The Corporate Colossus1

“There is a sufficiency in the world for man's need but not for man's greed.”

- Mahatma Gandhi

One downside of the trend in the past several years that has seen the price of condominiums skyrocket is that many people can no longer afford the down payment to purchase one. In turn, this has led us to a nation and state of renters.

There's nothing wrong with having tenants in condominium associations. (I have had many, many more problems with owners than with tenants in the associations I am fortunate to represent.) But another current trend casting an eye of concern among condominium associations around the nation.

A new business model has emerged in recent years. Either a deep pocket sole investor, a small group of business friends, or a group financed by investment capital have been buying up large amounts of condominiums in various associations. These investors are taking advantage of the skyrocketing rents to make such large investments viable.

Further, because condominium associations are required to keep units looking good, fund reserves properly and maintain the value of units, investors who may live may states away are less concerned about units falling into a state of disrepair or a neighborhood depreciating in value.

Unfortunately, this can, of course, go too far. As a result of this corporate condominium purchasing trend the balance of control in condominiums is shifting. Such investors are purchasing so many units that they actually control the board of directors, and therefore how much money is spent on what, without regard to the owners who actually live there, giving the on site owners less of a voice in the operation of the association.

This can lead to problems such as owners not being able to sell their condominium units to anyone other than the corporate investor since few will want to purchase into an associations where they have no real voice in the operation of their association. Further, if the association is large enough, it can also keep people renting, and not purchasing, a condominium as there are fewer homes on the market as institutional investors don't usually sell their units.

If you fear that your association now or in the future could face such absentee rule, there are a few things you can do, any of which should be done by amending your Declaration. You can limit the number of units to be rented in an association. Though the Federal Housing Act does not penalize associations with higher interest rates until over 51% of the units are owned by off site owners, you might want to lower the amount of rentals and cap it at somewhere around 33%, i.e. somewhere high enough to allow some owners to use the condo as an investment to help with their retirement or payment of college expenses, but not so high that the on site owners will have trouble seating owner occupants on their board of directors to maintain control locally.

There are other steps an Association can take, such as adopting language that notes no person or related entity may own more than some number or percentage of units in an Association, something along the lines of 10% of the total number of units.

Since corporate investors are, of course, out to make money, the last thing they want is to put millions of dollars into a project and have no return on their investment. So, you may want to amend your documents to note that no new owners can rent their unit for the first 3-5 years after they purchase the Unit. This language would allow the young couple who move in to, perhaps, later keep it as a rental as they move into a single-family home elsewhere, but to persuade the corporate entity to look to invest in an association other than yours.

1Much of the information in this column came from a wonderful presentation by attorneys Darren Bevan, and Scott D. Weiss entitled Hot Topics in Community Association Law: The Invasion of Real Estate Investment at the Community Association Institute's Annual Law Seminar held this past January in New Orleans.