Disparate Impact - Where do we draw the line?

As a professional in the property management industry with more than 24 years of experience and as a licensed Real Estate Broker in Florida and North Carolina, not to mention being a proud US Citizen of Hispanic descent, I am very concerned with discrimination. I admire the way we try to include everybody in our great Country, The United States of America and I am an advocate to eliminate any possible discrimination in our communities. Living in South Florida, a true melting pot, shows people how people of different ethnic and cultural background can live together in harmony. Of course we still have to solve some discrimination issues in our Country but I do not see any place in the world where people are treated so equally as in our Country.

Not only as President of my company, Florida Property Management Services Inc but as the current President of the South East Florida National Association of Residential Property Managers Chapter (in formation) as a Past Vice-President and Director of the local Chapter of the Institute of Real Estate Management, Past Director of the Florida Association of Realtors and Past President of the Florida Chapter of the CCIM Institute (www.ccim.com), I have always been working towards equality, inclusion and the promotion of non discriminatory practices in all organizations. Furthermore I have participated in several Committees and Advisory Boards concerning professional development of minorities. In summary I am totally in favor of the Civil Rights Act, that all men are created equal and that discrimination practices of any kind cannot be tolerated. What I do not understand is taking such an important issue and try to create problems instead of solutions. Trying to distance more groups of Citizens than bringing them together, worrying more for the things that separate us than for the things that unite us. Recently I heard for the first time the concept of Disparate Impact. 

Here is some background on Disparate Impact:

The U.S. Supreme Court was set to hear arguments in early December regarding the case, Mt. Holly Gardens Citizens in Action v. Mt. Holly which involved the disparate impact housing theory. The case focused on the question of whether or not the Fair Housing Act would permit the government to establish discrimination using statistical analysis instead of if the discrimination was intentional.

Earlier this year a final rule was published by the Department of Housing and Urban Development (HUD) which established a national standard for determining whether a particular housing practice violates the Fair Housing Act (“Act”).

The rule implemented a burden shifting test that requires the charging party to first prove that a practice results in, or would predictably result in, a discriminatory effect on the basis of a protected class. If the charging party is successful proving their case, the burden then shifts to the defendant. The defendant must then prove that the practice taken into question is indeed necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests.

A major concern with this rule is that the method of proving one’s case is inconsistent with traditional judicial processes in the United States. Historically, the charging party has the burden of proving their lawsuit. It should not be different in this situation.

An additional concern with the final rule is that a legitimate business practice, such as imposing a minimum economic standard or requiring a criminal background check on prospective tenants, may fall into the category of creating an unintended disparate impact on a group of citizens. This may significantly alter typical business activities for property managers if they cannot set standards for tenants pertaining to the ability to pay rent and the safety of other tenants.

So where do we draw the line? This means that if in my daily business I require to check criminal background on all applicants because our policy is not to rent to people with criminal background but if as a result of that policy I am not approving prospects from a protective class under the Fair Housing Act, then I am in violation of the Act. really? Are you kidding me? If I request as a policy that tenants meet the criteria of proving monthly income of 3.25 times the monthly rent and as a result of applying this policy to all applicants regardless of race, ethnic background, etc., one specific group is left out because of applying this policy then I am in violation of the Fair Housing Act. Really? Are you kidding me? 

One thing is to exclude a protective class another thing is applying policies in our businesses that make economic and financial sense for our business to perform to the maximum possible. Isn't this what capitalism is all about? If I want to require 3.25 the rent in income from applicants that is a business decision. the market will tell me and the forces of supply and demand will make me lower it for my business to perform but why do i have to change my business financial policies due to this interpretation.

The rule is out there and of curse we will comply with the rule and all aspects of any law as we usually do BUT,

WHERE DO WE DRAW THE LINE?

Apartment Occupancy Rate Sets Record with Fourth Consecutive Month Increase in May MultifamilyBiz.com (06/18/2015)

According to Axiometrics, the nation's apartment market recorded a monthly occupancy rate of 95.3 percent in May, along with annual effective rent growth of 5.0 percent -- the fourth month in a row that this particular metric was at or above the 5 percent mark.  In fact, the four-month streak was the first since May to August of 2011.  Furthermore, the May occupancy rate -- a 12-basis-point increase from April -- was the highest since Axiometrics started monthly reporting in 2008.  "Owners and investors are having a profitable start to the year," said Stephanie McCleskey, Axiometrics Vice President of Research.  "One interesting point is that rent growth is increasing in previously challenged markets in the East and Midwest, such as Chicago, St. Louis, Philadelphia, Kansas City, Baltimore, and even Detroit."

