The standard practice of paying a month’s rent (or more) is being challenged in the multifamily marketplace with new alternatives to the cash security deposit.
These new products represent a gamechanger for the way landlords protect themselves from potential damages and non-payment of rent. An estimated $45 billion currently sits in security deposit accounts. These new products have the potential to free up much of this money for more immediate uses. However, there are pros and cons to these new products.
There is a growing movement in many cities called "Renters Choice," which is pressing cities and states to relax security deposit laws allowing greater potential for the new products, which are known collectively as "security deposit replacements," or SDRs. The first two laws of this type have been passed in Cincinnati and Atlanta.
How It Works
Companies like SureDeposit, TheGuarantors, Rhino, LeaseLock, and Obligo sign up property owners. Each product has a different system, so owners have a variety of choices. The target tenant market is not generally people who cannot afford a deposit, but people who prefer to use their money elsewhere or do not trust the landlord to return it.
Some companies - such as Rhino - offer security deposit insurance. The renter purchases the insurance for the landlord’s benefit in case there is unpaid rent or damages. For example, a tenant with a $2,000 monthly rent would pay a monthly fee of $20 or so for a policy that would pay the landlord as much as $2,000 if there were issues when the tenant moved out. If the damages total more than $2,000, the tenant is billed by Rhino.
One of the main weaknesses relative to regular security deposits is the complexity and cost of maintaining the accounts. Also, landlords often have trouble tracking down tenants to return the security deposit after they move out. And of course, in affordable housing complexes, new applicants often have a tough time coming up with the money for a deposit. In the affordable housing realm, one of the primary benefits of these products is to help people get into the housing that they can otherwise afford - were it not for the upfront costs.
However, tenant advocacy groups are not fully onboard with the alternatives. They point out that security deposits - while imperfect - offer legal protections that are lacking in these new products. The deposits are refundable while the cost of the new products is an actual cost - that will not be recouped.
While these products do offer viable alternatives to traditional security deposits in many cases, landlords considering offering these options to applicants should be aware of potential pitfalls. Tenants who can afford lump sum deposits will usually be better off providing a refundable deposit than paying a nonrefundable monthly fee. Also, most affordable housing programs (e.g., LIHTC) will have to offer this service as an option and not require that applicants use the product. Otherwise, the fees associated with the insurance will be considered rent.
All-in-all, it seems worthwhile for landlords of affordable rental properties to at least look into the possibility of offering an SDA to applicants. While pricing varies geographically, the cost of one of these products can range from $96 to $262 for a $1,400 per month rent. This is clearly more affordable to many applicants than a $1,400 security deposit, but it is nonrefundable.
As noted already, the key to offering products of this type is to ensure that applicants fully understand that they have an option to provide a traditional security deposit or use of the alternate products. With this option available, affordable housing operators may well be able to expand the market of eligible renters who can afford the upfront costs of project entry.
Census Bureau Report Shows an Aging and More Diverse Population
On June 30, 2022, the U.S. Census Bureau released the 2021 Population Estimates by Age, Sex, Race, and Hispanic Origin. The report shows that the last two decades have seen the country grow continuously older. Since 2000, the national median age - the point at which one-half the population is older and one-half younger - has increased by 3.4 years, with the largest single-year gain of 0.3 years coming in 2021. The median age in the U.S. is now 30.8. The median age for most states also increased from 2020 to 2021, indicating their populations are getting older overall. Utah remains the youngest state in the nation with a 2021 median age of 31.8 - up from 31.5 in 2020. The District of Columbia has the second-lowest median age (34.9) but had the largest increase - 0.5 years from the 2020 age of 34.4. According to the Census Bureau, "With birth rates trending downwards and the aging of the Baby Boom and Generation X cohorts, the median age will likely continue to rise in the coming years. Only one state s population - Maine - became slightly younger, as its median age decreased from 44.8 to 44.7. However, Maine remains the state with the oldest median age in the nation. Only three states have no change in median age - Montana (40.1), New Hampshire (43), and West Virginia (42.8). These are also among the oldest states in terms of median age. The median age in 57% of all U.S. counties and equivalents increased, and 74% of counties had higher median ages than the nation as a whole. Six counties had median ages greater than or equal to 60 years - Sumter County, FL (68.3); Kalawao County, HA (65.5); Catron County, NM (61.8); Harding County, NM (60.3); Charlotte County, FL (60.2); and Jeff Davis County, TX (60). The counties or equivalents with the youngest median ages in the nation were Lexington City, VA (22.2); Todd County, SD (23); Kusilvak Census Area, AK (23.7); Madison County, ID (32.7); and Radford City, VA (24.4). The median age increased in about 76% of metro areas between 2020 and 2021. The three largest increases were in Lake Charles, LA, where the median age rose from 36.5 to 37.4; Hilton Head Island-Bluffton, SC, which increased by 0.8 years to 47.8; and San Francisco-Oakland-Berkeley, CA, where the median age crossed the 40-years-of-age threshold, increasing from 39.4 to 40.1. Provo-Orem, UT was the metro with the lowest median age in 2021, and The Villages, FL, had the highest median age - 68.3. Not surprisingly, The Villages is located in Sumter County. Regionally, the Northeast was the oldest in 2021 with a median age of 40.4, followed by the Midwest (39), the South (38.6), and the West - which experienced the largest increase, 0.3 years to 37.7. In addition to aging, the nation is becoming more diverse. Nationally, all race and Hispanic origin groups experienced population increases, with the exception of the White population, which declined slightly by 0.03%. The Native Hawaiian and Other Pacific Islander population was the fastest-growing race, increasing by 1.54% between 2020 and 2021. Population breakdowns follow: White: 260,183,037 (down 79,836 since 2020);Black or African American: 49,586,352 (up 0.7%);Asian: 23,962,215 (up 1.2%);American Indian or Alaska Native: 7,206,898 (up 1.0%); andNative Hawaiian or Other Pacific Islander: 1,709,860 (up 1.5%). The Hispanic (any race) population grew by 767,907 from 2020 to 2021. California, Texas, and Florida have the largest Hispanic populations. Only New York (-1.1%) and the District of Columbia (-2.5%) experienced drops in the Hispanic population. Maine (5.4%) and Montana (5.4%) were the states with the fastest-growing Hispanic populations. There are two major takeaways from the data: The nation is growing more diverse; andIt is getting older. For affordable housing developers and housing agencies, this indicates continuing growth in the need for senior housing - especially housing that provides the amenities and services required for "aging in place. The growth in diversity serves as a reminder that discrimination based on national origin is a violation of federal fair housing law. Owners of multifamily housing must be willing to work with prospects for whom English may not be the primary language and should have policies and procedures in place for doing so.
