BLOGS: Multifamily Focus

2008-10-30, 09:44

NEW LAW MAY POSE NEW CHALLENGES

By: Multifamily Real Estate Industry Team
Responding to protests from plaintiff’s attorneys and a variety of public interest groups, and faced with a surprising degree of support from the business community, Congress hammered out the ADA Amendments Act, or “ADAAA”—an unwieldy acronym for an even more unwieldy name (“Americans with Disabilities Act Amendments Act”). The new law, effective January 1, 2008, promises to usher in a lengthy round of litigation challenges over the next several years.

The principal focus of the ADAAA is on employment. There is no change in employer coverage—employers with 15 or more employees are subject to the law. But sweeping “corrections” are found in the amendments, which are claimed “to restore the intent and protections of The American with Disabilities Act of 1990.” An extensive list of “major life activities” is included (the ADA did not give examples). “Mitigating measures” such as medication and medical devices to be used to alleviate limitations, are no longer required in determining whether a disability exists; this provision expressly overrules Supreme Court decisions which had concluded that individual responsibility should take hold before an employee was required to accommodate a disability. Conversely, eyeglasses and contact lenses are not “mitigating measures” within the ADAAA language, so one who has correctable vision impairment is not entitled to be treated as if the devices weren’t available.

Conditions which are episodic or in remission are considered disabilities irrespective of their current impact. On the other hand, Congress found that no reasonable accommodation is mandated for a “regarded as” disability, rejecting the contrary views of some courts. (It has never been clear to the writer why a nonexistent “disability” would require an accommodation just because an erroneous perception was in play.)

That cursory review of the changes to ADA Title I—the employment section of the law—is of concern to employers, but there are other aspects of the ADA which impact on the multi-family housing industry. Remember that the Fair Housing Act Amendments, dealing with the interior design of rental units, and their concentration on limitations on mobility, are not affected by the ADAAA; so let’s look at the principal ADA concern of our readers, the public accommodations language of Title III governing rental offices, clubhouses, recreation facilities, walkways and other common areas. The impact of the ADAAA changes on Title III is more subtle, but should not be ignored: The new law restructures the definitions of “disability,” “major life activities,” and “regarded as having such an impairment,” adding “rules of construction regarding the definition of disability” and making all four subsections applicable to all four ADA Titles. (The other two are “public services” (Title II) and “miscellaneous provisions” (Title IV).)

Both Title I and Title III prohibit discrimination based on disability, but “discrimination” has different meanings in the two: While employers have a wide range of actions and prohibitions they must comply with to avoid discriminating, public accommodations and commercial facilities have four basic requirements: ensuring full and equal enjoyment of goods and services they provide to all, including those with disabilities; making reasonable accommodations to the disabled when necessary unless such accommodations would “fundamentally alter” the nature of the goods or services; and providing necessary auxiliary aids and services; removal of architectural barriers “and communication barriers that are structural in nature.” The latter obligation may yield to “available alternative methods” if removal of barriers is not “readily achievable.” Note particularly that “barriers” has a broad meaning, and includes such things as issues for the visually impaired which may be accommodated by Braille, sign language or other “auxiliary aids.” (Latest case in point-an orthopedist’s office in New Hampshire which told a patient she needed to provide a family member, rather than an American Sign Language interpreter, to facilitate future appointment.)

