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How to Protect Economic Occupancy Regardless of Market Condition or Asset Class

How to Protect Economic Occupancy Regardless of Market Condition or Asset Class
Driving occupancy in a time when demand dips is challenging. Recent data indicates the pace of leasing is picking up after bottoming out in the early stages of the coronavirus pandemic. But we’re still in the midst of a recession caused by COVID-19, and many residents and prospects will continue to experience profound economic hardship.   In an effort to fill apartment homes, many operators will offer prospective residents a helping hand in the form of a month of free rent, reduced or slashed security deposits and fees or lower monthly rates. But in their quest to maintain or bolster their physical occupancy rates, apartment communities should be careful not to sacrifice their economic occupancy rates (i.e., the percentage of potential gross income that a property achieves for the lease). Unfortunately, common lease concessions - especially reduced security deposits - can eat away at a property’s economic occupancy.  Don’t Reduce Deposits and Call It a Day When an apartment community collects rent from a lease, the economic occupancy rate equals the money actually received. So, if the property was able to receive all of its potential funds, the economic occupancy on that lease would be 100 percent. In a sluggish demand market or in submarkets with competition from new construction, communities might turn to financial concessions to draw in new residents. How often have you seen offers of six weeks of free rent or a 14-month lease with two months free, or deposit specials of $99 or even $0? I would ventu......
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Legislators recognizing the role deposit alternatives can play in driving housing affordability

Housing affordability is a serious problem across the U.S. Nearly half of renter households are considered cost-burdened (meaning they spend more than 30% of their income on rent), and of those renters, more than half spend over 50% of their incomes on housing.  This means there’s a real need for strategies that reduce the cost burden on renters.  While some municipalities have focused primarily on rent control bills, others are focusing on solutions that are beneficial for both renters and properties. And as new legislation shows, an increasing number of lawmakers are recognizing the role that deposit alternatives can play in offering these win-win solutions.  Legislators focusing on up-front rental costs Several states introduced (and passed) rent control bills in 2019. This legislation focused on monthly rent costs and was designed to make renting more affordable, but was largely opposed by property owners and operators.  Now, legislators are beginning to shift their focus from monthly rent costs to up-front move-in costs, as these can be cost-prohibitive to many renters.  In fact, in our 2019 Renter Sentiment Report, 30% of renters ranked affording up-front costs as more stressful than making monthly payments, and almost 60% of renters said they’d been prevented from moving into a rental home because the up-front costs were too high.  As a result, legislators like Cincinnati’s have chosen to focus on giving renters more affordable alternatives to standard cash security deposits. With their new bill, passed in January, properties have the option to either cut deposits in half, give ......
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History Shows That Revolutionary Change Can Be Slow in Multifamily

History Shows That Revolutionary Change Can Be Slow in Multifamily
Today, it's hard to imagine the apartment industry without renters insurance.For a variety of reasons, many property management companies require their residents to purchase this kind of insurance. It covers properties for extreme property damage  and liability caused by residents, and may also cover the cost of replacing a resident's personal belongings in the event of a disaster. It is now simply industry standard. Given how widespread it is now, it can be hard to remember that renters insurance was initially met with a great deal of hesitancy and skepticism. But that reaction is worth remembering as new technologies and solutions continue to emerge for the industry's consideration.A Reluctant EmbraceSometime around the mid-2000s, we began to see the major operators insert provisions in their leases mandating that residents purchase renters insurance. The benefits of doing so just became too obvious - for the property and residents alike. Before that, though, most communities were downright scared of doing so. The thinking went like this: if the property across the street doesn't require renters insurance and mine does, I'm going to lose the prospect to the property across the street. You could almost hear property managers say, "I have to do it the same way we've always been doing it because if I do something different, it's going to cost me residents."Slowly, over time, enough properties had to deal with residents wanting owners to replace their stuff in the aftermath of a fire or other disaster. They saw the tremendous tension and bad......
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Considering Concessions? Think about Eliminating Deposits Instead

