Assessing Oregon’s Rent Control Four Months In

PORTLAND, OR—It has been four-plus months since Oregon enacted statewide rent control. So, it seems logical to ponder the ramifications that have become evident during that timeframe. In this exclusive, Mitch Paskover, president at Continental Partners, a commercial mortgage brokerage firm, shared insights on how multifamily financing in Oregon is being affected by rent control, the advantages and long-term effects, and whether other cities are poised to take the leap.

GlobeSt.com: What are the advantages of rent control in the broader finance world/?

Paskover: From a lender perspective, there is not necessarily a difference between a rent-controlled and a non-rent-controlled multifamily deal, as loans regarding existing assets are typically sized based on the net operating income that the property is currently generating.

While the parameters of legislation can vary widely across municipalities, some lenders may find that they are sometimes able to offer higher leverage loans in light of recent or potential rent control implementation. For instance, it can naturally limit and cause uncertainty surrounding, when and if value-add investments can meet projections. That said, these same deals remain attractive to lenders because they can be fairly confident in the eventual upside on the asset since markets implementing rent control will tend to have strong growth indicators.

GlobeSt.com: What are the downsides over time, if any?

Paskover: While there will not likely be significant longstanding downsides, a side effect of virtually any rent control legislation is a slight slowdown in multifamily activity in the markets where it is being implemented or considered–as sponsors, lenders and other stakeholders take time to assess the situation and determine whether they must modify their strategies. Because rents at a given property may increase at a slower pace than they would have without rent control restrictions, loan proceeds may be limited on certain deals as well.

However, we have secured competitive financing for properties in major cities where rent control is applied, such as San Francisco, through creating highly specific packages for sponsors and approaching a wide range of lenders. We anticipate that if rent control continues to be implemented on a larger scale nationwide, similar strategies can be successfully enacted.

GlobeSt.com: How will multifamily financing be affected by rent control in Oregon?

Paskover: While the rent control ordinance in Oregon states that landlords can only raise rents once a year, some limitations only apply to select properties and situations. For example, caps on rent increase amounts do not apply to new leases or any apartment communities constructed within the past 15 years. Additionally, it will still allow for increases of 7%-plus local inflation rate, meaning approximately 10% per year in most areas.

It could impact some cases of financing for value-add multifamily plays, as the potential for rent increases due to renovations will limit some of the lender proceeds. Value-add projects for older properties may undergo more lender scrutiny, however, sound business plans and projections in line with what is allowed through rent increases can still secure strong financing.

GlobeSt.com: Are other states using Oregon’s rent control model and if so, how will that create long-term financing trends?

Paskover: Oregon’s new rent control model has other municipalities watching closely to see the impact. Californians could be voting on a rent control initiative next year that would allow local governments within the state to establish rent control on residential properties over 15 years old, similar to the Oregon ordinance. On the other hand, Chicago tried to enact rent control recently, which lost to a 4-2 vote, so overall acceptance remains to be seen.

While Oregon’s ordinance does not directly impact newer assets, we may see a slowdown in construction as developers wonder if their properties and income could be affected in the foreseeable future by rent control.

While it is too early to tell exactly what the long-term effects will be, we anticipate that investors will continue to be increasingly discerning of the properties and transactions they finance–a trend we are already seeing at this extended point in the cycle.