Trying to be Slick with Legal Language

elxeneize_2The packages for FHA condominium project approvals include the management agreement between the association and the property manager.  Most of them are about 8-12 pages, cut-and-dry, very simple and very easy to read and interpret.  But there are some that are just so tedious to read primarily because they are trying to be slick with the legal language.

Case in point: we reviewed the language of a 33-page management agreement from 2012 and the paragraph about the term of the contract went like this…

The Board appoints Agent exclusively to manage the Property for a period of ONE (1) year(s), beginning JANUARY 1, 2012, and The Board shall have TWO (2), ONE (1) year options to renew such agreement. Each renewal term shall include a TWO PERCENT (2%) increase in management fees and Cortland provided onsite personnel fees described herein. If Board does not exercise such option within 90-60 days prior to expiration, and does not terminate this agreement according to the terms hereof, this agreement shall automatically renew for additional ONE (1) year terms, with an automatic minimum TWO PERCENT (2%) increase in management fees and Cortland provided onsite personnel fees described herein.”  [Emphasis added so that you don’t have to read the whole thing]

Is there an attorney in the house??

I’m sure your first thought was “isn’t Eric’s job fun??!”  Actually, I really enjoy my work and to answer your follow-up question: yes, I know I’m not normal.

For anyone who cared to try to digest that paragraph [and those who did are probably as abnormal as I am], might think like me that initially it doesn’t make sense.

The first sentence says that the Board has two options to renew the management agreement in one-year increments.


If the Board doesn’t “opt in”nor terminate the agreement, it will automatically renew for one-year terms.

The question that HUD will have: “is this agreement still in effect?”

What would your answer be?

My answer is that it is still in effect.  This is not because the association is still paying the management company to manage them; we see expired agreements all of the time and the HOA still pays the manager.

My opinion is that it is still in effect because the second piece appears to overwrite the two one-year option stipulation by saying that if the association is silent, then the contract continues in one-year increments until it is terminated.

That’s just my opinion.  Let’s see what FHA has to say.

Stay tuned…

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

Can Our Condominium Get FHA Approved Before Construction?

elenathewise_3Recently, I received a call from a developer in California who asked me at what point during construction is a condominium eligible for an FHA condominium project approval.  She has a condominium approved for development by the city but ground had not been broken as of yet.  She said that she had spoken with other project consultants and FHA and had received conflicting information.

In speaking with FHA, she was told that proposed projects can be approved prior to construction and are approved at this stage quite often.  Projects do not need to be complete or even have phase completion to be approved.

In speaking with the other project consultants, she was told that the first phase of the project – or at least some units – must be completed in order to get approved with FHA.

I ran into a similar situation back in 2010 when I was working with the developer of a new condominium project.  Back then, I was told by FHA that it does allow project approval even before construction has begun and I have found this to be true in practice.

In addition, if the project is approved before construction, once they are built, completed units would have to be annexed to the project approval in FHA’s system before they are available for FHA unit financing.  Only those units that are noted in FHA’s system would be eligible for financing provided that all other requirements are met.

While the project may be eligible for approval, FHA loans are not available in the project until the loan-level requirements have been met.  Besides the project-level requirements FHA has for condominiums to get on its approved condominiums list, loan-level requirements must also be met when a borrower is applying for a loan.

A proposed new construction condominium project can meet the project-level requirements to get on the FHA Approved Condominiums List even before any of the units have been built.  But FHA will not allow unit financing until the completed units are annexed AND 30% of the units in the current legal phase have been sold or are pending sale and at least 50% of the sold units are owner-occupied.  [There are other loan-level requirements.]

The developer was thrilled to learn of this and said to me “I have spoken to a lot of people and you are the first person who could explain this to me in a manner which I could understand.”

I was just pleased that I was able to clear her confusion.

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

FHA Condo Approvals – Impact of Affordable Rental Units

photo5A recent inquiry that I received was regarding the impact of Affordable Rental Units on an FHA Condo Approval.  The real estate agent that contacted me was troubled because her buyer’s loan was denied by the lender because there are Affordable Rental Units in the condominium project.

Obviously, if the loan got this far, the project must already have been approved with FHA – and it was.  The underwriter was denying the loan because he was claiming that the owner-occupancy rate was too low (below 50%).  The problem was that he was using the Affordable Rentals in his calculation of this ratio.  According to FHA, Affordable Rental Units are exempt from this calculation.  In this case, removing these units from the calculation would result in an owner-occupancy ratio of greater than 50%.

I recommended to the real estate agent that the loan officer communicate with the underwriter’s supervisor.  All major lenders have in-house condominium specialists who are experts on FHA’s guidelines.  If they don’t know the answer to the question, they can contact the jurisdictional Home Ownership Center (HOC) and ask the question.

When Affordable Housing Units or Rentals exist in a condominium project, the project must meet additional criteria:

  • The Affordable Units or Rentals must be mandated by a governmental entity – state, county or local ordinance – or by an eligible nonprofit organization that meets the requirements of CFR 203.41(a)(5).
  • The Affordable Units or Rentals must be specifically named in the legal documents by unit numbers.  The documents are not permitted to simply state “10 units”.  They must say “Unit X, Unit Y, Unit Z”, etc.
  • The Affordable Housing language must meet the criteria set forth in 24CFR203.41.  Although it must meet all of the requirements as dictated by this Section, one specific item to pay attention to is that the Affordable Housing restriction automatically terminates if title passes to HUD/FHA.

When a condominium project is approved with FHA, the Affordable Units and Rentals are noted in the system (FHA Connection).  If the Affordable Housing language in the condominium’s legal documents are acceptable to FHA and meet 24CFR203.41, those units would be eligible for FHA financing.  If they are not acceptable, they will be noted in the system as not being eligible for FHA financing.

This is an example of a “common sense” approach by FHA to carve out the unacceptable Affordable Units and allow for a project approval.  Prior to March 2011, if an Affordable Housing clause existed in the project’s legal documents, the entire project was deemed to be ineligible for project approval, and, therefore, FHA financing would be outright disallowed.