Considering Concessions? Think about Eliminating Deposits Instead
When the market softens and vacancies begin to rise, apartment operators traditionally turn to lease concessions. Whether they take the form of discounted rent or gifts such as a free iPad or a free television, the goal of concessions is the same: boost occupancy.But while concessions do have the benefit of decreasing vacancy rates, they can cause their fair share of trouble down the road including increased out of pocket expenses or even devaluing a property. Instead of offering concessions, operators should consider boosting occupancy by permanently doing away with security deposits.The Current ClimateMultifamily has been on a roll for the last decade. Rents soared while vacancies were sliced razor-thin. But the market has softened recently as new development has increased. And where there is a lot of new construction, there are bound to be lease concessions. This past spring, RealPage noted that rental concessions are particularly prevalent in the 15 markets with the most new supply.In September, Doug Ressler, director of business intelligence with research firm Yardi Matrix, told National Real Estate Investor that concessions are now present in all 133 apartment markets tracked by the company.Concessions could increase in the months ahead. In the National Multifamily Housing Council's most recent quarterly survey of CEOs and other senior executives of apartment-related firms, the survey's Market Tightness Index was 41. A reading below 50 indicates that market conditions are getting looser.The Problems with ConcessionsWhen you're in the midst of a softening market and you see more and more units sitting unoccupied,......
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Top Seven Problems with Surety Bonds

Top Seven Problems with Surety Bonds
Updated on October 28th, 2019 Let's face it: security deposits are a big headache for both apartment operators and residents alike. In their quest to find a better option, some properties have turned to surety bonds as an alternative to security deposits. Are surety bonds the right solution? Most multifamily experts agree that security deposits will eventually be a thing of the past. For applicants – especially in an era of growing rents and stagnant incomes – it can be challenging to pull together the funds for a big security deposit. And when a lease is over, residents are almost inevitably upset about the portion of their deposit that is returned to them. This leads to angry online reviews that can lay waste to an operator's reputation. Security deposits also saddle apartment operators with significant administrative costs associated with managing the deposits and handling reimbursement disputes. Furthermore, the financial burden of a security deposit slows down the leasing process, reduces lease conversions, and means operators lose out on prospects who would become high-quality residents. In light of these many drawbacks, surety bonds emerged about twenty years ago as a more affordable alternative to deposits. What is a Surety Bond?In the multifamily industry, surety bonds are a three-party contract consisting typically of the resident, the property and the bond guarantor. The renter pays only a portion – typically 17.5 percent – of the total security deposit amount at move-in as a non-refundable fee. The surety bond enables residents to save money up front a......
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Key Clauses You Cannot Afford To Exclude From Your Rental Agreement

Key Clauses You Cannot Afford To Exclude From Your Rental Agreement
A decreasing rental vacancy rate combined with an increasing median monthly gross residential rent in the US real estate market, is progressively creating a favorable environment for rental property owners. According to the Census ACS survey, the median gross rent, as of 2014, stood at $934 with an average of $992- up from $903 and $960 respectively, the previous year. Going by these numbers, rental property owners are undoubtedly making more than they did in 2008, right before the recession- back when they grossed in a median of $924 at an average of $974 per month. With such a great market, the only thing that could stand in your way of effectually monetizing your property is a poorly drafted rental agreement. Although a piece of paper may seem negligible at first, it could ultimately make a great difference between making and losing money. We’ve seen many frustrated landlords lose cases in court just because of simple omissions in their respective lease agreements. Even with a comprehensive tenant screening framework, landlord-tenant disputes can potentially develop down the road. Your tenants, for instance, could fail to honor their rent payments- and consequently, as most landlords would presume, terminate their tenure. Fortunately or unfortunately, tenures are not simply terminated by presumptuous terms. All the terms need to be laid out clearly and explicitly in your rental agreement. To aid you in the process of drafting one, here are the most critical clauses you cannot afford to exclude from your rental agreements:  Right to Entry Gaining e......
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Managing Disputes Over Security Deposits

