Raising Rent Via Amenities

4 min read

Adding value between recaptiliazations

For maximizing the value of Section 8 properties, cost-effective amenities are a tool to consider. Depending on the market and the specific attributes of the property, particular amenities can yield higher rents while maintaining low cost. While appraisers can assist developers in identifying appropriate amenities for a substantial rehab, they can also assist asset managers during the lull between recapitalization periods – where simple and small additions may create large value through increased rent (marking-up-to-market).

The vehicle for increasing rents, as deemed by HUD, is a Rent Comparability Study (RCS). In order to perform a mark-up-to-market utilizing an RCS, the project requires 1) a passing REAC score (60 or better), 2) for-profit ownership, 3) rents between 100 and 150% of the FMRs and 4) no low-or moderate-income use restriction without the option for unilateral termination by the owner.

If the project doesn’t meet the above requirements for what is called “entitlement” mark-up-to-market, it may be eligible for a “discretionary” mark-up-to-market which requires that the project serve a vulnerable population, is located in a low-vacancy area, or has community support. Note that in either situation, a mark-up-to-market requires, at minimum, a five-year renewal contract.

According to Jay Wortmann, MAI, President of Lea & Company, who performs RCSs around the country, “the right amenity is going to make your property more competitive in the market, which translates to higher rent.”

If a property is lacking amenities that certain nearby properties have, or if the property becomes the only property with a particularly desirable amenity amongst comparable properties, completing an RCS will increase rents.

Which amenities yield the greatest increase in rent for the lowest upfront cost of implementation? Mr. Wortmann offered successful examples from his experience:

  1. $5-$10 Rent Increase Amenities

Per RCS guidelines, it is possible for certain amenities to deem a $5-$10 increase in rent without market support. Simple, cost-effective amenities may include ceiling fans, microwaves, picnic areas, playgrounds, security cameras or part-time security patrol officers, emergency call systems, and transportation (monthly bus passes). It’s also worth investigating local programs regarding these items, for example, the District of

Columbia offers residents and business owners rebates for installing security cameras, and Chicago is considering a similar program.

  1. Greater than $10 Rent Increases

When market support is provided, it is possible for an amenity to merit more than a $10 increase in rent. These amenities could include car ports (placed over surface parking), storage spaces, free basic cable, and free

Wi-Fi. Mr. Wortmann put particular emphasis on items like Wi-Fi, noting that it is “a direct savings to tenants which you can treat just like a utility; it’s a savings of $30-$60 for your residents and you can pass that savings onto rents. This should be an especially simple and affordable addition for single building properties.”

The above-mentioned amenities still depend on the market. While installing washers and dryers in each unit isn’t usually cost-effective, some markets support it and certain properties may have pre-existing infrastructure to allow for such an investment. If the property has preexisting unused space, then storage units or a business center could be affordable amenities to implement. Emergency call systems may increase the value significantly for senior housing and have no effect on family housing. When building an expensive swimming pool results in a $5 rent increase and installing one or two wireless Wi-Fi routers increases rent by $40, it becomes apparent that there is real strategy in maximizing a property’s potential value.

Monica Sussman, an attorney with Nixon Peabody, cautions asset managers to keep the big picture in mind. “If you’re planning on selling or doing a major preservation transaction [in the near future] you hurt yourself by doing a little mark-up-to-market now because your rents are not going to be at the requisite below-market amount.” For properties nearing a period of recapitalization, this is a definite concern. That said, if a recapitalization period occurred five years ago, and something was left out, opportunity may be present between recapitalization cycles for a well-placed, cost-effective amenity.