Q: As more and more units are being rented in our condominium community, homeowners are expressing concern, especially about the policies of lending institutions toward prospective buyers in a community with a lot of rental units. Could you shed some light on those policies? Is it possible to put a cap on the number of rental units? -- Odenton, Maryland.

A: This question highlights one of the recurring tensions in many community associations: rental units. Whether it's a question of promoting compliance with your rules by residents who don't have an ownership stake in the community, or collecting delinquent assessments from an owner who is drawing rent but not paying his or her share of the association¹s expenses, renters often are a source of concern.

LOAN RANGERS

Lending institutions and mortgage-assistance programs like the Federal National Mortgage Association (Fannie Mae) and the U.S. Department of Housing and Urban Development (HUD) have guidelines that discourage a high percentage of rental units in a community. However, there may be problems with putting a strict cap on the number of rental units in a community. However, there may be problems with putting a strict cap on the number of rental units in an association. Many declarations expressly provide that owners can rent their units so long as they conform to certain requirements -- like a minimum lease term -- and register with the association. This is because prohibiting rentals completely or putting a cap on the number of rentals restricts unit owners' ability to use their property as they choose.

Both Fannie Mae and HUD show a clear preference for owner-occupied units. Their guidelines, in turn, influence lenders to whom prospective condominium buyers look for financing.

A new community must be 70 percent owner-occupied to qualify for Fannie Mae financing. This 70 percent may include those who own their unit as a second home, but there is still a clear policy to keep the number of owner-investors to a minimum. For existing communities, the figure goes down slightly to 60 percent owner-occupied -- but this still shows an obvious preference for a community owned by those who actually live there. Likewise, HUD -- which offers insured or guaranteed loans to condominium purchasers -- requires that 80 percent of its assisted mortgages be given to owner-occupants.

The rationale behind such guidelines is obvious. A unit owner who is far from home is far from the issues that touch and concern the community. Non-resident owners generally are expected to have less time and interest in maintaining their unit. And an investor-owner who owns several units and falls on hard times can do a great deal of harm to the community.

SUPERFICIAL APPEAL

The logical question is whether a community association can incorporate this public policy into its declaration -- whether it can prohibit or limit the number of rental units permitted in the community. While the idea has some superficial appeal, it's rarely put into effect. There are several reasons, chief among them being the developer's desire to sell units. Restricting the pool of potential buyers to owner-occupants would make the units more difficult to sell.

This limitation then becomes difficult to overcome. Placing a cap on rentals in the declaration would restrict unit owners¹ ability to dispose of their property. Although not all "restraints on alienation" (the legal benchmark) are unenforceable, this one in particular is at least questionable and certainly challengeable. If a community association were to attempt an amendment to its governing documents capping the percentage of rental units, it's not hard to envision the ensuing debate about who does and doesn't get to continue renting. In the absence of unanimity, it's unlikely that an amendment limiting an owner's right to rent would be valid.

The best answer is an educated and informed community. Once owner-occupants know the lending guidelines and the policies behind them, they can work with all other unit owners to create the right balance between renters and owners.

Hal A. Barrow is the principal in Barrow & Associates, a Pennsylvania law firm concentrating in the representation of community associations, and the president-elect of CAI's Pennsylvania and Delaware Valley Chapter.