Hot off the Press: The House Just Passed the Most Comprehensive Housing Bill in U.S. History
After months of debate, the Senate and the House reached an agreement on the 21st Century ROAD to Housing Act, a comprehensive bi-partisan housing package aimed at tackling the affordable housing shortage.
Below are some of the highlights, specifically on how this new legislation will impact investors
1) Large Institutional Investors
Title X of the bill explicitly prohibits large institutional investors from purchasing or entering into a contract to directly or indirectly purchase a single-family home (SFH).
The bill defines a large institutional investor as any “investment fund, corporation, general or limited partnership, limited liability company, joint venture, association, or other for-profit entity that is a legal entity engaged in whole or in part, in the business of investing in, owning, renting, managing, or holding single-family homes (SFH), and that, alone or in conjunction with others after enactment, has investment control of at least 350 SFH in the aggregate.”
The term “purchase” within the context of the Act includes any purchase, transfer, or other acquisition of an SFH, including through mergers, acquisitions, construction, foreclosures, or bulk purchases whether or not for cash considerations
The term “single-family home” is defined as a structure that contains 2 or fewer dwelling units that are each intended for residential occupancy by a single household and does not include a manufactured home.
An entity has direct or indirect investment control over an SFH if the entity owns or has management authority over the SFH, directly or indirectly controls the GP, managing member, investment manager, management company, or investment advisor of the entity that owns the SFH, or owns more than 25 percent of any class of equity interest in the entity that owns the SFH unless the entity is a passive investor
2) Excepted Purchases
The above prohibition will not apply to large institutional investors provided they meet any of the following eleven criteria when purchasing an SFH
Acquiring newly constructed, renovated, or a rental conversion for sale by a large institutional investor
Pursuant to build-to-rent programs
Acquiring to make substantial improvements in the aggregate of at least 15 percent of the purchase price of the SFH.
Pursuant to qualifying homeownership programs
Pursuant to a program that boosts homeownership, including positive rent reporting, right of first refusal, and a 30-day "first look" period
In connection with satisfying good-faith debts where the large institutional investor has repossession rights
Loss mitigation acquisitions by servicers and lenders (foreclosure, deed-in-lieu, enforcement, or operation of law) and not as part of a long-term investment strategy
Purchases from another large institutional investor that owned the home on the date of the enactment or purchased the SFH in compliance with this section
Purchases from a non-covered investor within two years of the effective date
Acquiring newly constructed, renovated, or rental conversion intended to be operated for occupancy for senior communities comprised of 55 and older members and satisfies the HUD visitability standards
Any combination of the above
3) Enforcement
Penalties for noncompliance are severe. The Treasury may seek civil penalties of up to $1,000,000 per violation, or three times the purchase price, whichever is greater. Proceeds from penalties collected will go to the HUD’s HOME Investment Partnerships program to fund construction, acquisition, and rehabilitation of SFH, plus first-time buyer assistance for down payments, closing costs, and rate buydowns.
Large institutional investors must notify HUD annually that they qualify and disclose how many SFH they control and where. However, further details on compliance are still uncertain and implementation remains to be seen.
The prohibition will take effect 180 days after enactment, and is repealed 15 years after the effective date.
4) Key Takeaways
Its important to note that this version of the bill can now be interpreted as a purchase restriction, not an ownership ban for large institutional investors. Language was intentionally excluded regarding divestiture for any large institutional investor that may have entered into any “disqualifying” purchase before the enactment date.
Disposal requirements for homes acquired under certain excepted purchases were initially subject to a seven-year disposal period in the prior version but have since been removed. Therefore, any portfolios assembled before enactment are grandfathered and any prior separate carve-outs with respect to specific investment vehicles such as REITs and how divestiture would impact them are now inapplicable.
Moving forward, sponsors should be proactive in testing whether the 350 SFH threshold applies to them as the aggregate test is applied across all common control structures. Stakeholders should also be mindful of the 25% equity interest introduced as it will impact how new syndications or joint ventures are structured.
