Need Help- Purchasing Multifamily - Local Law Preventing Rate Increase

[William Coet]

Hello,

This is a crazy situation where the city rental law may end up harming the tenants. We would like to purchase this property but need to figure out how to navigate the significantly below market rates.

The Situation:

- Small multifamily of less than 6 units. The current rents are currently 40%+ below market rate. All leases expire this summer

-City rental law restricts increases of more than 9% upon renewal.

-If a tenant has been there for more than 2 years, 90 days notice of non-renewal is required.

-Seller has agreed to provide notice of non-renewal if we request it.

The problem: The tenants may want to stay, but we need to achieve market rate to pay the bills. One tenant has been there for 10+ years and is paying 75% below market rate. If they stay, we will never catch up to market rate because of the City rental law. If the seller issues them a non-renewal letter we will be showing the apartment to future tenants while the current tenant is still there. Even if the current tenant wants to stay and signs a lease at the current market rate they can get mad in the future and say that we violated the City rental law's limit on annual allowable rate increase and they would win in local court (based on what I'm hearing from other people in the market). Obviously the ideal thing would be for the current tenants to agree to the rate increase and not use the City rental law's limit on rate increases against us in the future, but this seems like a risk.

Solution: Not sure what to do. Any insight and/or ideas will be appreciated.

Thank you for any help on this matter!

[James Hamling]

@William Coet I think your over complicating this and missing the simple obvious. 

Being at rents 40%-75% below market is not something a persons just fell into overnight, it takes years to build such a hole. 

And it's equally not something that get's fixed overnight rocketing too full market. 

This regulation seems very reasonable and realistic to me. It allows for basically a 2X historical norm in rent increase. 

The issue is not the regulation, it's the hole selling Landlord dug for themself. I am guessing from there neglect of doing an annual rent increase over time. And I've seen that play out time and time again. It never, NEVER creates good futures. 

If you are to buy the place, it's a simple 3-step approach: 

(A) Factor in the costs to your purchase price

(B) Institute all leases as maximum 12mnth term. 

(C) Start sending those renewals for the sub-market rate units at max of what can raise. 

Is it going to take some time, yup, sure is. Historical average annual rent increase is in the ball-park of 4%. So if doing 9% every 12 months for those sub-market rate units means you'll be gaining some significant ground every year. And doing it in a way that doesn't make shock-n-awe in tenancy lending really bad PR. 

And again, you price it into purchase price, selling Landlord shot themself in the foot with this, that's not a you problem that's a them problem. 

And if seller throws a fit wanting a price as if they hadn't mis-managed it for years, you show them how you can get to that #. And that's via seller financing. They have to give you the years to turn that ship around, get it back to correct revenues. 

I'd say do the math, figure out what each scenario pencils out, and give them an either or offer. Look, they know the situation they made by re-leasing on yester-years rates, over n over. There just hoping you'll be the sucker who adopts there poor choices. Don't. 

Stop trying to put square peg's in round holes, stop making excuses for their mismanagement. Run the numbers, present the offer, and move on. They take it great, it works. They don't, great, it works. 

That's how this game is played. You can't dictate the pitch only how you swing. And keep swinging. Swing enough your gonna hit some balls. 

That's it, it's just that simple. 

It's not the regulations fault so-n-so made a less then ideal bed for themself.