While Oakland reported the highest annual effective rent growth among Axiometrics' top 50 apartment markets again, the rest of the top 10 underwent a bit of a shake up.  For the first time in at least a year, for instance, the top five did not include all three Bay Area markets, as San Francisco fell to sixth place.  Portland leaped from number four to the second-place spot, while Sacramento eased into that fourth-place opening. Finally, the top five smaller metro areas among the Axio Top 120 in May included three Florida markets and two California markets, just like the month before, although Palm Bay, Fla., replaced Deltona.

Smoke Detectors – The New 2015 Law 
by Harry Heist, Attorney at Law

After a number of years of unsuccessful bills introduced in the Florida Legislature, finally a bill addressing smoke detector/alarms has passed into law. Florida Statute Section 553.883 governs what property managers or owners must do under certain situations with regards to smoke detector/alarms. The law is simple, it is not burdensome, and the sooner property managers begin to comply, even if not necessarily right away, the safer the residents will be, and the less liability exposure that will be placed on property managers and owners. The law applies to battery powered smoke detector/alarms. It does not apply to fire/smoke alarms that are electronically connected, hardwired or part of a centrally monitored alarm system, so this will not have much impact on the multi-family manager.

Prior Law

Prior to the law change, the property manager simply had to use an off the shelf smoke detector/alarm with a removable 9-volt battery. However, problems occurred when residents tampered with the alarm or failed to notify the property manager that the battery was dead. Residents would remove the battery if the low battery signal was going off, and statistics have shown that the majority of injuries and deaths caused by smoke and fire was due to the fact that there either was no smoke detector/alarm, or that is was simply not operational. Property managers would replace the smoke detector/alarms with the cheapest possible models available, deaths and injuries occurred, and lawsuits against property management companies were common.

The New Law

The new law is quite simple. Any time a battery powered smoke detector/alarm is replaced, if it is defective, or has exceeded the 10 years lifespan, (dates are usually on the back) the replacement must be with the type that has the 10-year, non-removable, non-replaceable battery. Presumably these batteries will last 10 years and cannot be easily tampered with by the resident once they are activated. They are a bit more expensive than the older type, but a few dollars is all it takes. Buying in bulk as well will save even more money.

Best Practices

The law does not require that the property manager replace a working smoke detector/alarm that is less than 10 years old with the new type. The property manager can simply replace the battery with a fresh battery, test it, and be in compliance with the law. Why take such a shortcut? Do the right thing. Replace all your battery powered smoke detector/alarms with the new 10-year smoke detector/alarms. It is simply the right thing to do. We recommend you do not wait a moment longer. Buy them in bulk and replace them all. Below is the text of the law. The law is not 100% clear and does not answer all the questions we may have now, but one thing is clear: you can and should replace all your battery powered smoke detectors/alarms now and sleep easy.

The New Law Text

Florida Statutes Section 553.883 Smoke alarms in one-family and two-family dwellings and townhomes.—One-family and two-family dwellings and townhomes undergoing a repair, or a level 1 alteration as defined in the Florida Building Code, may use smoke alarms powered by 10-year nonremovable, nonreplaceable batteries in lieu of retrofitting such dwelling with smoke alarms powered by the dwelling’s electrical system. Effective January 1, 2015, a battery-powered smoke alarm that is newly installed or replaces an existing battery-powered smoke alarm must be powered by a nonremovable, nonreplaceable battery that powers the alarm for at least 10 years. The battery requirements of this section do not apply to a fire alarm, smoke detector, smoke alarm, or ancillary component that is electronically connected as a part of a centrally monitored or supervised alarm system.

Accounting for Reserve Items to Properly Calculate Return on a Real Estate Investment

I see mistakes all the time in calculating the return of a real estate investment.  Today the topic is how to properly to account for reserves when one calculates the return on investment. You see brokers and investors calculating the annual return on a real estate investment that has been acquired with no financing as follows:

