Should Your Condo Association Be Limiting Rentals?

As many would-be sellers face losing all the equity in their home and maybe even having to write a check at closing they often turn to renting their home out as a way to cover a portion of their expenses so they can move to a new home. The only problem is that when that home is a condominium they often have to deal with restrictive associations that cap the percentage of units in the development that can be rented out. Given all the underwater condos in Chicago, these rental caps are becoming more and more of an obstacle. And just because you were able to rent out your unit this time that doesn’t mean that you will even be allowed to renew that lease when it expires. Some associations limit the term of a lease or how often it can be renewed. And another technique used to discourage rentals is to charge large lease application fees.
In defense of these associations they are trying to maintain the character of their developments and, let’s face it, renters just don’t care as much about a property as owners do. In addition, if the percentage of rentals climbs above 30% then most lenders will not loan money to buyers in that development, which really impairs sales in a development.
But what is an owner supposed to do if they can’t afford to sell but aren’t allowed to rent their unit out? I know owners that are stuck between a rock and a hard place. Of course, it’s often difficult for associations to track their percentage rentals but often if you try to sneak this past them there’s a chance they will eventually discover your deception and there can be consequences.
This thorny issue has recently pitted many aspiring landlords and their associations against each other. The most prominent Chicago case right now has been covered in Crain’s recently. Scott Kluth, the founder and CEO of CouponCabin, and Steve Brin have sued the association of the John Hancock Center to block a vote on a proposed rule to restrict rentals in that building to around 20% of the units. According to the Crain’s article the building has been turned into a “battlefield”, with pro-rental residents avoiding board members in the halls. In addition, 600 N Fairbanks Court recently voted to limit rentals to 27% of the units and The Heritage recently had a vote to limit rentals to 15% or 20% of the units but the proposal got tabled after many residents puked on the idea.
Presumably some kind of compromise can be worked out in these cases by giving a high priority to individuals suffering from financial hardship and giving a very low priority to obvious investors (e.g. they’ve never lived in the building or they own more than one unit). If not, these restrictive rules can have the unintended consequence of increasing foreclosure activity and driving down their own property values. I know of one smaller building that is prohibiting a client of mine from renting out his unit while all the units that have been sold in the building or are currently for sale are distressed. Doesn’t seem wise to me.