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What's really so bad about rental units in a condo complex?

July 02, 2006|Stephen Glassman and Donie Vanitzian | Special to The Times

Question: Our condo complex is 19% rental units. I want our association to prevent the future purchase of units intended to be rentals. I want the board to require a buyer to live in the unit for two years before it can be rented. I've heard that mortgage companies can refuse to finance condos and homes if more than 25% of the complex is used as rentals. Some of the other owners don't share my concern, but I'm worried about lowering property values. Can our board legally cap the number of future rentals while permitting the existing rentals to stay?

Answer: Although popular opinion is that the presence of rental units diminishes the value of common-interest development properties, some evidence appears to support the opposite conclusion. We investigated the subject and not one bank, loan broker or lender we spoke to admitted to limiting loans because 25% or more units were rented. Conversely, in talking with dozens of lending institutions, not one admitted to placing a cap on the number of rentals in a common-interest development when determining whether to grant an individual's loan application.

In fact, numerous owners of rental units were found to keep their properties in better condition than many deed-restricted owner-occupiers due in part to landlord-tenant laws, higher rents because of rental housing shortages and hefty security deposits. On the other hand, when faced with increased association dues and assessments in addition to their mortgage obligations, owner-occupiers were more inclined to cut back on their own maintenance, particularly when on a fixed income or subject to unemployment.

We were told that rental properties often contribute to stability of ownership, which in turn ensures that the association continues receiving assessments. Not one bank or other lender agreed that renters decreased property values or that there was a provable correlation between lowered property values and the percentage of renters in any given development.

Lenders were concerned with the "revolving door" of owners coupled with association mismanagement, not the number of rentals. Owners who rely on rental income are less likely to sell their properties, thus reducing the "turnover" problem many associations complain of.

Each company stated that listing the number of rentals was not a requirement on applications, and that there are no stipulations as to how many renters an association can or cannot have as a prerequisite to purchasing property or obtaining a mortgage.

Lenders were concerned that some associations would restrict certain owners from renting their units while allowing others to rent, creating an unequal situation within the development and leading to potential lawsuits or making it difficult for existing owners to meet their mortgage obligations. Owners who experienced difficulty in meeting mortgage payments but had the leverage of renting out their units to continue making payments appeared to have an advantage as loan applicants.

A lawsuit brought against the association could do more to devalue property than restricting rentals. Any judgment against an association that limits the number of rental units in the project would make owners liable, and this concerned lenders.

Such covenants, conditions and restrictions (CC&Rs) amendments would have the side effect of placing further liability on the association and its board of directors. For example, if the buyer is a corporation or a trust and the association limits rentals to units occupied by owners for two years, the question of who qualifies as the "resident" for purpose of unit occupation becomes difficult if not impossible to answer. In the event the buyer makes a 1031 purchase (like-for-like exchange under the Internal Revenue Act), the prohibition on rentals may cause a variety of legal problems for the association, seller and buyer. This could also require the services of a tax attorney, which in turn drives up the cost of doing business.

Interestingly, associations that had multiple CC&R amendments faced lender problems. In some cases, the more rewrites and recordings of title the more difficult it was to get a loan and the longer the application process. Lenders required each set of documents to be analyzed from a legal perspective and compared to other recorded documents within that project. A comparatively large number of documents recorded on title and longer, rewritten CC&Rs are warning flags, lenders say, and indicators of how an association manages itself. Multitudes of restrictions actually may work against the buyer, resulting in longer escrow periods and higher costs. Lenders may ask buyers to obtain additional insurance to cover potential problems likely to arise after purchase.

Since lenders apparently do not have any restrictions per se on rentals, or the number of units rented in an association, our recommendation is not to amend the CC&Rs limiting the percentage of renters. Limiting rentals would appear to subject associations to greater liability than the initial problem it was intended to cure.

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Send questions to P.O. Box 11843, Marina del Rey, CA 90295 or e-mail noexit@mindspring.com.

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