Hi All - Happy Thursday. It’s (not) the last day of the month, but whatever — it’s still time for the Last Cast Letter. (I’m secretly so rattled I didn’t send this yesterday, but let’s move on).

Today I'm going to keep this letter relatively short and sweet. Or, not so sweet if you're a landlord and you live in Colorado. That's because the state has recently been in the spotlight for tenant rights. More specifically the issue tenants, landlords, and property managers are fighting over is "junk fees".

Before we dive into how "junk fees" impact owners and operators in the real estate industry, I want to zoom out quickly because it's not a sector-specific issue.

A Non-Sector Specific Issue & Shift

On October 26, 2022 "The Biden-Harris Administration [declared that it] is taking action on junk fees that hurt Americans’ pocketbooks and the economy."

According to the Biden administration, junk fees cost Americans $24 billion every single year. A large portion of these junk fees are often paid by lower-income consumers. Junk fees on a national level include bank overdraft fees, resort fees, event fees, and more.

StubHub, for example, tacks on 15%-to-20% in service fees to its ticket costs. On the one hand, if StubHub is providing this service they need to get compensated for building out a marketplace. At the same time, exorbitant fees suck. No one enjoys paying for these things, especially if you don't see them coming.

Now, as it relates to the real estate industry, junk fees, often buried within the fine print of lease agreements, can encompass a variety of charges that tenants may not anticipate or fully understand at the outset. Here are some examples:

• Administration Fees: These fees are often charged upfront for administrative tasks such as processing applications or preparing lease documents.

• Application Fees: Landlords may charge prospective tenants a fee to cover the cost of processing their rental applications, regardless of whether they are approved or not.

• Move-in Fees: Some landlords impose fees for the privilege of moving into a rental property, covering expenses such as cleaning or key distribution.

• Pet Fees: While pet-friendly apartments are desirable for many renters, landlords may tack on additional fees for having pets, including non-refundable pet deposits or monthly pet rent.

• Utility Fees: In some cases, landlords may charge tenants for utilities that are typically considered basic amenities, such as water, sewage, or trash removal.

As a tenant, these fees stink. But what tenants and legislators don't know is that sometimes they're necessary, especially if they're properly disclosed. I'll explain why in a little, but let's zoom in on Colorado.

For background, Shelterforce provides some nice context on the Colorado real estate market over the past decade-plus:

This happened in other states as well, and it came to a head during COVID when people could work remotely. A lot of them chose to move to states with great outdoor amenities. Think Florida and Colorado. But with a lack of affordable housing (something I've written about) and increased demand, tenants' voices got louder and policy shifted as a result.

In 2022, Colorado implemented legislation granting the attorney general the power to initiate both civil and criminal enforcement proceedings concerning housing statutes. Additionally, this legislation paved the way for the creation of a dedicated housing unit within the state's Department of Law. Basically, the AG got more power and decided to wield it.

For example, earlier this month Colorado Attorney General Phil Weiser announced a settlement with Four Star Realty a Boulder-based property management company. Weiser said Four Star was “illegally charging tenants for routine repairs and other services” and ordered the company to pay a $1 million penalty.

“Too often, landlords and property management companies nickel-and-dime tenants by deceiving them into paying for things like normal wear and tear or damage from previous tenants, or by charging fees not reflected in leases,” Weiser said in the release.

In a statement, Four Star Realty CEO Caldwell Sullivan said, "… in a time of progressive tenant advocacy that is quickly changing the landscape of property management in Colorado, we experienced scrutiny in this investigation for practices that are widely used in the industry."

This lawsuit might be just the tip of the iceberg, however. On the same day, Weiser announced a settlement with Four Star Realty, "a former tenant Nichole Collins filed a proposed class-action lawsuit against Greystar, the top manager in the country" according to Multifamily Dive.

"This case is about how Greystar, the largest apartment management company in the country, with over $45 billion in assets, forces thousands of Colorado tenants to pay inflated and unfair fees that make it even harder for families to afford housing in the state," the suit says.

Collins alleges that Greystar hid these fees and that they don't provide any extra service beyond what landlords are supposed to provide.