A major distinction between Title I and Title III is the question of enforcement procedure. Employment claims under Title I start with a charge of discrimination filed with the Equal Employment Opportunity Commission, and the process from that point is identical to that of other private-sector employment discrimination cases: Investigation and attempted conciliation by EEOC, followed by a notice of right to sue (or, in rare cases, EEOC’s filing suit on behalf of the charging party), then litigation in a U.S. District Court. By contrast, the enforcement mechanism under Title III is described in Section 308 of the ADA, 42 U.S.C. § 12188: The remedies and procedures of Title I of the 1964 Civil Rights Act, and not those of the Fair Housing Act, apply; there is no necessity of filing an administrative complaint with any governmental agency, attempting prelitigation resolution, or even making the complaint known to anyone including the alleged discriminator if that would be a “futile gesture”—that is, if a person with a disability “has actual notice that a person or organization covered by this subchapter does not intent to comply with its provisions; and either the Attorney General or private plaintiffs—including organizations who would be able to file housing discrimination lawsuits—can initiate the litigation. In addition to court-ordered remedial steps such as injunctions, Title III allows monetary damages, but not punitive damages, for aggrieved persons only in actions brought by the Attorney General. The AG can also obtain civil penalties “to vindicate the public interest”: up to $50,000 for a first offense, and ‘not exceeding $100,000 for any subsequent violation. The prevailing party (other than the United States) can recover attorneys’ fees and costs from the loser, so in a government brought case, there is frequently a request by the aggrieved person or organization to intervene as an additional plaintiff.

Therefore, although the specter of large damage recovery is not as much of an issue under Title III, there can be significant costs in remediation and other compliance steps, not to mention the expense and effort which flow out of any litigation. Watch for creative approaches by advocates for the disabled to convert the employment-focused amendments to the ADA into another weapon in the housing discrimination arsenal.


(This entry posted by Charlie Edwards, a member of Womble Carlyle's Labor and Employment group.)

2008-10-28, 09:30

Outlook for Apartment (and Storage) REITs Not So Bad

By: Multifamily Real Estate Industry Team
According to a recent article in The New York Times, some real estate investment trusts are not faring so badly in this otherwise dreadful investment climate. Third quarter earnings were strong in both apartment and storage REITs, apartments posting a 12.5 percent gain and storage surging by 19.3 percent.

REIT investors appear to have more confidence in these two sectors for several reasons. The current difficulties associated with home prices and mortgage availability are keeping households in the rental market. Tenant turnover has slowed, and operators have been able to trim operating expenses as a result (e.g., spending less on replacing carpet, repainting). Fannie and Freddie continue to be active apartment lenders, with adequate capital available for this sector. Particularly in areas where the economies seem to be relatively stable, the apartment sector is anticipated to continue to be strong.

Storage REITs appear to be doing well in areas at the opposite end of the economic spectrum. They did best in the regions that had the worst housing markets and where foreclosures have been on the rise. Evidently, people need a space to store possessions when they move into smaller houses or apartments.

The article discusses several apartment REITs and storage REITs that are favored by analysts just now, click http://www.nytimes.com/2008/10/12/realestate/commercial/12sqft.html?_r=1&ref=business&oref=slogin to read about them.

(This entry posted by Karen Estelle Carey, member of the multi-family practice at Womble Carlyle.)

2008-10-23, 12:31

Zero Trans Fat Homes?

By: Chris Iavarone
Michelle Kaufmann, an architect known for her line of prefab homes, recently proposed a standardized "nutrition" label to communicate the benefits of a green building to potential buyers. She notes that we traditionally buy a home based on qualities like location, curb appeal, size, and upfront costs, but exclude important factors like sustainability, healthfulness of the indoor environment, and the cost of operating a home.

The purpose of the sustainability label is to quantify the advantages of a green home in easy to understand terms. Her proposed label, similar to the nutritional label found on packaged food products, lists key figures such as energy consumption, carbon dioxide emissions, and insulation values. The label would allow consumers to compare the long-term cost benefits of homes on the market and a home's contribution to improving the environment. In the same way that nutritional labels have changed the way people buy food (for example, the recent push for zero trans fats), Michelle Kaufmann hopes that a standardized sustainability label will change the way people buy homes.

The label could also be married to existing green building standard, such as LEED. The LEED distinction on the label would promote USGBC's brand, and listing key figures on the label will help distinguish a LEED building from one built using traditional building standards.

This idea could also have implications for the multifamily market as green takes hold. It could give prospective purchasers another way to evaluate a multifamily building, and it could give potential renters a way to compare apartments in different multifamily developments.

For more information and an example of a "sustainability label" see Michelle's blog entry and her whitepaper.

