New risks continue to develop for multifamily firms as federal programs and standards evolve, creating new compliance requirements and challenges.
The 2016 OPTECH Conference program included a series of sessions focused on new and emerging regulatory and compliance issues with consequences for multifamily operations. While some of the developments are in their infancy, multifamily executives should keep close watch over future changes, as they can increase compliance requirements and/or add risk to operations. Below are some of the key takeaways from the conference.
1. Debt Collection Rules Are Expanding
Michael Lamm, a managing partner at Corporate Advisory Solutions, said that he’s anticipating that there will be more regulatory movement, and potentially enforcement actions, around debt collection practices. Currently, 33 states and some localities like Puerto Rico or New York City have laws governing debt collection, often requiring licensing, bonds and/or fees. While these regulations are mostly focused on third-party debt collectors, the regulatory purview is expanding to include more first-party debt collectors, which could affect some apartment firms doing in-house collections.
The Consumer Financial Protection Bureau is currently taking the lead in the debt collection space. The industry’s growth is likely to attract more of the CFPB’s attention. Overall industry revenue is projected to grow at an annual rate of 1.0 percent over the next five years, hitting $78.2 billion by 2021; at the same time, the number of property managers is projected to grow at 2.7 percent per year, topping 265,022 firms by 2021. “In the next year or two, folks from that agency are going to show up here [in multifamily]. We are seeing that in every other industry,” said Lamm.
2. Third-Party Contracts Can Expose Cybersecurity Vulnerabilities
Third-party suppliers often have access to a multifamily firm’s sensitive data and systems. If a supplier is breached-even if the supplier is at fault-apartment firms are generally held responsible, leaving them at risk for monetary, brand and reputation damages. Chris Cwalina, a partner with law firm Holland & Knight, said that in 75 percent of the breach cases he’s worked on, gaps in contract language and coverage have played a role.
“A lot of the times, you’re working with ‘old paper’ and long relationships,” he added. As these business relationships grow in tenure and complexity, many apartment firms fail to reevaluate contract terms for cybersecurity risk as the contracts are renewed. That’s why it’s important to establish a process to not only conduct due diligence on supplier candidates prior to engagement and adopt standard contract provisions with regard to data privacy and security provisions but also periodically conduct audits and re-evaluate supplier practices to ensure they are compliance with the contract and adhering to reasonable security practices.
For more third-party contract best practices, please consult this cybersecurity white paper or webinar.
3. More Support for Federal Flood Insurance Program Is Needed
In a discussion of the National Flood Insurance Program, which is set to expire in September 2017, Dan Freudenthal, president and flood practice leader at CRIO, stressed that the industry needs to support the reauthorization of the National Flood Insurance Program (NFIP).
While the private flood market is emerging and providing multifamily companies with some better coverage options and pricing, it’s not robust enough to efficiently serve the entirety of the multifamily industry’s flood insurance needs. The federal program plays a big role in addressing those gaps, providing critical protections against flood disasters. “Multifamily is a unique line of business for flood insurance,” he said. “We need federal and private coverage options that acknowledge this unique position and help us mitigate risk.”
For several years, apartment owners and managers have been seeking clarity on what is and what is not permitted regarding using music on their properties. Music licensing companies have reached out to some owners and managers demanding royalties for the use of music in common areas, fitness centers and lobbies.
Attorney Jeff Tinker, a shareholder in Winstead's Intellectual Property Practice Group, said licensing should be considered for an individual apartment community rather than a portfolio as a whole, since licensing obligations depend on how music is used by each property, among other factors. He emphasized that some multifamily scenarios are straightforward but others are unclear and have not been considered in court.
For example, when it comes to TV monitors, Tinker noted that training community staff to disable the audio function and turn on closed captioning, post a "no volume" sign and take away the remote control could help demonstrate an affirmative effort to eliminate a licensing obligation. Yet a resident-only fitness room with audible music would more likely require a license, but there is a reasonable argument against the need for licensing a fitness center with sound that's only available to residents through an individually-controlled device, Tinker said.
However, whether a public performance license is needed for a resident-hosted private event is a "gray area," according to Tinker, and may depend on the number of the resident's guests in attendance.
For background information about music licensing for apartment firms, please refer to NMHC's members-only music licensing white paper.