a particular seat, and a good deal of that seat is spent across the table from family offices. The instinct we’re describing here isn’t stupid. It’s consistent.

Real estate allocations among families actively repositioning have come down from something like 11 percent toward 8 percent. J.P. Morgan’s family office survey this year put real estate exposure well below where it was in 2024, with the money rotating into public equities. And a ten-year pays close to four and seven-tenths with no roof, no tenant, no property manager, and no capital call in year two.

So when a family says value-add, what’s usually meant is: beat the bond, and pay us while you do it.

That’s the risk premium, requested in cash, on day one. Premiums don’t work that way. The premium pays for the years in the middle — the vacancy, the capital, the lease that gets signed a year after the model said it would. It arrives at the refinance, or at the sale, or it doesn’t arrive at all. It isn’t there in the first twelve months, because in the first twelve months nothing has happened yet.

And here’s the part that would be funny if it weren’t costing real deals. Value-add fundraising surged this year. The label is booming. The behavior is a coupon.

The meeting we keep having

A multi-tenant industrial building. Seventy-eight percent leased, eight tenants — a sheet metal shop, a tile importer, a small e-commerce operation packing returns, a cabinet maker. Six and a half going in. Two suites to lease, some deferred capital, rents fifteen percent under market on the near-term rollover. Year one cash-on-cash of four, year three of nine or ten, and a basis we’d be glad to own for a decade.

Everyone nods through the pages. Then: what’s the current cash flow? Four. And the meeting is effectively over — not because anybody thinks it’s a bad building, but because year one is the only year in the model anybody is really reading.

Which lands right back on the sentence that opened the meeting. They said value-add. They meant a higher cap rate on stabilized cash flow. Those are opposite things. The higher cap rate exists because the cash flow isn’t stabilized. Take the vacancy away, and the yield goes with it.

We’ll own our share of this. We’ve underwritten downtime at nine months and paid for it at eighteen. There’s no line in anybody’s model for the tenant who takes two more quarters to make up his mind, and after enough cycles we’ve stopped pretending otherwise. But the answer to that is a wider margin of safety at the buy. It isn’t a demand to be made whole in year one for risk that resolves in year four.

What it does to the buildings

We’d take the other side of this, and the evidence is not subtle.

Shallow-bay industrial vacancy is running under five percent nationally against six and a half for the sector overall. Buildings under 50,000 square feet accounted for the large majority of lease transactions this year. Asking rents are up close to three percent nationally, and the gains have broadened out across most markets. The tenants are there. The demand is there.

What isn’t there is the money to fix the buildings those tenants need.

When nobody will fund the distance between an empty suite and a leased one, the suite stays empty. The dock doesn’t get cut in. The power doesn’t get upgraded. The lot gets patched instead of paved, the roof gets patched instead of replaced, and four or five years from now somebody buys that building at a nine cap and calls it a bargain. It isn’t one. Nobody did the work.

The work is the product. Buildings don’t stabilize themselves. Somebody signs the leases, spends the capital, absorbs the downtime, and carries the negative leverage while all of that happens. It isn’t an inefficiency to arbitrage around. It’s the job.

Where that leaves us

None of this says families are wrong to want income. At four and seven-tenths on the ten-year, wanting income is rational, and we’d take a partner who says plainly that she needs a check every quarter over one who says value-add and means Treasury.

What we’d push on is the language, because it’s costing everybody time. If what you want is a coupon, go buy a coupon. There are plenty of them, and the market bought about $293 billion worth in six months. If what you want is a value-add return, you’re buying an eighteen-month problem with a five-year answer, and the payment comes at the end of it.

The higher cap rate is the price of the work. The coupon is the price of not doing it. This market has been very clear this summer about which one it would rather pay for.

The buildings still need the work. Somebody is going to do it, and it won’t be whoever is waiting to be paid first.

— Christopher C. Rising

Under the host city agreement, Los Angeles pays the first $270 million of any Olympic cost overrun. The state pays the next $270 million. Past that — no ceiling, no cap, no second guarantor — the bill is the city’s alone.

LA28, the private organizing committee, is required to post a $270 million contingency fund. That sounds like a shield in front of the city. It isn’t one. The city controls that fund, and it is the same $270 million the city is already on the hook for in the first tier. LA28 isn’t standing between Los Angeles and the risk. The city is guaranteeing itself, and calling it a safeguard.

The city knew better once. In 1984, when the IOC wanted a city guarantee the way Montreal had given one, Tom Bradley refused. He let the IOC walk instead — and it blinked, making a private organizing committee and the U.S. Olympic Committee the guarantors instead of the taxpayers. Voters backed him three to one. Those Games cleared more than $230 million, with zero dollars of city exposure.

This time nobody made the IOC blink. The city signed for the first dollar of every overrun, uncapped past $540 million, and never put it to a vote.

Twenty-four months out, that open-ended guarantee sits on the same balance sheet as the fire litigation, backed by the same three weeks of cash.

The Bill Nobody Has Priced: 4,000 Officers

Jim McDonnell, the Chief of LAPD, says policing this city properly takes 12,500 sworn officers. As of late July, he has 8,551 — a gap of roughly four thousand, and the lowest deployment in a quarter century.

Los Angeles runs about 2.2 officers per thousand residents; New York and Chicago run four to four and a half. Attrition takes 500 to 600 a year. The June academy class graduated twenty-six. The adopted budget funds 510, which, against that attrition, holds the department at roughly where it started. Bass campaigned in 2022 on rebuilding to 9,500; in April she said it plainly: “My goal changed, unfortunately. I do hope that one day we get to the expansion, but we are not there now.”

The goal is no longer growth. The goal is to stop shrinking.

Whatever figure you use for a fully loaded sworn position — salary, benefits, pension, overtime, equipment — four thousand officers is a recurring obligation in the high hundreds of millions a year, every year, for as long as anyone reading this is underwriting buildings here.

Here is where it gets uncomfortable, and it is what Part II set up. In May, the city kept its gross receipts tax — a repeal had qualified for the November ballot, and the business coalition withdrew it in a trade. The roughly $830 million that tax raises is still there. It was fought for and won.

And the police force the chief says this city requires costs about the same as the tax the city just fought to keep. The money is in the building. The force is not. This is no longer a revenue problem you solve by finding revenue. The revenue showed up, and the force still did not.

The chief says 12,500. Mayor Bass, who ran in 2022 on rebuilding to 9,500, now funds a department that holds at roughly 8,555 and calls it stability. Her leading challenger this November, Nithya Raman, was elected to the council in 2020 promising a smaller, more specialized force — and now says the department can’t shrink any further either. Two candidates running against each other, for opposite reasons, land on the same number: 8,555.

Neither has a plan to close the other four thousand — and neither has said where the money would come from if they did.

The Olympics do not wait for it. LAPD expects to supply about 2,400 officers to the Games. Its own commanders say the city’s venues alone need twelve to fifteen thousand, with 24,000 to 30,000 drawn from across the state. A department that cannot hold its own headcount is the anchor tenant of a security operation five times its contribution.

The Part That Shows Up in My Own P&L

Here is where I stop citing documents and tell you what I see from the operating side, because the cost of an unsafe city is real and almost nobody puts it in a budget.

When a public system doesn’t deliver, the private market buys the service twice. Owners hire security. Tenants demand it in the lease. Retailers staff for shrink instead of sales. Restaurants pay for valet because customers won’t walk two blocks. Every one of those is a line item on somebody’s operating statement, and every one is a second tax — paid by property owners, on top of the property tax, for a service the property tax already funded. It doesn’t appear in the city budget. It appears in ours, and it goes straight into what a building can charge and what it’s worth.

I’ve signed those invoices. So has every operator reading this.

Now put the Olympics on top. The 2028 Games are planned car-free — no parking at any venue. Spectators will have to use a transit system Angelenos have spent a decade avoiding, and Metro’s answer is a dedicated police force it hopes to have fully deployed by 2029.

The security force for the system that has to carry the Olympics arrives the year after the Olympics.

Metro is not wrong that crime is down — overall crime fell 13.6 percent in March, and the World Cup drew nearly 50,000 rail trips for a single match. That’s real progress. But a system’s value depends on whether people will use it, not whether the statistics say they should. Billions of dollars of rail only pay off if riders show up, and perception is the asset that was destroyed. You cannot rebuild it in twenty-four months with a police force that arrives in thirty-six.

And the Money We Cannot Even Find

A city with three weeks of cash cannot afford to spend money it cannot trace.

A court-ordered audit by Alvarez & Marsal examined roughly $2.3 billion of homelessness spending from 2020 to 2024 and could not determine where much of it went. LAHSA — the joint city-county authority administering most of it — never verified whether the services it was invoiced for were actually provided. Then it became a cash problem: in June, federal housing officials suspended funding to LAHSA over fraud and control failures, after the region had taken in close to a billion federal dollars since 2021. The city sends roughly $320 million a year of its own general fund into that system.

I am not making a policy argument about homelessness. People are suffering on the street and the city has an obligation to address it. I am making a balance sheet argument: when the federal money stops, the obligation does not.

So count what is standing in line at the same account. A fire judgment nobody will size. A police force four thousand short. A homelessness system the federal government just stopped funding. A liability run rate that has outrun its own budget for years. Four claims, one general fund, three weeks of cash.