2008-10-13, 14:52

Department of Housing and Urban Development Financing

By: Multifamily Real Estate Industry Team
Conventional wisdom tells us that, with markets in crisis, debt is virtually unavailable to investors and developers in the multifamily housing market. While the ability to obtain debt from private financial institutions has changed drastically, there remains a reliable source of financing for multifamily projects: the Department of Housing and Urban Development (HUD).

Section 221(d)(4) of the National Housing Act allows for-profit developers to obtain a mortgage loan in an amount up to the lesser of:

1. 90 percent of the HUD replacement cost estimate, OR
2. the amount that 90% of net operating income can debt service considering up to a maximum 95% stabilized occupancy rate.

Here are a few other criteria to consider in pursuing Section 221(d)(4) loans:

  • Loans are non-recourse with respect to the borrower’s personal liability.
  • Loans are assumable by a qualified buyer approved by the lender, subject to a 1% assumption fee.
  • The subject property must remain rental property for five years from the date of the loan.
  • The borrower must make monthly deposits into an escrow account for real estate taxes, special assessments, hazard insurance, replacement reserves and an amount equal to 1/2% of principal balance for mortgage insurance premiums.

It is important to bear in mind that the borrower has very little negotiating power when it comes to HUD loan documents. The documents therefore provide little flexibility for a borrower’s particular situation.

(This entry posted by Mark Polston, a member of the Real Estate Development group)

2008-10-09, 11:31

Immigration Law and the Fair Housing Act: The Tensions in Rental Housing

By: Multifamily Real Estate Industry Team
As most owners and managers of multifamily communities are aware, the Fair Housing Act (“FHA”) prohibits discrimination in most housing related transactions based upon a person’s race, color, religion, sex, national origin, disability, or familial status. This means, among other things, that under the FHA, landlords are prohibited from requiring disclosure of national origin as a part of an application or lease for rental housing. At the same time federal immigration and state laws impose criminal penalties for anyone, including any landlord, who “knowingly or in reckless disregard” of an immigrant’s undocumented status “conceals, harbors or shields [the immigrant] from detection.” Penalties for noncompliance can include a fine, prison sentence of up to five years, or both.

How can owners and managers comply both with the FHA and avoid the draconian penalities associated with a violation of immigration law requirements? In other words, how can landlords best reconcile these seemingly conflicting legal requirements?

Owners and managers can take some comfort in the fact that there currently are no federal, state or local laws that expressly require verification of citizenship for renting or leasing purposes. This circumstance will likely change when the next presidential administration takes over, as both presidential candidates, who have very different opinions on immigration, have articulated their intentions to introduce legislation that will address that national concern about illegal immigration. “While McCain supports tightening the borders and sending undocumented immigrants "to the back of the line" for citizenship, he steers clear of the issue during campaign rallies and press events. Obama supports tightening the borders and sending undocumented immigrants "to the back of the line" for citizenship and addresses immigration at campaign rallies and press events.” http://www.diversityinc.com/public/4390.cfm Whichever approach is taken, the likelihood is that the multifamily industry will suffer either a direct impact or a trickle down effect from these new legal requirements.

In the interim, and based on the current state of the law, here are some general guidelines that landlords can follow to endeavor to walk the minefield of tension between the requirements imposed by the FHA and existing immigration laws:

Questions Concerning National Origin are Impermissible: Asking prospective residents to verify the country of their citizenship on rental housing applications/leases runs afoul of the FHA and exposes landlords to the risk of FHA enforcement action, fines, and other penalties.

Questions Concerning U.S. Citizenship or Legal Status are Permissible (But be Careful): Whether a person is a U.S. citizen or whether a non-citizen is legally present in the U.S. are not defined under the FHA as protected characteristics. Thus asking specifically whether a prospective resident is a U.S. citizen does not violate the FHA. However, since neither the FHA nor any existing immigration laws expressly require a landlord to ask this question, give thought to whether this question is essential and whether you might be better off not asking anything of prospective residents concerning this subject. If the response from prospective residents is that they are not legally present in the U.S., then you have been put on notice of their illegal status and leasing to them may expose you to civil and/or criminal liability.

