Common Interest Development “Occupancy Restrictions” Working Group (WG) ReportTo: Members of the Common Interest Development (CID) CommitteeFrom: Steve Delmartini, ChairThe working group grew out of a series of discussions surrounding the apparent rise of incidents involving CID associations imposing restrictions on the number of units that can be rented by unit owners. I appointedCID Committee Vice Chair Rana Linka to chair the WG. Rana presided over the first conference call meeting of the WG on March 7, and the second call on May 3, 2007. The WG has 10 members, including Steve and Rana. At the invitation of the Chair, REALTOR® Vicki Carpenter participated as a guest/resource person for these conference call meetings. CID Committee Staff Dave Milton and Natalie Cardenas also participated in the calls.Extensive discussions occurred on both calls. Focus was initially directed to “Single Family Residential (SFR) Detached” residential communities that have, or are proposing, occupancy restriction revisions to their CC&Rs or HOA rules. This was done primarily as a reflection of the fact that currentcase law and Freddie Mac/Fannie Mae underwriting guidelines address mobile home and condo restrictions, but not SFRs.The WG was pretty much divided into 3 “camps” during this first discussion:-Leave it aloneand address it on a case-by-case basis as most WG Members have not encountered the problem;-State-wide prohibition of CID Occupancy Restrictions is a mustto protect property rights of the homeowners; and-Deal withit regionally, not on a state-wide basis, to avoid “awakening a sleeping giant”. (Out of more than 41,000 CIDs in the state, there are less than 100 that have entered the “domain” of occupancy restrictions.)Background & ActionAt various times in 2005 and 2006, several local associations of REALTORS® requested C.A.R. to investigate this issue. The CID Committee considered the matter during its January 2006 meeting and concluded that more research was necessary and a “work group” was appointed at that time. In 2006, six local associations of REALTORS® retained a law firm to represent them on this matter before several homeowner associations. In the areas represented bythese six REALTOR® organizations, there appeared to be a trend for homeowner associations to adopt restrictions that limit the number of dwellings that may be non-owner occupied, whether by raw numbers or percentages of owner occupied vs. renter occupied.The “Occupancy Restrictions” Working Group was re-constituted at the January, 2007 meeting of the CID Committee, in order to continue the Committee’s research of this issue. During its first conference call, the WG unanimously approved a suggestion to create an “Outreach Questionnaire” on the occupancy restrictions experience. With input from WG Members, WG Chair Linka, CID Chair Delmartini, and CID Committee Staff D. Milton and N. Cardenas compiled the Questionnaire and provided it to the WG Members. Members distributed it within their respective regions; CID Committee Members and Regional Chairs were requested to circulate the questionnaire within their respective regions as well. The WG Members felt strongly that such an effort was needed to secure a better understanding of the scope and level of REALTOR® interest in the CID occupancy restriction issue. The second conference call followed compilation by Staff of the Questionnaire responses.Additionally, under the leadership of Vicki Carpenter, the Inland Valleys Association of Realtors (IVAR) and the Pacific West Association of Realtors (Pac West) also distributed a survey among their respective membership to determine the level of interest on this issue in their areas.The results of the WG Questionnaire and the IVAR/Pac West Survey are summarized below:Responses to “Occupancy Restrictions” Working Group Questionnaire, and IVAR/Pac West Survey, on issue of Occupancy/Rental Restrictions
Occupancy Restrictions in Your Area?A.WG Questionnaire Results (34 responses received)-1. Have they experienced any issues involving OccupancyRestrictions on a real estate transaction?Yes- 14 No- 14 Condos- 6a. What was the exact nature of the restriction?-Number of occupants as tenants (San Luis Obispo area) -Lenders wanted certain ratio of owners to renters living in condos (Desert area & Indian Wells) -Cannot separately rent a casita (second dwelling on same parcel) from the single family home -No restrictions; currently 60% tenants (Indian Creek condos) -Townhouse required owner occupancy & restriction on # of children in home (Desert Property Management) -Minimum of 3 months for any rental occupancy (Sun City Shadow Hills, Indio) -No renting or leasing permitted (Tamarisk West – Phase III, Rancho Mirage)b. Did it prevent the transaction from closing?-No, but excluded investor from purchasing. -Buyer not informed of restriction at purchase and was unhappy when discovered. -This restriction should not keep a unit from closing if it is clearly disclosed upfront. This means the Agents involved must ask the questions of the Buyers as to whether it is an income property or an owner.2. Are you aware of any litigation on occupancy restrictions in your area?No responses noted any knowledge of litigation in their respective areas involving CID occupancy restrictions.3. Specific comments regarding prohibiting CID occupancy restrictions:-From a property manager’s perspective: Having more than a handful of rental units in one complex is not good. When so small as to not require a resident manager, complexes suffer from increased criminal activity, littering, and maintenanceproblems. For these reasons, I would NOT advocate C.A.R. pursuing a prohibition on rental restrictions in CIDs.-It hurts the real estate market when restrictions are placed on rentals, especially condo rentals. The market here in the desertis still a good market for the investor, but when restrictions are placed on the length of stay or number of renters, it hurts the potential of “income” property.- The situation I am aware of that was a disasterfor the neighbors was the HOA known as Crystal Cove in Dana Point. A neighbor leased his home to one of those “half-way houses” and the neighbors “flipped out”. Also, I am aware that New World in Laguna Hills (now Aliso Viejo) hadlots of problems with renters who did many illegal things.- I am President of a block in San Juan Hills West HOA. Last year we looked into voting in a rental restriction. There was concern that too many rentals would eliminate FNMA/FHMC financing eligibility, as well as a perception that rentals meant poor maintenance issues. Counsel advised us that we could impose a restriction if it was reasonable and not too broad. The concept did not catch on well, as many home owners did not want to lose the option of renting if medical or job-related problems arose and an owner was forced to temporarily re-locate. The issue died down and nothing was done. It may come up again, due to the slow sales market and the recent increase in rentals.