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I recently wrote about what is being termed naturally occurring affordable housing (NOAH) and zones created to protect this type of housing stock. A basic definition of NOAH is inventory that is older, with fewer amenities and upgrades. Efforts to preserve more of this kind of housing include offering improvement subsidies at low interest rates to smaller property owners (sometimes those with 25 units or less) to improve properties and keep them affordable. With eviction moratoriums of the last year impacting the rental industry and expiring across the country, the potential for evictions of tenants leads to the question of whether these moratoriums might lead to an expanded effort to protect naturally occurring affordable housing.
What’s the catch for potential efforts by municipalities to designate zones of NOAH? Well, depending on the proposal, the property owner will exchange a covenant holding the property as affordable for the subsidized improvement funds. This covenant could follow future owners of the property. With the future unknown, there’s a chance for a binding covenant to diminish potential profit that would come from inflation or any higher and best use for a property.
Even without targeted subsidies, there are efforts to preserve different kinds of naturally occurring affordable housing. Long Beach, California, is in the midst of disallowing owners to remove and re-tenant units that are being remodeled. The previous lay of the land was that was permissible provided you pull permits with the building and safety department. Now, owners cannot use the “significant remodeling” reasoning to move tenants out.
Somewhat adjacent to the other methods of affordable housing preservation is California’s right of first refusal on foreclosed homes that have been bundled together for sale by the owner. This gives tenants, neighbors and especially community non-profits like housing trusts the ability to beat the current bid. To me, this shows the possibility for the state to own more properties or to entice existing property owners to take advantage of repair subsidies — and thus tie themselves into a covenant.
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Considering the damage that Covid-19 has placed upon all industries, real estate has not escaped the effects and small landlords have been especially hit by eviction moratoriums and the like. This seems like a prime time for NOAH proposals for subsidies to be enacted — and real estate owners and investors should be aware. In particular, there are three reasons why the current climate may be suited for these changes:
1. The national rent moratorium does require renters to pay as much of the rent as they can, but if renters do not have the funds to do so, they will not be disqualified. This means not all renters protected by the moratorium have paid and some will have paid less than they typically would.
2. Low or no income for landlords over the course of several months up to a year means few if any repairs were possible — even with any reserves.
3. The smaller landlord may not have the equity or other assets that would put them in a great position to negotiate with their lender.
There is no guarantee for the actions of the municipality where real estate owners and investors operate. There are some possibilities, however, based on the actions of different towns and states. With the recovery from any rent income loss front of mind for small property owners, I see them at risk of being tasked with solving societal issues that are not of their making.
People who rent do deserve protection and decent treatment but that property owner is not a charity and has a profit incentive in owning property. If the goal of sustainable housing is adequate and safe dwellings this sure can be had without veiled takings in the form of non-inflation adjusted covenants — what many call real inflation. Unfortunately, whatever increase in profit a covenant would allow may not necessarily give the same incentive that some property owners have had with non-covenant rents and transfers of property.
This is a time for the real estate operator to be vigilant regarding the fee interest in properties they hold. Stay in contact with your local and state leaders, make them understand you are not only here for the tenant but your family as well. It’s your right and fee interest at issue with NOAH. Study up.
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