FHA Condo Approvals – I Disagree. Transient Leasing is Not Possible
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This is Part 2 of the series about leasing restriction issues with FHA Condo Approvals. This one wasn’t as difficult to overcome as the condominium that I discussed in Part 1: Restricting Leasing to Family Members.
This condominium project had never been Approved with FHA and was submitted for approval in October 2013. The package was over 400 pages with the vast majority consisting of the Declaration, By-laws and 19 Amendments! It was Approved by FHA in November 2013.
After reviewing the documents, FHA rejected it based on the interpretation that the project allows transient leasing. Transient leasing is defined by HUD to mean leasing for a term of less than 30 days.
The actual language in this project’s By-laws reads “Any lease or rental agreement for any Unit shall be in writing, shall be subject to the terms and provisions of the Instruments, and shall not be for a term of less than ninety (90) days. This restriction shall not apply to a construction lender in the event of a foreclosure.”
The restriction that the term of the lease or rental agreement shall not be for less than 90 days is acceptable. FHA allows condominiums to dictate both minimum and maximum lease terms.
It was the final sentence of the paragraph that contained the offending language. Because the construction lender is exempt from this minimum leasing restriction, it can be interpreted that the lender may be able to lease a unit for a term of less than 90 days…or less than 30 days, which constitutes transient leasing.
The interesting part is that the condominium project has been fully completed since July 1991.
As such, I disputed this reason for Rejection with FHA on the grounds that because the project has been completed since 1991, the construction lender could not possibly acquire a unit by means of foreclosure. This means that the exemption as stated does not apply to anyone so transient leasing is not possible.
Believe it or not, this one could have gone either way. Because of how vague the language is, we can’t be certain what constitutes a “construction lender”. It could be construed as any lender that provides construction financing in addition to end-loan financing.
Fortunately, for this condominium project, FHA agreed with my interpretation and the project was subsequently approved.
Had FHA not agreed with me, the condominium project would have had to amend its By-laws to remove the line that grants the exception. I am recommending that they remove this line anyways so that we don’t run into the same problem in two years during the recertification process.
Thanks again to the fine folks at FHA for taking a "common sense" approach to this approval. Knowing that they are approachable removes so much stress from my work.
Image courtesy of digitalart/freedigitalphotos.net
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