I admit I am puzzled that with a national housing shortage, governments across the country – and the federal government as well – are taking aim at the so-called “Build-to-Rent Industry” – but so it is.
 
I wrote about this a few months ago as a risk for those in the BTR industry to be concerned about, but at the time, it seemed to be partisan, with only Democrats supporting it. My thinking then was that as long as Congress was divided, this would not occur; however, watch out if Congress and the presidency were ever unified as all Democrats. 
 
But I was wrong about that, as now Republicans seem to be jumping on this bandwagon too.
 
Strangely enough, it might become one of the few bipartisan pieces of legislation being considered right now. 
 
Currently, bills are under consideration in the U.S. Senate, and in the state legislatures of California, Minnesota, and North Carolina.  Texas does not have a bill yet but its governor has spoken out for the necessity for such a bill.
 
All of these bills have the same populist–resonating theme: There is a housing shortage, and normal human beings cannot compete in bidding against multi-billion dollar funds, so these parties go house-hungry. Taking the major players off the playing field will ease the housing shortage and make it easier for normal human beings to buy houses.
 
These bills generally propose limiting corporate ownership of single-family residences, entirely or to limit ownership to no more than 1,000 homes, and introduce taxes and hefty fines for failures to comply with the imposed limits.  Some of the bills differentiate “corporate ownership” between owners that have $50M or more in net value or assets under management or are based on the number of homes owned.  The bills also vary in their definition of a “single-family home,” where some seem to envision restrictions applying to homes with up to four units or less, and others would only restrict ownership of homes with one unit. 
 
I don’t agree with all of this, but at least I can understand it for existing houses.  The part that is harder to understand is how it would apply to major players who build new houses, i.e. the point of Build-To-Rent.  One would think that these parties would be exempted since they are building new housing, and indeed, the bill before the California legislature was amended to exclude persons engaged in the construction of housing, but still, some cities have adopted outright bans of Build-To-Rent.  

There are constitutional challenges abounding to these bills; however, I am no constitutional scholar and am not able to evaluate whether these challenges will be successful. 
 
Although I try to avoid politics in The Real Estate Philosopher, the exception is for proposed lawmaking that harms my (beloved) real estate industry, so I don’t think I am out of line in saying that I do not think this is wise policy making.  Also, I cannot help but note that the last time the government went on a binge of pushing people who could not afford houses to buy them anyway, it ended (slightly) badly as one of the causes of the Global Financial Crisis.  But I am not writing about that here – or am I ????? 
 
Since this is likely becoming bipartisan, is increasingly in the public eye, and seemingly gaining support, I do think it has become more likely than not that legislation of this nature will be adopted. 
 
More imminently, what should BTR players do?
 
There are two situations, of course: 

  • Those who are not in the industry already.
  • Those who are in the industry and own large numbers of housing.

For those not already in the industry, I would carefully assess the risks and the rewards. There are certainly dangers ahead.  If you are entering the space, you should do it in a way that will not run afoul of the likely legislation. 
 
On the other hand, there may be opportunities from parties who have BTR assets now that are overleveraged or otherwise challenged, and that may be forced to unload them.  If you approach these situations opportunistically: 

  • There may be ways to provide financing on the assets at higher interest rates or with lower loan-to-values;
  • There may be ways to purchase assets using creative structures; and
  • You may be able to effectuate some of the business models I outline below for those already in the industry.

To conclude, all investments have a risk and a reward.  My theory is that investors should be overpaid for risk.  If you are entering this industry, you should be mindful that the risks have become greater, and the rewards should rise commensurately.
 
If you are already in the industry, I would not just passively accept negative outcomes.  I would consider various ideas.  Here are a few that have come to mind: 

  • Since there will be time to divest large portfolios, morph the business to assist homeowners in purchasing houses.  There are already business models where the investor allows the renter to use part of the rent towards building a down payment, which allows the renter to build the necessary equity to permit the renter to buy the house.  This model will be consistent with governmental goals to foster home ownership.
  • Enter into shared appreciation arrangements with homeowners.  So far, most of the laws seem to prohibit majority ownership but not minority ownership.
  • Since the goal is to prevent major players from owning the houses, create spinoffs of smaller entities to buy smaller pools of houses.  I suspect this will be quite complicated, and I wonder if it is worth it.
  • If the laws are local in nature, fight like heck against the laws – based on unconstitutional takings, confiscatory taxes, and similar theories -- and perhaps a more balanced outcome will come of it.  This will likely not be effective if the laws are State-Wide or Federal in nature, but it might be doable if the adversary is a municipality that is not well-capitalized and may have an interest in a negotiated resolution.

At my law firm, we are thinking aggressively and creatively about how to protect and advise our clients in this business.  So feel free to call us if you have any thoughts. 
 
Best of success to everyone,

Bruce Stachenfeld aka The Real Estate Philosopher®