Tag Archives: transient leasing

Airbnb and FHA Condominium Approval

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vkoletic

One of the topics on HUD’s agenda for the round table session last month was that of “Airbnbs”.  We have to admit that even with all of the condominiums that we have worked with, this was a new concept for us.  None of the legal documents of our condominium clients had any such language in them.

In case this is new to you, Airbnb is when unit owners allow overnight guests or trading of units on a temporary basis.  We understand that this is more common in areas where unit owners can provide an alternative to hotels in resort areas or for large events such as a university graduation.

Airbnb is a topic for discussion for HUD because this falls into the category of transient leasing, which is prohibited by the National Housing Act.  A home, whether it be a single family home, 2- to 4-family home or condominium unit, may not allow leasing for a period of less than 30 days.  Therefore if the condominium consists of Airbnb units, the project is not eligible for FHA project approval or FHA-insured loans.

The obvious dilemma here: how can it be determined if unit owners are offering their units in this manner?  Tracking this would become a nightmare.

HUD has not formally released an update to guidance for project approval to spell out how it will handle Airbnb.

The linked article above regarding transient leasing provides how HUD ruled on that issue.  Basically, if the legal documents are silent on transient leasing or set a minimum lease term of greater than 30 days, the condominium is acceptable.  If the documents allow for lease terms of less than 30 days or provide exemptions for anyone to the minimum leasing period, HUD will require additional documentation for the condominium to acquire approval.

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

FHA Condo Approvals – Transient Leasing

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Salvatore VuonoFHA only allows a handful of leasing restrictions; one of them is that units cannot be used for transient leasing.  FHA also does not allow unit owners to provide hotel-like accommodations for the tenants.  If either of these are allowed in the condominium project, it is not eligible for FHA condominium project approval.

The term transient or hotel purposes is defined to mean:

1.     any rental for a period of less than 30 days, or

2.     any rental if the occupants of the housing accommodations are provided customary hotel services such as room service for food and beverages, maid service, furnishing and laundering of linen and bellboy service.

Prior to the 2013 bulletin, the only way for a project to get approved with HUD if the legal governing documents allowed for transient leasing was to amend the legal documents to remove or revise this language.  This can sometimes be difficult to accomplish as the legal documents often require a 2/3 majority vote in order to amend the documents.

HUD allows for another option.

If the Association is not willing to amend their legal documents, an executed written statement may be provided by the Board that affirms that there are no units within the project currently rented for less than 30 days and/or pursuant to the lessor for providing any services normally associated with a hotel.

On the loan-level, the FHA Originating Lender will also be required to provide an executed written statement that affirms  in the event of a conveyance action to the lender that they will not rent the associated unit for less than 30 days an/or provide any services normally associated with a hotel.

Borrowers will now be required to execute form HUD-92561, Borrower’s contract with Respect to Hotel and Transient Use of Property for all condominium loans using FHA insured financing.  This is the same form required by HUD for loans for 2-4 unit properties.

Image courtsey of Salvatore Vuono/freedigitalphotos.net

FHA Rejected Condo for Transient Usage

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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