BLG's Monthly Newsletter - February 2015

Rental Restrictions

by Candice J. Gundel, Esq.

For many condominium, homeowner, and cooperative associations increased foreclosures have translated into increased rental properties in the community.  Rental properties serve an important function in the larger real estate market, however too many rentals may cause enforcement issues, decrease property values, and jeopardize lending in an association.  A large percentage of rentals may also be a pre-cursor to converting a condominium to apartments.  There are several tools available to community associations to restrict rentals to serve the best interests of the community.

It is important for associations to consider which restrictions will best suit their needs to serve the best interest of the community and how the restrictions will be implemented.   If the board enacts new rental restrictions they will not apply to current owners in the community, who are grandfathered in until they sell their unit.  A few exceptions exist, but are rare.   Because it may take years for a majority of the properties to be sold the restrictions will not have an immediate impact, but will slowly improve the community as time marches on.

The vast majority of communities have restrictions for who and what duration a property may be rented. This often includes an approval process that allows the association board to review rental applicants and either approve or disapprove of the proposed lease and tenant prior to the tenant moving in.  Common restrictions in this category include a minimum length of time for the proposed lease and clean background check for the proposed tenants.  Communities may also restrict rentals or access to amenities for tenants for units that are delinquent in a monetary obligation to the association. It is crucial that the board is compliant with Federal Housing Guidelines when reviewing proposed leases and tenants to avoid selective enforcement or discriminatory practices.

Another type of restriction, which is gaining in popularity, allows the association to control when and if a property may be rented at all.  For example, a community may not allow any owner to rent their property within the first 1-2 years of ownership, this often deters investor buyers who have no intention of residing in the unit.   An association may also put a cap on the total number or percentage of units that may be rentals.  In that case any owner may rent their property but if a cap of 20% is in place then when 20% of the units are rented, no owner may rent their unit until the percentage falls below 20%.  Caps on rental properties are more difficult administratively as it requires the board or management to closely monitor the units being rented and maintain a wait list for owner who want the opportunity to rent.

When imposing a rental restriction that controls when and if a property may be rented, the board should consider both the short term and long term effect on the community.  In the short term current owners may continue to rent their properties despite the new restrictions and investor or bulk buyers may be deterred from purchasing.   This combination could cause property values to remain stagnant or decrease.  However, in the long term the rental restrictions will likely attract quality owner-occupant buyers and will positively affect property values.