Rental Restrictions
Q: Our condominium seems to be continuing to attract investor buyers. Out of 64 units, we have 14 rentals. The renters don't seem to abide by the rules to the same degree as owners and the owners who rent don't participate in meetings or volunteer for community work, so we view this trend as not a good one for the community. Can we restrict our owners from renting?
A: This is a question that is frequently asked because it seems, to many people, that it should be an "inalienable right" of ownership that you can rent your property, but that is not true in a community association. When you "sign on" to participate in a community association by accepting a deed subject to the restrictions of record, you give up certain rights and submit to the will of the majority on most aspects of community living. Consequently, if the required number of owners is willing to sign off on an amendment, everyone must comply.
Over the past couple of years, there have been an increasing number of communities putting caps on the number of permitted rentals. Many owners ask why this is important. One reason is that a high number of rentals in a community can cause difficulty in securing financing. Lenders impose restrictions on the percentage of rental units in a community. If rentals exceed those limits, owners who want to refinance can find it difficult to secure a normal rate or even obtain a loan. While the allowable percentage can vary by agency, typically it is 40% to 50%.
The second driving force behind rental caps is the widespread perception that owners who rent and their tenants do not respect and maintain property to the same degree as resident owners and are not as involved in the community. A high percentage of renters results in a smaller pool of resident owners to serve on the Board of Directors, and otherwise help with committee work. Also there are more frequent rules compliance issues - such as pets.
A third concern is the impact of a high percentage of rentals on property values. Most real estate agents are aware of the rental percentages and are likely to steer their buyers away from those communities with significant rental percentage, because they know it is typically not as desirable a community to live in for the reasons stated above.
The following steps can be taken to tailor a rental restriction program for your community.
1. The first critical step is to engage in a dialogue with your members to determine the level of interest and willingness to impose the restrictions. Naturally, if many unit owners are renting or have more than one unit which they are renting, they are unlikely to be willing to sign off on an amendment or, at least, will insist on a generous grandfathering clause whereby current owners are exempt from the restrictions for a set period of time into the future.
2. Determine a percentage which will serve your purposes in terms of lender requirements and community needs.
3. Consider a hardship provision. Most leasing restrictions with which we are familiar contain a hardship provision which allows the Board to permit a rental under certain circumstances where the cap has been reached. When a unit is subjected to an unusually difficult estate situation, an owner incurs a disability or health condition which prevents him from living in the unit either temporarily or permanently, or a military owner is receiving orders but expects to return, the hardship provision allows for the board to tailor a "special deal" for that owner or owner's estate for a limited period.
4. Consider carefully your definition of a leased unit -- a tenant isn't always someone paying rent, but rather someone occupying the unit with consent of the owner, but without the owner being in residence.
5. Create a set of procedures for owners to be given the opportunity to lease on an equitable basis.
There are other leasing requirements which you may wish to have in force. Some documents or rules require approval of tenants or approval of leases - most do not define what they mean by "approval". Since the owner, not the tenant, is financially responsible to the association a credit check is irrelevant. Perhaps checking with a prior landlord about conduct is the only legitimate need, and you may wish to do a criminal records check which requires permission of the prospective tenant, which can be required by your rules.
Additionally, some associations charge their owners a reasonable move-in and move-out fee for their tenants based on the extra wear and tear on the facilities and extra administrative time involved in that process. In addition, owners who rent are often charged an additional security deposit for potential damages to the common elements by the tenant or their guests. This is often passed along to the tenant by the owner.
Also, all owners should be required to provide copies of the leases and to include language in the lease under which the tenants agree to abide by the documents and rules and regulations.
In order to impose additional leasing restrictions beyond the current provisions of your association documents, a document amendment must be approved by the requisite majority of owners. Before launching this process of developing leasing restrictions and rules, be aware that this will create a significant administrative burden for both the manager and the board of directors to keep track of rentals and administer a system fairly. We have found that proposed amendments placing caps on rentals have been successful more quickly if the community at large is given an opportunity to review the proposed rules and ask questions of the board and, perhaps, the association's attorney, at an open meeting.