Compliance with City/County Immigration Ordinances; Proceed with Caution: Be careful about blindly following city/county immigration ordinances. More than one hundred localities have considered enacting ordinances imposing bans on leasing or renting to undocumented aliens. These ordinances impose monetary penalties and in some cases, may revoke the business licenses of offenders. However, these ordinances either have been struck down by the courts as unconstitutional or have been placed on hold pending the outcome of ongoing litigation. If your local jurisdiction enacts an ordinance that effectively requires you, as a landlord, to also serve as an immigration officer, seek legal advice about the best means to employ to satisfy these requirements without concurrently violating the FHA.

Requirements for Government Documentation are Permissible. Landlords may impose a requirement for prospective residents to produce either a driver’s license or a government identification document with a photo without violating the FHA. However, if Landlords choose to do so, they must be sure to enforce these requirements in a nondiscriminatory and uniform fashion and should therefore apply the requirements consistently to all potential tenants. Failure to do so, could result in non-compliance with the FHA.

(This entry posted by Christina Thomas, a member of Womble's Real Estate Development group)

2008-10-08, 11:34

How Commercial Mortgage Loans Are Affected By The Emergency Economic Stabilization Act of 2008 Overview

By: Multifamily Real Estate Industry Team
The Emergency Economic Stabilization Act of 2008 (“EESA”) provides up to $700 billion to the Secretary of the Treasury to buy mortgages and other assets from financial institutions.[1] Some aspects of the bill apply more broadly to financial institutions, but the core of the legislation is the Troubled Asset Relief Program (known as “TARP”).

The heart of the credit crisis has been the contagion in the credit markets initially caused by subprime loans and other single-family residential loans which were either originated without adequate underwriting (e.g. so-called “liar” loans) or in which the loan balance now substantially exceeds the collateral value due to the precipitous decline in home values over the last year. The initial focus on the purchase of troubled assets by the Treasury under EESA is therefore likely be on the purchase of residential mortgage loans and securities, including residential mortgage-backed securities (RMBS) secured by residential mortgages.

However, there is also a growing crisis involving commercial real estate loans, particularly commercial real estate loans used to finance land, acquisition and development loans to developers of single-family residential projects and financing for residential condominium projects[2].

The Act addresses the purchase of troubled assets in the form of both residential and commercial mortgages as well as securities backed by those mortgages.

[1] This summary is based on the version of the Act passed by the Senate on October 1, 2008. The House of Representatives enacted the Act without changes on Friday, October 3, 2008.

[2] See, e.g., After Lehman, Banks Jettison Commercial Property, The Wall Street Journal (September 17, 2008). See also Collateralized Damage: Commercial Mortgage Securities Are at a Standstill (July 23, 2008) at www.http://knowledge.wharton.upenn.edu

Link to full alert on the bailout act and how it could affect commercial mortgage loans is found in pdf format at: http://www.wcsr.com/resources/pdfs/capmkt100308.pdf

(This entry posted by Gary Chamblee, a member of Womble Carlyle's Capital Markets Business group)

2008-10-07, 16:23

The "Green Preference" trend will continue accelerate

By: Multifamily Real Estate Industry Team
There are strong indications that this "green preference" trend will only accelerate.

Tim Sanders, author of the recently published Saving the World at Work (Doubleday), has done extensive research concerning the lifestyle demands of the rising generation of consumers, who take ecology seriously. Among his findings are that they increasingly demand to become identified with businesses that share their sense of eco-consciousness.

For example, they want to be proud of the "greenness" of where they work and live, so they can display these associations on their personal Facebook pages and blogs. They also pay more attention to a company's social contributions than to celebrity endorsements and even the content of a firm's advertising.

Thus, home buyers and apartment renters will increasingly seek out builders and communities that actively reflect their own sense of "greenness" and should be willing to spend a premium to live in a place they deem "Facebook-worthy."

