Impact on Large Institutional Investors
Newly added Section 901 of the Act would prohibit large institutional investors — entities that own more than 350 single-family homes — from purchasing additional single-family homes. There are currently 11 enumerated “excepted purchases” in the Act. As detailed below, three of those exceptions include a mandatory divestment requirement that would require such entities to sell to an individual homebuyer within seven years.
Relevant definitions include:
- Large Institutional Investors — any for-profit entity or business arrangement that is a legal entity and engaged, in whole or in part, in the business of investing in, owning, renting, managing, or holding single-family homes, and either alone or in concert with one or more other entities, beginning after the date of enactment of the Act, directly or indirectly has investment control of more than 350 single-family homes in the aggregate.
- Purchase — any purchase, transfer, or other acquisition of a single-family home, including through mergers, acquisitions, construction, foreclosures, or bulk purchases, whether or not for cash consideration.
- Single-Family Home — any structure that contains two or fewer dwelling units that are each intended for residential occupancy by a single household, but not including manufactured homes.
Excepted Purchases Requiring Divestment
The excepted purchases that require divestment within seven years are listed below. The Act also specifies requirements for disposal regarding renter accommodations, renter options to purchase, and the advertisement of the property.
- Newly constructed, renovated, or a rental conversion for sale by a large institutional investor, not including single-family homes rented pending sale.
- Build-to-rent projects where the large institutional investor purchases newly constructed single-family homes to be managed as rental properties, whether as communities exclusively of renter-occupied single-family homes or as communities of single-family homes that are both owner- and renter-occupied.
- Renovate-to-rent projects that (i) substantially rehabilitate single-family homes that do not meet structural or core system elements of local building codes and (ii) make improvements in an aggregate dollar amount of not less than 15% of the purchase price of the single-family home(s).
There is also an exception for senior housing projects consisting of newly constructed, renovated, or rental conversions that are intended and operated for occupancy as part of a community for households with one or more members aged 55 years or older, and satisfies specified standards established by the Secretary of Housing and Urban Development (HUD). Divestment is only required if the single-family home no longer meets the specified senior housing criteria.
Enforcement
In its current iteration, Section 901(d) of the Act would impose civil penalties of up to $1 million per violation or three times the purchase price of the property involved, whichever is greater. The civil penalties would be transferred to HUD for homeownership expansion activities.
Next Steps
The proposed institutional investor restrictions would not be retroactive, meaning current portfolios would not be affected. Nevertheless, prospective institutional buyers should prepare for these incoming regulations, as they will affect future acquisitions.
While the White House has expressed strong support for the Act in its current form, House Republicans and other industry groups have opposed newly added Section 901. As such, it is expected that Section 901 will be amended in the coming months.
