Portland Commissioners Overreach In Draft Landlord Regulations

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Portland Commissioners Overreach In Draft Landlord Regulations

Portland City Commissioners overreach on landlord regulations is the focus of this blog post by Clifford A. Hockley

By Clifford A. Hockley

President Bluestone and Hockley

In early May 2018 the City of Portland introduced a rent control concept to limit annual rent increases for tenants to 5 percent.po

 In addition, Commissioner Chloe Eudaly and the Rental Services Commission are testing out new approaches in application screening.  Both

The basic objective of these two policies is to make it easier for low income tenants to afford rental housing in the City of Portland.   Unfortunately, there are major misconceptions regarding the ability of local landlords to absorb these costs.

Landlord regulation plus operating cost increases are a problem

Local landlords, buffeted by more and more regulation, are finding additional levels of regulation and rent increase caps difficult to swallow.  These new policy changes are in addition to new unreinforced masonry regulations and massive zoning changes that will affect real estate investors.

The city wants to limit rent increases to 5 percent per year.

Landlords will not be able to keep up with maintaining buildings, as the operating costs continue to increase. Utilities, maintenance, and property taxes are slated to increase 5 percent annually or more in the next two years.This will likely increase rental housing shortages even more as landlords consider selling their investments that are not making money

Landlord regulation around tenant screening criteria is challenging 

Commissioner Eudaly and the Rental Services Commission are introducing additional tenant screening criteria that are to maneuver the most challenged tenants into rental housing.

These are the most difficult tenants to place and dont have the money to rent from market rate Landlords.

These tenants would be better served through not-for-profit and/or government-funded housing because the targeted demographic do not have the income to pay market rate rents.  Landlords do not have as much flexibility in setting rents, seeing as they have to pay market rate mortgages, and these additional screening requirements will affect the whole marketplace and create risk for all tenants and landlords alike.

Of the estimated 120,318 total rental units in Portland (2016 number), 80,445 are owned by Ma and Pa investors. Any screening criteria changes made will have a huge effect on these small business people and their ability to maintain properties and pay taxes and mortgages.

Landlords face utility expense increases

For many rentals, the utilities (water, sewer and garbage) are paid by the landlord and are anticipated to increase over 5 percent  annually over the next five years. 

For example, quoting from a recent memo from Melissa Merrell, PUB Analyst, Portland Utility Board:

"While the board sees encouraging process changes and transparency efforts in both bureaus, we remain concerned about long term cost projections for Portland customers. Current rates of increase in the proposed ordinance are 8.7% for PWB and 2.35% for BES for a combined rate of increase of 4.46%.

"We are grateful to the mayor for directing BES to use more of its cash-on-hand to reduce next year’s rate of increase but are still concerned that at the current rule of thumb for increases [5% combined for both bureaus], utility rates would double in less than 15 years,” she said.

Landlords face rising maintenance and operational costs

Property maintenance usually accounts for between 5 percent and 15 percent of the annual operational costs, excluding capital expenses.

These increased maintenance costs are being driven upward by the construction boom, the reduction in immigration, and the increase in minimum wage. (See chart below.) Additionally, health insurance companies are forecasting 7 percent to 20 percent increases in their 2019 premiums. We forecast wage and construction cost increases in excess of 6 percent annually for 2018 and 2019.

Portland Commissioners Overreach In Draft Landlord Regulations

Source:  Oregon Minimum Wage Summary

Property tax increases coming

Due to increased demand, Portland housing prices have increased significantly.

 As a result, every homeowner's assessed value will likely go up by 10% or more in 2018.  For example, a current home with an assessed value of $400,000 would increase by $1.40 per thousand or $560 a year due to the new school bond alone.

 The 2017-2018 property tax bill will include this increase as well as the affordable housing bill bond increase. This is in addition to strong appreciation in the Portland housing market. So, a 2016-17 tax bill that was $5,000 will probably increase to $6,500 or more in the 2017-2018 bill.

