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The LandLord Advocate October 2013

Lead Article:

When is the right time for the government to get involved?

The current federal government’s partial shutdown is due to (at least in part) a dispute among our federal legislators regarding whether and how the government should be involved in health care policy, insurance, and administration. Regardless of your position on the subject of health care, this process reminds us that the government’s role in the operation of a particular part of our economy is not a given, and that lobbying and other grass roots efforts are often required to ensure that our legislators and executive branch agencies enact sound policy.

We all collectively share an interest in the continued strength and viability of our country’s multifamily industry. Luckily, we have the National Apartment Association (“NAA”) and National Multi Housing Council (“NMHC”) working to address our concerns at our nation’s capital, while the Connecticut Apartment Association (“CTAA”) acts here locally to do the same.

In last month’s newsletter, we discussed the important NAA/NMHC white paper titled “Key Principles for Preserving Liquidity and Stability for Multifamily in a Reformed Housing Finance System.” During this discussion, we reviewed two broad themes:

  • The importance of rental housing, and its continued growth, in today’s economy and
  • How recent growth trends revealed the need for multifamily housing finance reform and the importance of continued government involvement to ensure adequate capital availability at competitive interest rates to ensure the industry’s continued viability [click here to access the discussions in last month’s newsletter].

Since the newsletter’s release, we have received a number of requests for more details about the latter subject and for some “talking points” to help address it with our federal legislators. This matter takes on a greater urgency now, as the current federal budget debate highlights the disagreement currently in our country about when and where the government should be involved.

The NAA/NMHC team makes a compelling case in the white paper that government should continue its credit support in the form of explicit federal guarantees for multifamily-backed mortgage securities in all markets. The key “talking points” associated with this position are outlined below:

First, the multifamily housing industry was not part of the of the capital markets failure of several years ago. The problems that arose then were mostly in the residential mortgage industry. The current focus on reducing the potential for another such meltdown blurs the line between these two industries in part because the government-sponsored enterprises (“GSEs”) like Fannie Mae and Freddie Mac provided financial products and services to both industries. In short, the distinction is critical and the focus of legislative reform should be on the residential side, not in the multifamily arena. Indeed, the Federal Housing Finance Agency (“FHFA”), the regulator overseeing Fannie Mae and Freddie Mac, identified (in its February 21, 2012 strategic plan to privatize the GSEs) the opportunity to treat these two industries differently and use more direct financing methods to support the multifamily industry.

Second, unlike residential mortgages that usually carry 30-year terms, multifamily housing mortgages are usually from seven to ten years in length and therefore need much more frequent refinancing to continue the functioning of the underlying apartment buildings. In 2013 alone, NAA/NMHC estimates that $100 billion in multifamily mortgages will need to be refinanced, and that many of the involved properties are not in areas served by the private capital market.

Third, a private-only housing finance system will create an enormous amount of capital for high-end properties in top-tier markets, but those only capture a small percentage of the total nationwide renter households that also exist in smaller cities and towns across the country. As the white paper states:

The GSEs’ multifamily programs have provided the capital for thousands of properties over the past 20 years that otherwise would not have been able to find a lender to refinance their mortgage when it came due. Without them, even though these properties were capable of covering their debt, they would likely have faced foreclosure, putting millions of renters at risk of losing their housing.

The market failure the GSEs’ multifamily programs addressed was ensuring capital reaches markets deemed undesirable by institutional capital. It is imperative that a reformed system continue to fill this important public policy need.

Fourth, the GSEs have done an excellent job creating strong underwriting, due diligence, risk-sharing, standardized contractual documents, geographic and other loan product diversification, and other credit risk management practices in their multifamily programs, which protects taxpayers from losses. These efforts have resulted in a $7 billion profit and a serious delinquency default rate of 0.51{b3839be935df112798d4ec5997aa1a27aa9a9725854b075bcbd0000f0c7f06fc} in the multifamily programs over the last several years, which compares favorably to the billions lost and a serious delinquency default rate of 8.7{b3839be935df112798d4ec5997aa1a27aa9a9725854b075bcbd0000f0c7f06fc} in the residential programs during the same timeframe.

Fifth, the FHFA concluded in two recent reports that the potential elimination of a government guarantee for those entities would lead to:

  • A reduction in mortgage liquidity to the apartment sector;
  • A reduction in multi-family property values;
  • A reduction in the overall rental housing supply;
  • An increase in multi-family mortgage costs and interest rates; and
  • An increase in rents.

Given the actual and expected increase in rental households in this country, and the slow economic recovery from the great recession, it is illogical for the government to eliminate this critical financing tool at this time and create these effects.

Now is the time to show your support for your industry by joining the NAA, NMHC, and CTAA in their legislative lobbying efforts on multi-family housing finance reform. Contact your federal legislators to let them know your position on the subject. Contact your landlord attorney if you have any questions about the potential impact of – and how to plan operationally for – such current legislative initiatives on the multi-family housing industry.

Quick Tip:

Use your legal actions to evaluate your processes for quality control.

You’re facing a problem tenant and have decided to refer the tenant to your landlord attorney for legal action. You’ve got a lot to think about as you begin:

  • What action steps have you and staff taken in this matter in the past and what will be expected of you in the future?
  • What documents, correspondence, notes, and other documentation have you and your staff placed (or should have placed) in the tenant physical and/or system file, and
  • How is the lease going to support your position and efforts?

While the upcoming legal action may be stressful and appear daunting, this is a great opportunity to confirm whether your expectations align with the actual handling of that problem tenant situation.

