Build-To-Rent Communities and Local Regulations in North Carolina

Published for Coates' Canons on May 24, 2022.

On the edge of town there’s a new residential development under construction. The neighborhood looks fairly conventional—there are houses and yards, streets and sidewalks. But there is a notable difference that you can’t see. The homes are not listed for sale; most or all of the properties are owned by a corporate landlord and the new homes will be rented to residents.

Can the local government use development regulations—like land use zoning and land subdivision—to regulate this development differently because the homes will be renter-occupied rather than owner-occupied? The short answer is no. Under North Carolina law a local government may not use development regulations to regulate the ownership structure of a development. But development regulations still apply. The owner may not use the ownership structure of the development to avoid generally applicable development regulations.

This blog explores the basics of build-to-rent communities and the extent to which local development regulations apply to those communities.

Basics of Build-To-Rent

It has long been the case that some residences are owner-occupied and some residences are renter-occupied. In recent years, though, there has been an increase in the number of institutional investors purchasing single-family homes to operate as rental homes. Back in 2020 my School of Government colleague, Frank Muraca, with the School’s Development Finance Initiative looked at the numbers and impact of buy-to-rent investment. In 2021, Ely Portillo and Justin Lane at the UNC Charlotte Urban Institute analyzed Mecklenburg County property records and found over 11,000 single-family homes owned by institutional investors. In 2022, reporters for The Charlotte Observer and The News & Observer reported on the rise of corporate landlords in North Carolina.

Many of the properties purchased by corporate landlords were existing homes purchased over the last decade. They were not built as rentals but were purchased by corporations and rented out. In more recent years, residential developers have entered the rental market. They are building new residential subdivisions as rentals from the start. Developers have constructed new build-to-rent communities of single-family homes in Charlotte, Raleigh, Wilmington, and around the Southeast.

The basics of build-to-rent communities are the same as any residential subdivision. There are streets, infrastructure, and homes. The development creates the same impacts as an owner-occupied subdivision: demands for public facilities like water, sewer, and roads; demands for public services like schools, parks, and recreation; and demands for public safety like police, fire, and emergency medical services.

Build-to-rent communities, though, may raise separate concerns. Some communities fear that such development is driving up the cost of housing, limiting the availability of homes for purchase, and changing the nature of neighborhoods. Such communities are exploring options for regulation.

Ownership and Development Regulations

In North Carolina, local governments may use development regulations to regulate the use and division of land, but not to regulate the ownership of land.

In Graham Court Associates v. Town Council of Chapel Hill, 53 N.C. App. 543, 281 S.E.2d 418 (1981), the North Carolina Court of Appeals ruled that zoning may regulate land use, but not the form of ownership. In that case, the town’s ordinance regulated multifamily rental apartments distinctly from multifamily owner-occupied condominiums. After a property owner was denied a permit to convert an apartment to a condominium, they challenged the ordinance. The court ruled that the multifamily development would have the same impacts whether it is occupied by renters or owners. As such, zoning cannot legally distinguish between the two, nor require extra permits to change from renter-occupied to owner-occupied.

The North Carolina Court of Appeals reaffirmed that rule in City of Wilmington v. Hill, 189 N.C. App. 173, 657 S.E.2d 670 (2008). A Wilmington ordinance required that, in order for a residential property to have an accessory apartment (e.g., a garage apartment or in-law suite), the owner of the property must reside on site, either in the principal residence or the accessory residence. The court ruled the requirement for owner-occupancy was an unconstitutional regulation of ownership and beyond the scope of delegated zoning authority.

Given these precedents, under current law a local government could not use zoning or land subdivision regulations to regulate build-to-rent development differently from comparable owner-occupied development.

Zoning and Subdivision Rules Still Apply

While zoning and subdivision may not require a certain ownership structure, neither may the developer avoid zoning and subdivision regulations through the ownership structure. The basic rules of land use and land subdivision still apply to build-to-rent communities.

Zoning regulations commonly regulate the types of activities permitted, design aspects such as size of buildings, and site considerations such as open space and parking. Those regulations apply whether the home is owner-occupied or renter-occupied. If the zoning ordinance limits the density of residential development, that rule will apply to a build-to-rent development just the same as it will apply to build-to-sale development. If a build-to-rent development is a townhome development, the standard zoning rules for townhome development will apply.

Development of a build-to-rent community may be subject to the local subdivision ordinance regulations. In common language we think of a subdivision as lots for sale, but under the state law land subdivision regulations can apply even when the property is not for sale. The local subdivision ordinance may apply to divisions creating building sites and leased premises just the same as it applies to divisions creating lots for sale.