HUD Issues MOR Rule and Notice
On June 27, 2022, the Department of Housing & Urban Development (HUD) published the Management and Occupancy Review (MOR) Rule and Notice in the Federal Register. The rule becomes effective on September 26, 2022. This final rule follows the 2015 publication of a proposed rule on MOR scheduling. The Rule and Notice apply to properties covered under project-based Section 8 Housing Assistance Payments (HAP) Contracts for the following programs: New ConstructionSubstantial RehabilitationNew Construction or Substantial Rehabilitation financed by State Housing AgenciesNew Construction financed under Section 515 of the Housing Act of 1949 (Section 8/515 projects)Loan Management Set Aside ProgramDisposition of HUD-Owned ProjectsSection 202/8 HUD conducts MORs to ensure that owners and agents (O/As) comply with HUD requirements. The MOR rule establishes a frequency for the completion of MORs based upon a project s prior MOR score and the project s rating under HUD s risk-based asset management model. HUD believes that moving to a risk-based MOR schedule will enhance HUD oversight of the Section 8 HAP program and improve overall program effectiveness. Beginning on September 26, 2022, Contract Administrators (CAs) will establish MOR schedules as follows: Properties with a previous MOR rating of Unsatisfactory or Below Average will be reviewed within 12 months of the prior MOR;Properties with a previous MOR rating of Satisfactory will be reviewed within 12 months of the prior MOR if the Risk Classification of the property was Troubled or Potentially Troubled. If the Risk Classification was Not Troubled, these properties will be reviewed within 24 months of the prior MOR;Properties with a previous MOR rating of Above Average or Superior will be reviewed within 12 months of the prior MOR if the Risk Classification of the property was Troubled or Potentially Troubled. If the Risk Classification was Not Troubled, these properties will be reviewed within 36 months of the prior MOR. Owners and Agents should remember that MORs are different than the physical inspections conducted by HUD s Real Estate Assessment Center (REAC). The MOR Rule and Notice do not affect REAC s inspections of Section 8 HAP properties. O/As operating any of the property types noted above should obtain a copy of the MOR Rule and Notice at https://www.federalregister.gov/documents/2022/06/27/2022-13426/streamlining-management-and-occupancy-reviews-for-section-8-housing-assistance-programs?utm_medium=email&utm_source=govdelivery.
A. J. Johnson Partners with Colorado Housing on Average Income Webinar
A.J. Johnson will be presenting Average Income Minimum Set-Aside: Requirements and Best Practices on July 19, 2022, at 11:00 am (EST). This class will be offered through Colorado Housing and Finance Authority s chfareach educational programming for affordable housing property owners and managers. The one-hour live webinar will review the requirements of the Average Income Minimum Set-Aside Test (AI), discuss the risks of this set-aside, and provide best practice recommendations for implementation of the Average Income test. It will also cover the current IRS guidance relating to the AI set-aside and recent industry requests made to the IRS. The webinar will be presented by A. J. Johnson, a nationally recognized expert on affordable housing who has provided compliance oversight on multiple properties using the AI set-aside To register, please visit the chfareach webpage at this link.
A. J. Johnson to Host Live Webinar on Criminal Screening Policies
A. J. Johnson will be conducting a webinar on June 29, 2022, on Criminal Screening in Multifamily Housing - Recommended Policies & Procedures. The Webinar will be held from 1:00 PM to 2:30 PM Eastern time. Property owners may (and should) screen applicants for criminal behavior but must be careful when doing so - and must have transparent and defensible policies relative to screening for past criminal conduct. This 1.5-hour webinar will assist owners and property managers in understanding what is required when implementing a criminal screening policy. The training will outline the HUD guidance relative to criminal screening and will review the type of policies that are - and are not - acceptable. The discussion will center on (1) the types of crimes that are appropriate for screening; (2) the HUD policy regarding the use of arrest records in criminal screening; (3) dealing with convictions for non-dangerous crimes; and (4) the use of individual assessments for rejected applicants. Following the session, participants will be better prepared to develop a criminal screening policy that will not run afoul of fair housing law. Those interested in participating in the Webinar may register on the A. J. Johnson Consulting Services website (www.ajjcs.net) under "Training Schedule.