Rental Caps: The Good, The Bad and the Ugly
Written by: Maris Davies on Tuesday, August, 15th, 2017
A rental cap is a mechanism put in place to limit the number or percentage of units which may be rented at any one time in a community. While not every community needs, wants, or should have a rental cap in place, before you spend the time and money on getting one drafted and approved by the owners, it is important to weigh the pros and cons to determine whether or not a rental cap is beneficial for your community.
Many communities implement a rental cap based on the belief that: (1) tenants are not as responsible as owners in terms of maintaining the unit or complying with the rules and regulations; and (2) investors are not as interested or involved in the community as resident owners. While there are certainly renters and investors that in no way fall within the foregoing categories, the perceptions nonetheless factor into the analysis.
Why to Include a Rental Cap (i.e., Perceived Pros)
When discussing with boards why they wish to include a rental cap, generally the following are the reasons offered:
- Regulate rentals in the community. An association may determine how many units can be rented at one time.
- Ability to ensure lease complies with governing documents. The association may mandate that certain language regarding compliance with the governing documents be included in every lease.
- Greater marketability of units with rental caps (although just as many boards and owners believe that a community with a rental cap makes the unit less marketable).
- Regulate the number of rentals so as to stay within FHA financing and other lender guidelines. At this time, potential purchasers will not be eligible for condominium FHA financing unless, among other things, the majority of the units in the community in which the potential property sits are owner occupied. See FHA Guidelines.
- Rental caps also provide social benefits. The more owners residing in a community, the more opportunity for said individuals to become involved in community governance, including the election to the board of directors and/or participation in association committees.
Cons of Rental Caps
When boards determine not to include a rental cap, generally the following are the reasons offered:
- The unit is less marketable. An investor or other potential purchaser may wish to purchase a home for the sole purpose of renting the home. A rental cap, particularly if the association is close to the cap and definitely when it has met the cap, may be a deterrent to these types of purchasers.
- Rental caps are difficult to monitor and enforce. How does an association truly know a unit is being rented? It may also be difficult to oversee the waiting list process.
- Increased costs that are incurred through the management company and others in administering the process of monitoring and enforcing a rental cap.
- Rental caps may be hard to pass. Rental caps must be enacted through amendment to the declaration. Consequently, it will take anywhere from between a majority to 67% of the owners to approve the amendment. Depending on how many units are presently rented, the passage of a rental cap amendment may be difficult.
The above are some of the common pros and cons offered for associations considering a rental cap. If your association is contemplating rental caps, do your due diligence and make an informed decision. Please contact any of the attorneys at HindmanSanchez at (303) 432-9999 for more information on rental caps or to discuss your individual association.