But with New Speed Limits
by Andy Peluso
After months of hearing “Are we there yet?” from residential developers, investors, and professional property managers, Congress finally pulled into the driveway and answered loudly, “Yes, we’re here!”
On July 11, the 21st Century Renewing Opportunity in the American Dream (ROAD) to Housing Act took effect, securing a permanent place for institutional investment in the single-family rental (SFR) and build-to-rent (BTR) industries.
The broad consensus that delivered the legislation was achieved only after months of tense discussion, negotiation and compromise.
A New Traffic Light on Main Street
One of the most closely watched provisions of the final ROAD Act is found in Title X (titled “Home-Ownership for Main Street America”), Section 1001 (titled “Homes are for People, not Corporations”).
Subject to certain important exceptions and exclusions, Section 1001(b)(1) of the ROAD Act prohibits “large institutional investors” from purchasing additional “single-family homes.”
Although the statutory definition is more detailed and subject to qualifications, the ROAD Act generally defines a “large institutional investor” as a for-profit entity that directly or indirectly invests in, owns, rents, manages, or holds more than 350 “single-family homes.”
Further, Section 1001(a)(5)(A) defines a “single-family home” as “a structure that contains two or fewer dwelling units intended for occupancy by a single household,” excluding manufactured homes.
However, equally important to this prohibition are the ROAD Act’s statutory “excepted purchases,” which are expressly excepted from the prohibition.
In broad terms, Section 1001(b)(2) of the ROAD Act permits certain categories of “excepted purchases” that Congress determined either contribute to housing supply or otherwise do not implicate the policy concerns underlying the legislation.
An important “excepted purchase” category is set forth in Section 1001(a)(2)(B), which applies to acquisitions made pursuant to a “build-to-rent program” in which the large institutional investor is developing, constructing, acquiring, or managing single-family homes as rentals in BTR communities as well as communities with a mix of BTR and non-BTR homes.
Two additional “excepted purchase” categories are intended to promote renter-to-homeowner transitions.
Section 1001(a)(2)(E) requires qualifying programs to provide renters with a right of first refusal and a 30-day “first look” period, thereby affording renters an opportunity to purchase a home before it is offered more broadly.
Section 1001(a)(2)(D), meanwhile, focuses on more structured homeownership programs, requiring, among other things, that the arrangement be treated as a consumer credit transaction secured by a dwelling or real property and that the large institutional investor provide meaningful financial assistance, including price concessions, to support the renter’s eventual purchase.
Both categories further require positive reporting of rental payments to consumer reporting agencies, providing renters with an opportunity to build credit while pursuing homeownership.
Accordingly, due to these and other “excepted purchase” categories and other exceptions, the final legislation is not a blanket prohibition on institutional participation in the single-family housing market, but rather it creates a more targeted restriction.
Mandatory Divestiture
One of the most significant changes in the final version of the ROAD Act was the removal of the mandatory divestiture provisions contained in earlier versions of Section 1001.
Initially, certain single-family homes acquired by large institutional investors that met an exclusion would have been subject to a seven-year disposition requirement. Allowing these transactions but requiring investors to divest within seven years would have turned a permanent exception into merely an extension.
However, after months of hard-fought negotiations and substantial pushback from industry participants, Congress removed the mandatory divestiture regime. The final legislation eliminates the forced-sale requirements entirely.
This change preserves the long-term viability of the SFR and BTR sectors. It allows qualifying BTR communities and other excepted purchases to remain viable long-term investments and reflects Congress’ decision to distinguish between investment acquisitions that impact current housing inventory and those that contribute to housing supply.
Potential Traffic Ahead
Although passage of the ROAD Act in its final form represents a green light for business model continuity, this does not mean large institutional investors may cruise ahead unchecked.
The final bill shifts its focus from property ownership to federalized operational oversight. Section 1001(c) of the ROAD Act establishes a new “renter outreach resource” managed by the Secretary of Housing and Urban Development (HUD).
This renter outreach resource will introduce, among other things, a toll-free telephone number and a public website designed for receiving, tracking, investigating and resolving renter complaints relating to institutional landlords.
The renter outreach resource could inject operational uncertainty and reputational risk into daily portfolio management:
» HUD must promptly investigate potential violations of federal law reported through the portal, including issuing formal requests for information directly to corporate owners.
» The renter outreach resource is designed to actively share data and coordinate enforcement actions with other federal and state regulatory bodies.
» For localized landlord-tenant friction, the portal acts as an administrative pipeline, identifying state-specific enforcement authorities for renters to pursue local complaints against large institutional investors.
» HUD must submit an annual public report to Congress detailing and aggregating the types and volumes of renter disputes logged against large institutional investors.
For large institutional investors, the operational implications of this renter outreach resource are significant.
Federal complaint portals like this renter outreach resource could escalate standard operational friction. Things like maintenance delays, security deposit disagreements and routine lease enforcement could quickly transform into formal federal inquiries.
Defending against an influx of portal-generated inquiries will likely require additional administrative costs.
Professional property managers may no longer just be resolving a maintenance ticket. They will be compiling what will become evidence to respond to HUD investigators to prove statutory compliance.
The public reporting aspect also poses a serious reputational hazard.
In an era where institutional housing providers are highly scrutinized, raw complaint metrics could add to this scrutiny from corporate critics, interest groups and media outlets.
Drive Forward Safely
To safely navigate these new potential hazards, large institutional investors and professional property management should continue focusing on providing rigorous, audit-ready compliance operations.
Create standard operating procedures to make renter communications more efficient.
Because every renter interaction can now become a federal matter, dispute resolution must be localized and highly responsive. Property management should build internal review and resolution pathways to help renters quickly resolve friction before issues escalate.
Keep accurate, detailed records of data.
Professional property managers should approach every maintenance request, rent ledger adjustment, and lease renewal interaction as if it will be reviewed by a federal investigator.
Digital paper trails should be detailed, useful and quickly retrievable. At the same time, professional property managers should write every email and text message about the matter with the expectation that it will eventually become a court exhibit or part of a report to Congress.
Comply with the ROAD Act’s new notice requirements.
Under Section 1001(c)(5), large institutional investors must: prominently feature the renter outreach resource on their public websites; provide each renter with written notice of the renter outreach resource, once when the renter moves in and again each year; and provide each renter with contact information for a designated point person or entity identified to field renter disputes.
Compliance with these future requirements will not be easy to accomplish at scale. But comfort, familiarity and compliance with these requirements may be an opportunity for the best professional property managers to set themselves apart in the SFR and BTR industries.
Where the Rubber Meets the ROAD
The final version of the ROAD Act proves that the institutional single-family rental asset class is here to stay.
Washington gave the SFR and BTR industries a vital green light to continue deploying long-term capital into American neighborhoods.
Yet, this green light comes with some caution. Risk areas have shifted from ownership rights to operational compliance.
The rise of a centralized, federalized tenant-complaint apparatus means that institutional landlords and their professional property management companies will soon be operating under a new microscope.
The companies that thrive in this next era may be those that pair their real estate acumen with institutional-grade compliance to insulate their property management practices from the inevitable speed bumps ahead.
