Dive Brief:
- Twenty-five housing researchers warned in an open letter released Friday that a policy on build-to-rent homes included in the 21st Century ROAD to Housing Act would “significantly decrease the nation’s housing stock.”
- The legislation, which passed the Senate and is now under final consideration before the House, contains a provision that disrupts the BTR business model by mandating these communities be sold to individual homeowners within seven years — a limited time to generate rental income in order to justify the investment into building them, per the letter.
- “While some may assume that the homes now being built as BTR units will be built as homeownership units instead, real estate financing does not work this way,” the letter reads. “BTR units are meeting the needs of a particular middle-income group that often cannot afford homeownership.”
Dive Insight:
The housing industry has been pushing back hard against the single-family BTR forced sale provision in Section 901 since it was passed on March 12. The Senate added the measure following a Feb. 9 statement that indicated President Donald Trump wouldn’t sign the housing package without a single-family investor ban.
However, the measure is inconsistent with what the president has said repeatedly: that he doesn't want the bill to hurt rental housing, National Multifamily Housing Council President Sharon Wilson Géno told Multifamily Dive.
“It was dropped in, purportedly on the theory that it would ‘limit private equity or institutional investment in housing.’ That's something everyone in the multifamily space should be concerned about, regardless of whether or not they're building specifically in the build-to-rent space or not,” Wilson Géno said.
If passed, the seven-year disposition requirement would result in a decline of more than 7% of single-family home completions and 18% of rental completions, according to analysis from Laurie Goodman and Jim Parrott at the Urban Institute, a Washington, D.C.-based think tank.
“In their zeal to punish institutional investors with this move, Congress could ultimately decrease the number of rental units built each year by at least 72,000, meaning its package to expand the supply of housing has included a measure that would actually reduce housing development,” according to Goodman and Parrott.
Meanwhile, a preliminary estimate from the National Association of Home Builders dated March 12 indicates the proposed rule “would decrease investable capital and lower housing supply” and place approximately 40,000 units per year at risk.
Investors will need to leave the home vacant for about a month to prepare it for sale, another two months while it is on the market and two more months between the accepted offer and the closing of the deal, all of which eats away at the margins in the seven-year period, according to the letter. There are also serious logistical challenges to the proposal.
“The requirement that homes be sold to individual homeowners will also be impossible to meet in many circumstances given the way BTR homes are constructed,” per the letter. “Units in BTR communities are often built on one single lot, making it difficult, if not impossible, to subdivide these units to be sold individually.”
Meanwhile, the cost to comply with the “home boosting” exemption is simply providing credit reporting agencies with a tenant’s positive rental payment history and offering the tenant a 30-day right of first refusal, according to the Urban Institute’s Goodman and Parrott.
“Given the enormous cost difference, we expect most new activity in the single-family space to use the home boosting exemption and ignore the exemption for build-to-rent housing,” the authors wrote. As a result, capital will flow “away from the now costly build-to-rent model and into a new model designed to meet the relatively cost-free exemption for programs that ‘boost homeownership’ under the bill’s rules.”
According to the researchers, the solution is simple: Congress should strike the requirement to dispose of the properties that fall under the build-to-rent exemption. It should also “change the ‘home boosting’ exemption to require a more meaningful social benefit to avoid the statute’s prohibitions, like deeper tenant protections or down payment assistance,” they wrote.
“This would bring the single-family rental provision in line with the broader bill, ensuring that the significant capital flowing through this channel will help address the nation’s pressing housing needs.”
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