FHA Rejected Condo for Transient Usage

fotomineLast year, HUD released FHA Info #13-42 which clarified its stance on Transient Usage as it pertains to condominium project approvals.  Transient usage is allowing the rental of a property (including a condominium units) for less than 30 days.  HUD does not allow FHA loans for any property that allows transient usage.

It is common for the legal documents of a condominium to create leasing restrictions to prevent transient leasing.  This includes language such as “no unit may be rented for a period of less than 30 days [or 60 days or 6 months, etc].”  Where it becomes complicated is when this language is present but also contains language which exempts lenders who acquire a unit through foreclosure.

For example, if the minimum lease term of a unit is specified to be no less than 60 days but also says that lenders are exempted from the rule, FHA perceives this to mean that lenders are allowed to lease for any time they choose, including less than 30 days.

However, if the legal documents are silent as it pertains to a minimum lease term, then HUD does not construe that as allowing for transient leasing.  In this regard, it’s better for the documents to not say anything at all.

One of our associations was recently rejected by FHA and flagged for transient leasing.  This particular case is very perplexing to me and here’s why:

The legal documents that were provided clearly state “…no transient tenants may be accommodated therein.”  That’s pretty clear, isn’t it?  No transients.  Period.

Nowhere in the documents does it otherwise specify any minimum lease term.

The By-laws contain a Right of First Refusal clause that pertains to any unit that is being sold or rented for more than 1 year.  A later paragraph provides for exemptions to the Right of First Refusal if a unit transfers to an immediate family member or to a lender.  Again, there is no minimum lease term that is specified here.  All this section says is that units that are rented for more than 1 year are subject to the Right of First Refusal.

My position was that transient leasing is not possible for two reasons:

  1. It specifically states so in the By-laws and
  2. The exemption provided to family members and lenders only pertains to the Right of First Refusal and not a minimum lease term.

I was told by the reviewer that the exemption could be understood to mean that units acquired by family members and lenders are free to do whatever they want.  He is not about to remove this condition for approval based upon my interpretation of the documents.

This leaves us with two options:

  1. Have the file sent to QC in Washington DC for review.  This could take a few days to several weeks, or
  2. Provide a letter from a member of the Board of Directors of the Association stating that no units are currently being rented for a term of less than 30 days.  This is probably the quicker approach.

I can understand the reviewer’s reluctance.  He is “on the hook”, so to speak, for his condo approvals.

The takeaway from this is that whenever there is legal language that provides for a leasing restriction exemption to anyone, including lenders and family members, it is good practice to include a letter from the Board as stated in #2 above.

Even if you don’t think that it opens the door for transient leasing.


Top Photo Credit: (c) Can Stock Photo / fotomine