Apartment rents
  • The pro-tenant movement and its impact on real estate investors

    Monday, July 15th, 2019

  • If you are a real estate investor, you know that there is a housing shortage not only in California but across the nation. In many cities it has reached a critical level. Some experts are even saying it has reached crisis proportions. While this has created opportunities for investors, rents have been steadily rising, it has also created challenges for communities, home buyers and renters. The challenges have gotten so big that we are now starting to see a newly energized pro-tenant movement among tenant advocates and local governments.

    If you are already an owner / investor in long-term rental property or multifamily properties, it is becoming increasingly important to understand current and planned tenant protections in your local area. Rent control and tenant protections are nothing new and most agree that solutions to the affordable housing crisis are needed. However, some of the approaches being taken, while potentially helping renters in the short-term, will have a negative long-term impact on the value of properties and may even end up hurting renters and communities in the long run.

    To illustrate the extent of this newly energized pro-tenant movement, we need look no further than Glendale, California. A Right to Lease ordinance was adopted by the Glendale City Council in February 2019. The ordinance spells out the amount a landlord must pay a tenant who opts to leave after receiving notice of a rent increase of 7% or more. The amount the landlord is on the hook for depends on the number of units owned, how long the tenant has lived in the unit and how much money the tenant makes. The ordinance is a bit complicated but generally mandates the following when a tenant decides to move after receiving notification of the rent increase.

    • Two units or less – properties are exempt from the ordinance.
    • Three to four units – landlords must pay all tenants a flat three months of the tenant’s current rent.
    • Five units or more –
      • If the tenant has lived in the same unit for less than or equal to three years, the landlord must pay three months of the proposed rent.
      • if the tenant has lived in the same unit between three to four years, the amount jumps to four months of rent.
      • if the tenant has lived in the same unit between four to five years, the amount increases to five months of rent.
      • Those who have lived in their apartments for more than five years will qualify for six months of rent.

    An exception to the above is made when tenants’ income exceeds Los Angeles County’s median income. For these higher earning tenants, landlords will be required to pay three months of the proposed rent no matter how long the tenant has lived in the unit.

    The way in which this ordinance is structured seems to hurt the “good-guy” landlord the most; the property owners that kept their rents below market rate. When these “good-guy” landlords are ready to refinance or sell, they will not get the fair market value for their property.

    There are examples of the pro-tenant movement elsewhere in California and across the nation. Menlo Park and Mountain View also instituted similar ordinances although Mountain View has since cancelled their Right to Lease ordinance.

    After New York state instituted a new rent reform law community banks that lend to apartment companies suffered declines in their stock prices as investors worried about increased risk on those loans.

    Conclusion

    The affordable housing shortage is a big and growing problem that isn’t likely to go away anytime soon. Most of us want to find smart solutions to this problem. Solutions that will help those in need of housing without hurting those who are in the business of providing housing.

    As an owner or investor, a good first step is to make sure you stay up to date on pro-tenant movements and ordinances wherever you have property or investments.

    If you have been a good-guy landlord, it may be a better strategic move to keep rents closer to the market rate. If you are worried about tenants leaving, you may be able to keep them by offering other incentives.