“Build-to-Rent” (B2R) product, meaning the construction of homes in a defined community intended to be leased, as opposed to sold, has become a more frequent sub-product within master planned communities. B2R product is similar to a typical multi-family apartment complex in that a single development owner constructs, owns, operates and maintains multiple dwellings which are then leased to residents. Once the project has been developed and leased, the development owner often looks to sell the project to an investment fund or experienced operator. The B2R development confers to the renter all the benefits of the planned community, including access to community amenities and the “neighborhood feel”. Homes in a planned community are often rented so what’s the big deal? Why is this any different? The difference lies in single ownership, and a single owner that is, or will be, different than the planned community developer. Also, the B2R product is, in itself, a community within a community as opposed homes rented and spread among the entire planned community. Meeting the expectations of the B2R development and future ownership, especially where the B2R areas will be within a planned community with standard for-sale governance documents, requires some planning and due diligence. A traditional set of residential planned community governance documents are drafted from the perspective of single home owner. Introducing a B2R development within the governance system requires that you look at the system from a different perspective. Instead of requirements that are imposed on each lot and enforced solely against a single owner, many of these requirements should be reviewed from the perspective of the project and will need to be enforced against a single sophisticated operator. Also, it goes without saying that the governance documents and provisions, especially the rental provisions, if any, should be carefully reviewed to ensure that the B2R product is permitted and may be operated successfully.
Home and Lot Maintenance
While there are exceptions, usually the owner maintains their home including yard areas. It is usually not advisable to stipulate detailed maintenance requirements in the planned community governance documents since owners are individuals and each will approach maintenance differently, but still in a manner that adheres to acceptable standards of good condition and repair. To the extent there is a dispute regarding the maintenance, or lack thereof, performed by a single owner, the dispute is likely to be resolved due the greater leverage enjoyed the association as compared to a single owner. The association will often be represented by counsel and professional management accustomed to resolving similar disputes, have a better understanding of the governance system and its application to the issue at hand, and likely has ready access to the funds necessary to prosecute and resolve the dispute.
The B2R operator will implement programmatic and uniform home and lot maintenance. Maintenance will be closely monitored and coordinated with expectations regarding lease revenue. The concern is that the B2R operator will reduce project maintenance to preserve operating profit. If lease revenue declines, or if there is pressure to increase operating profit, the level of maintenance could be lowered. A sharp decline in maintenance can affect the value and perception of non-B2R homes within the overall planned community. To address this concern, the master developer should consider whether specific home and yard maintenance requirements are necessary for the B2R project. If that is important, the requirements can usually be included in an amendment to the governance system or specialized design criteria. More detail can help resolve later disputes where the stakes will be higher, at least from the B2R operator’s perspective, since the corrective action will affect overall B2R project maintenance and B2R projected profit.
Votes and Assessment Load
When considering introduction of a B2R project within a planned community, the master developer should determine if the votes allocated to non-B2R lots would be appropriate for the B2R project. In most cases, for non-B2R lots, the governance documents will allocate 1 vote for each lot. This vote is held and cast by a single owner in association board elections, owner or association initiated amendments to the governance system, or, in some cases, approval of assessment increases or special assessments. If the same voting allocation will be used for B2R lots, the master developer needs to recognize that these votes will be cast as a block. As such, it may be that the B2R owner can control aspects of the community which would not be in the best interests of the planned community as a whole. In other words, it may be appropriate to reduce the number of votes allocated to B2R lots, at least during the period in which the B2R project is operated as a single owner rental community.
Similar to votes, the master developer should consider if the proportion of assessments allocated to each non-B2R is appropriate for the B2R product. Most likely, the B2R sub-developer will argue that a lower allocation is appropriate which may be justified if the B2R area includes amenities or open space available to non-B2R owners but maintained by the B2R operator. A lower assessment rate may also be appropriate if the B2R lots do not have access to community amenities available to non-B2R owners. On the other hand, if B2R tenants have the same access to community amenities as non-B2R lots, a reduction may be hard to justify. The master community developer should also keep in mind that a lower assessment without proper justification may be scrutinized by non-B2R owners within the community.
Whatever assessment load is allocated to the B2R lots, assessment have to be collected. Most governance documents will provide that the owner is responsible for payment, so there should be no concern regarding the B2R owner’s responsibility for payment (but do check the governance documents). On the other hand, depending on the number of B2R lots in the program, B2R assessments may constitute a significant percentage of the community association’s revenue and timely payment may be critical to the association’s ability to pay its expenses. Since the B2R project will most likely have a single owner, the effects of non-payment are magnified as opposed to non-payment by a single lot owner. As such, it is important to more closely monitor B2R payments and initiate collection proceedings on an accelerated schedule. It may also be appropriate to consider increased penalties for non-payment and collecting such amounts on a quarterly or annual basis, as opposed to monthly.
Property Insurance
In most cases, the community governance documents will not require specific property insurance that must be obtained and maintained by non-B2R owners. For the B2R product, it may be appropriate to consider requiring that customary replacement value insurance and commercial general liability be obtained and maintained for the B2R improvements, at least so long as the B2R project is owned by a single operator. Most likely, the initial B2R sub-developer and operator will obtain this insurance as part of their operations, so requiring a baseline insurance standard should not be a point of contention. However, including a baseline requirement, which can be enforced by the community association, is sensible in that the B2R project can be sold to another operator who may have different plans or requirements regarding insurance coverage.
Disclosure
The master developer should consider disclosing the existence of the B2R project within the community and that certain lots may be rented on terms and conditions which differ from the terms and conditions that may apply to other owners. The disclosure can be including in an amendment filed by the developer to accommodate the B2R project, in a separately recorded notice, or on the master developer’s web site/conceptual map.
Disclaimer: Content contained within this publication provides information on general legal issues and is not intended to provide advice on any specific legal matter or factual situation. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel.