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Single-Family Rental – Why, and What’s Different?

February 27, 2020

If you had asked us a year ago about build-to-rent or single-family rental (SFR) deals, we wouldn’t have had much to report. But in the year since, we’ve seen the area explode, and there are no signs of a slowdown. Homebuilders, developers, and equity funds are all paying attention to the SFR space.

The reasons potential homebuyers may prefer to rent are fairly obvious: a hangover from the Great Recession, millennials who don’t have the savings account to support a down payment, and families who want the flexibility to move every few years, to name just a few. But why would a residential developer want to set aside some acreage in an MPC for a section of SFR homes? And what are the considerations before, during, and after this new product type enters a community?

Why Build-to-Rent?

There are several reasons a developer would want to set aside space for rental homes:

There’s consumer demand for rental product. In addition to the reasons mentioned above, military families, families displaced by natural disasters, and families interested in “test-driving” a neighborhood or new to a metro area have reason to rent, rather than buy, a single-family home.

Faster ROI: If for-sale demand is low or slowing, introducing rental product can accelerate a developer’s returns. Even in a well-paced for-sale program, introducing SFR can be advantageous, as SFR developers often can spend more on dirt than other purchasers, and the MPC developer can recoup utility district receivables at a faster pace with SFR units on the ground.

Parallel market: Single-family rental homes can provide additional segmentation for an MPC, i.e., a new and different product type that doesn’t compete with existing and potential homebuilders whose homes are for sale.

More foot traffic for multi-use spaces: If an MPC is contemplating or has a retail or commercial component, additional residents – whether homebuyers or tenants in SFR product – mean additional traffic and support for the retail center.

What’s Different?

To be clear, SFR is a different product and must be approached accordingly.

More strenuous approvals: Before an SFR developer enters a community, they will seek approvals from the relevant governmental authority (city, town, etc.) for their plat and product type, as well as from the developer for their home plans. Given the novel product type, often increased density, and that the home plans sometimes require variances from the MPC’s design guidelines, the approvals process is often more strenuous for SFR developers than traditional homebuilders, or even multi-family developers.

Amenities, HOA dues and other fees, and more: Once an MPC contains an SFR section, considerations – for both the MPC developer and the SFR operator – include:

(1) whether the model home requirements and welcome center presence will be the same for the SFR operator as other homebuilders,

(2) whether tenants will have the same amenity access as owners within the community, or whether the SFR operator will provide a separate amenity for tenants,

(3) whether tenants will pay the same HOA dues as owners within the community (particularly if they aren’t permitted to access certain amenities, or if the MPC developer isn’t responsible for common area maintenance within the SFR section),

(4) how the developer’s marketing program will account for single-family rental product, and any related adjustments to marketing fees,

(5) whether CC&Rs allow these types of rentals (or if not, how they can be modified),

(6) homeowner reactions to – and misconceptions about – the introduction of SFR product (it’s recommended that MPC developers make clear in their master plans that rental product is anticipated so that residents aren’t surprised after they’ve bought homes in the community), and,

(7) how HOA dues and fees and utility district assessments are factored into rents.

Exit considerations: When an SFR developer is ready to exit an MPC, one consideration is whether the lots were platted individually or as a single, multi-family tax parcel, as this structure affects sell-off. Also relevant is whether there’s a sub-association in place with respect to maintenance of and assessment for the parcel.

Still interested in the ins and outs of single-family rentals within MPCs? Contact The Watson Firm to discuss.

About The Watson Firm

The Watson Firm provides legal services for master-planned, mixed-use and resort communities. Our industry experience, both on the business and the legal side, is what makes us uniquely capable of guiding clients through the myriad of legal issues involved with any new or ongoing development.