Requests for amendments to declarations tend to go in waves. Twenty years ago many associations were concerned about certain categories of sex offenders living in their communities. For several years now, the declaration amendment our firm most often gets asked about has to do with rental restrictions. Such questions arise out of concern that too many rentals or certain types of rentals will impact the “character” of neighborhoods. As a result, associations regularly approach our firm for advice on rental bans, rental caps, or restrictions on short-term/transient rentals like Airbnb or VRBO. (See Top Declaration Amendments for an HOA or Condo in North Carolina & South Carolina and Short-Term Rentals in North Carolina and South Carolina HOAs and Condominiums).
Corporate Owners Versus Institutional Investors
A more recent trend has been concerns about purchases of properties for rent by corporations or “institutional investors” (large banks or other companies that buy homes for purposes of rental). Many homeowner and condominium associations in North and South Carolina have seen some or many properties in the association purchased by these investors that only intend to rent. Concerns about such practices are that corporate landlords may have little personal connection to the community or even care whether assessments are kept at levels to maintain association amenities. Numerous national articles about these worries have recently appeared. Concerns have risen to a level where some state and national legislators have considered whether legislation is necessary to address concerns. (See Democrats Eye New Legislation to Rein in Wall Street Landlords.)
So, what’s the real deal with institutional investors? According to Clifford Treese (President of Association Data, Inc.), who provides so much valuable data to the community association industry, it’s a mixed message:
- Investors are buying up more housing than ever (in 2021, one in seven homes sold in the 40 largest US metropolitan areas). In first quarter 2022, investors comprised between one-quarter and one-third of home sales in Atlanta, Jacksonville, Charlotte, Phoenix, and Miami. The US House Financial Services Committee reported in June that corporate ownership of single-family rental homes has grown 3 percent annually since 2010, “with the third quarter of 2021 posting the fastest year over year increase in 16 years.”
- Advocates concerned about corporate landlords state that such owners, due to pressure to deliver profit to shareholders, are more likely to evict tenants, raise rents, and avoid basic maintenance and repairs. Others believe that investors target minority neighborhoods at disproportionate rates, which accelerates gentrification and makes home ownership further out of reach.
- On the other hand, the percentage of housing owned by large corporate investors is a smaller percentage of the overall housing stock than headlines may suggest. Freddie Mac data shows that institutional investors (entities that own 100 or more properties) account for less than 3 percent of home sales in 2021 and 2022.
- Private individuals or companies that own fewer properties (“mom-and-pop” investors) are growing at faster rates. Data from the National Rental Home Council shows that only 1.16 percent of single-family rental homes were owned by rental companies. Americans for Financial Reform estimates that in June 2022 private equity firms owned 1.6 percent of rental homes.
(Cliff, thanks for your continued great information!)
So, what do all these facts mean? Most likely, concerns that “we must immediately enact rental restrictions on institutional investors or our neighborhood will be ruined” are overblown for most associations. After all, there are neighborhoods that due to type of product (HOA/condo), location, proximity to colleges or other attractions, price point, or other reasons will be more or less attractive to mom-and-pop or institutional investors. On the other hand, certain neighborhoods may be very appealing to investors. Rentals can become so high that the community becomes almost a neighborhood of rentals with a community controlled by a large, distant investor. So the level of concern depends on the specific facts.
If rentals, short term rentals, or investor-owned properties are a concern of your association, contact one of our community association attorneys. We regularly talk through the pros-and-cons of such amendments, the costs, and what action would be necessary to amend the association governing documents.
I’ll note that the issue is more complex than simply trying to ban investor ownership of homes. Properties get put into corporate ownership, usually a closely held corporation or LLC (limited liability company), for various reasons, including estate or tax planning purposes. And the concerns about large institutional investors may not apply to an owner with one or two houses in a corporation. As a result, any covenant wording–as with any amendment–should be carefully tailored to solve the specific concern. For instance, large professional investors are less likely to purchase in communities where language infringes on their desired property use. As a result, declaration amendments that impose rental restrictions or impose minimum lease terms or require ownership for a certain time prior to renting may discouraging investors from purchasing in a particular community altogether.
Rental Amendment Concerns
We are sometimes asked by associations just to provide our “standard rental amendment form.” There is no such thing, nor could there be. Circumstances vary, and every association is different. Considerations for rental amendments include:
- What type of association—single family homes, multifamily, condos? (Legally, it matters.)
- What do the existing governing documents provide?
- Are there existing rentals?
- What type of rental restriction–no rentals, a percentage or number of units cap, trying to address investment companies?
- If a cap, how will new rentals be decided? Do existing or new rentals get priority?
- If to address short-term rentals like Airbnb or VRBO, how short?
- Will current owners or renters be “grandfathered,” or will the restriction apply to everyone upon adoption or a later date?
- Does the restriction impact mortgagees and must there be exceptions for lenders-as-owners?
- Are other rental limitations needed, such as whether only the whole unit/home can be rented and not parts or individual rooms?
- Any exceptions or “waivers”? If so, what or by whom? (This talk will take a while.)
- Any requirements as to the language of leases or that copies must be provided to the association?
- Will the association wish to be involved in policing, or just put the language in the declaration? (This talk will also take a while.)
The specifics of each association must be taken into account so that the solution isn’t worse than any perceived problem!
If you have questions about any community association (HOA or condo) issue, please contact a Law Firm Carolinas attorney at any of our six offices for assistance.