With rent prices skyrocketing not just in the Denver metropolitan area but throughout Colorado, rent control is back in the legislature with big changes for property owners, prospective purchasers, and tenants.  The current focus is on mobile home parks with sweeping new legislation.  How will this legislation impact affordable housing?  Are you ready for Rent Control?

What is in HB 22-187: Concerning Protections for Mobile home park residents?

State lawmakers from Northern Colorado, dismayed by changes in local mobile home parks, are proposing a sweeping new bill that would include the first statewide mandate for rent control.  Here is a link to the full bill (HB 22-187).  Below is a summary of some of the key provisions.

1. Cap annual rent increases to 3%
2. Give Residents the opportunity to purchase their parks: this will allow residents 6 months to make an offer
3. Giving cities the right of first refusal on a purchase
4. Require landlords to pay each household 7500 to 10,000/unit or higher to shut down a mobile home park to cover the high cost of moving a mobile home:
   1. Require a landlord who changes the use of the land comprising the park to compensate a mobile home owner who has not given notice to terminate the lease or rental agreement and who is displaced by the change in use for the reasonable costs of relocating the mobile home to a location within 100 miles of the park, the fair market value of the mobile home before the change in use, or in the amount of $7,500 for a single-section mobile home or $10,000 for a multi-section mobile home
5. Allow a resident, local government, or a nonprofit to file a complaint with the division under the dispute resolution program Impact to property owners

What are the impacts to property owners from this new bill?

Below I’ve gone through each of the five changes to highlight the impact to property owners

1. Rent increases: Capping the rent increases to 3% over inflation will disincentive any repairs to the property and future purchases/construction
2. Right of first refusal owners: This will slow the process of mobile home parks down and individual owners could use this tool to derail other sales.
3. Right of first refusal cities: This could get interesting as sales could get tied up in litigation with the city as they attempt to purchase a park. I’m on the fence on how impactful this provision will be to owners.
4. 10k/+ unit to shut a park: This will have an enormous impact on owners as they will be “stuck” with a park that they can’t redevelop.  I could see this tied up in litigation as it is considered “taking” of mobile home property rights and there is considerable ambiguity in the compensation for the displaced resident.
5. Non profits and others allowed to submit claims: As more people submit complaints to mobile home parks, the profitability will decline even further.  Unfortunately rents cannot be raised to account for repairs/updates which will force owners to do the bare minimum.
6. There are a number of other provisions in the bill that will further increase costs for mobile home park owners; for example: a landlord is responsible for the cost of repairing any damage to a mobile home or lot that results from the landlord’s failure to maintain the premises of the park. Let’s say there is a sewer backup somewhere in the system and sewage backs up into the mobile home premises, the park owner would be on the hook for this even though it is not directly there fault (let’s say the user of the mobile home flushed wet wipes down a toilet causing a blockage somewhere in the line).  The potential costs for park owners will be large.

Law of unintended consequences

Unfortunately the intent of this legislation was well intentioned, but the impact will do the opposite.  With strict caps on rents there will be less investment in this property type as owners cannot amortize the repairs in rent. Furthermore with payouts to owners to redevelop properties, this will further restrict investment in new parks.  Here is an example of the unintended consequences from a CPR analysis:

John Victor, who co-owns four mobile home parks around Colorado, said that he targets rent increases of 3 percent — the same limit the bill would set. But he said that rent control would endanger his parks and others. With limited revenue, owners couldn’t respond to urgent needs, he said.

For example, state regulators recently ordered Victor and his sister to replace the septic system of Pinon Pines, a park in Buena Vista. The system had been installed by previous owners only a few years prior, but apparently didn’t meet current standards, Victor.

Replacing the system could cost up to $1 million — close to what the siblings paid for the entire park. Without the ability to raise rents, it could be “goodbye, park,” he said. 

“We don’t like rent raises. Rent raises are painful. The rent raise allows the community to continue to operate in a safe manner. At the end of the day, if you handcuff people you won’t even have a community to complain about anymore,” Victor added.

What does history tell us about the effects of rent control?

According to the Brooking institute, a liberal leaning organization:

DMQ find that rent-controlled buildings were 8 percentage points more likely to convert to a condo than buildings in the control group. Consistent with these findings, they find that rent control led to a 15 percentage point decline in the number of renters living in treated buildings and a 25 percentage point reduction in the number of renters living in rent-controlled units, relative to 1994 levels. This large reduction in rental housing supply was driven by converting existing structures to owner-occupied condominium housing and by replacing existing structures with new construction.

Long and short, study after study even by liberal organizations confirm that rent control does just the opposite of its intention by reducing supply. The real solution would be to make it easier to build mobile home parks to increase supply, but unfortunately the not in my backyard group staunchly oppose this option.

Summary:

The creators of this mobile home bill like to use the fancy term “rent stabilization” but don’t be mistaken this is rent control.  There are unintended consequences from this legislation that will do just the opposite by eliminating more mobile home units and restricting further development in turn hurting the constituents the bill was meant to protect.  Furthermore existing mobile home parks will have their values substantially reduced as rents cannot be increased even to cover basic repairs.  If this legislation passes look for a decline in one of the most affordable housing options in Colorado.

Additional Reading/Resources

1. Colorado Democrats consider ‘rent stabilization’ for mobile home parks | Colorado Public Radio (cpr.org)
2. https://www.brookings.edu/research/what-does-economic-evidence-tell-us-about-the-effects-of-rent-control/
3. https://www.denverpost.com/2022/03/11/mobile-homes-rent-control-colorado-legislature/
4. Rent control coming to Colorado; Impact on real estate, your property taxes will skyrocket – Colorado Hard Money Lender
5. https://leg.colorado.gov/sites/default/files/documents/2022A/bills/2022a_1287_01.pdf

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Written by Glen Weinberg, Owner 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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