GROSS INCOME

less VACANCY AND COLLECTIONS

equals GROSS EFFECTIVE INCOME

less OPERATING EXPENSES

equals NET OPERATING INCOME

RETURN = NET OPERATING INCOME/PRICE PAID FOR THE PROPERTY

Using a simple example, let's say a residential property was purchased for $200,000 and it generates in Gross Income $18,000.00 per year, a 5% vacancy and collections is applied for a Gross Effective Income of $17,100.00. Let's assume that Operating Expenses are $6,300.00 per year (this is property taxes, Insurance, maintenance,etc). Then the Net Operating Income is $10,800.00 which will show a Return on the Investment of 5.4% on the first year operation and using a simple cash on cash return. This figure is totally wrong and misleading to an investor. We should account for reserves for replacement, a non-tax deductible deduction that must be applied to the investment every year as a cost for when replacement of items will become necessary in the future. Also from a cash flow standpoint, it is necessary to actually put the funds aside for when the time comes in the future to replace an item. Reserves for replacement are reserves based on the cost and life expectancy of items that must be replaced in a property such as driveways, roofs, air conditioning units, appliances, other equipment and paint. If the cost of a roof is $15,000.00 and its useful life is 25 years, assuming in our example this property ha a new roof then we must account for a roof reserve of $600.00 per year. Let's also assumed that the expected remaining life of an air conditioning unit in our property is 4 years and the cost of an A/C unit is $3,500.00 and that all appliances have an expected remaining life of 5 years with a total cost   of $3000.00 then our total reserves for replacement will be $600 for the roof, $875 for the A/C unit and $600.00 for appliances for a total yearly reserves for replacement of $2,075.00. Then the real Cash on cash Return on the Investment is Net Operating Income of $10,800.00 less $2,075.00 in reserves for replacement over what we paid for the Investment ($200,000.00). 

Net Operating Income = $10,800.00

less Reserves for Replacement = ($2,075.00)

Net Investment Income = $8,725.00

Return on the Investment = $8,725.00/$200,000.00 = 4.3625% (before taxes)

Then 4.3625% is the actual cash on cash return on the investment  before taxes and not 5.4%. Then applying the proper tax rates one can obtain the return after tax and in the event a portion of the purchase is financed the return will be affected by the principal and interest paid and we will discuss this as well as Internal rates of Return in the future in other blogs. 

The point here is that real estate brokers and managers must use an accurate way to calculate the return of an investment for an investor and must include not only all operating expenses an account for vacancies but also account for reserves for replacements. 

Corporate Leases and Guaranties

Properly Executing Corporate Leases and Guaranty Agreements 
by Brian Wolk, Attorney at Law Law Offices of Heist, Weiss and Wolk 

In most cases, property managers receive little or no training on how to deal with a prospective resident or guarantor that is a corporation. The property manager then will either just carry on business as usual, not recognizing the significance of this type of lease transaction, or the property manager will essentially make up rules on how to deal with the prospective corporate resident based on the manager’s common sense. If that happens, the property manager will complicate and jeopardize any future collection or eviction actions. It is crucial that a property manager step back, take a breath, and act in a careful and deliberate manner before executing any guarantee of lease agreement or lease with a corporate entity. Very often, a property manager with the best of intentions, and attempting to increase occupancy at the apartment community, may be blinded by excitement with the possibility of filling numerous apartment homes with a corporate resident. The property manager is an easy target in this situation. The property manager should always keep in mind that the purpose of most corporations is to turn a profit. Accordingly, there are often in-house attorneys or attorneys on retainer who are paid to fully insulate or limit the corporation from liability for any lease obligations. Thus, the property manager better be certain that the lease and guarantee agreements are properly executed, so there is clarity as to who is legally obligated to pay the rent and meet the other lease obligations. To make matters worse, there are applicants who are scam artists, who have no intention of paying rent and who may even submit fake corporate names that do not exist.

Rent Responsibility

In instances when the corporate entity is signing the lease as the resident, an individual person is not responsible for the rent or any other obligation under the lease. To make this easier to understand, the corporation is treated like a person during the term of the lease and any future collection or eviction proceeding. For example, if the rent is not paid, the property manager would name the corporation as the resident being evicted, and only the corporation’s name would be listed on the eviction paperwork filed with the court.

Is there really a Corporation?

Initially, the property manager must verify that the corporation truly exists, as the full corporate name should accurately be referenced on the lease. Corporate officer information should also be verified, as the property manager also needs to confirm that the person claiming to be a corporate representative has actual authority to do so. The corporate representative with whom you deal may not be an officer, but you can require correspondence written on corporate letterhead signed by an officer that the person with whom you are dealing has the power to bind the corporation. The Florida Secretary of State maintains records concerning corporations, including corporate officer information, and it is usually fairly simple to verify this information online. The corporation may be incorporated in a different state, and the corporate information may need to be verified under that state’s secretary of state website. However, if the corporation is doing business in Florida, it should still register with the Florida Secretary of State. In some cases, we recommend that the property manager obtain the articles of incorporation. Never blindly accept the information provided to you by the corporate contact you are dealing with. It is imperative that the property manager use diligence and verify that the information provided is completely accurate.