A related finding is that one-fifth of the most affluent young workers plan to leave their current jobs because they perceive their companies as doing too little of social value. Thus, even beyond the initial impulse or decision to buy or rent, realtors that earn reputations for supporting ecology are likely to foster loyalty and enthusiastic endorsements among their most influential young clients.

In sum, ecology is an integral part of the outlook (and spending decisions) of those upon whom our economy will depend. Multfamily owners, developers and managers who attract the attention and deserve the loyalty of prospective residents are paving the way to their own future success.

(This entry posted by Peter Gutmann a member of Womble's Cable and Broadcast group)

2008-10-06, 09:03

Opportunities for Property Management Companies Under the EESA

By: Multifamily Real Estate Industry Team
It seems to be the conventional wisdom that the Emergency Economic Stabilization Act ("EESA" or "Bailout Plan") that President Bush signed into law last Friday afternoon will not immediately free up capital markets, make credit more available, or in general alleviate our serous economic problems. That said, the text of the Bailout Plan, hot off the press, is being eagerly studied by many businesses, including those in the multi-family housing sector, to determine what business opportunities have been created by the new legislation.
Indeed, it appears that there are many. Section 101 of the EESA contemplates that Treasury will enter into a variety of agreements with a variety of third party service providers, including firms that will provide property management services for troubled assets purchased by Treasury. At the same time, these service providers will be subject to a good deal of scrutiny and oversight required by the new legislation.

For a discussion of these and other provisions of the EESA relevant to property managers and others in the multi-family housing industry, see a summary of the legislation prepared by Womble Carlyle's EESA Action Team by clicking on this link. http://www.wcsr.com/?id=680&objid=181

(This entry posted by Karen Estelle Carey, a member of the EESA Action Team and Womble Carlyle's Multi-Family Housing Group.)

2008-10-03, 10:51

Home Buyers Increasingly Focus on “Green Features” over Luxury Amenities

By: Multifamily Real Estate Industry Team
In a recent article, Builder Online reported that green features, such as solar panels and energy-efficient appliances, are beating out luxury amenities as selection criteria for home buyers. http://www.builderonline.com/green-building/green-features-beat-out-luxury-amenities.aspx

There is little doubt in my mind that this sustainability trend will similarly impact the multifamily industry, as prospective residents increasingly focus on the “green factor” in their rental decisions. As a consequence, the incorporation and implementation of sustainability features and practices will be a compelling means by which owners and managers can differentiate their communities.

This trend reminds me of a time, about seven to ten years ago, before apartment communities ubiquitously offered residents high-speed internet services. Ultimately, high speed data services, whether through cable or telephony systems, became the norm. However, the apartment owners and managers that were first movers to offer “new economy” communications services captured more market share than others who ignored this trend and clearly established themselves as thought leaders in the industry.

Similar opportunities abound for owners and managers that are the first movers in embracing and incorporating green features and practices into their apartment homes.

(This entry posted by Pamela V. Rothenberg, a member of the Real Estate Development group)

2008-10-02, 08:47

Non-Traditional Households are on the Rise - The Impact on Owners and Managers

By: Multifamily Real Estate Industry Team

Recently released census data, known as the American Community Survey (ACS), indicates that “non-traditional” households headed by single men and single women will continue to rise. http://www.builderonline.com/demographics/the-rise-of-non-traditional-households.aspx According to the Census data, “non-family” households totaled 37 million. The ACS Census data covers the social, economic and housing characteristics of the nation’s population.

Researchers at the Joint Center for Housing Studies at Harvard University project that between 2010 and 2020, the number of unmarried householders with children is projected to increase from 11.0 million to 11.8 million. “Married couples are a shrinking share of American households…Several trends have contributed to this shift, including higher labor force participation rates for women, delayed marriage, high divorce rates, low remarriage rates, and greater acceptance of unmarried partners living together. The resulting growth in unmarried-partner, single-parent and single person households has increased the share of adults in all age groups heading independent households.”

