The seven-year problem: How Trump's housing bill will undo the very thing it’s meant to solve, affordability

The 21st Century ROAD to Housing Act has sent shockwaves through the BTR and SFR sectors. During a packed session at the Build-to-Rent Spring Forum, industry leaders warned that the bill's forced disposition provision, far from solving the affordability crisis, risks making it worse.

Over the last few months, single family rental and build-to-rent sectors in the US have found themselves squarely in the middle of the national housing debate.

The 21st Century ROAD to Housing Act represents the most comprehensive overhaul of housing policy for three decades. Devised to help alleviate the affordability and housing crises, the bill, if passed in its current form, would restrict institutional ownership of single family homes, based on the argument that investors are crowding out home buyers.

What has caused the most alarm is the requirement of institutional investors to divest portions of their single-family rental portfolios over a seven-year period.

As the bill returns to the House, its future remains uncertain.

The possible impact of the legislation as it currently stands was the topic of a standing-room-only session, President Trump’s Housing Policy Shake-Up: Navigating the Potential Impacts on BTR and SFR Markets, at the IMN Build-to-Rent conference in Nashville, Tennessee. “I've never been in a conference where the regulatory panel had three times the attendance of the M&A panel,” quipped panelist Gary Beasley, Executive Chairman of the Board at Roofstock.

What does the legislation mean for investors, developers, and operators in the SFR and BTR space? Is it a temporary political movement or a structural shift that the industry needs to prepare for?

A poorly worded bill

While it was widely assumed across the panel that the bill, in one form or another, would pass, there was broad agreement that it would likely have unintended consequences.

Gary said that in 2012, institutional capital had been instrumental in preventing the decline in housing prices: “Institutional capital came in, bought homes no one wanted to buy or could buy, renovated them and stopped that. I think it's very scary to limit that flow of capital in housing where we're so undersupplied.”

It was a poorly worded bill, said Richard Ross, CEO at Quinn Residences. It could take months to finalize the wording and could even go to court over whether the disposition rule was constitutional, he said. “We all know capital does not like uncertainty. So if this legislation passes as is, it's going to take some time for us to have clarity, and that's the real fear.”

Joel Kirstein, Managing Director at Berkadia, pointed out the irony of the seven-year disposition rule, in the context of Fannie Mae and Freddie Mac, which had lent on a number of these assets. “So you have seven and 10-year notes sitting out there with a disposition. In seven years, how are you going to deal with the bondholders on those deals? How are you going to deal with the yield maintenance calculations, and what does that do to values?” he asked.

The effects on capital flow were already being seen, he added. “You've seen equity go right back to the sidelines. Even those that have dedicated funds, the LPs in those funds have said, don't put out any money right now.”

The hits keep coming

Gary said it would lead to a lack of investment in build-to-rent if the seven-year disposition were not excluded, which would mean lower supply and ultimately, higher rents. “If people do build-to-rent projects and they're forced to sell them and kick out the renters, it's not good for anybody.”

An underappreciated aspect, he added, was that build-to-rent was often part of a larger project, and a contributor to getting the overall project financed. “So it's not just the 50 to 100,000 build-to-rent homes that might be lost. The spillover effects could actually be much larger in other projects not moving forward.”

Larry Franks, President of Florida at BrightSky Residential, raised the question of bulk divestiture: what if institutional investors on the SFR side simply decided to offload their portfolios wholesale? He asked, adding, “that’s good for potential homebuyers, but then the equity in the neighborhood goes down, so you're going to have a loss of wealth across the board that's going to be far greater than the affordability that you're creating on a short-term basis.”

A call to action

Larry added that there were other mechanisms to try: “If they want affordability, I think those of us who are developers in the room should tackle impact fees. Let's tackle the regulations that we face on a daily basis, trying to get things rezoned, to be able to get additional density to provide affordability, as opposed to this.”

The industry had to act swiftly and decisively, stated Richard.

“We as an industry have to do a good job of calling our representatives, particularly now in the House, and fighting the good fight to get the worst of this legislation out. If we can accept and get the seven-year forced disposition out, there's probably something the industry can live with going forward.

“This is a supply problem. We've faced a supply problem since the great financial crisis; we just haven't built enough homes in this country," he concluded. "It's Econ 101. I think if we can get back to a policy that makes sense for increasing the supply of homes, the country, and certainly the industry will be better off.”

The ROAD to Housing Act has sparked critical conversations about the future of housing policy and its implications for the BTR and SFR sectors. Continue this vital dialogue and collaborate on actionable solutions at the Single Family Rental East Forum this May in Miami. Together, we can shape the future of housing and address the challenges facing our industry!