“Short Term Rentals in Indiana Community Associations” – KSN attorney Kelly Elmore discusses short term rentals in Indiana condo, homeowner (HOA), and townhome associations. Topics include rental restrictions, owner occupancy requirements, lease terms, fines, enforcement procedures, and more. (29 mins.)

The KSN Podcast examines various aspects of association law, landlord/tenant issues, property tax appeals, and more.

In each episode, KSN attorneys share their experience and knowledge as they discuss legal updates, best practices, industry trends, and more.

KSN Podcast episodes are available here: www.ksnlaw.com/podcast

Subscribe to the KSN Podcast where podcasts are found including:

You can also listen to the episode on YouTube:

Since 1983, KSN has been a legal resource for condominium, homeowner, and townhome associations. Additionally, we represent clients in real estate transactions, collections, landlord/tenant issues, and property tax appeals. We represent thousands of clients and community associations throughout the US with offices in several states including Florida, Illinois, Indiana, and Wisconsin.

For more info about our law firm and legal services, please visit www.ksnlaw.com.

 

Episode Transcription

Bernie: You’re listening to the KSN Podcast, and on this episode, we’re discussing short-term rentals in Indiana condo, homeowner, and townhome associations. Welcome to the KSN Podcast, where you’ll hear from KSN attorneys as they share their experience and insight on legal issues surrounding community associations, collections, property tax appeals, and landlord tenant law. This episode is an excerpt from our February 22nd, 2023 webinar presented by KSN attorney Kelly Elmore. Kelly practices community association law and has an extensive background as a litigator. During the webinar, Kelly discussed short-term rentals in Indiana condo, homeowner, and townhome associations. Topics include rental restrictions, owner occupancy requirements, lease terms, fines, enforcement procedures, and more. KSN is an experienced legal resource ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we’ve earned the trust of thousands of clients since 1983. If you’d like to reach Kelly or any of KSN’s experience attorneys, please call 855-537-0500. You can also visit ksnlaw.com. Complete the contact form and send us a message.

Kelly: My name is Kelly Elmore. I am a principal here at KSN down in Indianapolis. I have been practicing law since 2005, but I have focused my entire career exclusively on the practice of representation of community associations, so condominium associations, homeowner associations, townhome associations, and the number of other types of community associations. All right, so moving into our first hot topic. So, rental restrictions and short-term rentals. So, as I said earlier this is a topic that we have been talking about for a while, but it continues to be probably one of the most addressed issues that we are handling on a weekly basis, specifically spending amendments that we are being asked to prepare for associations of several different kinds. So, the first rental restrictions are bans. So these types of amendments are the types of amendments where you’re simply capping the number of rental properties within a community. So that could be a percentage number of homes or lots or units. The result is that essentially, you have a community where you’re going to have owner occupied homes or units and then those homes or lots with renters.

So, the percentage number really varies by association. We have some that have higher percentages than others. It’s sort of changed. Back in 2007 and 2008 when I really saw the first huge trend with rental restrictions and a lot of associations wanting to implement those. The comments on the amount of restriction within a community, you know, what percentage associations should adopt was really driven in large part by the banking community. In other words, people were very, very concerned about being able to get funding and loans, whether it’s owners selling to potential buyers, or whether it was communities, certainly in city urban areas where they had capital projects and they needed to take out a loan. And so, everyone sort of looked to the banking professionals to provide feedback on what is the percentage number where the banks are comfortable with the rental rate in a community. That is because in many lending type situations, if an association’s attempting to get a loan for a project and the bank comes in, reviews your documents, they review the financials, and they see a high number of rentals that can essentially be a ding when they’re considering whether to loan or the rate.

So that’s really where a lot of times the percentages early on came on. I don’t see that quite as much now. Now I think that percentage number really just depends on the community and it’s just something typically we talk it through with each individual association. With the rental restrictions and bans, and I think each of these types of amendments have their own advantages and disadvantages but generally, if you do a rental restriction or entire ban, you generally have to maintain as a board management a list. So I just had a meeting with a community this week where they have a high level of rentals within the property. They’re looking to now implement a rental restriction and maybe take the community down to, let’s say, 30%. Well, it’s going to take some time to, you know, as people sell and leave to slowly get down to that number. But, you know, I advise them, someone’s going to have to go around and survey everyone in the community, figure out which homes are actually rented, create a list and then going forward in the future, you know, there is a responsibility then to continue to track that number and make sure you’re staying on top of it.

