July 1995
Vol 18 No 11
John Kennedy wasn’t the first person to start a political speech with this admonition, nor is he likely to be the last. He concluded by saying: ‘rather, ask what you can do for your country’. The inference being that we each owe a duty to serve our country in some fashion. It’s interesting that these ringing phrases always seem to be proclaimed by those in positions of political privilege whose country appears to be serving them quite well. Folks at the bottom of the political food chain more often already are serving their country. Tax-paying wage earners and producers are burdened by hoards of government regulations, enforced by legions of bureaucrats who soak up taxes squeezed from meager profits and earnings.
If I were going to complete the topic line, I’d restate it this way: Ask not what your country can do for you, because it’s going to cost you a lot more than it’s worth. I’ve recently completed a study of Title X which contains the lead-based paint regulations. Title X might be more appropriately entitled ‘The Bureaucrat Budget Expansion and Equity Destruction Act’. It’s going to give birth to a cornucopia of riches and create bureaucratic empires at all levels of government. Why? Think of all the ramifications of implementing lead paint programs.
Inspection, enforcement, abatement lead the parade. Protection of workers, protection of occupants, financing, training, litigation, information and communication, administration, investigation bring up the rear. These are going to require tens of thousands of highly paid government employees just for this single program. This is the result of voters allowing government to take over the responsibility for their personal well-being. This will all come at a price.
Eventually, the costs of compliance with the lead paint laws are going to be borne by those they are meant to serve – the consumers. If things proceed as envisioned by Title X, at taxpayer expense, public housing will be gradually purified of lead-based paint hazards or replaced. Owners and managers of private housing will be required to alert potential tenants and purchasers of the hazards of buying residences built prior to 1978. The Federal Register of November 2, 1994 contained specific proposed notification and waiver language for landlords, tenants; buyers and sellers. This will be required for all pre-1978 housing, public and private, after October 28, 1995. Let’s see how this might affect the market.
Forewarned, buyers are going to gravitate to dwellings constructed after 1978. Real estate marketing efforts will also be focused on these properties. As demand for them goes up, so will their prices. Post 1978 investments in residential properties should prosper as will rental markets. Think about it. Why would a tenant select a residence which could only be rented after waiving all claims for compensation because of lead paint poisoning? Rents for post 1978 dwellings should be driven upward by demand just as supplies of older, lower priced rentals are diminishing. What would reduce the supply of rentals?
Put yourself into the shoes of owners of residential rentals, once federal and State lead-based paint hazard inspection and abatement standards are promulgated. They’ll either have to comply or pay the price. HUD compliance cost estimates as of late 1994 were $7700 per dwelling unit for complete abatement. An owner of an affected dwelling could be caught between a rock and a hard place.
If he fails to comply, he’ll be open to all sorts of governmental enforcement action including penalties and assessments. Furthermore, he’ll be a sitting duck for legal suits lodged by tenants who claimed failing health and inability to work as a result of lead poisoning contracted in their lodgings. We’re already seeing the results of these suits beginning to affect the markets. Some title insurance companies and lenders are beginning to require certification by qualified inspectors that there is no lead-based paint hazard in the insured premises. This is going to make it harder and more expensive to finance dwellings.
With its open-ended budgets, government can simply either tear down old apartments or replace them at taxpayers’ expense. Or rehabilitate them to remove the hazard. But how are owners going to cope? Abating lead paint hazards is going to destroy the operating statement. Abatement could wipe out many private owners. Suppose lead paint hazard abatement in a free and clear 20 unit property required $2500 per unit. That’s a cost of $50,000. Here’s a ‘Catch 22’. To raise this money, a loan would need to be secured. Loan approval may be denied without lead-free certification. Moreover, unless the market value of the property was increased, lead paint abatement could lower owner’s equity by up to $50,000.
THE RENTAL MARKET FOR AFFECTED PROPERTIES IS GOING TO SUFFER
After October, 1995, all tenants renting pre-1979 properties must be notified of lead-based paint hazards in general. They must be given an EPA pamphlet describing the effects of lead paint poisoning and be informed whether or not the property contains lead paint at hazardous levels, if this is known. Then the tenant must sign a statement that he has been warned, and that, despite this, he still desires to rent the premises. Multi-family properties will be competing with public housing cleaned up through HUD’s lead abatement grants. Finding tenants under these conditions isn’t going easy after the notification requirement takes effect.
The first wave of tenants who rent after October 28th is going to create a lot of problems for landlords. The notice virtually instructs them as to the symptoms they should claim when suing landlords for lead paint poisoning. It would be a good idea to get as many renewals and extend as many rental contracts as you can prior to October 1995. This way, you may avoid the notification requirements until the next rental contract is signed. By the time that your rental contracts come up for renewal, perhaps the furor over lead paint will have died down a little. Moreover, the rental market may have stabilized once the initial shock of compliance has taken effect.
Ironically, the poor tenants who rent the older residences are going to pay the highest price for this ‘protective legislation’. Alarmed by the prospects of expensive abatement procedures and/or the potential for lawsuits against them claiming illness caused by lead paint, many landlords are going to remove their units from the residential marketplace. Anyone who has ridden the Bus from New York’s Kennedy International Airport into Manhattan has seen the hundreds of derelict, squalid, abandoned apartment buildings which have fallen victim to government regulatory programs and high taxes 20 years ago. Lead paint will sound the death knell for older apartment buildings everywhere as landlords give up and vacate them. Consequently, New York apartments are expensive and hard to find. Isn’t it odd that they haven’t yet figured out where all the homeless come from?
Under federal regulations, State and local governments are allowed to draft as stringent lead paint regulations as they want so long as local guidelines meet minimum federal standards. In Los Angeles, they’ve already published their own regulations. What struck me most when I read them was the emphasis placed upon the protection of those engaged in the abatement procedures, and the disposition of materials. That’s going to be a real battleground, with one set of regulations requiring the removal of contaminated materials from buildings, and the other restricting the method of disposing of them.
Those trying to comply with the law are going to be caught in the middle. OSHA, HUD, and the EPA – that unholy alliance – are charged with coming up with workplace standards – which the owners and consumers will pay for. Minimum requirements for a worker would include a moon-suit with breathing apparatus, 6 mil plastic floor coverings, scrub-down area, etc. Contaminated materials must be placed under control and deposited in an approved dump. It’s going to be hectic.
SINGLE FAMILY HOUSES WILL HAVE AN ADVANTAGE . . .
The market for multi-family residential properties, even condos and town houses, is a lot smaller than the market for single family houses in most areas. Suppose that conventional institutional lenders, FHA and VA were to red-line non-certified pre-1979 houses. The private secondary mortgage market would have to take up the slack. This could be a bonanza for mortgage originators, investors and dealers looking for inventory in the form of first, second and wraparound loans. But, the mortgage market for the relatively smaller single family house loans would be larger than the market for the inherently riskier multi-family property loans. Thus, mortgage rates on singles would probably be lower than on multi-families.
From the standpoint of the tenant population for single family houses, by and large, this isn’t a government subsidized market. Single family tenants in older houses are probably going to earn more than those in older multi-family units. To some extent, there will be some upward pressure on single family rental rates as a result of the shrinking supply of older apartment rentals. Additionally, because of the scope of the job, it will be easier and less expensive for single family landlords to abate lead paint problems. Thus, their profit margins should suffer less. And, when all fails, by carrying back the financing, they’ll have a much easier job of converting a rental into an owner-occupied residence through sales to their tenant.
Single family residences are going to be easier to work on too. Federal regulations require that occupants be removed along with their possessions prior to the commencement of abatement procedures. This could be financially devastating to multi-family properties. With singles, abatement procedures can be implemented between tenants with only a few days lost rents. And, once certified clear of lead paint, increased rents should be expected to replay lost days and abatement costs. Added to this is the possibility of do-it-yourself remedies on small jobs. Generally, wood windows and sills, door jambs and impacting door surfaces, and scuffed wall and floor surfaces are the real lead paint culprits. In small doses, these can be treated to reduce the hazard at reasonable cost for the most part.