Nobody Is Going to File. That’s the Problem.

Let me be precise, because “bankrupt” is a word people reach for and then hide behind.

I don’t think Los Angeles files for Chapter 9. It has an enormous tax base, California makes municipal bankruptcy slow on purpose, and the political system will find money somewhere before it finds a courtroom. Bankruptcy would at least end in a plan — a number, a schedule, somebody forced to say out loud what the city can afford. That is not what is coming. What is coming is a decade of a city that still holds meetings, still passes balanced budgets, and quietly stops doing things.

The test that matters isn’t legal, it’s the one a lender applies: an entity is insolvent when it can no longer absorb an ordinary bad outcome without borrowing or cutting the things it exists to do. Not a catastrophe. An ordinary bad year.

By that test Los Angeles is already there. Lose a meaningful share of the fire litigation and the reserve is gone in a single wire transfer. Get an earthquake or a bad fire season before federal and state money arrives — and it always arrives late — and the city funds the response from an account it can drain in a month. Get a summer of civil unrest with sustained overtime and property claims, and the same account absorbs it. There is no ARPA coming this time.

Any one of those is survivable. Two is not. All of them are live right now.

So How Do the Chips Actually Fall?

Everybody pictures a moment — a takeover, a receiver, someone from outside walking into City Hall with authority and a mandate. That is not how it works, and understanding why is the whole point of this piece.

It will not be the federal government. Congress created a control board for Washington, D.C. in the 1990s, but D.C. is a federal district Congress governs directly. Los Angeles is a chartered city of California, and Washington has no standing to take it over. Even in bankruptcy, Section 904 of the Bankruptcy Code forbids the judge from interfering with the debtor’s political powers, property or revenues without consent. No trustee, no forced asset sales, no ordering a tax. A Chapter 9 judge is the weakest court in America relative to its debtor.

It will not be the county. Los Angeles County has no authority over a charter city, and it has its own problem: the $4 billion abuse settlement, the department cuts, the first rainy day draw since 2009. In the fire litigation the county isn’t a rescuer. It’s a co-defendant.

It could be the state, but only if the Legislature builds the machine first. California has deliberately chosen not to have one. Michigan appoints emergency managers. Pennsylvania has Act 47. California’s posture is hands-off home rule: it already gave cities the tools, and the tools are a fiscal emergency declaration and the ability to file for bankruptcy.

If Sacramento ever did intervene, the template is New York in 1975: a Municipal Assistance Corporation to refinance the debt, then an Emergency Financial Control Board chaired by the governor, holding veto power over the city’s budget, contracts and borrowing. It lasted until 1986. That is what a rescue costs. Money for sovereignty, and you don’t get the sovereignty back for a decade. It also takes an act of the Legislature, and Sacramento is running its own deficits. The honest answer to “will the state step in” is: only if the alternative frightens Sacramento more than the price does.

Which leaves the courts — and this is the part almost nobody sees coming.

Control does not get seized. It gets transferred, one judgment at a time, through a statute most people have never read.

When a plaintiff wins a money judgment against a California city, the remedy under Government Code section 970.2 is a writ of mandate — a court order compelling the city to pay. Section 970.4 requires the city to pay out of whatever unappropriated, unrestricted money it has in the year the judgment becomes final. Section 970.8 requires the city to include in its budget, every single year, funds sufficient to pay all judgments against it.

There is exactly one escape hatch. Under section 970.6, a court will order payment in up to ten equal annual installments — but only if the council first adopts a resolution finding that paying now would cause unreasonable hardship, and a judge, after a hearing, agrees. With interest running the whole time.

The city’s own way out is to go into open court and plead poverty on the record. And the moment a judge is setting a ten-year schedule that must be funded ahead of anything discretionary, the council is no longer deciding a budget. It is servicing a court order and allocating whatever survives.

Nobody takes over. No one is appointed. The council still meets, still votes, still issues the press release about the balanced budget — and somewhere in the document is a line item a judge put there, which cannot be moved, and which gets funded before the pothole, the tree trimming, the library hours and the police academy class that was supposed to start in January. That is what losing control looks like in practice — not a seizure, a schedule.

The Draconian Menu, in the Order It Gets Served

We know the order because the city wrote it down. This spring, when the gross receipts repeal was still on the ballot, the City Administrative Officer modeled what an $860 million hole would do. The measure came off the ballot in May. The playbook did not.

First the reversible things: hiring freeze, cancel the academy classes, dis-encumber contracts, defer capital projects. Then a declared fiscal emergency to unlock extraordinary budgetary controls. Then reopening every labor agreement to cancel scheduled raises. Then eliminating filled positions — layoffs, which the city knows from 2025 arrive slower and cheaper than promised.

Then it hits the wall, and this is the part that survives any particular ballot measure. The Charter mandates minimum funding for the Library and for Recreation and Parks. Police and fire already run more than sixty percent of unrestricted spending. And on this November’s ballot is a half-cent sales tax for the fire department — about $345 million a year, taking the city’s sales tax to 10.25 percent — carrying a maintenance-of-effort floor: let fire funding slip below its ten-year average share and the city cannot levy the tax at all.

Every protection you add makes the unprotected slice carry a larger cut. The city’s own modeling this spring had the Police Department absorbing $376 million in one scenario and over $450 million in another. That scenario died with the repeal. The arithmetic underneath it did not.

At the end of that road is Chapter 9, where California built a specific door. Under Government Code section 53760, a city may only file after a sixty-day neutral evaluation with creditors, or after declaring a fiscal emergency by majority vote at a noticed hearing, with findings that it cannot pay its obligations within sixty days.

Note the phrase. “Fiscal emergency” is the same term the CAO already had drafted this spring. Two different instruments — one unlocks spending controls, the other requires a finding of insolvency. What they share is a name, a drafter, and a reason to exist.

And Chapter 9 doesn’t do what people think. Vallejo went in in 2008, established that a city can reject its labor agreements and cut retiree health care, and came out three and a half years later still struggling to balance a budget. Stockton’s judge ruled CalPERS pensions could be impaired — and Stockton didn’t do it, because pensions are the biggest creditor and the hardest politics in the room. San Bernardino spent the better part of a decade in court. Across all three, bondholders and retirees take the loss, pensions survive, and the city comes out with worse credit and the same structural problem. You don’t restructure a city the way you restructure a company. There is no one to sell it to.

So the answer to “when do elected officials lose control” is not the day someone files. There is no such day. Control is lost the moment the discretionary share of the budget gets small enough that the decisions stop being decisions.

Charter minimums are not a choice. Labor agreements are not a choice. Pension contributions are not a choice. Debt service is not a choice. A court-ordered judgment is not a choice. Everything else is — and everything else is what a mayor and fifteen council members are actually elected to decide.

And for a decade, they haven’t decided it. They’ve punted it. Every budget season the same reversible things get cut first — a hiring freeze here, a deferred project there — and every hard choice about headcount, about which services this city can actually afford to run at their current size, gets pushed to next year’s council and next year’s mayor. Los Angeles has been shrinking the everything-else for a decade by pretending it wasn’t a decision. It is down to three weeks of cash, a judgment it cannot size, and a police force it cannot fund.

Nobody is going to walk into City Hall and take the keys. They won’t have to. By the time anyone thinks to look, there will be nothing left in the drawer to take.

So What Would Actually Work

I’ve spent three pieces describing a problem. It’s fair to ask what I’d do — and fair to say plainly that none of it is comfortable, because the comfortable options ran out a few budget cycles ago.

Start with the premise. A city that cannot make people feel safe and cannot let a business earn a return does not have a revenue problem it can tax its way out of. It has an exit problem. Every company that leaves takes its business tax with it, and eventually the property tax too. Safety and viability are not competing line items against fiscal responsibility. They are the fiscal plan.

Stop taxing gross receipts. Tax net. A tax on revenue rather than profit punishes low-margin businesses, punishes a business having a bad year, and rewards the ones that can leave. The answer is not a lower rate on the same base. It is a different base. Tax what a business actually earns, the way the state and federal government do, and let the city argue about the rate like everybody else. Phase it over three to five years and publish the offset schedule alongside it.

Fund public safety first and cost it honestly. If the number is 12,500, publish what it costs — recurring, fully loaded, pension-inclusive — and the specific reductions that pay for it. If the city can’t get there, say so and tell people what 8,551 buys. What isn’t acceptable is another decade of promising a number nobody funds, then paying for the shortfall in overtime, response times and private security.

Be honest about where the offsets are. Homelessness spending is the right accountability target — $2.3 billion auditors couldn’t trace makes that obvious — but the city’s own contribution is roughly $320 million, much of it court-supervised or federal pass-through. Zeroing all of it doesn’t come close to covering a police buildout. Anyone who tells you the homeless budget pays for this is selling you something.

The money is in payroll, and that is the decision nobody on the council wants to be the one to make. The city carries about 34,000 full-time employees, and this budget alone adds $343.6 million in obligatory compensation increases. Pensions and debt service already consume roughly a sixth of the general fund. Freeze the escalators. Reopen the agreements. Cut civilian headcount outside public safety and consolidate departments that have duplicated back offices for forty years. This city is going to have fewer employees doing fewer things, on some timeline, one way or another — the only choice left is whether the council picks the timeline or a judge does. It is unglamorous, it is a brutal fight with people who turn out votes, and there is no version of this that works without it.

