HOA Rental Restrictions - Your Experience?

Hi -- we a 120 unit condo complex in Los Angeles, westside. We have a proposal on the ballot to limit leasing to 25% of the building (but with a hardship exemption), with the expressed purpose of preventing properties from becoming unwarrantable for lending, and to preserve property values. Because of state law revisions that took effect on Jan 1, 2012, the restrictions can only apply to new buyers. (Which makes preventing the "51% Iceberg" exceedingly difficult.)

It is clear that lending is greatly hurt by high rental occupancy, and FHA / Fannie Mae is widely purported to be pretty much impossible over 51%. The complex then becomes "cash buy" investment instead of homeowner community.

But what about insurance that the HOA pays? I've read (Rebecca Law and elsewhere) that the insurance reclassifies complexes at 51% as investment properties, and rates skyrocket (HOA dues then must go up.)

I am interested in YOUR EXPERIENCES!

- Are you happy with your rent restrictions in your building? Angry?
- Is your building over 51% and did / how much did the insurance and resulting HOA dues go up?
- Did you find resale value hurt more by higher leasing occupancy, or by leasing restrictions?
- Does anybody have any data?

Anything -- your thoughts! Thank you!

Hi, Tim, thank you for your reply! Yes I'm on the board. Ballots are distributed already, and the final vote and count is on the 23rd at our annual meeting. No, we don't have any rotation (I didn't know you could do that!), just the limit. It would mean a queue, waiting for a unit probably to sell and become owner occupied before another was available. But mostly it would mean new buyers wouldn't be able to lease out their units, thanks to recent changes in state law. Yes, sure, here is the "sanitized" proposed amendment: http://dl.dropbox.com/u/11290938/rental_restrictions.pdf

California has an interesting time ahead for rental restriction. As of Jan 1st it became law that any such change may only apply to new buyers. Current owners are grandfathered into the old rules. So despite the hard 25% cap, leasing percentages in our building will most certainly continue to go up -- only people who buy after the amendment goes into effect will be bound by the rule.

The building is near-ish the water. We have a lot of new buildings on the street built during the boom, and finished and sold after the bust. Since the original developer sunk, a partner came in, they sold all units at a good price and they went very fast. Our building of 120 units is full and about 25% owner occupied. I am under the impression that this is typical for our street, though other buildings haven't sold so fast. Sales galleries seemed to be oriented towards homebuyers.

Since buyers are young, often first-time, some owners -- such as those having their first baby -- move on but keep their properties to rent out. Though maybe only half or less do that, there is no trend of any landlords pushing out tenets and moving in. So it appears that the tend is / will be a steady climb upwards of leasing, probably until the building hits the 51% iceberg. At that point, in addition to the end of lending, rise in insurance and whatever effect on property values, we can assume that leasing interests as majority will take over. Have I got that about right?

The current proposal was crafted by counsel at request of the board, though (now a bit late in the game) I am feeling like we missed an opportunity to propose a waiting period instead.

I would be very interested in seeing the language of the waiting period you speak of!

Brian, first of, if I may, let me address few issues with your restriction language:
- "... no more than twenty five percent of the condominiums shall be leased to any person or persons". does it mean that if one leases to a corporation or any business entity they are excluded from the limitation?

- "As required by California civil code section 1360.2(c), prior to leasing his or her condoinium, an owner shall provide the association verification of the date ...." - There is no such requirement in 1360.2(c)

- Without defining 'hardship' you are opening yourself to trouble later one. Essentially you'll be forced to either approve virtually every hardship request or be threatened by a lawsuit. If your intent is to grant those requests, why even bother with the restriction.

Another leasing restriction that I find useful is to say that a unit cannot be rented during the first year of ownership. That pretty much blocks investors from buying.

A number of associations went through adopting rental restrictions late last year because of the new law. As you can imagine general membership supports the restrictions in mostly owner occupied building and votes for it. When things change and one wants to rent is when problems and conflicts arise.

My understanding from an insurance broker I work with is that an insurance company can classify a building 'apartment rental' and significantly increase rates if owner occupancy drops below 50%. A worth problem is that at the renewal time it's not being discussed and often not reflected in the policy. In case of a major loss your insurance company may try to get out of paying by claiming you didn't provide correct information.

As far as the association knows, all of our units are 100% owner occupied. If someone asks me about renting out their unit, I just tell them not to tell the association. Problem solved. Let the insurance company or Fannie mae knock on each door to prove me wrong. LOL.

> There is no such requirement in 1360.2(c)

Should read 1360.2(d) and is fixed in the final.