With the exception of vacation condominiums or condominium hotels, residential condominiums are created with the intention that the co-owners will be owner occupants. However, the glut of foreclosures that occurred from 2007 to 2012 led many investors to purchase condominium units for rental purposes. Moreover, the recovery of the housing market has also led many co-owners to move and rent their units. Accordingly, the growing number of rentals in condominiums has made “rental caps” a hot topic for many condominium associations.
Condominium associations often adopt rental caps for a variety of reasons. The most popular reason to adopt a rental cap is to ensure that an association remains eligible to receive FHA Certification. FHA Certification increases the potential pool of purchasers which often results in increased unit values. In order to be eligible for FHA Certification, at least 50% of the total units in the condominium project must be owner occupied. Similarly, many associations adopt rental caps in order to maintain the original character of the development. Many associations believe that landlord/co-owners do not have a vested interest in the condominium as they do not actually live there. The same would hold true for the renters who do not have an ownership interest in the condominium. Detractors of rental caps often claim that the rental cap forces owners into foreclosure and that they are unduly restrictive. However, a well drafted rental cap would grandfather existing rentals and create exceptions if co-owners are required to move for medical reasons, employment reasons or other extenuating circumstances. Accordingly, rental caps can be drafted to prevent investors without unduly restricting co-owners that may experience a hardship.
Condominium associations that desire to adopt rental caps should do so before the number of rentals becomes too high. In Michigan, MCL 559.190 requires 2/3 of the co-owners to approve an amendment to the condominium bylaws. MCL 559.190a also requires 2/3 of mortgagees to approve an amendment to the bylaws that imposes a rental cap. While 2/3 of the co-owners must affirmatively approve a rental cap, the failure of a mortgagee to respond to a vote to impose a rental cap constitutes a “yes” vote. Accordingly, the enactment of a rental cap is largely dependent on whether or not 2/3 of the co-owners will affirmatively vote to institute a rental cap. As such, once 1/3 or more of the units are rented, it is unlikely that a rental cap will be approved. Accordingly, it is recommended that rental caps allow for no more than 20% of the units to be rented and that a rental cap be proposed well before 1/3 of the units are rented. While every association is different, and some associations have now become largely become “rental associations” controlled by investors, condominium associations that are controlled by owner occupants should consult with a condominium attorney to enact rental caps before it is too late.