Why are landlords offering 1, 2, or 3 months free rent?
Why don’t they just lower the rent?
Because they want to maximize what is called the cap rate (or capitalization rate.) And they want the highest possible cap rate because then they can sell the building for a higher price.
Since the cap rate is tied to how much rent an apartment building collects in a year, it lowers the cap rate to lower the rent. So landlords offer a free month or two rent free instead of lowering the rent.
Lowering the rent hurts the cap rate. Giving away a free month or two does not typically have any effect on the cap rate.
So giving these months of free rent is a business strategy to maximize their return by selling the building at the highest possible valuation at some point in the future.
And if you thought all these new apartment buildings are built by owners who plan to own them for the long term, think again.
The owners are often secret because they are hiding behind a privately owned LLC so neither city council nor the public nor the IRS nor the US Treasury Department know who the true owners are. All they know are the made up names on the LLC paperwork.
They may even have sub-LLCs that own shares in the main LLC in order to further obfuscate who the actual owners are.
In many cases, they plan to get the apartment projects built, get them leased out and then sell them for a profit and possibly enjoy the benefits of getting paid in clean US dollars.
Having the highest possible cap rate is all part of that plan. And that is sometimes why they offer free rent.
Buildings constructed based on that business model are not incentivized to have the best construction materials or build quality because the original developer may only need to own the building for a relatively short period of time. Maybe less than 5 years.
They may do other things to enhance the cap rate such as using ill advised underground detention vaults instead of surface ponds. These underground vaults can be risky for personnel to climb inside and maintain, they may pose an added risk to the building foundation and may attract rodents and mosquitoes.
For example, the massive multifamily building proposed by Kairoi next to Belmar Park is designed to use these type of underground storm water detention vaults.
They use these underground vaults in order to build more units because ponds take up too much space. Again, more units means more total rent and a higher cap rate.
When we are considering if it is wise to ‘densify’ Lakewood by relaxing zoning standards, that is exactly what these secret owners want to happen.
City council is willing to do this to accommodate these secret, unknown owners.
Are you in favor of that?
What do you want to happen?
(I was just advised that, at least, maybe somebody out there will read this whole article!)