The City of Milwaukees Residential Rental Certificate program is a financial scheme designed to replenish shrinking city coffers. Stung by declining property assessments the city desperately needs another income stream to buttress its deteriorating financial position.
This program is initially being deployed in two designated areas: UWM and Lindsay Heights. The first thing to make clear is that without a doubt this program will be extended to the rest of the city. The only reasons why it is initially being implemented in just two areas is that administratively it would have been impossible to implement city wide and would have created a greater wave of opposition. They will work out the processes and deal with the legal challenges in the first phase of implementation, and subsequently move it out to the rest of the city.
This program is a typical bureaucratic myopic ploy to boost revenue short term, but will have a negative impact on houses values long term: Let me explain. We are moving back to valuing investment real estate based on the timing, amount and risk of the free cash flows that it generates. This model of valuation has led to a drastic correction on the housing market, and prices will not stabilize until valuations are in alignment with the cash flows they generate. That being said, from an investor stand point what does this new governmental program do to the timing, risk, and amount of the free cash flows a property generates? First at 85 dollars a unit it lowers it, but more importantly it adds more risk and uncertainty to the cash flows. As every investor knows having only pristine properties is a difficult proposition and more importantly is not practical in certain neighborhoods. So now when I am evaluating potential deals I know that I will have to allocate additional capital to ensure it meets the subjective standards of the Dept of Neighborhood services, which will subsequently lower the cash flows generated. This will result in downward pressure on housing prices, especially in areas where rental prices are not very elastic. These lower valuations will result in lowers assessments and hence lower tax collections. And then the city will come up with another brilliant idea..... I can not wait.