Seeing Both Sides

I see both sides. As a consumer, I don't want surprise fees. Even non-surprise, optional fees get my blood boiling. I'm talking specifically about tipping, which has gotten absolutely out of control.

If I go into a shop that serves coffee, and I pick it up at the counter myself without any additional service, don't turn the iPad around and expect me to tip 20% (or more!). The purpose of that business is to serve coffee and there was no "extra service" beyond what the landlord coffee shop is supposed to provide.

So yes, I get why hidden fees aren't fair. With that said, sometimes additional fees are necessary, especially if they're properly disclosed. Why? Because look at the price increases for certain expense items over the past few years. I dedicated an entire edition to the absurd spike in insurance premiums.

And what about property taxes? Property taxes are increasing nationwide, doubling in some markets between 2021 and 2022, according to a recent study from ATTOM Data Solutions, a real estate research firm.

And what about building materials? Building material prices have jumped 40% since December 2019.

These are just a few of the expense items that have surged over the past few years and obviously, the Fed's rate hike crusade didn't help either because the cost of capital also jumped.

NIMBYism also plays a role in driving prices higher for both tenants and landlords because it creates red tape and leads to a lack of new supply. Ironically, tenants who support NIMBY (Not In My Backyard) projects inadvertently drive their own rents higher by perpetuating housing scarcity and limiting the supply of affordable housing options in their community.

Zooming out, almost everything got 10x more expensive, not just for the tenants, but for the landlords as well. If you own property, you can't just not pay your bills or pay the bank (not to mention your investors), so you have to pass the costs along. This happens either in the form of rent increases or additional fees — or both.

Okay, So Where Do We Go From Here?

For both tenants and landlords, understanding additional fees is crucial to maintaining a transparent and harmonious rental agreement. Here are some key points for both parties to consider:

Tenants:

• Read the Lease Carefully: Before signing a lease agreement, tenants should thoroughly review the document to understand any additional fees that may be charged beyond the base rent.

• Ask Questions: Don't hesitate to ask the landlord or property manager about any fees that are unclear or not explicitly mentioned in the lease. It's essential to have a clear understanding of all financial obligations.

• Budget Accordingly: Anticipate additional fees when budgeting for rent and living expenses. Consider setting aside funds for potential fees such as pet fees, parking fees, or utility charges.

• Document Everything: Keep records of all communication and documentation related to fees, including lease agreements, receipts, and correspondence with the landlord. This can help resolve disputes or discrepancies in the future.

• Negotiate When Possible: In some cases, tenants may have the opportunity to negotiate or waive certain fees as part of the leasing process. It never hurts to ask for clarification or potential adjustments to fees.

Landlords:

• Transparent Communication: Clearly communicate all potential fees to tenants before they sign the lease. Provide a detailed breakdown of what each fee covers and when it is due to avoid any surprises or misunderstandings.

• Adhere to Legal Requirements: Ensure that any additional fees charged to tenants comply with local and state laws, including regulations governing security deposits, late fees, and utility charges.

• Fair and Consistent Application: Apply fees consistently and fairly to all tenants, avoiding any appearance of discrimination or favoritism. Consistency helps maintain trust and fosters positive landlord-tenant relationships.

• Provide Notice: If new fees are introduced or existing fees are modified during a lease term, give tenants adequate notice in writing. This allows tenants to adjust their budgets accordingly and prevents any unexpected financial strain.

• Document Everything: Keep accurate records of all fees charged to tenants, including receipts, invoices, and lease agreements. This documentation can serve as evidence in case of disputes or legal proceedings.

By prioritizing transparency, communication, and adherence to legal requirements, both tenants and landlords can navigate additional fees effectively and ensure a fair and mutually beneficial rental arrangement.

Zooming out, I think what we are seeing in Colorado is a canary in a coal mine for the rest of the country. There is too much of a focus on the lack of affordable housing, plus a rising wave of populist politicians on both sides connecting with voters, which will ultimately impact policy. Could be wrong, but that’s my take today!

So, there you have it, that’s all for now. As always, if you’re interested in investing alongside us, fill out the form below.

— Brooks