NOTE: The Idaho law in this article was current as of the date of its publication in 2010

Synopsis

Idaho law allows for implementation of owner-occupancy ratios in condominium developments as a reasonable restriction on alienation of possession to real property. With proper planning, boards of directors or developers may implement such restrictions to uphold the property values of a condominium development.

Introduction

During challenging economic times, owners in homeowners’ associations and condominium buildings seek ways to uphold their property values.  Some owners perceive that property values are better maintained if tenant occupancy rates are low.  This article explores implementation of owner-occupancy ratios in both existing single-family detached homeowner associations and condominium buildings.

What is a Condominium?

Pursuant to Section 55-101B of the Idaho Code, “[a]condominium is an estate consisting of (i) an undivided interest in common in real property, in an interest or interests in real property, or in any combination thereof, together with (ii) a separate interest in real property, in an interest or interests in real property, or in any combination thereof.”  Therefore, in Idaho, the estate in land called a condominium may include both condominium ownership of a single-dwelling unit within a single building of multiple units, but also a homeowners’ association of single-family detached residences.  The Department of Housing and Urban Development refers to the latter type of condominium estate as a “site condominium.”[1] Idaho Code section 55-1501, et seq., govern the establishment of condominium projects in Idaho, although ongoing governance is largely left to the articles of incorporation, the developer’s declaration of covenants, conditions and restrictions (“CC&Rs”), the bylaws, and other rules created pursuant to those governing documents. Generally, Idahoans are not currently burdened, or benefited, as one’s perspective may conclude, by statutory restrictions or requirements related to owner-occupancy ratios for condominium projects.

Why Limit Tenancies in Condominium Projects?

Whether correct or not, many have found that maintenance of real property is more promptly and thoroughly accomplished by those who have more than a single month’s rent at stake.  Arguably, tenancies for longer periods should engender or extend better quality care of real property by occupants.  Ultimately, the line is drawn between occupants who are title owners and occupants who are lessees.  Generally, owners of property tend to remain longer and maintain their property better than tenants.  The resulting community dislocation and lack of maintenance brought by tenants to communities can severely impact property values within a neighborhood.  In order to address this issue, homeowners’ associations or condominiums may find it prudent and reasonable to limit tenancies in their communities.

Are Owner-Occupancy Limits Lawful?

In condominium projects, limiting the number of tenants is a limitation on alienation of possession, a common law right held by owners.  In Idaho, “because restrictive [CC&R] covenants are in derogation of the common law right to use land for all lawful purposes, the Court will not extend by implication any restriction not clearly expressed.”[2] “Further, all doubts are to be resolved in favor of the free use of land.”[3] If expressly found in the governing declaration, the Idaho Supreme Court has found Idaho recognizes the validity of covenants that restrict the use of private property.[4] Therefore, owner-occupancy limits are likely lawful in Idaho, if they are expressly contained within the declaration of CC&Rs and include provisions for mitigating potentially adverse circumstances negatively impacting an owner’s ability to alienate possession.  Further, since most homeowners’ associations in Idaho are organized under the Idaho Nonprofit Corporation Act,[5]the directors and officers are obligated to act “in good faith; with the care an ordinarily prudent person in a like position would exercise under similar circumstances; the [director or officer] reasonably believes to be in the best interests of the corporation.”[6] Thus, in addition to being expressly stated in the CC&Rs, owner-occupancy restrictions must be imposed with ordinary care, in good faith, and be reasonable and in the best interests of the corporation.

Within Which Governing Document Should Restrictions Be Found?

Restrictions of an owner’s right to alienate possession of his land to a third-party lessee must appear in the governing document commonly known as the declaration of CC&Rs.[7] Since the bylaws of a nonprofit Idaho corporation govern internal management, voting and elections, maintenance and repair, and budgeting, it would be improper to include owner-occupancy restrictions in the bylaws.[8]

Each condominium project has a hierarchy of governing documents. Sometimes the documents conflict on the same point of governance. Usually, the Declaration of the CC&Rs overrules both the Articles and the by-laws, and both the latter, whatever their order in the hierarchy, overrule any rules and regulations that may be found in a separate document. Owner-occupancy-related restrictions on alienation must be in the highest level document in the hierarchy, which is usually the Declaration of the CC&Rs. Amendments to CC&Rs may require as much as an 80% affirmative vote of the unit owners to become controlling. Additionally, some documents require the affirmative votes of some percentage of the mortagees, or the first mortgagees, if the amendment is detrimental to a mortgagee’s interests. It cannot be assumed that imposition of an owner-occupancy ratio is not detrimental to a mortgagee, because after implementation the saleability of a unit may become more difficult. These considerations argue for imposing the desired ratio at project implementation, because educating owners and gathering votes of owners and mortgagees after project units are fully sold, or when a project is past the developer’s control period may be an impossible task.

Ranges of Owner-Occupancy Ratios that are Lawful and Prudent.

Idaho does not set any standards for owner-occupancy ratios in condominium projects, whether they are site condominiums or multi-unit condominiums within buildings.  However, federal lending requirements for mortgage insurance or loans do provide such limits, and common sense in a particular situation should be considered.