Budget liability honestly — and give credit where it’s due. For five straight years the city budgeted $87 million against payouts that reached $287 million. This year it finally moved, funding $210.4 million plus a $20 million reserve. That is real progress. It is also still short of the run rate. Attack the causes — sidewalks, fleet, training — because prevention costs less than judgments.

Term out the fire exposure now, before a court does it. LAUSD did it. The county did it. The city has an unquantified judgment and no structure on the table. It will cost something in the rating. It costs less than a judge setting a ten-year schedule.

Rebuild the reserve to the ten percent the city’s own policy already requires — and stop counting one-time appropriations into it as discipline.

None of this is ideological. Every item is available to a mayor of any politics, and all of it is arithmetic a CFO would recognize on the first read. The only thing standing between Los Angeles and any of it is a council and a mayor’s office that keep choosing the next election over the next decade.

What This Means If You Own Something Here

For those of us who own and operate buildings in this city, the practical consequence is that you can no longer underwrite the asset without underwriting the city.

It shows up as permitting timelines and inspection staffing. As streets and sidewalks in emergency-only status. As services degrading in exactly the neighborhoods where you are asking a tenant to sign ten years. And most of all as the near-certainty that a city short on revenue and long on obligations will reach for the only base it can actually reach — property, and the transactions in it. It has done it twice in four years. It will do it again.

That is the real risk in a Los Angeles pro forma now. Not the rent roll. Not the cap rate. The municipality.

And if you own here and have not looked hard at your Proposition 8 position — on the building, on the house, on the portfolio — look. Not because it fixes anything. Because the city’s forecast quietly assumes you won’t.

Affection is not underwriting. Every fix above was available four years ago, and every year the council punts, the arithmetic gets harder.

Nothing in these three pieces is a forecast. The reserve is $515 million today. The demurrer was overruled in February. The mains broke this month. The repeal came off the ballot in May and the tax stayed. All of it has already happened — and the people who will tell you it’s manageable are the same ones who called $515 million against a multi-billion-dollar judgment stability.

A budget tells you what a city intends. A balance sheet tells you what it can survive. Los Angeles has published the first every spring for a decade. It has never once published the second. At some point the people running this city are going to have to choose what it actually looks like — smaller, or insolvent. Every year they don’t choose is a year they chose for us.

— Christopher C. Rising

Then you notice what the slide is measuring. Every one of those numbers describes a region. Draw a line around the City of Los Angeles and run them again.

THE BUILDINGS THAT LEAVE

Start with what happens when nobody wants the asset.

When a building sells, its assessed value resets to the price. The 777 Tower traded for $120 million in cash — about $117 million of buyer money, with roughly $163 million of building upgrades budgeted on top. Every sale like it rewrites the roll lower.

Now watch the second exit, because it is worse. The Gas Company Tower — fifty-two stories, once collateral for more than $600 million of Brookfield debt — went through default and receivership, and the County of Los Angeles bought it for about $200 million. The markdown alone would have cut the building’s taxes. The government purchase ends them: the day the County took title, the building came off the roll altogether.

Marked down, then removed. The buyer is a government, and the city general fund that pays for police and fire gets nothing and loses a little every year from here.

Nobody broke a rule. That is the point. One tower is a rounding error. The question is what the tenth one does to a tax base.

And look at who is left bidding. Capital Group is paying around $210 million for Bank of America Plaza — appraised at $605 million in 2016 — at roughly $150 a foot, for a building it will occupy itself. Carolwood, a local sponsor, took the Aon Center. The DWP is taking 865 Figueroa. Brookfield has defaulted on well over a billion dollars of downtown debt across multiple towers.

Downtown did clear. It just cleared into the hands of owner-users buying their own offices, local private sponsors with no committee to answer to, and two government agencies that will never pay tax on any of it — which is not the same thing as a market finding a floor, however it prints in the volume tables. The institutional bid did not show up.

AND THE BUILDINGS THAT ARE TAKEN

There is a quieter version of the same subtraction, and it does not take a government agency buying itself an office.

When a nonprofit owns and operates housing for low-income tenants, California exempts the property — Revenue and Taxation Code section 214, the welfare exemption. For genuinely new affordable development that is a fair trade: you want the units, you give up the tax, and something got built that otherwise would not have. Even that exemption keeps widening — a 2019 law lifted the old $10 million assessed-value cap, a 2024 change broadened who qualifies — but at least the bargain buys you housing.

The other version does not. A Joint Powers Authority — CSCDA, CalCHA, the California Municipal Finance Authority — issues tax-exempt bonds and buys an existing, fully taxable, market-rate apartment building, and because a government body sits inside the JPA the building goes exempt the day the deal closes. No new unit is built. A taxable building simply comes off the roll, and in exchange the tenants get modest rent caps, often set for households earning up to a hundred and twenty percent of area median income — which in much of this county is not who you picture when you hear “workforce housing.” Roughly $5 billion of these bonds took about nine thousand apartments off the roll, at an average north of $540,000 a unit, in the coastal cities where the lost tax hurts most. Each one was paying property tax the day before and nothing the day after.

Then came the tell. In January 2024 the state’s own assessors — the people whose job is to put property on the roll — asked the Legislature to treat these buildings as taxable “possessory interests” and pull them back on. When the tax collectors are the ones asking to undo a housing program, you are not watching a policy debate. You are watching the roll hollowed out in real time.

Building housing that did not exist is a trade. Taking a revenue-producing building off the roll and calling it a housing program is financial engineering — and it belongs on the same ledger as everything else leaving this base.

NOBODY IS UNDERWRITING THE CITY

I could give you my read on why. I would rather give you theirs.

Sean Burton runs Cityview, an institutional multifamily manager that was for years among the most active developers in this city. This June, asked where he is building:

“We are down to our last new development in the City of Los Angeles, and it’s a deal that pre-dated Measure ULA. We are not underwriting new development deals in Los Angeles. We’re building in Culver City, San Diego, Irvine, Walnut Creek, Seattle, Denver — so it’s not like we’re not building. But L.A. has become near impossible to build new housing because of ULA.”

Culver City is four miles from downtown, and it charges its own transfer tax — Measure RE — nearly as steep as ULA. The capital went anyway. That is not a market call, and it is not one tax. It is a jurisdiction call.

Watch where the region’s one genuinely booming sector is landing, too. Anduril is building more than a million feet by the Long Beach airport, and the advanced-manufacturing and defense expansions of the last two years have gone to El Segundo, Torrance, Gardena, Carson, Long Beach. Some of that is seventy years of aerospace gravity in the South Bay. But the City of Los Angeles is not on the list, and nobody is surprised that it isn’t.

I said a version of this to a reporter last month, and I will stand on it here. Downtown should be the easy answer — the basis has reset, the buildings are good, the location is irreplaceable. Then the city makes the trade impossible: the top tax rate, no incentive, and streets and transit it has not made safe enough. The safety piece is a real number, and it lands on owners rather than on the city budget. I will price it in Part III.

AND NOTHING IS GETTING BUILT

This is the part that should end the argument, because housing is the one thing everyone in this city says they want.

The City of Los Angeles approved 15,289 new residential units in 2022. In 2025 it approved 8,714 — down forty-three percent, and that count already excludes backyard accessory units. Count the ADUs and the picture gets worse, not better: they now run about forty percent of everything the city permits. Purpose-built apartments, the thing institutional capital actually finances, fell to 7,038 units in 2024, the lowest in more than a decade. Los Angeles is meeting a housing crisis with granny flats.

Set that against the obligation. The state has assigned the City of Los Angeles roughly 457,000 units for the eight years ending in 2029, which works out to about 57,000 approvals a year, which is a number the city has not come within shouting distance of in any year of the cycle and has stopped pretending it will. It is running at roughly a sixth of that.

RAND published the accounting in May. Measure ULA has raised $1.2 billion for housing and tenant assistance. It has also cut high-value sales by thirty-one percent, deterred more than nine thousand housing units, and cost Los Angeles and its related agencies $452 million in forgone revenue. A UCLA analysis puts the suppression at roughly 1,900 apartments a year.

That is a housing tax that produced less housing. Measure ULA should be repealed — not indexed, not amended, not carved up, repealed. And the people who passed it are starting to say so themselves. The president of the City Council said in June, about ULA: “I can tell you with certainty ULA has not helped.”

And before anyone says the real problem is permitting, look at what happened when the city fixed permitting. Executive Directive 1 fast-tracked fully affordable projects: more than 43,000 units proposed, about 34,000 cleared planning, just over 8,000 permitted — twenty-three percent. The city streamlined the entitlement and the buildings still did not get built, because the entitlement was never the binding constraint. Whether the deal pencils inside the city limits is.

FEWER PEOPLE ARE STARTING ANYTHING

In 2015, 60,550 new businesses registered in the City of Los Angeles. In 2025, 35,593. That is a forty-one percent decline in a decade, from the city’s own filings.

The category that collapsed hardest names the industry: motion picture and video businesses registering in the city fell from 846 in 2022 to 219 in 2025 — down seventy-four percent in three years.

Now the tax.

