Can We Amend Our Condo Documents to Prevent Future Leasing?
I received a call on Wednesday from an attorney in Alabama who found me via my ActiveRain blog. He read my article titled: FHA Condo Approvals – Leasing Restriction Update and had some questions for me.
The condominium project that he represents has a high investor concentration and he was researching the requirements to get the project approved with FHA. The Board desperately wants to get FHA-approved because the units are very difficult to finance in their current state. They contacted the attorney for help.
Their idea was to create an amendment to the Declaration that would forbid any leasing of units to future unit owners. The current unit owners would be “grandfathered in” and allowed to lease their units but new owners would be forbidden from doing so.
The attorney said that such an amendment could be done; however, he wanted to investigate how that might impact financing of the units, particularly how it might adversely affect obtaining an FHA Project Approval.
I told him that I would advise against it. FHA does not allow a leasing restriction that completely forbids leasing in the project. The leasing of at least ONE unit has to be allowed or the project is not eligible.
If future leasing would not be allowed, it is conceivable that all of the units will eventually turn over to new owners at some point. At that time, no leasing would be allowed and the project would not be eligible for FHA Project Approval. Even though this may not occur for 20 years, it could be cause for FHA to reject the project now because the term of the loan may exceed this timeframe.
He agreed with me and we discussed other opportunities to accomplish the goal of reducing the number of investor-owned units. One such way would be to amend the Declaration so that only a certain number of units could be leased at any given time. This way, the number of leased units would have to drop below this threshold prior to the leasing of any new units. Limiting the number of rentable units to maintain an acceptable ratio of owner-occupants is suitable to FHA.
We went on to discuss how this project may be able to lower the number of leased units so that it would be eligible for an FHA Condominium Project Approval. But that is a topic all on its own.
Image courtesy of Jeroen van Oostrom/freedigitalphotos.com
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