For mortgage insurance in new multi-unit condominium projects within buildings, the Federal Housing Administration (“FHA”) requires “at least 50% of the units of a project [to] be owner-occupied or sold to owners who intend to occupy the units.”[9]  Owner-occupancy limitations do not apply to FHA mortgage insurance procured for site condominiums.[10] To obtain Fannie Mae loans or mortgage insurance for new or newly-converted condominium projects, “at least 70 percent of the total units in the project . . . must have been conveyed or be under a bona fide contract for purchase to principal residence or second home purchasers.”[11] The percentage was 51 percent in 2007.[12] Therefore, owner-occupancy restrictions are not only lawful in Idaho, but are considered prudent by major lenders and insurers such as Fannie Mae and the FHA.

What Specific Owner-Occupancy Ratios Should be Provided?

For new projects, developers may reasonably create owner-occupancy ratios as high as 80%.  However, due to the likely occurrence of adverse and foreseeable circumstances, developers may want to avoid higher ratios.  For example, in seniors-only housing, the occurrence of medical illness may place unjustified hardships on multiple owners within the same time period.  Likewise, in developments with high concentrations of young families, job transfers or calls to military service may bring hardships not envisioned by the original developers.  Thus, while on one hand, an extremely low owner-occupancy ratio development may not pass requirements for federal loans or mortgage insurance, a high owner-occupancy ratio may bring avoidable hardship to the development’s community.  Further, amendment of CC&Rs is purposefully difficult; it frequently requires member approval of above 70%, and mortgagee approval may be required for amendment of provisions that adversely affect the lender.  If the owner-occupancy ratio is too high, it may preclude purchasers and thus lending into the community.  Thus, while it may appear initially that high owner-occupancy ratios would always benefit lenders, the tightness of the restriction on owners may prevent sales and the new loans that accompany those sales.

For existing projects, the condominium community may already be experiencing owner-occupancy ratios lower than 60% and correctly perceive that federal loans and insurance may rapidly dry up if only a few more units become rented.  It is likely that during difficult economic times, many owners feel financial pressures sufficient to make them vote against any further restrictions on alienation.  Also, as mentioned above, those serving in the military or those worried about job transfers may feel that their ability to rent their homes quickly should they need to relocate could stave off foreclosure.

Overall, whether for a new or existing project, it is likely that an Idaho court would find, and the owners would benefit from, owner-occupancy ratios that are between 60% and 80%.

Specific Provisions That Are Prudent and Reasonable.

Amendment of CC&Rs is a difficult task.  The homeowner community must be pre-educated with information to address and allay their fears of further restrictions on alienation.  Most CC&Rs require meetings of the membership where the agenda specifically discusses this type of change.  Further, the directors of the homeowners’ association would be well-advised to know the demographics of their association, in order to design a path toward owner-occupancy ratios that avoid hardship.

A well-crafted grandfather provision may allow the requisite number of votes to be obtained, so that the homeowners are not scared off by an immediate application of the new rules.  Even if a case is made that the homeowners’ property values will benefit from immediate implementation of such rules, many homeowners will be more concerned with the immediate, personal financial impact than they are concerned about the long-term impact of deterioration in property values in the development generally.  A grandfather provision could allow every homeowner to rent his unit freely for a period of five or ten years after the rule change is made, thus allowing owners to vote for such rules and benefit from the rule upon sale without being unduly constricted by it.  The five-year period would be appropriate during periods of property value appreciation, and the ten-year period could be implemented during deteriorating economic periods.  Further, an owner who decides to terminate a lease and move back in to make it an owner-occupied unit should be able to “sell” the remaining time of his grandfather provision to another unit owner lessor, who needs more time under an existing lease, or who, due to other circumstances, needs the extra time.  This would be an appropriate use of market-based mechanisms to increase the desirability of such rules without unduly restricting a given owner.  Finally, the homeowners’ association may decide to levy a fee on transfers between unit owners of such grandfather provision time periods, in order to offset the bookkeeping necessary to monitor the restrictions on alienation.

Hardship provisions are very advisable, because they allow for flexibility.  If a family breadwinner is transferred, the association will not benefit from an empty unit, especially in site condominiums where a vacant unit may draw vandalism, thereby deteriorating property values, and if the homeowner is restricted from leasing his unit, he may be placed in an inequitable financial bind.  If an owner loses his job and needs to move to less expensive living quarters, it would also be inequitable to enforce the owner-occupancy ratio to prevent a financially-viable tenancy.  Further, even though lenders may not be on everyone’s party invitation list, restrictions on leasing that prevent a foreclosing mortgagee from renting the property may result in the loss of that mortgagee’s vote to amend the CC&Rs.  Reasonable directors will understand both existing and potential demographics of their homeownership community, so that proper and equitable hardship provisions may be created.

Finally, as mentioned above, the homeowners’ association itself or its management company may experience higher costs due to the administration of owner-occupancy provisions.  It should be current practice that a homeowners’ association require lessees to receive and sign an acknowledgment that they have received copies of the governing documents and agree to abide by them, and that copies of all leases are given with such certification to the board of directors, through a management company where one is utilized.  Such costs should be tracked, so that budget planning can be adequately completed.

Conclusion

In order to maintain Idaho’s real property values within homeowners’ associations and condominium buildings, lawful owner-occupancy ratio provisions are prudent and reasonable to include in CC&Rs.  With proper legal and implementation planning, the required member percentages can be obtained in a vote of homeowners and mortgagees where necessary, and appropriate and equitable hardship and grandfather provisions can ease the transition.

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