Kill Your (Vacation) Landlord

Judging from the amount of coverage it’s received from the domestic and foreign press, Airbnb’s decision to remove 80 percent of the properties from its Japanese listings is a big deal. That wouldn’t be surprising except that previously the Japanese press, at least, didn’t seem overly interested in the house-share service. What makes it news is mainly timing. On June 15, the new Minpaku Law, which regulates the short-time rental of private property, goes into effect, right before the vacation and tourist season starts. Apparently, Airbnb, nervous about a government crackdown, decided not to take any chances and dropped listings of properties that couldn’t prove they had already received permission to operate under the new law. That means people who had made reservations at these properties in the past are out of luck unless their owners can somehow get a license to operate by the time the visitor is scheduled to occupy the room or home. Some people are blaming Airbnb itself for, presumably, not being prepared for this sort of outcome, which has been apparent at least since the beginning of the year. Whether the visitors who made reservations have gotten the message isn’t clear, but it’s likely that, come next month when they show up in Japan after having spent money on air fare and other vacation-related expenses, they may find themselves locked out of the place they thought they would be staying at. One can imagine scores of foreigners wandering the streets of Tokyo and sleeping under bridges. Thank God it’s a safe country.

Seriously, though, the Minpaku Law, regardless of how poorly it was conceived and written, was inevitable, and its purport with regard to Airbnb is hardly limited to Japan. What makes it momentous, and, in the long run, perhaps prescient, is that it adds a layer of national intent to locally enacted rules that weren’t being enforced very strongly before. In other words, Airbnb didn’t take local regulations at face value until the central government said they supported them through the law. Ostensibly, the reason for the stricter definitions is public order–protecting communities where property owners rent out rooms to strangers. Less obviously, the Minpaku Law supports the powerful hotel and innkeepers industry, which has been calling for the banning of peer-to-peer short-term rentals. And even less apparently, but no less potently, the law favors another powerful lobby, the real estate industry, which can use the law to corner whatever market is left of short-term vacation rentals, since many of the rules call for oversight by corporate entities, or, at least, entities that act like corporations.

The Minpaku Law essentially covers two types of properties. The first type is a property that has applied for and received the proper permits, meaning they comply with the hotel law. From the outside, they may look like a regular private residence, but inside they adhere to fire regulations and there is someone who manages the property on site. Minshuku, capsule hotels, and guest houses fall into this category. The second type are properties that heretofore fell into the so-called gray zone, rooms that did not comply to the hotel law but weren’t really breaking any laws–until now. Though fire laws and other related safety regulations will presumably be more strictly enforced for these properties, the main difficulty will be stricter enforcement of zoning laws, which are locally enacted. The main blanket, national rule is the one that says minpaku can only rent out rooms for a maximum of 180 days out of the year. Also, if the property is in a condominium, the owners association must be apprised of the existence of a minpaku and approve of it in writing, which may end up being the most difficult condition to satisfy, even when localities don’t prohibit minpaku from residential zones. Read More

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Pity the landlord

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These are the kinds of apartments subleasing companies build.

We’ve already talked about the sublease racket. The term has a special meaning in Japan that’s related to a specific real estate scheme designed to sell apartment buildings to people with extra money. Construction companies build small apartment buildings on unused land for the owners of that land and then manage the property for them through a sublease arrangement that requires them to pay a guaranteed “rent” every month. The logic is simple. The property owners have to pay higher taxes on land that is empty and so they build an apartment building for purposes of reducing those taxes and providing income. The construction company then does all the work of finding tenants and managing the property.

As we’ve mentioned in past posts about this scheme, it heavily favors the construction company, which gets out of its obligation for guaranteed payments to the landlord through various small print loopholes. The construction company, which usually has a real estate subsidiary, is only really interested in building, and understands that as Japan’s population declines it is going to be more and more difficult to find enough tenants to make even small apartment buildings profitable. Consequently, they make sure there is something in the management contract that allows them to get out of the deal if things go south, and invariably they do. Read More

Condomanic-depressive

DSCF2154Last week the media reported that the Ministry of Land, Infrastructure, Transport and Tourism was devising a plan to limit the number of abandoned houses and apartments in Japan to no more than 4 million by fiscal 2025. As of 2013, the year the results of the last ministry 5-year survey were released, the number of vacant homes in Japan was estimated to be 8.19 million, about 40 percent of which–3.18 million–were not on sale or for rent. At the present rate, the number of abandoned abodes would rise to 5 million by 2025, so the ministry has decided to put into effect measures to bring down that number. They will announce these measures in March.

According to reports, the plan would involve “putting some abandoned houses and apartments back on the market and removing others,” as well as “offering such houses and apartments to low-income earners and families with children.” In addition, the government would also promote “the replacement of aging condominiums.” Any of these measures would require a much larger existing home market, which was worth about ¥4 trillion in 2013. The ministry thinks it can boost it to ¥8 trillion by 2025 and increase the remodeling and renewal market from ¥7 to ¥12 trillion. Since there would be no attendant increase in the population, the new home market would probably have to decrease in order for these targets to make sense; that and salaries would have to see a boost.

Since new housing starts has always been a chief economic motivator in Japan, it’s difficult to imagine that the government would do anything to discourage new home construction, and as long as it’s a priority it will be difficult to reduce the vacant home problem. For one thing, only new home buyers get tax breaks. More to the point, while the problem of abandoned single-family homes can be addressed in a relatively direct fashion–either fix them up to make them sellable or tear them down–the problem of abandoned units of collective housing is not so simple. For one thing, in order for a building to be rebuilt or “replaced,” four-fifths of the owners of the building’s units must approve, and that’s a hard portion to reach, especially given the fact that a lot of condo owners do not live in their units but rather rent them out. According to Yomiuri Shimbun, the government is thinking of changing the law so that absentee owners of condo units can be ignored if for whatever reason they do not participate in the vote for rebuilding. Read More

Sub Standard

CIMG3720Last year we wrote a Home Truths column about real estate schemes being promoted to property owners whose legacies would be subjected to higher inheritance taxes under new government rules. Since the government also is in thrall to the construction industry, it offers tax cuts and deductions to people who build on their property or improve it. The focus of our report was on rental apartment buildings that property owners could have built by companies that would then manage them for the owners, thus killing two birds with one loan: greatly reducing the inheritance tax burden for the owners’ children, and bringing in income from the property itself.

However, according to a special report that NHK aired a few months ago, these schemes have turned out to be a great deal of trouble for property owners. Typically, a real estate company gets a landowner to build an apartment building on his piece of land and helps the landowner secure a loan. The company then guarantees a certain amount of “rent” to the landowner for the next thirty years and subleases the apartments. The company does all the work: solicting tenants, maintaining the building, collecting rents, etc. The owner simply pays for the structure and sits back and collects money. Or, at least, that’s how the scheme is sold.

The NHK program profiled an elderly farm couple living in Gunma Prefecture. Though both are in their 70s, they continue to work the land, but don’t have the energy to work all of their land any more. However, if they let part of it go fallow, the property taxes for that portion will go up. And then there was the inheritance taxes to think about when they died. Ten years ago they were approached by a real estate company who had a plan that would solve all their problems and set them up with a monthly income for the rest of their lives. All they had to do was take out a ¥100 million loan to build an apartment building on the unused portion of their land. They took the offer. Read More