On October 23, the U.S. Department of the Treasury issued proposed regulations implementing Section 1001 of the 21st Century ROAD to Housing Act (ROAD). Section 1001 restricts certain large institutional investors (i.e., entities that hold 350 or more single-family homes) from purchasing additional single-family homes for rental programs. There is no forced divestiture of currently owned homes.
Included in the proposed regulations are a set of exceptions to the definition of a single-family home, among them build-to-rent (BTR) homes. The proposed regulations define certain instances where build-to-rent communities would be excepted from the regulation. The statute’s prohibitions are effective January 7, 2027, and expire after 15 years in 2042.
Although NMHC will be offering comments on the large number of questions contained in the proposed regulations to ensure they are administrable and function as intended, our preliminary analysis is that entities owning single-family rental homes, including BTR, will, in many cases, be allowed to continue to conduct business operations. They will also be able to add newly constructed single-family rental homes, including BTR, to their portfolios.
How Transactions May Be Impacted
One area, however, that may cause some disruption is when a non-large institutional investor (non-LII) seeks to sell single-family rental homes to a large institutional investor (LII). In such a case, the LII will have to rely on an exception to the prohibition rule as described below. Here is how we believe transactions of single-family rental home sales, including BTR, will be impacted.
- LII selling to LII: Sales of single-family rental homes between these entity types appear permissible in all cases.
- Non-LII selling to Non-LII: Sales of single-family rental homes between these entity types appear permissible in all cases.
- Non-LII selling to LII: Sales of single-family rental homes from a non-LII to a LII: Such properties may be sold if a transaction is conducted within 18 months of the home having received a certificate of occupancy or if the purchasing LII employs one of the following exceptions:
- Renovate to Rent: Requires that a purchasing LII substantially rehabilitates single-family homes failing to meet local building code requirements concerning structural or core elements and the resolution of material deficiencies. Cosmetic improvements are excluded. The provision requires the cost of such improvements to be 15 percent of the purchase price of a home but does allow a safe harbor if those costs total 10 percent but the overall spending on improvements is 15 percent.
- Homeownership Program: To qualify for an excepted purchase for a single-family rental home, the LII would have to establish a homeownership purchase program for a resident occupying that rental home. Among other requirements, the purchasing LII would have to provide meaningful financial support that is not recouped to help facilitate the purchase. A safe harbor provides amounts of assistance that must be provided for a resident who has lived in the home for at least five years (i.e., the lesser of $5,000 or 2.5 percent if the resident has lived in the home at least 5 years, and 3.5 percent if the resident has lived in the home at least 7 years). The percentages refer to the lesser of the purchase price of the property or the FHA mortgage limit for a one-unit property in the same county. Other requirements like positive rent reporting apply as well. Financial support could be terminated if as of the date of a purchase rent is unpaid, a rental contract is breached, or a resident decides to terminate the rental contract. Should an LII sell the property to another LII, the program must continue.
- Program to Boost Homeownership: To qualify for an excepted purchase of a single-family home, an acquiring LII may establish a program to boost homeownership. Under this option, the home ultimately purchased by a resident does not need to be the one currently occupied or even owned by LII. The safe harbor mirrors the one above for levels of assistance and also requires positive rent reporting. It may also be terminated for unpaid rent and material damages, and an obligation to provide assistance terminates 90 days after resident vacates a single-family rental home owned by the LII. Should an LII sell the property to another LII, the program must continue.
- Renovate to Rent: Requires that a purchasing LII substantially rehabilitates single-family homes failing to meet local building code requirements concerning structural or core elements and the resolution of material deficiencies. Cosmetic improvements are excluded. The provision requires the cost of such improvements to be 15 percent of the purchase price of a home but does allow a safe harbor if those costs total 10 percent but the overall spending on improvements is 15 percent.
The options offered above all carry structural, administrative and financial costs that may make it difficult to transact.
Additional Areas to Note
Additional areas to note are that the proposed regulation does not define “structure.” While the underlying statute defines a “single-family home” as a structure with two or fewer dwelling units that are each intended for occupancy by a single household, clarification could be beneficial. For example, are three-connected townhouses one or three structures if they share the same roof? What if the roofs are sloped and just the walls touch? Additionally, the proposed regulation treats “passive investors” as entities that essentially have no control (including approvals or vetoes) over any decisions regarding a BTR property. This would be a very difficult standard for an investor or even a lender to meet in many transactions, causing most investment in BTR transactions to potentially constitute LII status.
HUD Issues Mortgagee Letter on BTR
In separate news on the BTR front, the Department of Housing and Urban Development earlier this month issued a mortgagee letter on underwriting FHA-approved multifamily mortgages. Specifically, the letter notes:
“Effective immediately, HUD will accept applications for mortgage insurance on multifamily rental properties that consist of detached single-family homes, duplexes, or triplexes—commonly referred to as Build-to-Rent (“BTR”) communities (formerly referred to as “subdivisions for rent” by HUD). These properties will now be treated under the same terms and conditions as traditional multifamily rental developments, subject to the specific requirements outlined in this memorandum.”
Executive Order on Housing Affordability
Finally, on October 22, President Trump signed an executive order (EO) focused on increasing housing affordability. While the provisions in the EO do not impact the multifamily industry, the EO demonstrates the continued focus the Administration is placing on housing affordability issues. NMHC is continuing to seek opportunities to work with all policymakers to enact new policies fostering housing supply and promoting affordability.