Los Angeles taxes gross receipts — revenue, not profit — at rates running from about a tenth of a percent to just over four tenths, depending on what you do. Read that with an operator’s eye. A business that loses money still pays. A business running a four percent margin hands over roughly a tenth of its profit for the privilege of having an address, which is a rate no one would ever propose out loud if it were described that way, and which nobody notices because it is described as four tenths of one percent instead. The small-business exemption sits at $100,000 of gross receipts and has not moved in about twenty years, while everything it was written to shelter got more expensive.

Run it on a professional services firm doing $2 million with twenty people. In the City of Los Angeles, at the top rate, that is $8,500 a year. In Burbank, which charges a flat base plus a per-employee amount instead, it is a few hundred dollars. Of the eighty-eight cities in Los Angeles County, only a handful levy one at all.

So let me be direct, because I have been asked and would rather say it plainly. I am one hundred percent against a tax on gross receipts. Not the rate — the base. Taxing revenue instead of profit punishes precisely the businesses a city should want and rewards the ones that can leave, and it bites hardest at the bottom of the margin stack, which is where the jobs are. If Los Angeles wants to tax business activity, tax what a business actually earns. A tax on net is a conversation worth having. A tax on gross is a policy that funds itself by shrinking its own base.

The city had one chance to be rid of it and traded it away. A coalition of business groups qualified a repeal for this November, filing petitions in February that cleared with more than 79,000 valid signatures, and the measure was certified in March. Then, in May, the proponents filed to withdraw it — announced by the Mayor’s office as part of a deal that delayed the hotel and airport wage schedule, pushing $30 an hour from 2028 out to 2030. The Council approved the withdrawal, and in June passed an ordinance repealing the election call itself.

The measure is gone. The tax stays. The wage increases arrive anyway, two years later. Nobody who pays this tax got to vote on it.

THE NUMBERS THAT LOOK LIKE RECOVERY

The bull case rests on three real numbers, and I would rather take on its strongest version than a weak one.

Gross receipts revenue is rising, not falling — from $509 million in 2016-17 to a projected $832 million this year. New restaurant openings in the city hit a record in 2025. And the region’s capital markets genuinely are recovering, which is where this piece started.

Every one of those is true. Every one of them points the same way I do.

The tax line grows in nominal dollars while the number of businesses forming inside the city falls by four in ten — which is what it looks like when fewer, larger firms carry a heavier load. Restaurants keep opening because people keep trying, on two-to-four-point margins, into taxable revenue that adjusted for inflation has gone backward to 2012. That is not a boom. That is churn.

And the region’s capital markets are healthy precisely because capital has somewhere else to go inside the same region: Culver City, El Segundo, Long Beach, Torrance, Burbank, Irvine.

Even the regional read is slipping. When PwC and the Urban Land Institute surveyed more than 1,700 investors, developers and lenders for this year’s outlook, Los Angeles fell ten places — the sharpest drop of any primary market in the country, landing above only Washington, D.C. Dallas finished first, Miami third, Nashville sixth, Phoenix tenth. That survey covers the whole metro, Culver City and El Segundo included. The city dragged the average down, not up.

The county looks fine because the county includes the places the money went.

SO PUT PART II TOGETHER

The tax base is leaving four ways at once: buildings resetting lower when they sell, buildings coming off the roll entirely when a government buys them, buildings quietly exempted when a nonprofit or a bond authority takes them off, and a transfer tax that stopped the transactions that would have refreshed the roll at all. Institutional capital has stopped underwriting new development inside the city and says so by name. Housing approvals are down forty-three percent from the 2022 peak against a state obligation the city is meeting at about one sixth. New business formation is down forty-one percent in a decade. And the one instrument that would have removed the worst tax on the books was pulled off the ballot in a trade nobody who pays it was party to.

None of that is a forecast. It is the assessment roll, the city’s own business filings, the permit counts, a RAND study, and the investors saying it out loud.

A city can survive a bad market. Markets come back. What a city cannot survive is being the one jurisdiction in its own region that capital has decided to route around — because that does not reverse when the cycle turns. It reverses when the policy changes, and nothing here suggests anybody is in a hurry.

The money did not leave Los Angeles. It stopped crossing the city line.

Part III, Thursday: what all of it costs. The four thousand police officers nobody has priced. The security bill that lands on private owners instead of the city budget. And what actually happens the day a judgment arrives — who ends up in control, and the precise moment elected officials stop making decisions. It is not bankruptcy. Bankruptcy would be the merciful version.

— Christopher C. Rising

I have spent thirty years underwriting buildings, and not once has a lender asked me whether I cleared debt service last year. They ask what happens in the bad year. How many months of cash. What the exposure is that I haven’t marked. A balanced budget is a statement about the past 12 months that went the way you hoped. Solvency is a statement about what happens when they don’t.

Los Angeles has the first. It does not have the second.

Everything that follows comes from the city’s own City Administrative Officer and Controller, the County Assessor, the four agencies that rate the city’s debt, and the docket of the Los Angeles County Superior Court.

Three weeks of cash

The Reserve Fund is about $515 million, compared with a General Fund of roughly $8.6 billion. That is six percent. Put in the terms any operator would use, it is somewhere around three weeks of general fund spending. Add the Budget Stabilization Fund and the mid-year cushion and the city gets to a combined nine percent — call it a month. The city’s own policy target is ten percent, and it has not been there in years.

Three weeks is not a reserve. It is a float.

And the drawdown that got us here didn’t come from an earthquake. Over two fiscal years, General Fund reserves fell from $648 million to $402 million — not because a disaster struck, but because lawsuits and departmental overspending ran past the budget in an ordinary year. The city rebuilt the fund by appropriating money back into it, which is the municipal version of moving cash from one pocket to the other and calling it a raise.

The $24 million tell

If you want to know whether an entity has a cash problem, don’t read the summary. Find the smallest thing it couldn’t pay for.

Los Angeles owed a $24 million transfer payment to the Fire and Police Pension Fund tied to Measure FF. It did not write the check. It amortized it — spread the payment over five years at a seven percent annual interest rate, adding about $3.5 million in interest to a $24 million obligation.

The city’s own Chief Administrative Officer recommended against doing it, on the record, in front of the Budget and Finance Committee, for exactly the reason you would expect: it adds accrued interest costs to an obligation the city already owed. The pension board approved the amortization on May 7. The adopted budget then added another $217,646 to cover the interest.

Twenty-four million dollars. On a $14.85 billion budget. Financed over five years at seven percent, over the written objection of the city’s chief financial officer.

I have been in rooms where a company stretched a small payable it could technically cover. It is never because the number is large. It is because the cash isn’t there, and every operator who has ever watched a borrower do it knows precisely what it means.

And it isn’t isolated. To fund its full annual pension contributions to both retirement systems at the start of this fiscal year, the city authorized the issuance of up to $1.5 billion in Tax and Revenue Anticipation Notes. There are legitimate reasons to prepay pensions with short-term paper — the systems give a discount for it. But look at the shape of the year: borrow a billion and a half up front to cover the pensions, and still stretch a twenty-four million dollar payment over five years.

That’s not a budget problem. That’s a cash flow problem, and they are not the same thing.

“But it owns LAX and the Port”

This is the first thing anyone says, and it deserves a straight answer because it is the load-bearing assumption behind every reassuring statement about this city’s finances.

Los Angeles owns Los Angeles International Airport and the largest port complex in the Western Hemisphere. Both are enormous, valuable, cash-generating enterprises. And the city cannot touch a dollar of either one to make payroll. Not shouldn’t — cannot.

The airport is fenced by federal law and by the city’s own charter. Every airport that has accepted federal grant money signs assurances that airport revenue stays at the airport. The City Charter goes further: Section 635 puts every fee, charge and rental collected at LAX into a dedicated Airport Revenue Fund and expressly exempts that fund from the year-end transfer provisions that sweep other city accounts.

We know exactly how this goes, because Los Angeles already tried it. In 1995, during an earlier budget squeeze, the city moved $58.5 million from the airport account to the General Fund. The FAA ordered more than $20 million of it returned. Congress got involved, conditioning federal transit money for the subway on the Inspector General certifying that no further diversion had occurred. That is what it looks like when this city reaches into its airport. It has been tried, it was reversed, and it cost the city standing it needed elsewhere.

The Port is fenced by state law, and the fence is older and higher. The Board of Harbor Commissioners holds the Harbor District in trust under the tidelands doctrine. Trust revenues may be spent on trust purposes only. The California Supreme Court, in Mallon v. City of Long Beach, struck down an attempt to divert harbor funds to general municipal use and identified the kinds of spending that don’t qualify — storm drains, libraries, parks, streets. Which is to say: the general fund. The list of things the Port’s money can’t pay for reads like a description of what a city does.

There is exactly one enterprise the city can legally tap, and it already taps it to the limit. The Department of Water and Power sends an annual power revenue transfer to the General Fund — about $220 million in this year’s budget. It is not a rainy day fund. It is recurring income, already counted and already spent, and it comes from the same utility now defending the fire litigation.

And while we’re here: the airport is not a piggy bank in the first place. The Automated People Mover — 2.25 miles of elevated track — was budgeted at $1.9 billion and has run roughly $880 million over, landing near $3.3 billion after a $550 million settlement with the contractor. Call it a billion and a half a mile. It was supposed to carry passengers in 2023. It did not, and the date has moved every year since. A county civil grand jury found that the contractor leveraged the change-order process by implicitly threatening litigation, knowing the city could not afford to leave it unfinished before the Games. That is the enterprise everyone assumes is the backstop, and it is over budget by more than the entire General Fund reserve.

