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KASS: Seek guidance on condominium rentals

DEAR BENNY: I am one of your readers and was hoping you could point me in the right direction.  I am on a condo committee considering implementing a rental restriction to our condo due to the fact that currently there are 36 percent renters. As a result, I was wondering if there were any sound economic studies, white papers or research done on the adverse impact of having too high a percentage of renters in one’s condominium? For example, are there any studies that show a relationship between too high a percentage of rental occupancies in a condo and negative effects to condo owners, such as the decrease in property values, a decreased chance to obtain a mortgage , decreased chances to obtain a mortgage on favorable terms, or any other negative effect? – Scott

DEAR SCOTT:  I have been struggling with how to respond to your very important question. My initial response was to be sarcastic, and say, “FHA has a requirement that in order to be eligible for their loans, the association’s non-occupancy rate must be less than 50 percent.” In other words, regardless of why –the rationale behind the FHA requirement – if you want to get an FHA loan, you have to comply with their rules.

I did locate some older studies from the Internet and from community association lawyers I know. For example:  “What Are Renters Really Like? Results from a National Survey,” David P. Varady (University of Cincinnati) and Barbara J. Lipman (National Association of Realtors), Housing Policy Debate, Vol. 5, Issue 4 (copyright Fannie Mae 1994).

Or here’s another one: “Incentives and Social Capital: Are Homeowners Better Citizens?” Denise DiPasquale (University of Chicago) and Edward L. Glaeser (Harvard University and NBER), Chicago Working Paper in Law & Economics (April 1998).

Personally, from my experience representing community associations for many years, I have seen bad owners and great tenants. Some tenants in associations want to actively participate in the various activities, such as getting on the landscape committee or working on the condo newsletter.

But FHA – which in recent years has become the predominant force in condo mortgages – has spoken.

What about the other major secondary lenders? Once a project is fully established,  Fannie Mae and Freddie Mac will also look at a 50 percent investor concentration limit in order to do maximum financing (90.1 percent or more).    As I understand it, although neither organizations has specific leasing restriction requirements, nevertheless, they do require the lender to certify the percentage of owner occupancy as part of the representations made to Fannie or Freddie in connection with all such loans.

If your board is seriously contemplating enacting rental restrictions, please make sure you consult a lawyer with experience in community association law. But here are some suggestions:

*To have the restriction withstand legal challenge from unhappy investor owners, the board will have to obtain an amendment of the association declaration. This has a higher priority status than if you amend only the bylaws. In fact, with associations I have represented, we actually amend both legal documents – just to be safe.

*What percentage of the membership votes is required for amending legal documents? Typically, you need a supermajority, either a 66  2/3  or even a 75 percent vote by the members, based on their percentage interests in the association.

*Do you need the affirmative vote of the mortgage lenders who have made loans to the unit owners? You can find all of these requirements in your bylaws.

If after all the research, your board decides to enact limitations on leasing, make sure that your attorney reads a 2014 case handed down by the state of Washington’s Court of Appeals. In Filmore v. Centre Pointe Condominium, the state’s condo act had two different requirements for amending documents: (1) in general, the declaration (one of the association’s legal document) can be amended with a vote of at least 67 percent; (2) however, if there is any “use to which a unit may be restricted,” it would take a 90 percent vote.

The board obtained more than 67 percent of votes  and took the position that the declaration was legally amended, and that there were restrictions on leasing. The plaintiff was an owner-investor who filed suit, claiming that to amend the declaration required a 90 percent vote.

The court agreed. It decided that “leasing” was a “use,” and thus the amendment failed because it did not have a 90 percent vote. The Washington Supreme Court affirmed the decision but based on different reasoning.

Community association law is complex and you need competent legal counsel to guide you through the amendment process.

 

Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: mailbag@kmklawyers.com.

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