FBI Searches Headquarters Of One Of America's Largest Landlords In Criminal Antitrust Investigation

The FBI served a warrant on the Atlanta offices of Cortland Management, one of America's largest landlords, concerning a Department of Justice (DOJ) antitrust investigation into price fixing in multifamily housing. Cortland Management's website claims the company's portfolio is worth $218 billion and manages 85,000 units in 13 states.

They have become the most recent addition to a growing list of management companies and real estate-related entities that the DOJ suspects of creating an illegal rental monopoly. However, the search of Cortland Management's offices does not necessarily mean that management companies and REITs are the ultimate targets of the investigation. The real issue may be the pervasive use of real estate software and advisory services from RealPage.

RealPage provides several software solutions for the multifamily rental industry, including basic management software that allows companies to collect rent, pay bills, and handle other accounting functions. That aspect of their service does not appear to be in the DOJ's crosshairs. RealPage’s use of algorithms to help landlords determine rent increases appears to be under scrutiny.

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The rents collected by companies that use RealPage's management software are one of the key data points their algorithm uses to recommend the amount of a given apartment's rent increase. Previously, figuring out rent increases was something that on-site property managers did in coordination with senior-level employees at the management company's home office.

The algorithm consistently recommends aggressive rent increases based on the information RealPage curates from the different companies that use its software. Collectively, these companies may represent hundreds of thousands of units across the country. The long-term effect for tenants is rents that just keep climbing no matter what they do.

If tenants remain in their current apartment and sign a renewal lease for an increased amount, RealPage and the tenant's management company win. If the tenant moves and finds a market dominated by other management companies using RealPage, another management company and RealPage win. The tenant basically never wins in that situation.

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Individual tenants began suing RealPage based on their belief that the company's software and algorithms allow landlords to collude with each other and keep rents high. These suits would eventually be consolidated into one case being heard in the Federal District Court in Nashville. That civil case appears to have sparked the current antitrust investigation, which could have criminal implications if the DOJ uncovers a conspiracy.

In the meantime, law enforcement officials nationwide are watching the situation closely. Arizona is a state where Cortland operates and Attorney General Kris Mayes spoke about the case, saying, "The conspiracy allegedly engaged in by RealPage and these landlords has harmed Arizonans and directly contributed to Arizona's affordable housing crisis. This conspiracy stifled fair competition and essentially established a rental monopoly in our state's two largest metro areas."

Meanwhile, Cortland Management acknowledged the search in a recent statement, which read in part, "We are cooperating fully with that investigation, and we understand that neither Cortland nor any of our employees are ‘targets' of that investigation. Due to the ongoing litigation, we cannot comment further at this time."

The DOJ did not issue a public comment regarding its search of Cortland Management offices, but their investigation remains ongoing. ProPublica recently conducted an independent investigation into RealPage. They concluded that RealPage (which denies any wrongdoing) had used its algorithms to encourage rent increases nationwide to maximize profit for everyone.

If the DOJ agrees with ProPublica, the result could be a blockbuster case against many of America's biggest landlords. The total damages from artificially boosted rents could be in the billions. That could leave RealPage and many of the largest multifamily residential REITs in the country cutting massive settlement checks. The outcome is far from certain, but multifamily real estate investors nationwide would be well advised to keep a close eye on this situation.