Combating Predatory Investors

More Regulation & Advocacy For Low-Income Home Renters May Help in the Battle Against Out-of-Town Investors Like Cerberus 

On Christmas Day 2018, Washington Post reporters Todd Frankel and Dan Keating delivered a printed gift to Memphis. 

It was a detailed, carefully researched expose concerning the practices of one of the largest property owners in Memphis and Shelby County and its wholly owned subsidiary rental property management company, a New York City based private equity firm known as Cerberus Capital Management (“Cerberus”).

In a nutshell, the story that Frankel and Keating told was that the same out-of-state investment firm that made money during the subprime lending boom of the late 1990’s and early 2000’s—the leading cause of the financial crisis of 2008 and the leading cause of dramatic real estate value decreases in Memphis and across the nation—has found a way to make money on the fallout of their predatory lending practices. 

At rock-bottom prices, Cerberus has bought the same houses, formerly occupied by homeowners, that were emptied out and devalued by the collapse of the housing market in the late 2000s and converted them to a massive portfolio of single-family rental properties throughout Memphis.  

To make matters worse, the Washington Post’s reporting suggests that the aggressive rental management practices of this new national private equity firm rental property owner are resulting in evictions at twice the rate of any local property manager. 

As lawyers who frequently interact in the Shelby County Environmental Court and in other community settings with owners of multiple single-family houses that are used as rental properties, we were aware of the growing trend towards conversion of single-family homes to rental property. 

We do not see the rental of houses as a bad thing in and of itself. Many families and individuals prefer to rent than to buy, and the vast majority of housing stock in Memphis is single family homes. But the rapidly declining rate of homeownership in Memphis, coupled with the proliferation of single owners of dozens or hundreds of single-family rental properties in Memphis is, for many, cause for concern.   

If a large-scale owner of single-family rentals does a poor job of managing the properties in its portfolio, the impact on Memphis neighborhoods could be severe. And it is very challenging to properly manage such a portfolio. 

Unlike in an apartment complex, where common areas are maintained by the owner of the property and not by the tenants, a tenant in a rental house is usually required to cut the grass and maintain the yard at the house as a condition of his or her lease. If the tenant does not, then both the tenant and the owner are in violation of the Memphis property maintenance code. And – also unlike in an apartment complex – where property maintenance like leaky pipes, overflowing toilets or broken windows can be repaired routinely by the same contractor or group of contractors who are familiar with the facilities, scattered site rental houses present a complex property maintenance challenge. Every house has a different layout and different systems, and each requires a customized response based on location, supplies required, and history of the property.  

We are realizing that scattered site property management of single-family homes is an emerging challenge without easy answers. We have repeatedly encountered such large-scale owners in litigation because one or more of the properties in their very large portfolios has “slipped through the cracks” or is not of particular importance to their business plan. Many times, owners of such large portfolios, or their representatives, have advised us that they acquired one or more abandoned, uninhabitable properties as a part of a bigger multi-property acquisition. There is little incentive, outside of regulatory enforcement of codes and the fines and penalties they would bring, for the owners to take prompt action at these properties, to either demolish or rehabilitate them. The focus is initially on properties that can “cash flow” quickly with little investment. Many of the remaining portfolio properties get the “out of sight, out of mind” treatment, causing problems for surrounding neighbors and communities, everyone but the owner.   

Property maintenance standards are enforceable against owners regardless of whether the owner has rented the property to a tenant. 

We are not impressed by statements such as the one made by Cerberus representatives in the Frankel and Keating article, that the code violations are the “tenants’ responsibility.” 

Perhaps there is a duty of the tenant to the landlord to take care of the exterior of the property. But the duty of the landlord to the city is to maintain the property pursuant to the property maintenance code, regardless of the behavior of the tenant. Additionally, we have spoken with many tenants who do not get from their landlords even the most basic, legally required services and basic habitable conditions that state and local law require. There is no robust, citywide agency or association that advocates for tenants in substandard rental conditions, but advocates who are involved in assisting tenants who are dealing with problematic landlords consistently report that Memphis has an affordable housing crisis. It isn’t that there is no housing; it is that there is not enough quality affordable housing for the many low-income families that call Memphis home. 

Our position has been that consistent, effective regulation of rental property in Memphis is desperately needed. Many systems are already in place that will help, but more is needed. The eviction process in our community, a topic for another “Law Corner,” is one system that may need reform. Code enforcement can be improved, but new tools will be needed to reach every rental property and assure that no one in Memphis takes money from a citizen for providing substandard housing. 

As the housing market shifts to a much higher rate of rented single-family housing, we as a community must keep up and respond to protect the integrity of neighborhoods and to defend what we consider to be a basic human right – quality, affordable housing. <>

Steve Barlow & Danny Schaffzin co-direct the Neighborhood Preservation Clinic.

For more on code violations and Code Violators Map, go to this post:

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