- I have two positions on this issue- (1) I oppose legislative restrictions on HOAs that try to protect their neighborhoods with reasonable restrictions on home ownership; and (2) I don’t believe that the real estate industry should get involved inthe issue. Some brokers and agents will want restrictions on HOAs and some won’t.- Cinnamon Tree HOA in Placentia just initiated a fee of $75 per month for each absentee owner on record. A $100 per month fee was assessed for every overcrowded unit that was defined as more than 4 occupants. They are calling it an administrative fee. A group of us wants to fight it.- As a broker, I understand the double-edged sword this represents. It is my hope that the “powers that be” come to an amicable and reasonable application of the code that will give CID HOAs the ability to enforce REASONABLE powers to retain the flavor of CID home ownership and not experience a collapse into a tenement-style community that surely willdeter prospective new purchasers and abnormally deflate property values. I do not wish to prevent property owners from exercising their right to a fruitful investment property. Is there any way to placate both sides of the issue?- In my experience, it is visibly obvious when homes in a HOA are rented. The renters park more cars and other vehicles on the street, and do not perform property upkeep like an owner does. During the early 90’s, when the real estate market was down, many of thehomes in my HOA became rentals and the community suffered visibly because of it.-I review several thousand HOA yearly and I am noticing more of them having Rental Restrictions. In the past couple of years, as the Laws have changed, the HOA Boards of Directors are being requested to update their governing documents to cover enforcement issues. Rental restrictions are just one of the areas being added. The Rental restriction usually takes on three faces:1. That of the Lenders notwanting to buy a loan in a project with high rentals. Fanny & Freddy underwriting guide lines are around 51% owner occupied for condos, and portfolio lenders vary in their requirements.2. From the HOA’s side, the costs are higher toenforce assessments and CC&Rs with renters than with owners. All owners then end up paying higher assessments. The HOA must go to the owner to get the renters to comply with the governing documents. Sometimes the owners ignore the HOA requests for enforcement and a lot more time and effort on the volunteer Board is expended which equates to more costly and time consuming efforts.3. Higher Insurance cost to HOA for blanket policies. Insurance carriers are asking the question as to how many rentals are in the project before they bid or renew policies.In most HOA’s I have seen that have rental restriction, there are also built in hardship clauses to assist owners that may need to rent for a short period of time due to family emergencies.I have seen restrictions set at 25% of the entire project and others where it follows the Lender guidelines for condos of 51%.B. IVAR/Pac West Survey Results (309 responses received)-1. Have you or any other agent in your Association experienced any issues involving rental/occupancy restrictions on a real estate transaction?Yes – 73 No – 236 Condos – 116 Mhps - 15a. What was the exact nature of the restriction?- Will not permit more than 5% of all units to be rentals. - No less than a one-year lease permitted. - A 20% cap was imposed on the number of units thatcould be rented. - A unit cannot be rented until it has been owner-occupied for at least one year. - No rentals; all units must be owner-occupied.b. Did the restriction prevent the transaction from closing?Yes – 26 No – 1432. Are you aware of any existing rental/occupancy restrictions in an HOA?Yes – 52 No – 1643. Are rentals restricted to a percentage of renters vs. owner-occupied?Yes – 41 No – 894. Is rental of a home totally prohibited?Yes – 12 No – 1215. What specific comments do you have regarding prohibiting or not prohibiting occupancy/rental restrictions in CIDs?- I have not run across this problem recently, but there has been a case in which we only had a choice between 2 lenders because conventional lenders wouldnot lend, stating that the rental ratio was not acceptable.- TOO MANY RENTALS IN A COMMUNITY BRING DOWN THE VALUE OF THE COMMUNITY.- Home owner associations should be able to do whatever their board agrees on.C. Related LitigationA related case has been brought to the WG’s attention recently. It is an Indiana Court of Appeals case, Villas West II of Willowridge Homeowners Association, Inc. v. Edna McGlothin, Case No. 34A02-CV-370. The plaintiff challenged a leasing restriction in defendant’s “duplex condo-style” homes association on the basis that it violated the federal Fair Housing Act, stating it “evidenced an intention to make a preference …. based on race, color,sex, familial status, or national origin….in violation of Article IX, Section 4(b) of the Fair Housing Act.” While the appellate court concluded that the trial court did not err in finding that the defendant’s restrictive covenant against leasing violated the Fair Housing Act, the decision was significantly tempered by its conclusion. The court went on to say that …”we do not intend to imply that all restrictive covenants prohibiting leasing violate the federal Fair HousingAct. Rather, this is a complex, fact-sensitive analysis that should not be taken to apply to all such covenants.”Coupled with the fact that this is an Indiana Court interpreting federal law, attempting to apply it as precedent in California would be problematic.ConclusionAt this point, the WG is moving toward a belief that this matter is more a regional than state-wide problem, due to the magnitude and content of information that has been provided to date. Evermindful of the C.A.R. policy as to protecting the property rights of property owners, it is easy to see how the arguments regarding CID rental/occupancy restrictions can be made both for and against such provisions. This tentative conclusion as to the regional nature of the issue will be further explored during the June 7 meetings of the WG and the full CID Committee. It has also been suggested by more than one region that C.A.R. look to education of Brokers, Agents, HOA Boards, Sellers and Buyers aboutcommon interest developments and their unique ownership characteristics, rather than pursuing legislative reform or resolutions.