Managing Disputes Over Security Deposits
Money’s funny. It makes people do funny things. That’s why they say you should never do business with friends or family. It’s the reason contracts are such a good idea. And, for landlords, it quickly becomes the reason for disputes…especially when a security deposit is in question. The best thing property owners and managers can do is protect themselves from the time that will come when such a dispute occurs. That begins with knowledge and adequate preparation. Know your lease and agreements. This definitely goes in the ‘planning’ column. You need to know the laws of your state when it comes to security deposits, and you need to have an iron-clad, signed lease agreement with all tenants that includes details such as: Amount of deposit Any amount deemed non-refundable Amount of time before notice or refund will be received after lease termination Costs for which tenants could be held liable Respond within the appropriate amount of time. If you say in the agreement that you will provide notice to within 30 days of lease termination on partial or non-refund of deposit, and you wait until day 31, you’ve lost your footing. You now are mostly likely liable for refunding the entire portion of the deposit eligible for return. Make sure to investigate the unit promptly and provide notice quickly, including refunds when applicable. Document everything. With an iron-clad lease agreement in place, you’re more than half-way there. However, you need to document any and every issue you find when investing a unit after a move......
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Security Deposit Tips for Property Managers, Landlords, and Tenants

By Matt Donnelly A security deposit is an amount of money — ranging from hundreds to thousands of dollars — that a tenant pays a landlord or property manager at the beginning of a lease above and beyond first or last month’s rent. The security deposit is kept by the landlord or property manager in a separate interest-bearing bank account and is returned to the tenant when he or she moves out at the end of their lease. However, if a tenant damages the property, the landlord or property manager will use some or all of the security deposit to pay for repairs. The security deposit has long been a bone of contention between tenants and landlords and property managers. Some courts are awarding double damages to tenants who sued their landlord for not returning their security deposit. This post will provide guidance for property managers, landlords, tenants, and others who want to navigate the world of security deposits. It will discuss the laws in each state, provide advice from landlords and property managers, and address some of the most commonly asked questions about security deposits. Security Deposit Tips for Tenants If you’re looking to rent, following some simple advice will help you avoid getting scammed. Don’t be afraid to negotiate. Remember that security deposits can be negotiable. There are no minimum amounts that property managers or landlords have to charge for security deposits. Know how much of a security deposit you’ll need to pay. There are some state laws that set the maximum amount you can be charged.......
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Deposit Reconciliation

Deposit Reconciliation
Dear Apartment Manager,   I just recieved my "deposit reconciliation" in the mail, and I use quotes because I believe I am being snarky even though, in this case, the quotes make absolutely no sense. I am besieged with vexation, because I enjoy using the thesaurus, about the cleaning and trash removal charges. Apparently, you have never heard of Proposition 13, which doesn't pertain to this situation at all, but I think I will scare you with my Google legal degree, and do not understand the ramifications of unlawfully holding a security deposit. According to my lawyer, who doesn't exist, I should be returned my FULL deposit. What I left behind was not "trash", since when is a Iron Gym trash? Since when is a computer screen from 1992 and a flower pinata considered trash? And the German Phrases For Dummies, I supposed that is considered trash, and if so, then I think my pretend lawyer would be happy to know that you are a racist as well as a slumlord. It takes a lot of presumption to charge me for cleaning when I lived in that dump of an "apartment" for over a year. The paint was peeling, the bathtub was dirty when I moved in, and the conditions were almost unlivable, even though I never complained about it once during my tenancy, and I am clearly pulling stuff out of my butt at this point. I expect to be refunded the remaining balance of my deposit within the next......
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Is the Security Deposit an Unintended Move-Out Incentive?

I have $800 of your money, and the only way you can get it is to move out of my property.

Today’s blog is meant to be a thought exercise, rather than any type of guidance.  I’m not suggesting that security deposits are bad, good, or anything in between.  But what I do want to do is throw out the idea that they have some unintended consequences.  The concept is pretty simple:  If I have some of your money, and you can only get it by leaving my community, does that create an incentive for you to do just that?  Potentially it does.

I think a lot of factors go into that, of course, such as whether your comps have reduced or eliminated security deposits, as that would mean a net cash gain for the resident, or if the resident was looking to buy a house, where that money would go towards a down payment.  Either way, there are potential negative incentives to renewing the lease, and I think it is important to address that.

What do you all think?  Is this an issue in the renewal process?

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