The condo board at The Chandler at 450 E. Waterside in Lake Shore East is attempting to pass a “Leasing Restrictions Amendment” also known as a rental cap. Over the weekend I was in the building on showings and ran into an owner who gave me the flyer below. Here are the sum of the details followed by my thoughts on the matter.

According to the letter I have, 135 units are leased at the Chandler which represents 44% of the units. The letter states that if this measure passes then unit owners would have less than a 50% chance to get a “leasing license” for the first 3 years and less than a 20% chance thereafter. The letter goes on to state that the writers are NOT in support of a rental cap and it is their belief that prices will decline in the building as those who cannot rent out their units will be forced to sell. Why then is the board trying to pass such a measure? The letter states that less rentals in the building (likely a cap around 20 to 25%) will ease financing for buyers and refinancing for current owners. For a quick explanation of the proposal which I have read please see the bold print below.

To keep this blog 100% fair below are the benefits as said by the Board of Directors of the Chandler Condominium Association in a letter sent to owners dated February 16 of 2012.

– The implementing of the amendment will allow current owners, as well as new owners, to easier refinance their mortgages or obtain premium lending rates with a lower rental percentage.

– Implementation of the amendment will help maintain property values, which is important whether you are a live in owner or use the unit as a 2nd home or currently rent.

– Implementation of the amendment will reduce the amount of move ins and outs causing less wear and tear on the building, elevators and staff (We average about 64 moves a year).

– Implementation of this amendment will also lead to our building being more secure. Less turnover means more owners living and staying in their units.

Here are my thoughts: It is true that rental rates at or less than 20% make it easier to obtain financing in the building. Furthermore, it does open up refinancing options for current owners who want to refi to a lower rate. However, there is a large problem here being overlook by the board trying to pass this regulation: Many people NEED to rent their units. The building currently has 44% of the units leased. If this number is decreased, to lets say a conservative 25%, this means that 19% of the building, which equates to 58 units will NOT be able to lease their units. What will these people then do? Use it as a weekend place? Or will they simply just list it for sale and cut their losses? Even if only 30% of those who could not lease their units listed them for sale it would still add 16 units to the market. Currently there are 6 units on the market in the Chandler that are not under contract or temporarily off market. This means this measure could easily triple the supply in the building. If every single unit that could not rent was placed on the market supply would increase by almost 1000% or more if the building limited the number of rentals to only 20%. Now as we know the 20% limitation will not be fully enforced until 2015, but in 2014 those owners who will not be able to rent their units will have a decision to make as their leases expire. Furthermore, what about the current owners who rent their units who will not be lucky and obtain a leasing license?

The Board also mentions that there is wear and tear on the building due to increased moves. This can easily be solved by increasing the move in fee for a tenant. If this is truly a major concern, increase the move in fee to pay for the wear a tear. A deposit is also held for the elevator as well as any hallway damage. Perhaps the association just starts to get much tougher on checking the hallways for damage after a move in/out.

On the surface limiting rentals may seem like a good idea. In some buildings this concept can work to sustain a healthy building. However in the case of The Chandler we see there is a need for unit owners to be able to rent their units out. Many owners would be negatively affected by the passing of such a measure. When almost 50% of the building depends on leasing their units such a measure WILL create a great OVER supply in the market place. What this will do is push the weak owners to the bottom. Those owners who cannot afford to hang on and wait for a buyer will need to lower their price in order to be the cheapest unit of their kind. Imagine if you have several owners in that position who all have similar units? They’ll compete against each other in price and drive the market down.

The fact of the matter is, this is not speculation! This is not just a hunch that I have. This is plain and simple economics. The numbers don’t lie. Why is it then that sometime rental caps work in buildings?

Rental caps work in buildings where there are only a few units going over the limit and messing it up for everyone else. Lets say that you have a building where just over 20%, lets say 21% of the units are rented. Because of this many people cannot refinance and some  buyers cannot obtain financing. Passing a rental cap in this instance may make sense since only a couple units would be affected and the majority of the units renting their units will still be able to. In this instance you would also have a great net benefit to the majority of the building. You would in this case keep “fire sales” to a minimum and can probably build in exceptions into the ruling in order to accommodate extremely distressed owners. However, in the case of the Chandler we are talking about 44% of the building, 135 owners who have leased out their units. This shows a clear NEED of owners having the ability to rent out their units.

