(The Center Square) - A land-use attorney is sounding the alarm about a congressional bill that could have a major impact on Arizona’s housing market.
Congress has passed the 21st Century ROAD to Housing Act, which would prevent institutional investors from buying single-family homes. The bill was approved by the Senate on March 12 and the House on Feb. 9. The Senate version is different from the House version, so it now must go back to the House for consideration.
The bipartisan bill was sponsored by U.S. Sens. Tim Scott, R-South Carolina, and Elizabeth Warren, D-Massachusetts.
“Housing is a major driver of concern regarding the cost of living today, where supply has not kept up with demand," said U.S. Rep. Abe Hamadeh, R-Peoria, Ariz.
“Current regulations drive up costs and delay construction while small to medium-sized banks are unable to finance new projects. That is why I voted in favor of this bill," Hamadeh said, answering The Center Square's questions by email.
"The conservative bill leverages private capital and existing federal programs to address housing affordability instead of expanding federal subsidies," Hamadeh said.
The representative also said the bill “furthers government transparency by requiring HUD to regularly testify before Congress and requiring HUD, USDA, and the VA to improve coordination and efficiency across their respective housing programs without increasing the federal deficit.”
Adam Baugh, a partner of the Phoenix law firm Withey Morris Baugh PLC, told The Center Square that the bill started out as a good idea.
But the bill became “kind of clumsy” as additional things were added to the bill that appealed to “the vibe of America and less to the facts of it," Baugh said.
The lawyer said there's a perception that these institutional investors were buying up available houses, so legislators added provisions to the bill to “respond to the vibe in America.”
A bill that started out with a great goal ended up being watered down by extra regulations on build-to-rent communities, he noted.
Baugh described built-to-rent as compact, ground-level homes, such as cottages and bungalows.
These living arrangements provide options for people who don’t want to live in an apartment, but want additional space, he explained.
Build-to-rent living spaces are not products that can be sold individually, the attorney stated.
“They make great sense for what is a horizontal apartment regime," Baugh said. "They make terrible sense if someone [is] trying to convert them to home ownership."
The 21st Century ROAD to Housing Act requires institutional investors with more than 350 build-to-rent homes to sell their excess structures.
The bill says institutional investors who own more than 350 units and continue building them must sell them within seven years of construction, with tenants given a first chance to buy them, he stated.
“This law essentially forces these units to be shed and sold one by one,” Baugh said, adding that this is an “impossibility to carry out.”
This bill will “likely kill off a very important asset class,” Baugh stated.
The attorney said the bill undervalues institutional investors’ assets and holdings because it “quickly forces a sale of assets.”
Baugh warned the bill would lead to less capital investment in these rentals.
“We keep talking about how we have a housing shortage. We have an affordability problem, and the biggest way to address that is to build more units,” he explained.
If build-to-rent developers no longer feel confident backing these projects, the future supply of build-to-rent lots will be reduced, tightening the rental market, he said.
According to Baugh, Phoenix is “arguably the most sensitive market in the United States for this bill.”
He said Phoenix is America’s top market for build-to-rent growth, with 30,000 units in the city and thousands more ready to hit the market soon.
“This bill directly targets one of Phoenix’s most dominant product types,” he said.
From 2019 to 2024, Arizona saw a 309% increase in build-to-rent homes, according to a study by Point2Homes, a company that helps people find rentals.
This bill would have a “dramatic impact” in Arizona, he said.
”Built to rent and the sale of land for built-to-rent is one of the things that has driven and supported the increased values of land in Arizona," Baugh said.
An unintended effect of this bill will be that Arizona land will not have “the same value as it did before,” with rents increasing because no new inventory is coming online, he said. “We thought we were solving a problem, [but] actually just exacerbated it."
Baugh, who gives advice to several build-to-rent investors, told The Center Square that they all worry about how they can exit an asset that was not meant for homeownership.
If institutional investors have to sell these units off at seven years, it will create a “mass eviction of an entire project," the attorney noted.
“Not only does it sort of boot people out of these units, it also is going to spook people from coming into the units as you get closer to that seven-year mark,” Baugh said.
He pointed out that if these institutional investors were going to sell these lots, they would have to make internal and external improvements, hire an agent who gets a certain commission and a period when no one is living there.
Baugh said this will cause investors to lose months of revenue.
If this bill becomes law, it will make institutional build-to-rent land buyers pause quickly, he said.
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