G.S. 160D-802 defines the scope of local land subdivision regulations:

subdivision regulations shall be applicable to all divisions of a tract or parcel of land into two or more lots, building sites, or other divisions when any one or more of those divisions is created for the purpose of sale or building development, whether immediate or future, and shall include all divisions of land involving the dedication of a new street or a change in existing streets;

The scope is broad. It includes divisions of “lots, building sites, or other divisions . . . for the purpose of sale or building development.” And the implication is noteworthy: If a tract is clearly divided into sites for building development, it qualifies as a subdivision. A commercial site plan of less than the total tract may qualify as a subdivision. Reservation of out-parcels for future commercial development may qualify as a subdivision. And, the division of a tract into sites for single-family residential rentals also may qualify as a subdivision.

In Jones v. Davis, 163 N.C. App. 628 (2004), aff’d, 359 N.C. 314 (2005), the North Carolina Court of Appeals took up a question about the scope of the subdivision definition. In that case there was a dispute: Is it a “subdivision” when the owner of property plats a mobile home park to lease lots to renters who place their own mobile homes there? The court found that the phrase “‘for the purpose of sale or building development’ includes construction on subdivision lots, which are leased to third parties who place their own improvements on the property.”

With this broad statutory definition of “subdivision,” the local subdivision ordinance may apply to a single-family rental development just the same as the ordinance would apply to a single-family owner-occupied development.

Limits on Rental Inspections, Permits, and Registration Programs

North Carolina local governments have authority to establish minimum housing codes and apply those standards to residential property, but local governments have very limited authority for requiring extra inspections, permits, and registration for rental properties.

G.S. 160D-1207 outlines specific limits on inspections, permits, and registration (IPR) programs for residential property. The statute prohibits periodic inspections of residential properties except for certain limited situations. The statute also limits fees, permits, and registration requirements for residential rental properties. The details of IPR programs and the statutory limits are discussed more fully in this bulletin from Tyler Mulligan on Residential Rental Property Inspections, Permits, and Registration: Changes for 2017 (written prior to recodification in Chapter 160D). Interpretation of the statute was central to a North Carolina case on short-term rental regulations, Schroeder v. City of Wilmington, discussed in this blog on Short-Term Rental Regulations after Schroeder.

With these authorities and limits, North Carolina local governments may enforce generally applicable minimum housing codes against homes in a build-to-rent community just the same as those codes apply against homes in any other development. But a local government could not single-out rental properties or rental communities for enforcement. Moreover, the limits on inspections, permits, and registration will limit the extent to which the local government could require extra inspections, permits, or registration for a built-to-rent community.

Other Regulatory Considerations

This blog is focused on the applicability of local development regulations to build-to-rent development.  This blog does not cover any and all possible limits on rental property. Private agreements such as deed restrictions and covenants may limit the extent to which property may be rented. Other regulations may also apply.

Additionally, it must be noted that ownership does affect the applicability of development regulations in a variety of scenarios. While North Carolina caselaw makes clear that local governments lack statutory authority to use local development regulations to regulate the ownership structure of property, elsewhere in the state law one can find examples of land development activities being regulated differently based on ownership.

For manufactured homes, for example, G.S. 160D-910(g) allows a local government to require a masonry curtain walls or masonry skirting if the land is owned by the homeowner, but not if the land is leased by the homeowner. With regard to land subdivision, certain applicability provisions outlined at G.S. 160D-802 are specific to tracts of land “in single ownership.” With this, the applicability of certain regulations may depend upon the details of how the ownership is structured. In general, vested rights run with the land but, under 160D-108(i) vested rights for outdoor advertising permits run with the owner of the permit.

These examples do not directly affect build-to-rent communities. They merely highlight some of the ways that ownership structure may still affect the way that regulations apply to a particular development. Where the General Assembly deems appropriate, it has granted authority for local governments to consider ownership for specific development regulations.

Conclusion

Build-to-rent developments are popping up across the state and the country. In many ways, these are nothing new: they raise the same public issues as other developments, and neighborhoods have always been a mix of owner-occupied and renter-occupied. But the quick rise of corporate ownership and the spread of build-to-rent development has raised questions in many communities.

Build-to-rent development is still subject to the standard development regulations. Local rules like zoning, subdivision, and minimum housing codes apply.  Those local rules, however, may not regulate the form of ownership nor treat developments differently based on the form of ownership.

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