So when someone tells you Los Angeles cannot be in trouble because it owns an airport and a port, be precise about what they are describing. Those are assets the city is legally forbidden to spend from. In a liquidity event, they are worth nothing.

Five hundred and fifteen million dollars. That is the whole of it. That is what stands between the City of Los Angeles and everything unbudgeted that can happen to a city of four million people.

What eats $515 million

None of this requires imagination. Most of it has already happened here.

A few bad weeks in the street. The anti-ICE protests in June of last year cost the city $32 million in roughly two weeks, by the Controller’s own accounting — $29.5 million of it LAPD overtime and citywide tactical alerts, the rest cleanup, fire response and repairs to City Hall. That figure excluded the lawsuits, which always follow. In 2020, the LAPD spent $40 million on overtime during the George Floyd protests, and the city has since paid more than $20 million in settlements over police conduct, with cases still open. Those were contained events measured in days. The 1992 unrest lasted five days and caused $775 million in damage in the dollars of the time — about $1.4 billion in today’s dollars.

One disaster, before the reimbursement lands. This is the part nobody outside government understands. When a fire or a quake hits, the city pays first — overtime, mutual aid, equipment, debris removal, shelter — and files for FEMA and state reimbursement afterward. That money comes eventually. Payroll comes on the fifteenth. The gap between those two facts is funded from the same $515 million, and the January 2025 fire is the living proof: an unbudgeted response going out the door while the tax base and collections went the other way.

One verdict. The city is already paying $287 million a year in liability claims against an $87 million budget — more than half the reserve every year — on sidewalks and use of force, even in years when nothing unusual happens. Now add the Palisades: thousands of plaintiffs, inverse condemnation, no obligation to prove the city did anything wrong, and no number anyone will say aloud. A single adverse ruling does not dent the reserve. It ends it.

The cases already filed. This is the one that should worry Angelenos most because it is neither hypothetical nor scheduled. Right now there are lawsuits pending against the City of Los Angeles that are not in any budget, because you cannot budget for a verdict you have not received.

Remember that $32 million from the protests? The Controller was explicit that it excluded legal costs. Those suits are now filed — journalists injured by police munitions, demonstrators hit at close range with less-lethal rounds, civil rights claims working through both state and federal court. The 2020 round of the same thing has already cost the city more than $20 million in settlements, with cases still open, and a single protester collected $1.5 million on his own. The current round is at the beginning of its life, not the end.

And the city’s own lawyers have told it where this goes. In a report to the Council, the City Attorney’s office noted that juries award an average of $2.4 million per lawsuit against the City — higher than against the County — and attributed the trend to aging infrastructure, rising case volume, jurors’ willingness to entertain far higher verdicts, and chronic understaffing in its own civil branch. The city is defending more cases with fewer lawyers before juries that are angrier than they used to be.

For scale, look at what an ordinary problem can become. A class of roughly 280,000 people with mobility disabilities sued over inaccessible sidewalks and curb ramps. It settled at approximately $1.37 billion — the largest disability-access settlement in American history — payable over 30 years, with a federal judge retaining jurisdiction throughout. Nobody at City Hall had a forecast line that read “one point four billion dollars, sidewalks.” It arrived anyway. And it did not solve the underlying problem: the city still paid $44 million in Street Services claims last year.

Now watch the city make it worse on purpose.

The state had committed more than $100 million to three mobility projects in Boyle Heights, Skid Row and Wilmington — sidewalk repairs, curb work, traffic calming, in exactly the neighborhoods that need them most and generate the claims. The city could not complete the pre-construction work inside the state’s deadlines. In April, it asked the California Transportation Commission for a six-year extension, citing staffing and funding shortages in its own public works and transportation departments. The Commission declined to put the request on its June agenda at all; a spokesman said the extension the city wanted exceeded what the rules allow.

Read that sequence again, because it is the whole disease in one paragraph. The city is under a billion-dollar court order to fix its sidewalks. It is paying $44 million a year to people whose sidewalks it injures. It cut staff to close a budget gap. Understaffed, it missed the deadlines on free money from Sacramento to do the very repairs a federal judge is supervising. And every sidewalk that does not get fixed generates the next claim, which comes out of the $515 million.

That is not bad luck. That is a city so short of people and cash that it can no longer collect the money other people are trying to give it.

The comforting answer is that the city would simply structure a big judgment over time, the way the school district and the county did. Understand what that actually requires. A city does not get to choose installments. It has to go into court, plead hardship on the record, and accept a schedule a judge sets — with interest running. That schedule then gets funded before anything a mayor or council member was elected to decide.

I will come back to that in Part III, because it is the whole mechanism. For now, it is enough to know this: the money to pay a verdict on the day it lands comes from the $515 million, and there is nothing else to reach for.

One event nobody can price. No city budgets for a mass-casualty attack. There is no line item because there is no honest way to write one. What is knowable is the shape of the bill when it comes: immediate and uncapped overtime, mutual aid the city reimburses, investigation, emergency medical, victim services, and then the cost of hardening every comparable site in the city afterward — followed, as night follows day, by litigation on the same dangerous-condition and inverse-condemnation theories that govern everything else this city owns and operates.

Federal money exists for this. It arrives later. In the weeks that matter, the money is the city’s.

And this is the part I want to be very clear about, because it is the whole argument. There is no second account. Not the airport — federal law and the Charter forbid it. Not the port — the tidelands trust forbids it. Not the utility — that transfer is already spent before the fiscal year begins. When any of the above happens, the City of Los Angeles reaches into one drawer, and there is $515 million in it.

Any one of these is survivable. The reserve does not reset between them, and nothing about the calendar suggests they will arrive politely spaced.

The claims are already bigger than the cushion

In fiscal 2025, the city paid $287 million in liability claims, exceeding the $87 million budgeted. Not a rounding error — a 228 percent overrun. The Police Department accounted for $152 million of it, Street Services for $44 million, and Transportation for $20 million. Trip-and-falls, sidewalks, use of force, harassment. This is the run rate, in a normal year, with nothing unusual happening.

The city has also borrowed to pay settlements. Judgment obligation bonds are a legitimate municipal instrument. They are also, in plain English, borrowing money to cover an operating loss, and every operator reading this knows what it means when an entity starts doing that.

Then there is the Palisades.

On February 19 of this year, a Los Angeles County Superior Court judge overruled the demurrer filed by the city and the Department of Water and Power in the master complaint over the fire. The claims — that the Santa Ynez Reservoir sat drained, that hydrants ran dry, that inspection policy was not followed — will be heard. Thousands of plaintiffs. And the theory that matters most is inverse condemnation, which in California does not require anyone to prove the city was negligent. It requires only that public infrastructure contributed to the loss.

Nobody credible will put a number on that exposure. What we know is the number on the other side of the ledger. It is $515 million, and it is three weeks of payroll.

It is not theoretical, and it is not finished

While that case moves, the next one is being filed. On July 16, a 36-inch Department of Water and Power transmission main more than a hundred years old ruptured under the Sunset Strip. Streets became rivers. Pavement buckled. A sinkhole opened in a sidewalk and swallowed two men. Roughly two hundred vehicles were destroyed, parking garages filled, Metro buses sat in water. One week later, a second main failed a few blocks away. Five breaks across the region in a single week, in Boyle Heights, in Venice, in Studio City.

Note where that happened. West Hollywood is its own city — but the pipe is the Department of Water and Power’s, so the claims come to Los Angeles. The city’s liability does not stop at its borders.

And the theory is the same one from the Palisades. Counsel is already advising owners on inverse condemnation, citing the line of cases that runs from Albers through Marshall v. Department of Water and Power — public improvements that physically damage private property, no proof of carelessness required. The visible damage may also be the smaller half; subsurface erosion under those buildings will surface as structural claims over the next several years.

A century-old pipe under Sunset Boulevard is not an accident. It is a budget decision arriving late. There are thousands of miles of that pipe under this city, every mile of it aging on a schedule somebody chose not to fund, and each one is a claim waiting for a date.

The neighbors have already stopped pretending

Here is the comparison that ought to end the argument.

Los Angeles Unified authorized $500 million in judgment obligation bonds in June of last year to settle decades-old abuse claims revived by AB 218, then came back in February for another $250 million. Roughly $750 million authorized; the district’s own estimate puts the all-in cost above a billion dollars, paid out of its general fund over at least a decade. Its superintendent said plainly that the district was exhausting its available funds.

Los Angeles County settled its AB 218 exposure for about $4 billion, using what its chief executive described as a combination of cash, reserves and borrowing — while cutting most departments three percent and tapping the rainy day fund for the first time since the Great Recession.

Two of the largest public agencies in America, operating over the same ground as the city, have each looked at their liabilities, concluded they cannot pay them out of operations, and termed them out over a decade. Both did it with minimal public discussion, which tells you something too.

The City of Los Angeles has used judgment obligation bonds, but at a scale that isn’t in the same conversation — a $60 million authorization against annual liability payments approaching $300 million. There is no set-aside for the fire exposure. No term-out. No structure on the table. The school district refinanced its liabilities. The county refinanced its liabilities. The city is holding $515 million and hoping.

That is not prudence. That is a balance sheet nobody has been asked to look at yet.

