Will the golden handcuffs of low rates save Denver real estate in this cycle? November paints an interesting picture of what the future holds.
The prevailing theory is that this real estate cycle will be considerably better than others…
Denver is making waves again with the passage of a new law that requires all long-term rental properties to meet “min housing requirements”. This new law goes into effect on January 1 2023. On the surface the new law sounds innocuous, but the reality is far different. How will these new requirements impact the number of rental houses? What are “min housing requirements”? What are the unintended consequences of the new law?
The Denver City Council Business Committee approved a rental licensing policy program that requires landlords to pay for long-term licenses to rent out their properties.
By requiring the long-term licenses, the “Healthy Residential Rentals for All” program intends to improve the conditions of rental properties, help the city track its housing stock and establish better communications between tenants and landlords.
To get a license, rental properties would need to pass an inspection to assure they adhere to Denver’s minimum housing standards, including having functional facilities, proper lighting and heating, sanitary dwellings, no pests and supplied utilities such as water and gas.
Landlords would need to hire certified private home inspectors themselves, costing around $150 for single-unit properties and $45 for each additional unit.
The program also features several renter protections, including requirements that landlords provide tenants with a copy of a written lease and a notice of tenant rights and resources within seven days of all new tenancies.
Landlords would also be required to provide tenant rights and resources with any rent demand. The rights and resources would be provided by the city and include information about minimum housing standards, how to file a complaint, legal rights when receiving an eviction notice and how to get rental assistance and legal representation.
The list is very extensive and is broken into 3 categories; here is a link to the full specifications provided by the city of Denver.
None of what is in the standards is rocket science, but each item will add considerable expense. For example on the heating you must be able to maintain 70 degrees in -5 temp. In older properties with single pane windows, the temp could drop below that level. If the tenants file a complaint, then they could stay in the unit for the remainder of the lease without paying until the situation is fixed.
With increased requirements for property owners, property owners will also increase requirements for tenants. For example, many older units will need to be substantially updated to comply with the new requirements. These property owners will demand more qualified tenants (higher credit scores, more security deposit,etc… ) to protect their investment
There is no free lunch in economics. I guarantee rents will be increased to comply with the new regulations. For example the inspection fee every four years and registration fees will be baked into the new lease rates along with any improvements that have to be done to comply with the new regulations.
I always find it ironic how government regulation picks winners and losers. Unfortunately the small property owner will be a loser in this. Large property owners/corporate owners have the resources to manage compliance and put substantial capital into properties. Unfortunately the increased regulations will force out the smaller players. A good example is the banking market. After 2008, the amount of regulations on banks increased substantially. As a result, smaller banks either went out of business or were acquired by larger national or regional players. This new law in Denver is no different with many smaller owners exiting the business.
As regulations increase along with property taxes, at some point it becomes unprofitable to operate units focusing on lower income renters. With values soaring, many property owners will end up selling to focus on areas that are more profitable. For example, they could sell the property in Denver and get a better return on a rental in CO springs or Greeley which are more cost effective markets.
As with anything in economics, money doesn’t grow on trees. Unfortunately, Denver, like many cities has missed this memo. There will be unintended consequences from legislation. In the case of the new law, “Healthy Residential Rentals for All”, there is no free lunch as someone will pay. Unfortunately renters will be on the hook for higher rents driven by increased compliance costs while at the same time supply will be reduced.
Unfortunately, the new law will not only increase rents, but also decrease the amount of affordable housing in Denver as small property owners either sell or focus on higher paying tenants. I doubt that the intent of the bill was to reduce affordable housing, but this is exactly what will happen. The only way to increase affordable housing and quality is through more supply not increased regulation.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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