How will the apartment industry be impacted by the decreasing number of households with married couples? Stated differently, how should multifamily developers, asset and property managers change the communities they develop and/or rehabilitate, as well as their approach to managing those communities, to most effectively target the needs of these increasing numbers of non-traditional households?

Here are some suggestions:

  • To differentiate their communities and address this changing resident constituency, owners and managers should focus on offering amenities and ancillary services required by non-traditional households, such as increased after-school programs, dog walking, grocery shopping, dry cleaning, house cleaning and on-site concierge services.
  • Resident selection criteria should be re-evaluated to address the differing circumstances presented by “non-traditional household” rental applicants, with any proposed changes in selection criteria being carefully scrutinized to avoid jeopardizing the integrity of the asset.
  • Property management professionals should be trained to “sell” to the non-traditional households and to focus on their particular needs and circumstances.
  • From a development perspective, unit designs should incorporate the needs of the non-traditional family – with the objective of enabling the owner to offer unique floor plans and associated pricing points.

The reality for most people is that they are looking for a home, not a house or an apartment. Given these changing demographics, to stay ahead of the curve, owners and managers should focus on how to best offer non-traditional households the specific services, amenities and unit designs that mesh with their needs and lifestyles.

(This entry was posted by Pamela V. Rothenberg, a member of the Womble Carlyle Real Estate Development Group and Kelly Treesh, President of Multfamily Consulting, LLC, http://multifamilyconsulting.com/pages/1/index.htm)

HUD's Neighborhood Stabilization Program

By: Multifamily Real Estate Industry Team
On September 26, 2008, the U.S. Department of Housing and Urban Development (HUD) announced an allocation of $3.92 billion to states, with particular concentration on hard-hit areas trying to react and counteract the effects of high foreclosures. The program is entitled the Neighborhood Stabilization Program (NSP). It is intended to aim emergency assistance to state and local governments whose communities have been especially hard hit by mortgage foreclosures. The funds will be used to acquire and redevelop foreclosed properties in neighborhoods with a high potential of becoming abandoned areas. HUD expects that requiring housing counseling for families receiving homebuyer assistance will prevent future foreclosures and hopes to ensure that homebuyers obtain mortgage loans from lenders who agree to comply with secure lending practices.

The funds will be supplied through the Community Development Block Grant Program (CDBG) under the Housing and Economic Recovery Act of 2008. This money will purchase, at a discount, foreclosed homes and demolish or rehabilitate the housing to respond to falling home values and increasing foreclosures. Alternatively, state and local governments may use the grants to offer assistance to low and moderate income homebuyers to use toward down payment and closing costs. Grantees can create "land banks" to assemble, temporarily manage, and dispose of vacant land with the hope that this will fortify neighborhoods and encourage re-use or redevelopment of urban property.

HUD plans to allocate funds by following the Congressional directive to target areas based on the number/percent of foreclosures, subprime mortgages and mortgage defaults and delinquencies based on data from government agencies and private sources. In order to assist communities in administering the NSP, HUD will issue specific rules that ensure, that the funds be put to use for specific activities within 18 months.

This new initiative is consistent with existing HUD revitalization programs such as the HOPE VI grant program, which is intended to assist in replacing obsolete and deteriorated public housing with new housing. While facially, the NSP is targeted at homeownership and not multifamily housing or mixed use development, by permitting governmental agencies to acquire tracts of land, the NSP does not seem to preclude use of this land for multifamily or mixed use development, especially if this development improves the overall community. In certain cases, development of multifamily and mixed use projects will be complementary to homeowners. And in general, once NSP is implemented and funded it can strengthen troubled communities and increase the value existing multifamily projects and make new multifamily and mixed use projects more feasible.

For more on HUD’s methodology for allocating CDBG Appropriation refer to the HUD release from September 26, 2008, which can be found at http://www.hud.gov/news/release.cfm?content=pr08-148.cfm

(This entry posted by Erica Harvey, a member of the Real Estate Development Group)
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