All four rating agencies now carry Los Angeles at a negative outlook. S&P has already taken the general obligation rating down to AA-, citing a weakening financial position and an emerging structural imbalance. When Fitch wrote about the fire liability, it said the scale would likely mean a multi-notch downgrade. That is not a market opinion about Los Angeles. That is Los Angeles, described by the people who lend to it.

Every number in this piece was published by the City of Los Angeles. All of it sat on the table in May, when the City Council reviewed the budget, called it stability, and went home. The information was never the problem.

So let me put Part I plainly.

The City of Los Angeles has about three weeks of cash. The City of Los Angeles has underbudgeted its lawsuits by $200 million per year for five consecutive years. The City of Los Angeles is defending a wildfire judgment that thousands of plaintiffs are litigating right now under a doctrine that does not require them to prove the City did anything wrong — and nobody in City Hall will put a number on it. The City of Los Angeles owns an airport and a port it is legally barred from spending a dollar of. The City of Los Angeles could not write a twenty-four million dollar check to its own pension fund.

Los Angeles Unified refinanced its liabilities. The County of Los Angeles refinanced its liabilities. The City of Los Angeles did not. All four rating agencies have noticed. The City of Los Angeles has not.

It will not take a catastrophe to break this. It will take one bad Tuesday.

Part II, Tuesday: the money that is supposed to refill that drawer, and why it is leaving. Downtown is not being marked down. It is being taken off the tax roll one tower at a time — and the buyers are governments.

— Christopher C. Rising

The denominator is the part nobody wants to mark.

The cost of capital moved. Not gently, and not gradually — it reset, and it reset faster than the values built on top of it. A building that traded at a 5 cap in 2021 doesn't trade at a 5 cap when the ten-year and the spread above it say buyers now need 8 or 9 to take the risk. The math isn't complicated. The income line can be flat, even up, and the value is still down a third, because the number underneath it changed. Everyone in the room knows this. Very few marks reflect it.

That's the gap I'd point to. The consensus story is that office is "repricing" — an orderly process, marks drifting down, the market finding its level. I don't think that's what's happening. What's happening is a standoff. Sellers are anchored to a denominator that no longer exists, buyers are pricing the one that does, and in between, nothing trades. The few deals that do print are dismissed as distressed, one-offs, not "real" comps. So the marks stay fictional, and the fiction holds right up until something forces a sale — a loan maturity, a redemption, a lender who's done waiting.

The danger in this isn't the crash. A crash clears. A crash is honest. The danger is the slow grind, where the denominator catches up one forced transaction at a time, over years, while everyone holding the asset tells themselves the last bad comp was an exception. Time is not the friend of an overpriced building. The carry runs, the capital sits dead, the lease rolls into a worse market than the one you underwrote, and the patient holder discovers that patience without a re-marked basis is just denial with a longer timeline.

I've sat on both sides of this. We've owned the building where the income held and the value still fell, because the world's required return moved out from under it. And we've looked at acquisitions where the seller's number and ours were separated by the entire move in the denominator — a gap no amount of leasing genius on the numerator could close. You learn to respect the bottom of the fraction. It does more to your value than anything you can do to the top.

Here's the part that matters for anyone deploying capital right now. The reset in the denominator is not a problem to wait out. It's the opportunity. If you're a buyer who underwrites to the rate the world actually requires — not the one the seller remembers — you are getting paid to be honest while everyone else is getting punished for being hopeful. The bid-ask gap that's freezing the market is the same gap that hands a disciplined buyer a basis nobody could touch three years ago.

So the question I'd put to anyone holding office, or thinking about buying it, isn't "what's my income going to do." It's "what denominator am I really marking to." If the answer is the one from the last cycle, the value on your books is a story, and the market is going to ask you to defend it. If the answer is the one buyers require today, you may be closer to a real number than your peers — and a lot closer to being able to act.

The numerator is where you earn your keep. The denominator is where you tell yourself the truth. Most of the pain in this market is people who got those two backwards.

— Christopher C. Rising

I’ve said it myself. And I’ve watched it not hold.

Replacement cost is a supply-side argument. It tells you what it would take to add another unit of the thing. That’s genuinely useful information — when the problem is that the world wants more of the thing than exists. In a market short of housing, or short of modern industrial, or short of power-ready data center sites, replacement cost is close to a real floor, because demand is standing there ready to absorb anything new, and nobody can deliver it for less. The scarcity is real, so the cost to recreate it is real value.

But replacement cost says nothing about demand. And most of the assets people are trying to comfort themselves about today don’t have a supply problem. They have a demand problem. Commodity office isn’t cheap because it’s hard to build. It’s cheap because fewer tenants want it, at any price, in that location, at that vintage. Telling yourself “you can’t build it for this” is answering a question nobody asked. Nobody’s building it. That’s the point. The market is trying to have less of it, not more.

When the use is in secular decline, replacement cost isn’t a floor — it’s a number on a page that has stopped touching reality. The floor on a building that nobody wants isn’t its construction cost. It’s whatever the next-best use will pay for the bones, minus what it costs to get there. And that math can be brutal. Once you net out demolition, or the capital to convert, or the years of carry while you reposition, the residual land value under a failed building can go to nothing. I’ve seen it go negative — where the cost to make the site useful again exceeds what the finished use is worth. Replacement cost told you there was a floor. The wrecking ball told you the truth.

This matters because replacement cost is doing a lot of quiet work in underwriting right now. It’s the unspoken backstop in a hundred memos — the reason a sponsor is comfortable paying a number that the cash flows don’t support. “Worst case, we’re below replacement.” I’d push on that every time. Below replacement of what, for whom, wanted by whom. If the answer is a use the market is actively walking away from, the discount to replacement cost isn’t margin of safety. It’s the market telling you the building is worth less than its parts, and you’re not listening.

The discipline is to separate the two questions and never let one answer the other. What would it cost to recreate this — that’s the supply question. Does anyone want it recreated — that’s the demand question. Replacement cost protects you only when both answers point the same way: expensive to build, and wanted. When they split — expensive to build, but not wanted — replacement cost is the most dangerous number in the deal, because it feels like rigor and functions like hope.

We’ve leaned on replacement cost where it earned the right to be leaned on. The industrial we like is hard and slow to entitle and build, and tenants are lined up for it, so the cost to recreate it is a genuine support under value. We don’t extend that same faith to a building whose tenant base is structurally shrinking, no matter how far below construction cost it’s trading. The number is the same kind of number. The protection is not the same kind of protection.

Replacement cost is a promise about the future cost of supply. It is not a floor under present demand. Treat it as the first, never the second, and you’ll stop confusing a building that’s cheap because it’s scarce with one that’s cheap because it’s unwanted. The market knows the difference. Eventually it makes you learn it.

— Christopher C. RisingThere’s a sentence investors reach for when a market gets scary. “You can’t build it for this price.” It’s said as a comfort, almost a closing argument. The building is trading below what it would cost to construct today, so there must be a floor under the value. Construction costs only go up. Land is finite. Sleep well.

I’ve said it myself. And I’ve watched it not hold.

Replacement cost is a supply-side argument. It tells you what it would take to add another unit of the thing. That’s genuinely useful information — when the problem is that the world wants more of the thing than exists. In a market short of housing, or short of modern industrial, or short of power-ready data center sites, replacement cost is close to a real floor, because demand is standing there ready to absorb anything new, and nobody can deliver it for less. The scarcity is real, so the cost to recreate it is real value.

But replacement cost says nothing about demand. And most of the assets people are trying to comfort themselves about today don’t have a supply problem. They have a demand problem. Commodity office isn’t cheap because it’s hard to build. It’s cheap because fewer tenants want it, at any price, in that location, at that vintage. Telling yourself “you can’t build it for this” is answering a question nobody asked. Nobody’s building it. That’s the point. The market is trying to have less of it, not more.

When the use is in secular decline, replacement cost isn’t a floor — it’s a number on a page that has stopped touching reality. The floor on a building that nobody wants isn’t its construction cost. It’s whatever the next-best use will pay for the bones, minus what it costs to get there. And that math can be brutal. Once you net out demolition, or the capital to convert, or the years of carry while you reposition, the residual land value under a failed building can go to nothing. I’ve seen it go negative — where the cost to make the site useful again exceeds what the finished use is worth. Replacement cost told you there was a floor. The wrecking ball told you the truth.

This matters because replacement cost is doing a lot of quiet work in underwriting right now. It’s the unspoken backstop in a hundred memos — the reason a sponsor is comfortable paying a number that the cash flows don’t support. “Worst case, we’re below replacement.” I’d push on that every time. Below replacement of what, for whom, wanted by whom. If the answer is a use the market is actively walking away from, the discount to replacement cost isn’t margin of safety. It’s the market telling you the building is worth less than its parts, and you’re not listening.

The discipline is to separate the two questions and never let one answer the other. What would it cost to recreate this — that’s the supply question. Does anyone want it recreated — that’s the demand question. Replacement cost protects you only when both answers point the same way: expensive to build, and wanted. When they split — expensive to build, but not wanted — replacement cost is the most dangerous number in the deal, because it feels like rigor and functions like hope.