Investigating the Corporation

If the corporate entity is bogus, then the apartment community owner’s ability to collect past due rent will be seriously jeopardized, and any eviction process can also be severely compromised, since the eviction action would be filed against an entity that does not exist. At that point, you are at the mercy of the presiding judge. Take your time, and do not let the applicant rush you.

The Inactive Corporation

Sometimes a property manager will discover that the exact name of the corporation exists in the records maintained by the Florida Secretary of State. However, it may turn out that the corporation was voluntarily dissolved or was administratively dissolved for failing to pay annual fees to the Secretary of State. The property manager must recognize that a corporate entity that is dissolved has absolutely no power to enter into lease guarantee agreements, residential leases or any other contracts.

Corporate Tenant Lease Execution Procedures

First, the corporate resident’s name that is listed on the lease must be an exact match with the name on file with the Secretary of State. This requirement has no exceptions. For example if the names do not match up by only one letter, the lease will be drafted incorrectly.

Lease Must Disclose the Actual Names of the Occupants

All properly managed apartment communities obtain criminal background checks on their residents. In truth, many corporate residences are essentially halfway houses or residential drug treatment programs that could indeed place convicted, violent criminals on the grounds of your apartment community if given the chance. When executing a lease with a corporate resident, the actual names of the occupants must be listed, or else the apartment manager will be powerless to verify if those occupants have any criminal history. Also, if the actual names of the occupants are not placed on the lease, the corporation could have a never ending parade of unsavory characters moving in and out of the apartment home, who constantly request that you provide them with keys to the unit or who cause unreasonable disturbances throughout the apartment community.

Corporate Lease Signature Block

It is imperative that the signature block on the corporate lease identify clearly the name of the corporate entity that will be listed as the resident under the lease. Also, the signature block must disclose the name of the corporate representative authorized to sign the lease on behalf of the corporation.

Properly Listing the Corporate Representative on the Lease

It is vital that the corporate representative’s name and complete title be placed on the lease when that representative signs the lease: for example: Brian Williams, as Vice-President of OYIL Corporation. In this example the corporate representative would be the vice-president. The property manager can verify this information by utilizing the Secretary of State website. The property manager must never blindly believe that the person signing the lease has legal authority to sign the lease on behalf of the corporation. Keep in mind, the corporate representative will have no individual liability and would not be listed on any eviction complaint, as that person signed the lease in a representative capacity on behalf of the corporation.

Negative Fallout from Failing to Properly List the Corporate Representative on the Lease

Under Florida Law, there is a strong presumption that if a lease is signed without the designation of the person signing in a representative capacity, then the person is signing in an individual capacity. For instance, the signature block has Beth Smith and the name of the corporate entity listed, but not Beth Smith’s corporate representative capacity or title. Negative consequence may result. Since the intent of the parties was that the individual would not be liable, a judge would probably prohibit the property manager from holding the individual, Beth Smith, liable for the lease obligations. In addition, because the apartment community drafted the lease incorrectly, the corporation could very well avoid liability for any obligations under the lease. That is truly a horrible result for your company, and your regional manager will be very upset.

Guarantee Agreements Involving Corporate Residents Must Be Properly Executed

Unless the property manager has researched the state of the finances of the corporation and determined that the corporation has a long standing history of promptly paying its bills, and the property manager believes with complete certainty that the person signing the lease has the authority to sign on behalf of the corporation, it will be safer for the property manager to have an individual sign a guarantee of lease. The person signing the guarantee would be responsible for all past due rent any other amounts owed under the lease if the corporation defaults on its obligations to the landlord. The guarantee agreement must have clear and exact written language to that effect. However, if the individual signs the guarantee of lease agreement and includes any reference to the company or corporate title, then the guarantee may be essentially worthless, because it will not be enforced against the individual. This result may occur when there is no clear language demonstrating that the person signing the guarantee of lease agreement intended to be personally liable. Also, if the property manager wishes to include the individual on the lease itself, then the signature block should state the following, for example: “Beth Smith, signing in her individual capacity”.

The Corporation as the Lease Guarantor

In many instances, the property manager due to resident selection criteria will not be able to approve an applicant unless the applicant obtains a guarantor. Very rarely, the guarantor will be a corporation. Therefore, in order to enforce the guarantee agreement against the corporation, all of the rules for proper execution which apply to the lease signing process will also apply when the corporation is guaranteeing the lease. The properly trained property manager must verify that the corporation is in existence, and the guarantee of lease agreement must list the name of the corporation exactly as it is listed with the Secretary of State, and the person signing the guarantee of lease must have the authority to do so. Likewise, the signature block must clearly list the name of the corporate representative and the corporate representative’s exact title. Call your attorney if you have questions about this process.

