FHA Condo Approval Specialist: November 2013

FHA Condo Approvals - More On Leasing Restrictions

In the past, I have written articles on the "no-no's" of leasing restrictions when it comes to getting FHA Condo Project Approvals and about an exception to rules on leasing restrictions.

Recently, I have had a couple of condominium projects get Rejected due to leasing restriction language that, in my opinion, didn't violate FHA's rules.  When I escalated my concerns to a supervisor, it turned out that I was correct.

Family Members

One of our projects was recently Rejected for the following language:

"No unit owner may lease or rent any unit to anyone other than his spouse, any of his children or his parent or parents, or to his brothers or sisters or any one or more of the above for a period or term of less than six months."

The project reviewer viewed this as an unacceptable leasing restriction because it says that "no unit owner may lease or rent any unit" to anyone other than a family member.  The reviewer claimed that this violated "free assumability" as stated in 24CFR203.41.  It was as if the last part of the clause "for a period of less than six months" was part of a new sentence.

I argued that this does not restrict the leasing of other units in the project and is only allowing unit owners to lease their units to family members for less than 6 months; that a lease to a lessee other than a family member had to be 6 months or longer (guaranteeing that transient leasing was not available.)

Unfortunately, the Supervisor didn't agree with me on this point, which was VERY surprising to me.  However, the paragraph that followed did contain language that made lenders, FHA, Fannie Mae, etc, exempt from the language should a tranfer of title occur to these entities.

The project was subsequently Approved.

Construction Lender Language

This one was interesting to me and really could have gone either way, I suppose.  Fortunately, common sense prevailed and they agreed with my interpretation.  It read:

"Any lease or rental agreement for any Unit shall be in writing, shall be subject to the terms and provisions of the Instruments, and shall not be for a term of less than ninety (90) days.  This restriction shall not apply to a construction lender in the event of a foreclosure." [Emphasis added.]

The restriction itself is within the guidelines as it is preventing transient leasing and it is common language for the leases to be in writing and subject to the rules in the legal documents.  The issue that the reviewer took was that this would not apply to a lender.

The reason that this is a problem is because it is essentially saying that leasing for less than 90 days is permissable if the lender acquires a Unit via foreclosure.  If the document had been silent about the 90-day minimum lease altogether, it would not have been an issue at all.  But by creating the 90-day restriction and then exempting the construction lender from it is the same as saying transient leasing is ok.

My argument here was that it specified construction lender and not simply any lender.  Construction on this project was completed and all units had been conveyed in 1986.  There was no way 

that the construction lender could now obtain a unit via foreclosure.

The Supervisor agreed with this logic and the project was Approved.

The good news also, is that in either of these two cases, the legal documents could have been amended fairly easily to adhere to FHA's guidelines.  In the first case, a line could be added to state that all other leases must be for 6 months or more.  In the second case, they could have simply removed the line regarding the exemption for the construction lender.

Keyboard image courtesy of renjith krishman/freedigitalphotos.net

Approved and Rejected stamp images courtesy of digitalart/freedigitalphotos.net