Leasing & Occupancy

Why Would You Bother? Leasing Cap Amendments Pros & Cons

There’s a lot of buzz these days about leasing cap amendments.  What are they? Are they necessary?  What’s the benefit?  Is there a downside? In its most basic form, a leasing cap amendment simply restricts the number of units that can be leased at any time.  For the sake of argument, let’s assume there are 100 units in your association and the board decides to pursue an amendment allowing only 30 units to be leased at any time.

Why would an association take this on?  First, the percentage of leased units can affect the kind of financing that buyers and existing owners are able to use.  FHA and Fannie Mae both look at this number. Even if your prospective purchaser is not seeking FHA or Fannie Mae financing, the fact of the matter is that mortgages are packaged together for resale, and most lenders seek to have all their mortgages meet this standard.

Just on its face, a leasing cap amendment can serve to limit potential purchasers. If you have reached the stated limit of leased units, owners cannot sell to investors. Owners may be forced to hold on to their unit because they can’t get their asking price from someone who plans to actually occupy the unit. Or worse, owners may actually lose money if they have to sell.

Let’s assume your association has decided to pull the trigger and you’ve made it through the amendment process.  Now what?  Obviously, as with any amendment, you have to notify all owners of the amendment. That notification should be accompanied by very clear instructions on how the process will work.  You may wish to require that all leased units register with the board and management for consideration to be legal under the cap.

Then, you have to review your existing leases. The board and management team need to be confident that you are aware of all leased units and that all their lease documentation is in line. You also need to define a lease.  Check your jurisdiction; there may be laws in place about what constitutes a lease.  Does money have to change hands for a unit to be considered leased? What about a child living in a unit owned by their parents? You need to make those definitions clear and be confident in your numbers.

Until you reach the cap number, all you have to do is make sure you stay aware of all the leases in the association.  Once you reach the cap number, you will need to maintain the wait list.  Generally, wait lists give an owner a certain amount of time in which to lease their unit before the next person on the list gets moved up to the first position on the list, usually between 60-90 days. This may seem short, but you should consider a set time to actually execute a lease.

Some owners will be inclined to just get on the list, so they have the option to rent their unit if they want to at some point in the future. This can delay the process for other owners on the list who may actually need to lease their units for financial reasons.  Imagine you’ve been reassigned for work and your unit has actually been sitting vacant for a couple months. The person in front of you on the list has no intent on leasing their unit. You have to wait until the allowable period expires, losing money the whole time on a vacant unit.  For this reason, many leasing cap amendments require that owners who request to be put on the waiting list actually submit some kind of deposit to maintain their place.

The wait list becomes the center of all kinds of concerns and questions. Is your position on the list confirmed by the postmark date on your notification of intent to lease? Or by when it’s received by the management team? In this day of electronic notification, is an email enough? If you require a deposit, is the receipt thereof what secures your place on the list?  You need to be sure that these questions are understood by all involved and properly communicated to all members of the association. The board and management need to work out these details before the notification goes out about the amendment, so everyone knows

You should also consider a hardship clause in the amendment. 

Currently, FHA and Fannie Mae have their limit set at 50% of units leased.  In our example, we’ve capped the number of units to be leased at 30.  This allows another 20 units to be considered before you run afoul of this limit and financing options are limited.  This gives the board some flexibility to consider hardships.  Maybe your work has transferred you, but only for two years.  Having some wiggle room built into your limit would allow the board to consider allowing you permission to lease your unit for those two years instead of forcing you to sell your unit because you can’t afford to maintain a vacant unit.

As with pretty much any rule, you will most likely have violations.  You will need to set the rules for this eventuality:  how you are supposed to notify the owner of the violation, what the penalties are for the violation and how the violation can be remedied are important considerations.  In most jurisdictions, a hearing is required before fines and penalties may be imposed.  The board and management need to be ready for this to happen and have the procedures in place to accommodate this.

 

By Mira Brown, CMCA, AMS
Mira is the manager of property operations at Delbe Management. She has held a variety of positions within the company, as well as managing sever­al condominium associations in D.C. and one in Virginia. Mira has been a member of CAI for several

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