It is all about lifestyle in multifamily living

It is all about lifestyle in multifamily living. Apartment complexes, condominium developers and even home owners associations are trying to attract buyers and renters not only offering a housing solution but a whole lifestyle. In recent years it is more important to offer the right amenities and lifestyle than the physical configuration of a specific unit, although this will always have an impact on a buying or leasing decision but to a lesser degree. The following article from GlobeSt.com shows what condo developers are doing in Miami, amenities never seen before in a condominium project.

From Globest.com "MIAMI—Developers are working hard to differentiate their Downtown Miami condos, but the market hasn’t seen anything quite like this yet. Paramount Miami Worldcenter will be home to America’s first outdoor soccer fields in a high-rise residential development.

Soccer is the world’s most popular sport and is gaining massive attention in Miami as the city works through details of a new soccer stadium. In the meantime, residents at Paramount can have kick all the goals they want in an indoor regulation size soccer field located within a two-acre sports complex on the ninth floor of the 60-story tower.

“The world’s number one sport is coming to Paramount Miami Worldcenter,” says developer Daniel Kodsi, who has developed a real estate portfolio of over $1.1 billion in mixed-use, multifamily, condo and single-family homes over the past 25 years. “We are including amenities for families who wish to live in the core of Downtown Miami but also want plenty of open green space to play. Paramount has already attracted buyers from around the world…”

Beyond soccer, the outdoor sports complex will be home to tennis courts, a running course, yoga deck, and basketball court or use the fitness center or boxing studio inside. Meanwhile, a “jam room” will come fully equipped with drums, guitars, a piano and recording studio. Private outdoor bath houses offer serene pools with 180-degree view from a top-floor indoor lounge.

“An amenity like the soccer field really catapults Paramount Miami Worldcenter into a league of its own,” says OneWorld Properties’ president and CEO Peggy Olin Fucci, who is leading marketing efforts for the property. “We have already received tremendous feedback from South American, European and Asian buyers.”

Paramount Miami Worldcenter is located on Biscayne Bay and surrounded by the American Airlines Arena, Adrienne Arsht Center, and the Pérez Art Museum Miami. The tower will be within walking distance of the new pedestrian 7th Street Promenade, which will be home to premier restaurants and outdoor cafes.

The project features 473 city and bay-view residences. Residences will range in size from 1,300 to 2,300 square feet, with prices averaging $700 per square foot. The project is scheduled to break ground in the second quarter of 2015 with occupancy slated for the third quarter of 2018.

Downtown Miami condo prices are soaring. Prices for resale condo units in Downtown Miami from the last boom have increased 75% over the past two years, rising from an average of $230 per square foot to $400 per square foot. The DDA credits most of appreciation to value recovery stemming from market stabilization and the launch of new projects since 2011.

“Strong buyer demand, appreciating prices, and growing appeal among renters continue to fuel the downtown Miami condo market,” says Anthony M. Graziano, senior managing director forIntegra Realty Resources in Miami, whose firm conducted the study. “While we expect price increases to slow with time, downtown is well positioned to absorb the new condo inventory currently under development should present-day buyer trends hold.”

A Green Building Culture

Model D (09/23/14) Mondry, Aaron

The Green Garage, a renovated historic Model T showroom in Detroit, typifies a growing green building culture in that city, using as many sustainable design elements as possible. The building weathered one of Detroit's snowiest winters and rainiest summers with built-in stormwater management, high-resistance insulation, UV-light-blocking windows, solar panels, radiant heat, and other features that enabled the building to use just 15 percent of the energy of a comparable office building. Another historic Detroit building, 71 Garfield, was retrofitted with geothermal heating and cooling, foam insulation, and a rooftop solar array, among other improvements. It uses one-third of the energy it used before the renovation. Meanwhile, Detroit-Wayne Joint Building Authority president Gregory McDuffee renovated the Coleman A. Young Municipal Center with simple and inexpensive changes that are expected to save approximately $1.8 million a year. Some of the changes included cutting energy for lighting by having cleaning staff clean during the day rather than at night, using single-stream recycling to reduce waste, and retrofitting 4,000 cooling boxes to save energy. More efficient insulation and windows are "relatively simple changes that pay for themselves within a year," says EcoWorks' Jacob Corvidae. Making buildings more energy efficient enables businesses to use saved capital for business expansion. "It gets back to our competitiveness as a city and as a nation," says Green Garage owner Tom Brennan. "If we have high infrastructure costs that have to be born in our products and services, then we're setting our businesses up for failure."