Many prospective purchasers and homeowners seek out home financing insured by the Federal Housing Administration (“FHA“) in order to purchase or refinance condominium units. In general, these loans have less stringent income requirements than solely private financing and require less of a down payment toward a purchase. These loans are so popular that, reportedly, up to 50% of the condominium units nationwide are financed by FHA-backed loans. Obtaining a loan insured by the FHA has become more difficult in the past few years, however, due in part to a wholesale change to FHA’s guidelines governing qualification for these loans. Not only must a loan for a particular condominium pass underwriting muster, but the condominium project must also meet a specific set of guidelines including with respect to owner-occupancy ratios, assessment delinquency rates, and the amount of commercial space. The manner in which some of the FHA’s guidelines are construed during the submittal process, however, may result in what amounts to a comedy of errors. The latest example of this involves a provision of the Federal National Housing Act that provides, in part, that no portion of the housing covered by a mortgage insured by the FHA shall be used for “transient or hotel purposes.” The National Housing Act defines transient or hotel purposes to mean: (1) any rental for a period less than 30 days, or (2) any rental if the occupants are provided customary hotel services such as room service, maid service, laundering of linens and similar services.
Most condominium association board members might breathe easy when, upon reviewing their condominium’s leasing restriction provisions, they see that the condominium declaration specifically prohibits use of a unit for transient or hotel purposes. However, many leasing restriction provisions provide an exemption for lease transactions entered into by the association or by a lender that has taken possession of a unit through foreclosure. These exemptions are usually intended to exempt a mortgagee or the association from a restriction on the number of units that may be in lease at any given time; however, the way many are written, the entire leasing restriction provision falls under the exemption. To the FHA, this exemption is basically taken as allowing use of units for transient or hotel purposes and causes an otherwise eligible condominium project to be ineligible for FHA-insured financing, even if the condominium had previously been approved.
To the extent that a board of directors of a condominium association has determined that obtaining FHA condominium approval is an association function and in the best interests of the condominium, the FHA’s interpretation of its guidelines has historically put the board between a rock and a hard place. As a general matter, the foreclosing lender exception cannot be removed from the declaration or modified without an amendment approved by the requisite membership vote (usually 2/3 of the eligible votes). Section 44-3-106(c) of the Georgia Condominium Act does allow a board of directors to amend the condominium declaration “as may be required to conform to mandatory provisions of this article [Georgia Condominium Act, O.C.G.A. § 44-3-70, et seq.] or of any other applicable law without a vote of the unit owners”; however, compliance with the FHA guidelines is mandatory only to the extent that condominium project approval is sought. There is no reported case law in Georgia supporting the position that, where a condominium project does not have FHA condominium project approval, a condominium association’s board of directors may unilaterally amend its declaration of condominium in order to comply with the FHA guidelines that do not yet apply.
Recently, however, the FHA began allowing a second route to attaining FHA condominium approval even if a condominium’s declaration “allows” use of a unit for transient or hotel purposes. The association’s board of directors may provide a signed and dated written statement on association letterhead that pronounces there are no units within the condominium currently rented for less than 30 days and no units where tenants are receiving “any services normally associated with a hotel.” If the association provides this type of statement rather than amending the condominium declaration, then the lender originating an FHA-backed loan and the borrower each must also provide a statement to the FHA that they will not allow use of the unit for transient or hotel purposes.
While at first glance it appears easier for an association to provide an additional certification from the board regarding transient rentals than to have an amendment to the declaration adopted by the membership, one must wonder what the board member signing this new certification to the FHA needs to do to assure him or herself that no units in the condominium are being rented for less than 30 days and no tenants are receiving services normally associated with a hotel. With its new policy, FHA seemingly has replaced one hoop that an association must jump through in order to obtain FHA condominium project approval with another one that perhaps is slightly lower – instead of obtaining the affirmative vote of approximately 2/3 of the members to amend the declaration by deleting the foreclosing lender exception, the board must now obtain information from every unit owner leasing their unit about the length of term and services provided to their tenants. It’s almost enough to make one throw their hands up in the air and laugh out loud!