We’ve leaned on replacement cost where it earned the right to be leaned on. The industrial we like is hard and slow to entitle and build, and tenants are lined up for it, so the cost to recreate it is a genuine support under value. We don’t extend that same faith to a building whose tenant base is structurally shrinking, no matter how far below construction cost it’s trading. The number is the same kind of number. The protection is not the same kind of protection.

Replacement cost is a promise about the future cost of supply. It is not a floor under present demand. Treat it as the first, never the second, and you’ll stop confusing a building that’s cheap because it’s scarce with one that’s cheap because it’s unwanted. The market knows the difference. Eventually it makes you learn it.

— Christopher C. Rising

It’s also a billionaire’s game. It belongs to permanent capital and balance sheets deep enough to treat a downturn as weather. Most of us aren’t playing it, and I’d rather say so than pretend otherwise.

Rising Realty Partners is not that. We’re an operating business. We invest our own capital alongside our partners’, and we run a services business beside it. We buy, we drive a current return, we improve the asset, and we aim for a larger return on the sale. That model uses leverage, and it works — unless the music stops. When it stops, the same structure that powered the returns is the thing that takes away your ability to wait.

I know this because we’ve lived it. We bought a historic building in downtown Los Angeles and repositioned it, the way we had before, and it had a great cycle. It just turned out to be the last cycle. COVID came, and then downtown itself came apart — a vacuum of civic leadership, homelessness, a collapse in the basic quality of life on the street. The loan term ended into that market, with no ability to refinance and no case for putting fresh capital into it. When that happens, you work with your lender, you protect your partners, and you reach the best outcome the situation allows. What you don’t get to do is wait. That’s not a failure of patience or temperament. It’s the arithmetic of how the deal was built, meeting a world that didn’t cooperate. And that is why they call it a risk-adjusted return.

So I’ve stopped thinking of patience as a virtue some investors have and others don’t. The patience that matters isn’t temperament at all. It’s a discipline, and you spend it before you fall in love with a deal — not after the market turns. It lives in the leverage you decline when everyone says take more. In the basis you refuse to chase. In the reserves you carry that look like dead weight right up until the day they’re the only reason you’re still standing. By the time the storm arrives, your patience is already banked or already gone. It was decided at the buy.

Here’s the part the pitch decks leave out. We are in the business of risk-adjusted returns, and people skip both words. “Risk” means some deals lose money. Not might — will. “Adjusted” means you were supposed to price for that going in. If you never want a loss, there’s a product for you: it’s called a Treasury. We don’t buy Treasuries. We take risk on purpose, because that’s where the return is. The discipline isn’t avoiding risk — it’s taking enough of it to be paid when we execute, and not so much that one bad turn ends the firm.

What I’ve learned, after a long time doing this, is to be honest about the line between what I can control and what I can’t. I couldn’t control a pandemic that emptied buildings overnight. I can’t control a city that has failed its own downtown — that taxes the wrong people, won’t make its streets safe, and then wonders where the tenants went. No underwriting model has a cell for those. What I can control is how much of the downside I engineer out before I sign, and how honest I am with our partners about the downside I’m choosing to keep. That’s the whole job: mitigate the risks that can end you, hold onto enough of the risk that pays you, and tell the truth about which is which.

I’m not the smartest person in the room, and I’ve stopped trying to sound like it. I’ve had deals go the full distance and deals that didn’t survive the cycle — sometimes the very same building, won in one cycle and lost in the next. The difference between the two wasn’t how patient I felt. It was how the deal was built before anyone knew which way the decade would break.

Patience you can’t afford isn’t a strategy. It’s a story you tell until the loan comes due. The discipline is in the buy, the losses are in the math, and the honesty is in admitting both.

I say all of this not to give an investor pause, but because it is the foundation of how we work. I’ve spent thirty years in this business, much of it alongside my father, in a family that has built real estate across generations and more than one cycle. We have created far more value than we have lost — because we put our own capital next to our partners’, we treat the buy as the decision that matters most, and we tell people where the risk is before the money goes in, not after. When a deal has gone the wrong way, we have handled it the way you would want a partner to: straight with our investors, professional with our lenders, and protective of the people who trusted us. That reputation is worth more to us than any single deal.

So if you want a promise that you’ll never lose, that product exists — it’s the Treasury desk, and the returns match the promise. If you want a partner who takes real estate risk intelligently, puts its own money beside yours, and is still standing and honest when the cycle turns, that’s the business we’ve built. Over a long enough horizon, that’s the partner worth having.

— Christopher C. Rising

#CommercialRealEstate #CRE #RealEstateInvesting #RiskManagement #CapitalMarkets

Start with who’s already gone. Skadden Arps left One California Plaza for Century City in 2023, cutting its footprint nearly in half on the way out. PwC signed a 15-year, roughly $200 million lease in Century City this year, walking away from 601 South Figueroa. Wedbush Securities cut its downtown footprint by 80% on its way to Pasadena. AECOM and CBRE, the world’s largest commercial real estate brokerage, both moved their global headquarters out of Los Angeles entirely, to Dallas.

That’s not a rounding error. That’s a market voting with its feet, one signed lease at a time.

The numbers back it up. Downtown office vacancy was 20.5% at the end of 2019. It hit 33.3% in the third quarter of 2025. By this June it was pushing 35%, per CBRE data reported by The Real Deal. Century City, by comparison, sits closer to 12%. Towers that traded near $450 a square foot before the pandemic are now changing hands closer to $150. The Aon Center sold for $268.5 million in 2014 and $147.8 million a decade later, a 45% haircut.

The tax bill is real, even where City Hall won’t add it up. Gas Company Tower left the property tax roll entirely when LA County bought it out of foreclosure for $200 million, against a basis near $650 million, and government-owned property doesn’t pay property tax. Add the Aon Center and Union Bank Plaza and three buildings alone cost the city and county more than $11 million a year, north of $30,000 a day. A study commissioned by the Central City Association projects a cumulative $353 million property tax shortfall over the next decade, tied to a $69.5 billion hole in assessed value. Downtown is roughly 1% of the city’s land and, by Central City Association President Nella McOsker’s own accounting, generates close to 30% of LA’s hotel, parking, and business tax revenue combined. To my knowledge, no city report has ever tied the billion-dollar deficit to what’s happening a dozen blocks from City Hall, and Los Angeles doesn’t break out business, hotel, or sales tax by neighborhood at all. When you don’t measure the damage, you don’t have to answer for it.

The law firms and banks can absorb a bad decade. They have balance sheets and Century City to move to. The people who can’t are the ones who never show up in a CBRE report: the dry cleaner, the lunch counter, the barber, the guy who shines shoes in the lobby.

Take Don Kohan, who runs Cleaners Depot a few blocks from what used to be the AT&T Center downtown. His revenue is down 60% since 2019. He put it plainly to a reporter: “People are not going to work — they’re not dressing up. Everybody is in front of a computer in a T-shirt and a pair of shorts.” He says he can’t afford to close his downtown stores, and he can’t really afford to keep them open either, but three families depend on the paychecks. That’s not a company relocating to Century City. That’s a guy who has nowhere to relocate to, watching his customers disappear one empty office floor at a time.

He’s not alone. Wexler’s Deli, gone from Grand Central Market in March 2025. Floyd’s 99 Barbershop, closed. None of these were hedge funds trimming a footprint. These were people who put everything into a storefront, and the storefront died with the foot traffic.

The mechanism isn’t complicated. Downtown’s own business association counted roughly 500,000 people coming into the core on a weekday in 2019, versus closer to 400,000 today, a 20% drop in the customers who used to buy the lunch, drop off the shirts, get the haircut, and hit the gym on their way home. Every office tenant that left for Century City took hundreds of employees’ daily spending with it, and none of it is coming back.

None of this happened because Los Angeles stopped being a good place to build a business. It happened because two mayors in a row, Eric Garcetti’s and now Karen Bass’s, and a City Council that never seriously checked either of them, let the basics slide until tenants stopped believing downtown was safe. The mayor proposes a budget; the Council can rewrite it, and holds its own sign-off authority over LAPD staffing and the settlements now driving the deficit. This isn’t a one-branch problem, and I’ll put my name on saying so.

Downtown’s own council seat is Exhibit A. Jose Huizar represented downtown for over a decade, then pleaded guilty to racketeering and tax evasion and was sentenced to 13 years in federal prison for roughly $1.5 to $2 million in bribes, cash, casino chips, and private jet flights, tied directly to downtown development approvals. His successor, Kevin de León, was caught on tape in a racist conversation about a colleague’s child in 2022, was asked to resign by the mayor, the governor, and the President, and simply refused, serving out his term.

Nithya Raman doesn’t get a pass either. The sitting councilmember now running against Bass for mayor has chaired the Council’s Housing and Homelessness Committee since 2023, voted yes on the 2023 budget that funded Inside Safe, then campaigned against its results, and was absent for the vote on the budget that produced this year’s deficit. Running against a record you had a vote and a gavel over is different than running against someone else’s.

Don’t take my word for it on the safety problem. Take the mayor’s. Asked directly what’s holding downtown back, Karen Bass told Commercial Observer this June: “First and foremost is safety... Thousands and thousands of people don’t want to come if they don’t perceive it as being safe.” That’s not a critic talking. That’s the sitting mayor, on the record, naming a problem her own administration owns.