More on proposed screening criteria for landlord regulation

  • Newly proposed screening criteria regulations are designed to take screening decisions out of the hands of landlords and instead focus on allowing almost any tenants with a low credit history the ability to rent.  Most disturbing is the requirement that landlords approve applicants with monthly incomes as low as two times the rent amount.   This obligates landlords to rent to tenants that may not be able to pay their rent consistently.
  • Additional changes mandate that all applicants need to receive a time stamp on their application and a queue number.  Landlords will also need to document all contact with prospective tenants and keep that record for over three years, including phone calls and email communication.  Records must include the tenant’s name, how the contact was initiated (phone, email, etc.), reason for contact, and any information the landlord shared with the potential tenant.  We expect these rules to cost us an additional $200per applicant to implement.  Mom and Pop owners will never be able to afford to comply.
  • Inquiries to past Landlords are limited to the time frame of rental period that that specific landlord and rental payment history, security deposit charges due to intentional damage, court judgements, and outstanding debts. However, the landlord reference cannot be asked if they would rent to that tenant again, or about general complaints, lifestyle, or eviction filings.  Any crime older than seven years from the date of offense (not the date of judgement) cannot be considered.
  • Fair and effective screening was a landlord’s last line of defense against the recently imposed tenant relocation payments.

Summary Total Housing Units In Portland

Lets summarize with some statistics.  See the chart below:

Portland Commissioners Overreach In Draft Landlord Regulations

Landlords are generally reasonable people, but they rely on these investments for their income.

It is time for the city to realize that the policies being drafted affect the rental marketplace, not just the 13% considered very low income.

There are other options beside landlord regulation to create more housing in Portland

  1. Erase or reduce system development charges for builders /developers that keep their properties as low-income housing for 30 years.
  2. Establish a grant program to help not-for-profit organizations build and manage low income housing.
  3. Use federal block grant funds to have Prosper Portland (formerly known as the Portland Development Commission) buy up a 25-year strategic land reserve to support future low-income housing development and grant that land to not-forprofit developers as the need arises in the future.
  4. Spend money on an office to help senior citizens rent out vacant rooms in their homes. This kills two birds with one stone; it helps low income renters and supports senior citizens raise money for their retirement.
  5. Encourage developers to build shared and multigenerational housing where families rent together in a co-op style of living, allowing tenants to rent to subtenants.
  6. Simplify building and zoning requirements to reduce the costs of construction.

The mandates proposed by the city may seem free, but they are not.  Landlords are being used as social service surrogates to support the system. To keep rental housing, real estate investors need to cover their operating costs and make a profit. Reducing income potential and revenue streams will cut out small Landlords, and the city needs small Landlords to keep its heart, personality and housing.

Finally, one of the new requirements demands documentation of all tenant/landlord contacts, and city commissioners should wonder if tenants will want to share all their information with landlords before they have a rental relationship.  Tenants might have privacy concerns as landlords track all phone calls, emails and contacts.

It seems that commissioners have overreached with this last set of adjustments to public policy. The battle against homelessness should involve all citizens, not just residential landlords and landlord regulation.

About the author Clifford Hockley

Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined the company in 1986 and has extensive experience representing owners of commercial, investment and residential properties. He has managed warehouse, office, and retail properties, as well as mobile home parks, condominium associations, and residential properties of all sizes. Cliff’s client base includes financial institutions, government agencies, private investors and nonprofit organizations. In addition to property management, he has served as an advisor, developed budgets, made value improvements to buildings, and trained on- and off-site staff. Cliff’s strong knowledge of maintenance enables him to counsel on the best approach for major value-add projects. Among his many civic activities, Cliff serves on the executive committee for the Portland Chapter of the Institute of Real Estate Management (IREM), where, in 2000 and 2003 he was recognized as Certified Property Manager of the Year. In 2014 he was recognized by IREM as board member of the year, and in 2015 he earned an achievement award in brokerage from SVN International. Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and serves as adjunct professor at Portland State University, where he teaches real estate finance. Cliff is the author of 21 Fables, a book about real estate investing that helps investors navigate the rough shoals of real estate ownership.

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