As an agent who has represented buyers and renters in the Chandler I oppose any rental cap that would greatly discourage buyers from buying and put owners in a position in which they would feel they need to sell their unit. I do not believe there will be a net benefit to the owners if the “Leasing Restrictions Amendment” is passed. Instead, I believe there will be grave negative consequences to the price sustainability of the Chandler for years.

Lastly, at the end of the day the market is just that, the market. The values of a unit are not dragged down because of renters in a building. They are dragged down because the market has dictated that unit owners have 1 or 2 choices: Sell their units or Rent. If the market place is such that unit owners choose to rent instead of sell then the renters are simply a symptom of the market. Implementing any kind of amendment which attempts to force the hand of the market will never work.

UPDATE: Since posting this blog additional information has come to my attention regarding the rental cap proposal for The Chandler. According to additional information I have received 135 Leasing Licenses will be distributed and will be good for 3 years.  If there is any additional information you believe I should know about this proposal please feel free to share below. Given some of the responses I have received on this blog and via e-mail here are my additional thoughts and questions. Keep in mind I am not an attorney so my interpretation of the amendment is only that and is not meant to be taken as any legal advice.

1 – 135 Leasing Licenses will be given to owners on a lottery drawing basis. This will be a 3 year license.
Currently there are 135 units leased in the building. The obvious intention is to give everyone who is currently leasing their unit a leasing license. However, how will these licenses be distributed? Will other owner occupied units sit idly by and give up their right to lease their unit? If I owned in The Chandler and lived in my unit I would still want the right to lease mine out so I would want a license which brings me to my next question….

2 – Does the license need to be used right away? For instance if I am granted a 3 year leasing license must I rent my unit out for 3 years (in order to insure that only those who truly need it will get one) or can I keep it in my back pocket in case I have the need to move? This is a concern I’m sure many landlords may have in the building. It appears from what I have read that unit owners must apply for the leasing license lottery in writing. If they are chosen they will be granted the 3 year license but it does not appear they will be forced to lease their unit out.

3 – I’ve received several e-mails that have mentioned a 3 year license. This brings to light my next question: Can owners who have the lease license enter into 3 consecutive 1 year leases to different tenants? From what I have read the answer is Yes. The 3 Year Lease license allows the landlord to rent his or her unit out for normal duration during this 3 year period. 

4 – It appears that a new round of lease licenses will be granted in coming years. This new round of licenses (drawn in 2014) for 2015 will apparently be less than the 135 currently proposed to be granted. If so, What will the new percentage be? It appears 20% will be the new percentage.

5 – What if, over the course of the next couple years, several owners need to move. If they cannot sell their unit and are in some sort of financial distress because they cannot rent their unit, will any exceptions to the rule be made? Can a temporary leasing license be granted? Those who have not received a leasing license may appeal and present their hardship situation which will be reviewed by the Board of Directors on a “Case by Case Basis.” The problem is there needs to be some guidelines put into place WITH the amendment which defines true “hardship.”

6 – 49% That is the magic number for tenant occupied units. When any building moves above that options such as FHA may go away and other serious buyer financing and re-fi issues may arise. Has this at all been discussed? I’m not sure if this has been discussed or not, but I would recommend it be brought up.

Many have said that it is wrong of me to assume the market conditions in 3 years when the number of leasing licenses will be granted. I do not know what the market will be like in 3 years; I have not a clue. But neither does anyone else. I always tell my clients to plan for the worst and hope for the best. Given that I have now read all the facts of the amendment I still do not agree with it. While I do not live in the building I must say, if I did live in the building I would vote against this proposal.

What I do know is that when I first started in the business clients would ask “What do you think I can sell this for in a few years if I get transferred or if we have a baby and need more space?” I haven’t heard that question in a while. The question I hear so many times now, is “What can I rent this for if I have to move?”

I understand that this is a hot button issue. This is an issue dealing with a very personal asset, the home where many of you live. For many others this is an issue because it threatens something that they thought would always be there no matter how bad the resale market would get; their ability to rent their home. If there is any information that I do not have or was mislead by please present it to me. My e-mail is below or you can comment directly on this blog. All facts for such an issue must be presented with complete transparency. Any guarantees made should always be in writing and in any proposal. There are many buildings going through this very same issue, including my very own. Each building is different but in most instances the basic economics of such a decision are the same.

Paul Blackburn is a licensed Illinois Realtor and Associate Broker with @ Properties. He can be reached anytime via e-mail at Paul@PKBlackburn.com