There are going to be three general approaches to dealing with excessive levels of lead paint, once a qualified inspector has certified that abatement is required. Painting lead paint over with non-lead paint and covering floors with tile is an approved temporary fix. Canvass-backed wallpaper can handle larger areas. Where paint is chipped or peeling, it shouldn’t be removed by sanding or scraping. Even chemical strippers are hazardous. In some instances, removing old wooden windows and doors and replacing them with metal windows and doors will not only solve the problems, but improve the appearance of the property. So will painting and installing tile and carpeting. You can install thin gypsum panels or wood paneling over deteriorated walls and ceilings to encapsulate the offending surfaces. With a house, you should be able to complete all of this in a week or so.
It goes without saying, that it will be a lot easier to complete abatement procedures voluntarily, before October and before lead paint hysteria creates multitudes of government overseers. They’ll surely increase the costs of compliance, once it is mandated for your property. It shouldn’t take a genius to determine whether or not any of your houses were built prior to 1978. Once you’ve established that your properties are affected, the mere presence of lead paint in private dwellings doesn’t require abatement unless there’s a hazard to tenants.
It is only were surfaces have been allowed to deteriorate to the point that they generate contaminated dust. Stair banisters and window sills which are favorite ‘chewing surfaces’ for small children should receive special attention. Non-lead-based paint can be applied to cover over hazardous lead paint. Then, a qualified inspector should certify that the property has no lead paint hazards present. This written certification could become part of your sales or rental presentation. It would certainly help offset future claims of lead poisoning.
WHEN THEY HAND YOU LEMONS, MAKE LEMONADE . . .
There are several ways to approach any problem. Ignore it, resolve it, or profit from it. Let’s back off and assess what we know thus far. Lead paint laws are going to create market disruptions. These are going to reduce prices in some instances and increase them in others, depending upon the presence of lead based paint hazards. The marketability of properties is going to be affected because of decreased net income streams. Lower valuations will be placed on rentals by investors who will demand higher yields to offset risks. Market liquidity will suffer because of higher underwriting standards for title companies, liability insurers and lenders. Not everyone will be affected equally under the law. Multi-family dwellings will feel the effects more than singles. Not every owner will be able to afford to remedy lead paint problems. What a cornucopia of opportunity!
Government interference in markets usually creates opportunity along with disaster. Those who can envision the distortions the lead paint laws are going to wreak in rental and sale markets, and who can devise a strategy to capitalize on these market changes, are going to profit. It boils down to whether you perceive yourself as a victim or of a victor. If you’re a subscriber to this newsletter, you’ve already established yourself as being among those who intend to contend with events, whether created by competitors or government. Now it’s more or less a case of being able to sort out the opportunities that you want to exploit. Read on!
Entrepreneurs, plug yourself into this situation. After having learned what the law says, you can offer yourself as lead paint consultants, inspectors, abatement contractors. You can buy contaminated properties at rock bottom prices, remedy the problem, and resell. With multi-families, you might double the gross rent multipliers of properties once lead paint is abated. Financiers who specialize in mortgaging older properties, especially where borrowed funds are to be used to abate lead paint, will be able to charge premium interest rates, or possibly take title to an interest in the property at deep discount. Fixer-uppers can package themselves as lead abatement contractors. Some of you can open ‘home finder’ services to help place those whom the lead paint problem is going to dispossess.
If none of the above is your cup of tea, there are defensive measures to be taken. Start by ascertaining whether or not your properties are affected. If so, do what you can to remedy the problem. If you can’t fix the problem, you can still sell the property. If you want to avoid abatement enforcement programs, start now. When you rent to any tenant, be sure to have him sign the required disclosure, disclaimer and waiver documents. Also, consider linking up with the local public health unit to have all tenants’ blood checked for lead levels. This will document the amount of lead in their bodies prior to moving in. This is a defense against illness claims later on. You might want to draft a specific rental contract disclaimer and blood level certification to limit your tenant lead paint liability.
A sample landlord disclaimer is contained in my brand new 75 page booklet called ‘LEAD PAINT – WARNING’. This contains the legal references and reference sources which pin down your obligations and risks as well as more ideas as to how to handle the coming lead paint abatement regulations. It’s free. All you’ve got to do is to extend your subscription by at least a year ($70) and we’ll send it to you. If you like, we’ll throw in a second year for half price ($100 total). Call (800)889-2020 and we’ll get it to you ASAP.
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