While prepping for the potential legal action, we recommend you step back a bit to evaluate from an operational perspective whether your assumptions and understandings of the situation are accurate. Some questions you may want to ask include:

  1. Did we catch the problem timely?
  2. Do we have a written procedure to address such a problem?
  3. How did staff and I handle the problem?
  4. If there is a policy or procedure that applied, and did staff and I follow it?
  5. Did we obtain the desired results?
  6. Does the tenant file contain and reflect our efforts and the tenant’s response (or lack of)?
  7. Does the lease adequately cover what I believe is required from the tenant on the subject?

Be sure to have a notepad and pen (or your iPad or other notebook device) handy while you are conducting your review so you can jot down your findings and identify what needs to be done (if anything) to align your expectations with actual practice.

Contact your landlord attorney for assistance in problem identification and response, including the refinement or development of policies and procedures and lease provisions to support you and your staff in operating the property effectively and profitably.

Quick Tip:

Train for what you do…and do that for which you’re trained.

Ever take on a task that even though you felt you were adequately prepared, you just weren’t really ready to do? While such challenges may ultimately make you stronger, you must be careful not to push your capabilities too far, lest the result of your efforts may not exactly be what you intended. I recently learned this lesson first hand…

A group of friends and I traveled to Vermont to participate in a grueling adventure race up and down (and back again several time) Killington Mountain. Although we accomplished the task, it was much harder than we had planned for and, unfortunately, the challenge didn’t come without some unexpected repercussions – in this case, physical injuries that will take some time to heal.

This trip taught me a few important, yet closely-related life lessons:

  1. To ensure I am fully prepared to handle the challenge at hand, and
  2. To make sure I am only tackling those challenges for which I am fully prepared.

While these lessons were learned during my private time, they’re easily transferrable to “the business world”. Whenever possible, we should be educating and conditioning ourselves to do those things which are central to our career goals and expectations, so that we can become experts in those areas. Once accomplished, if we choose to tackle something outside our bailiwick, we should plan to become proficient in that task before diving in.

Unfortunately, we will not always be afforded the luxury of preparing ourselves to this level. There will undoubtedly come a time when we have to improvise in the moment to get something done. However, hopefully these instances will not be the norm. By taking the time to ensure you are adequately trained and prepared, not only will you increase your opportunity for success, you will also likely reduce the unexpected repercussions and the recovery time associated with any lack of preparation.

Quick Tip:

How well do you know what’s going on with your legal cases?

You have a busy job dealing with the issues arising from either your clients’ business operations at your commercial properties, or their homes in your residential properties. Add to that demands from staff who service those tenants, and from management, ownership, or partners, stockholders, and other investors overseeing your operations. Things can get hectic and items can get lost in the shuffle.

However, there is one area where attention to detail and an unceasing awareness is necessary, and that is the management of your legal cases against tenants. Whether it be for nonpayment of rent or some other lease violation, nuisance, or serious nuisance issue, one misstep and the Connecticut statutes and case law (which otherwise act to protect and support your efforts as a landlord) can come crashing down on your best-laid plans.

There are a number of ways in which mismanagement can disrupt your business processes. For example:

  • Many of our clients use property management software that among other things, allows them to identify that they have begun legal action against a tenant. While these systems can greatly increase the effectiveness of your property management operations, forgetting to flag an account as “in legal” can negate any action you may have started. The reason being simply that such systems often generate automatic rent overdue notices or lease renewal paperwork, which – if sent after the service of a notice to quit – can kill an active legal case. Indeed, if the problem tenant receives a lease renewal offer and signs it, you may not only eliminate the ability to evict that tenant, you may be stuck with that tenant for yet another year.
  • Alternatively, staff members who are solely focused in on accounts receivable, may not realize that a court-enforceable stipulated judgment is in place and ending soon against a particular tenant. If managed correctly, the upcoming end-of-stip term provides you with adequate time to ensure that the tenant gets to a zero balance and eliminates all other problematic behavior. If unaware of the upcoming deadline, you might lose the opportunity to make timely contact with your landlord attorney for action using the leverage of a stipulated judgment to evict a tenant who refuses or otherwise fails to pay on time and in full, or is creating other significant problems for your commercial complex or residential community.

Make a commitment today to inventory your legal cases, to identify their status, and ensure that all of the necessary systems and participants are current and up-to-date on what’s going on with each. Unsure of how or where to start? Contact your landlord attorney for help.

Quick Tip:

LLF named Platinum Sponsor for the 2013 CTAA Tradeshow and Education Conference.

It’s official! The Landlord Law Firm has been named the Platinum sponsor for this year’s CTAA Tradeshow and Education Conference! As mentioned, this year’s event will be held at:

Foxwoods Resort and Casino – Friday, November 8, 2013.

Those who have attended in the past know of the educational and networking value of the event and yes, this will be another year of fun and excitement at the LLF booth. We hope you’ll swing by.

FYI, it’s not too late to register. Just jump over to the CTAA website and complete the online registration form.

DON’T FORGET, although free, registration for Thursday night’s Pre-Show Party is now required. This year, it will be a red carpet affair at Foxwood’s High Rollers Luxury Lanes that you don’t want to miss. Be sure to check that you will be attending when you complete your online registration.

Lastly, if you are, or know of a vendor that you’d like to see at the show, ask them to join us as well. Vendors can also register online. However, urge them to act soon as the tradeshow grows yearly and space will likely run out!

It ought to be quite an event. Hope to see you at Foxwoods!

DISCLAIMER:

The reading of this newsletter does not form an attorney-client relationship. The contents of this newsletter are for informational purposes only and do not constitute legal advice. Nothing in this newsletter is intended to imply or predict the outcome of any legal matter that you may be considering or be involved in. The Landlord Law Firm makes no warranties of any kind regarding the information contained in this newsletter.