If you are reading this article based on the headline, you’re likely already familiar with the problem. The downturn in the economy and associated depression of housing prices have created new challenges for Washington condominium residents far beyond the usual run of the mill disputes over noise violations and pet odors. Condo associations across the State are struggling with increased rates of unit foreclosure and mounting delinquencies on monthly assessments, and are also finding that rental policies intended to preserve property values and foster community bonds have become too restrictive for owners who want to rent out their units while waiting for prices to rebound. Now, more than ever, it is essential for Associations to successfully implement and manage rental policies in a manner that balances fairness to individual owners with the Board’s fiduciary duties to preserve property values and association finances for their membership at large.
The first natural question that arises when discussing rental restrictions is: why are they necessary (or even advisable)? The reasons are many, but the justification primarily comes down to protecting property values for owners. Condominiums with a high concentration of rentals are considered by many lenders to be risky investments because units in such condominiums are typically harder to market and have more trouble maintaining their value. Federal lenders Fannie Mae and Freddie Mac, for instance, will only guarantee a loan for a condominium in which renters make up less than half of the occupants.1 As a result, lenders providing funds for buyers and for refinancing owners routinely require disclosure of the number of nonowner occupied residences as part of their underwriting procedures, and the tenant population in the condominium community can be used as a basis for determining whether such financing will be provided and under what conditions. Additionally, insurance carriers for homeowner associations also require disclosure of the tenant population as part of their underwriting procedures, and will often charge higher premiums for associations with higher tenant populations. Therefore, while rental policies can vary widely, it is virtually universal at this point for condominium declarations to at least limit the percentage of units that can be occupied by tenants. Common rental caps typically range anywhere between 5% and 30% of the unit total so that a natural cushion is created and the percentages of renter-occupied units are sure to remain under the 50% limit dictated by Federal lending policy if hardship exceptions are granted.
There are other reasons for limiting the percentage of units that can be occupied by tenants as well. Property managers typically report a higher incidence of rule violations by tenants, including noise disturbances, unauthorized storage use and illegal parking. Additionally, rental occupancies are typically shorter than owner occupancies and do not allow for the development of long term personal relationships among neighbors. This is important in condominium communities where occupancy is dense, walls and entryways are shared, and the requirement for cooperation among neighbors is greater. Finally, operation of homeowners associations requires qualified volunteers to staff the board, officer positions and the committees of the association. Tenants are usually ineligible to serve as board members, so an increase in tenant occupancy diminishes the opportunity to secure able volunteers to serve these vital management functions.
Given these realities, why then would any board in its collective right mind allow for variations or hardship exceptions to established rental caps? The answer is that individual condominium owners often have a much different perspective about rental restrictions. At their heart, rental caps and other restrictions are significant restraints on an owner’s property rights. The significance of such restraints are reflected in the disclosure requirements in Washington’s Condominium Act, where the particular rental restrictions included in the condominium’s declaration must be enumerated and disclosed as part of the condominium’s Public Offering Statement.2
Generally speaking, when people elect to buy a condominium they usually intend to live in the unit. However, any number of issues can arise during the course of ownership that may necessitate renting out a unit. These include deteriorating health, divorce or change in family status, a job change or job loss, or any number of other unforeseen events or circumstances. Obviously, tough economic times usually include corresponding increases in job losses from downsizing, investment losses or other financial hardships. And as we’ve seen for the past few years, where an economic downturn also has a corresponding negative effect on housing values, these economic hardships are exacerbated because people often no longer have much, if any, equity in their home on which they can fall back upon. This can create a difficult dilemma for owners where sale of their unit is undesirable (if not improbable) because of depressed market conditions, but where the owner also has no choice but to seek less expensive living arrangements.
Additionally, if distressed owners cannot rent their property and also cannot realistically sell the property, it stands to reason that the number of foreclosures will increase. More foreclosures mean more delayed assessment payments,3 more vacant units (and deferred maintenance), and ultimately a corresponding downward pressure on property values. In short, if no hardship exceptions to a rental cap were ever granted, the resulting negative effects to property values and the community can be every bit as pervasive as those sought to be avoided with the rental cap in the first place.
So how best to deal with these competing interests when considering a hardship request? The first step is for the board to ensure that the association’s governing documents (declaration, bylaws and condominium rules) articulate a consistent and integrated policy for rental caps and hardship request process. To the extent the bylaws or rules conflict with the declaration, the bylaws and rules must be changed. Not only are bylaws/rules that conflict with the declaration unenforceable, it is practically speaking much easier to change bylaws and rules than it is to change the recorded declaration. For instance, if a condominium’s declaration was recorded on or after July 1, 1990, it can only be amended to add or change leasing restrictions with the approval of ninety percent of the affected owners (or higher if specified by the declaration).4
Second, the rules and procedures governing hardship requests should be as clearly articulated as possible. The clearer the rules and procedures are from the beginning, the easier it will be for the board to successfully comply. With hardship requests, as with most things, boards must avoid appearances of favoritism or discrimination. Tensions can run very high when a person’s home and finances are at stake, and hard feelings can easily erupt and potentially lead to legal action when one request is denied and another is granted.
Third, the board should be certain that all rules and procedures for hardship exceptions are enacted by the resolution process in compliance with all procedural rules set forth in the declaration and bylaws. If the proper level of formality is accorded to enactment of the rules, the owners will better understand what the rules may be and the rules will ultimately be more difficult to challenge after the fact.
Fourth and finally, approval of hardship exemptions can include imposing reasonable conditions on the applicant to mitigate problems that may be created by the exception to the cap. Such conditions might include requiring owners to undergo credit counseling or landlord training, limiting the length of the rental period allowed, or other similar conditions. Just remember that all decisions on hardship applications, whether they are approved or denied, should be properly documented and must comply with all applicable federal, state and local housing and privacy laws.
References
1 See FHA Mortgagee Letter 2009-46B.
2 See RCW 64.34.410(h).
3 It can often take between six months to a year for lenders to sort out ownership issues loan
documents during the foreclosure process, which typically results in delayed assessment
payments to associations.
4 See RCW 64. 34.264 (4).
