By Pamela Dittmer McKuen, Special to the Tribune
One of the early issues tackled by the new Kedvale Gardens Condominium Association in 2004 was renters. The board decided that up to six units, or 15 percent, of the 41 units could be rented at any given time. The policy worked well until a couple of years ago.
“Then the economy blew up,” said Kerry Smith, president of the association in Chicago’s Old Irving Park neighborhood. “People were begging and pleading for us to let them rent. They couldn’t afford to keep their units, and they couldn’t sell either.”
The board responded by granting four one-year hardship exemptions, raising the number of rentals to 10.
A few years ago, renters were largely unwelcome in community associations. Among the arguments: Owners take better care of the property, frequent move-ins tear up hallways, and rental restrictions protect property values. Some associations were so averse to renters that they amended their declarations to ban them.
But times have changed. Financially stressed owners increasingly are asking for exceptions to no-renter policies. Boards often are granting them, just as Kedvale did.
Joanna Dziok, who owns Integral Residential LLC in Chicago and who manages Kedvale, said most of her client associations have “reluctantly” allowed more renters in recent years.
“Boards felt they needed to do something,” Dziok said. “They were getting pressured from both sides, from owners who need to rent and from others who said, ‘I didn’t sign up to live in a rental building.’”
“We decided it was in our best interest to temporarily raise the cap,” said Smith. “No one wants a vacant unit.”
“This is a reversal of trends, driven solely by economic factors,” said attorney David Allswang, of Holland & Knight in Chicago. “Today, when sales are (made) less often, to put it mildly, the option of renting is much more prevalent than the option of selling.”
For some owners, the only other option is foreclosure, which will depress the value of everyone else’s unit, he said.
Foreclosures also strain an association’s budget. It can take six months to a year for lenders to sort out ownership and loan issues; meanwhile, assessments most likely go unpaid, said developer Garry Benson, chief executive of Garrison Partners in Chicago.
“Associations are sensitive about getting a transient reputation if they allow renters, but they often make exceptions because of the opportunity to recoup their overdue assessments,” he said. “It’s all about cash flow.”
That sentiment is echoed by Gene Fisher, executive director of Diversey Harbor Lakeview Association, which represents 30 North Side associations.
“There is little question that the number of condo rentals has increased,” he said. “It’s a concern, but I have a sense that most buildings in this neighborhood have put their concerns about rentals on the back burner as long as assessments keep getting paid.”
Boards are adapting their rental policies to economic conditions in various ways, ranging from rigid to permissive and from simple to elaborate.
Dziok said that some of her buildings lifted all restrictions for a year or two. Others raised prerecession rental caps, generally between 7 percent and 15 percent, to as high as 25 percent. Still others added a second cap for hardships on top of the regular cap. Percentages intentionally are set below Federal Housing Administration owner-occupancy requirements, currently 50 percent, so that buyers can seek government-backed mortgages.
Units that are rented to immediate family members usually don’t count toward the rental pool, she added.
Hardship exemptions are tricky for boards to deal with, said association attorney Allan Goldberg, of Arnstein & Lehr in Chicago.
“Hardship is, pardon the pun, hard to define and can be quite subjectively applied, since the human dynamic can enter into a board’s consideration,” he said. “Each board has its own penchant for factors determining hardship.”
Many boards take the view that the economy itself is not reason to determine a hardship, but they may be sympathetic to owners who have trouble selling their units or who are facing foreclosure, he added.
When considering hardship requests, boards must avoid appearances of favoritism or discrimination. Hard feelings can erupt and potentially lead to legal action when one request is denied and another is granted. The Illinois Condominium Property Act prohibits boards from creating two classes of membership.
Brian White, executive director of Lakeside Community Development Corp., urges associations to offer hardship exemptions, especially when doing so might keep owners from losing their homes.
Hardship exemptions can include reasonable conditions, perhaps requiring owners to undergo credit counseling or landlord training, or limiting the length of the rental to 12 months, he said.
“During that time, the unit owner should be making steps to resolve whatever barrier led to the hardship request,” he said.
Some associations have determined how often units may be rented, set up waiting lists and protocols for moving up and down the waiting list, and made rules for sublets, said Goldberg.
Dziok separates hardships into two categories: medical and financial. Medical hardships, such as when an owner must temporarily move in with an ailing parent, are easier to prove. Financial hardships are a little tougher.
“To not get into a legal pickle, my boards have left open to interpretation what is needed to prove the hardship,” she said. “They’ll take whatever documentation the owner wants to provide, but they won’t require specific bank or tax records. If the owner provides nothing, that doesn’t work in their favor.”
Allswang’s preference is for boards to create a relaxed rental policy for all owners rather than hardship exceptions for a few.
“Administratively, it’s easier,” he said. “With a hardship provision, you need to deal with owners case by case, which can get very personal and very emotional. People aren’t so keen on providing all the information why they have a hardship.”
He offered an example of a relaxed policy: “You might say, ‘The window is now open for two years for all owners, and after that, we’ll re-evaluate. The market might be different then.’”
Before implementing a new rental policy, boards must check their governing documents to see if they have the authority to make changes. A declaration that prohibits all leasing must be amended by a supermajority of owners. A declaration that prohibits leasing but contains a hardship provision gives the board more leeway to allow exceptions. Rules and regulations that address leasing can be changed by a board vote.
Back at Kedvale, a couple of the hardship rentals recently sold. The board is hoping for speedy resolution for the other two cases, so they can get back to their original six rentals.
“The economy has been a real issue for us,” said Smith. “We had to give people a chance to recover.”