Brokers say the same thing without the political filter. CBRE’s Jeffrey Welch has described what’s happening downtown as “quiet leaves, quiet downsizes” to Century City and Pasadena, and calls safety an “impediment” downtown is “swimming upstream” against. Starbucks didn’t hedge at all. It closed 16 stores nationally in 2022, several in the LA area, and named the reason outright: safety.

Then there’s the train system that’s supposed to move people through downtown. A USC survey found 84% of LA County residents now consider Metro trains unsafe, up from 76% before the pandemic; among riders who quit the system, only 19% say they still feel safe, down from 34%. Crime per rider climbed every year from 2019 to 2024, and Bass had to order an emergency law-enforcement surge onto buses and trains in 2024 just to stabilize it. You cannot build a functioning downtown around a transit system people are afraid to use.

And homelessness, the piece nobody in City Hall wants to actually account for. The city’s own homeless count rose from roughly 29,700 people in 2013 to nearly 43,700 in 2025, a 47% increase, after more than a decade and billions of dollars poured into the problem. Proposition HHH promised 10,000 new housing units in 2016; nine years later, roughly 3,800 are complete, at a cost that ballooned past $500,000 a unit. A federal judge overseeing the city’s homelessness settlement put it bluntly in March 2025, after an audit found the city couldn’t account for $2.4 billion in spending: “We pay your bills. Figure this out.” That is a sitting federal judge, not a critic.

Put it together and the picture is not complicated. Companies didn’t leave downtown Los Angeles because the office product got worse. They left because the city around the office got worse, and City Hall and the Council that funds it spent a decade treating that as someone else’s problem to solve. Every lease that moved to Century City, every tower that sold for half its former value, every dollar of tax revenue that vanished with it, that’s the bill for a policy choice, made by people who are mostly still in office or running for a bigger one. It isn’t just landlords and law firms paying it. It’s Don Kohan, and everyone like him, still showing up to open a business nobody told them was already dying. They didn’t write this bill. They’re the ones losing everything to cover it.

I think about bonds a lot because they’re honest. A bond is a promise: a fixed coupon, and your money back if the borrower makes it. That’s the whole deal, and it’s also the ceiling. The best thing that happens is you get paid in full. Inflation works against it the entire time, quietly taking value out of those fixed payments while you wait.

So when someone says “risk-adjusted return,” I don’t look at the yield first. I look at what I’m actually being paid for. A five percent coupon with no growth, in a market that says you’re underpaid for the risk, isn’t safe just because we call it a bond. You know the return, you know inflation will chip at it, and there’s no second act. That’s fine for what it is. I just want to call it what it is.

That gets me to the part of real estate we’ve spent our careers in, and that the market has lately decided it likes: shallow-bay, multi-tenant light industrial. Small buildings, five to twenty thousand feet, cut into units and leased to a dozen tenants at a time. The HVAC contractor, the e-commerce outfit shipping returns, the cabinet shop, the small medical-device company that needs a little space and a roll-up door.

For most of my thirty years in this business almost nobody wanted these buildings. The institutional money wanted the opposite, the half-million-foot box on a long lease to one good-credit tenant. Write one check, sign one lease, collect for fifteen years, never visit. That’s real estate behaving like a bond, and that was the appeal. Our little multi-tenant buildings were the other thing entirely: leases rolling constantly, a full-time job for a property manager, too small and too much work for a big allocator to bother with. They sat there underpriced for years, and we were happy to own them.

Then a few things changed at once. COVID broke supply chains everybody had taken for granted. The long bet on making everything in one country halfway around the world turned into tariffs and a slow, expensive push to bring critical things closer to home. E-commerce turned every neighborhood into a delivery problem that needs space near people. And almost nobody builds new shallow-bay industrial, because the numbers on small units at today’s construction costs don’t work. Demand went up, supply didn’t, and the tenants turned out to be small businesses with nowhere cheaper to go and enough margin to take a rent increase. Capital that wouldn’t return our calls ten years ago now calls this a conviction theme.

I’ve been around long enough to get nervous when my own thesis becomes everybody’s thesis. By the time the overlooked thing is obvious, the easy part, the rerating that pays you just for being early, is gone. Buying this asset class today because it’s popular is how you overpay for it. We’re as capable of overpaying as anyone, so we watch our basis closely.

Here’s what the new crowd tends to miss, and why I still believe in these buildings. The same things that kept the big money out are what protect the operator who stays in. You can’t run them from a spreadsheet. They take real asset enhancement and real property management: leasing a dozen small spaces, handling the turnover, knowing your tenants by name, knowing which ones are growing and which are quietly in trouble. It’s work. And work is one of the few edges that doesn’t get competed away when capital piles in. When the market stops handing you a return, what’s left is the return you make by running the asset better than the next owner. Most of the money chasing this theme isn’t built to do that.

So here’s the comparison I actually care about. A bond pays a fixed coupon for credit risk you’re underpaid to take, and inflation grinds on it the whole way. A well-bought, well-run set of these small industrial buildings pays a current yield too, but the leases are short, so rents reset with inflation instead of getting eaten by it, the income sits across a dozen tenants instead of one, and you can own it below what it would cost to build in a market where nobody is building. The catch, and there’s always a catch, is that none of it shows up on its own. With a bond you do nothing and the coupon comes. With these you have to go earn it.

That suits me. Thirty years in, I trust the returns we have to work for more than the ones that come in the mail. The yield nobody has to lift a finger for is usually the one the market has already fully priced. The work is the point.

— Christopher C. Rising

#CommercialRealEstate #IndustrialRealEstate #CRE #RealEstateInvesting #RiskAdjustedReturns

Small business drives the economy. It’s the most repeated line in American politics and the least reflected in how Los Angeles actually treats its small businesses. Look at how the city taxes them and the priorities become clear.

Los Angeles funds itself in part through a gross receipts tax — a tax on revenue, not profit. The distinction matters. A firm can have a hard year, make almost nothing, and still owe the city on every dollar that came in the door. For professional services — the law firms, the accountants, the consultants, the architects — the rate sits at the top of the city’s schedule, roughly $4.25 for every $1,000 of gross receipts. That’s a small firm’s tax bill calculated off its revenue, before it has paid a single associate or covered its own rent.

Now set that against who the city decided to protect. Los Angeles wrote a specific exemption into its code for entertainment — the Creative Artist Exemption — shielding qualifying creative income up to $300,000. The city looked at one industry, decided it mattered to the local economy and identity, and built it a carve-out. Fair enough; entertainment is part of who this city is. But notice what it tells you. The city knows exactly how to use its tax code to favor an industry it values. It has simply never decided that the small professional firm is worth the same consideration. There’s a token exemption for businesses under $100,000 in receipts — a threshold so low it describes a side gig, not a firm with employees and a lease. For a real small business, there is no relief, no incentive, no signal that the city wants them here. They are taxed at the top rate and forgotten.

And these firms are not captive. That’s the part the city seems to miss entirely: a small business can leave without uprooting anyone’s life. Drive a few miles in almost any direction and you cross into a city with no gross receipts tax at all. Pasadena taxes a business on a flat rate plus headcount, not its revenue. Glendale charges a modest flat registration. El Segundo runs a per-employee schedule and markets its lower taxes as the entire pitch — it has spent years filling its buildings with companies that did the math and left Los Angeles. A managing partner doesn’t have to absorb the city’s top tax rate. He signs a lease one freeway exit away and never thinks about it again. The tax doesn’t fall on the businesses that can’t move. It falls on the ones that haven’t moved yet.

This is where it stops being an abstraction for me, because I operate buildings downtown. Downtown should be the easy answer for a firm like this. The rents make sense there in a way they don’t on the Westside or in much of the county, the space is available, and the empty towers need exactly these tenants. The city has the supply and the demand sitting in the same place.

And then it makes the trade impossible. Because the same small firm that could afford the space looks at the rest of the equation and walks. The streets don’t feel safe. The transit that’s supposed to bring their people in doesn’t feel safe to ride. A managing partner deciding where to put eight or twelve employees is making a safety decision before a real estate decision, and downtown keeps losing it — not on price, which it wins, but on the basics of whether people feel secure walking from the train to the lobby. So the firm signs in Pasadena instead, and the city never even competes for it. The city taxes these firms at its highest rate, offers them nothing, and then fails to deliver the one thing that would make the affordable space usable: a downtown that’s safe to work in.

Put the pieces together and you have a policy that runs exactly backwards. The buildings that most need tenants are downtown. The tenants who can most afford those buildings are small professional firms. And the city greets those firms with its top tax rate, no incentive of any kind, and streets and transit it hasn’t made safe. Then it wonders why the towers stay empty and the recovery never quite arrives.

I’m not asking the city to subsidize anyone. I’m asking it to stop actively working against the businesses that would fill downtown on their own if it simply got out of the way. Tax revenue, not survival. Extend small professional firms the same consideration the city already knows how to extend to industries it favors. And make downtown safe enough that an affordable lease is an easy yes instead of a hard no. None of that requires a new tower or a ribbon to cut. It requires the city to remember something it says constantly and acts on rarely — that the small business is the economy, not a rounding error in it.

A city cannot tax its way to a comeback. Downtown doesn’t have a demand problem it can’t solve — it has a city that taxes and neglects the very tenants its neighbors are glad to take, then waits for a recovery that keeps moving a few miles up the freeway. Downtown doesn’t need another ribbon to cut. It needs to stop forgetting who pays the rent.

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