So that is one tricky thing with the rental restrictions based on percentages. But I think many associations are able to do it successfully. There is another type of rental restriction that we have done where it’s not based on a percentage, but it says each owner has the ability to rent at least one time during their ownership. So essentially the idea is that it’s for those communities where they don’t truly want to be a rental community but there is an acknowledgement that maybe during one’s ownership of your home or your unit you might at some point find yourself in a position where you need to leave either temporarily, maybe for work, something like that. So those types of amendments say something like, every owner has the ability one time during their ownership to rent, and then everyone is treated the same. That also accounts for hardships and things like that. Just a couple of ideas on the rental restriction or bans.

The next type of amendment that we’re seeing clients ask for quite a bit are the short-term vacation rental bans or restrictions. So certainly this has been absolutely huge in Indiana especially in the last two years. We had the wave initially with the Airbnb and VRBO. Now, I think there’s a number of other platforms that individuals are using, and it’s become quite commonplace, I think, for many associations to now have these short term vacation rentals in their communities. So, we are being asked to do quite a few of these amendments where the community essentially allows rentals within the community, but it’s targeting the length of the leaser. So, for example, the language in the amendment would say a lease can be no shorter than 30 days or six months, whatever the community or the board has decided on and the idea is that you’re going to continue to allow rentals, but you really want to restrict the really short-term or vacation rentals. Some associations are fine with short-term rentals as long as they are longer than a certain period of time. For some communities, the issue is just they don’t want people constantly in and out. So they’re fine with rentals through these third party platforms as long as they’re at least 60 days or 90 days. So again, these are very tailored to individual communities based on your particular preferences but just a lot of what we’re seeing with respect to these rental bans.

And then finally, owner occupancy amendments. Some associations as a way to curb the newest trend from the last two years is just the huge increase in the investor ownership. So, before the last couple of years, I think most communities were quite familiar with having owners who were investor owners or people, you know, I know we have a lot of snowbirds in Indiana where a lot of lucky individuals take off for Florida six months out of the year. And so, certainly a lot of associations had these investor owners who just weren’t there full-time. Well, the owner occupancy amendment which is really a clause within the amendment operates as a waiting period. So this type of requirement requires that an owner own and occupy the property for X number of years before the property can be rented. So the idea is if you as an association adopt an owner occupancy clause within an amendment, or an amendment itself within your community, that essentially deters all investor owners because if an investor owner comes in and looks at your governing documents and sees, well, we’re not going to be able to rent this for one year or two years, or five years because there’s this owner occupancy requirement, they kind of usually do the cost benefit analysis, figure out the loss rent for the waiting period and move on to the next property.

So those have been very effective with these investment type properties. So why are we seeing this trend? We are certainly seeing the trend with the amendments because of the popularity of Airbnb, HomeAway, VRBO. As I mentioned, just a huge increase in real estate investors. Personally, I can’t tell you how many letters I think I have sent to professional real estate investor companies. I think there’s some associations that have upwards of 20 or 30 homes within the community owned by a single investor group, and that’s now becoming a more common occurrence. So, I think a lot of associations who previously were kind of aware of real estate investors coming in it wasn’t really seen as a big issue but when you have an investment group coming in and buying 10 homes, 20 homes, 30 homes that can really change the makeup of an association from a family friendly community where owners have known each other for years and people stay in their homes for years to more of a transient rental type of situation, depending how the investment group is running the rental and for some communities, that’s fine. Many owners buy into associations knowing that it is very openly free for rentals. Some people prefer to not live in that type of community and that’s the beauty of the ability to change your governing documents to tailor it to the association’s needs.

In addition, national trends continue to be popular. So I was out in New Orleans last month for the CAI annual law conference. So every year, many of us nerdy attorneys who do HOA and condo law get together and talk about all of the issues that are facing associations all over the country and this topic, I think probably is still receiving the biggest buzz nationally because in other states, they are still seeing a ton of real estate investors coming in. And again, same thing like what we’re seeing here, it used to be a couple of homes per community, now it’s 20, 30, 40 or more. This is not just something affecting Indiana, it’s all over the country. A lot of talk about how to address this, what we’re going to do as far as adopting mechanisms. So, impact on community associations and some concerns going forward and just quickly before I go into that, one of the comments or questions, I routinely am asked by board members is why didn’t our governing documents have these provisions originally?

The very simple answer is, it’s not necessarily– you would think maybe it’s kind of a common sense provision to include a restriction on rentals for the protection of the community but the developers who are developing the properties, generally– once they’re moving on– once all of the homes or the lots or units have been sold, they’re really leaving the management of the association to the ownership to decide and it’s generally seen as adverse to a developer’s interest to include a rental restriction because they’re limiting the pool of potential people who might buy in their division. They want to sell to people who want to buy this home, and it’s going to be their home for the next 20 years, and they’re going to raise their kids, but they also want to sell to the person who might use it as a short term rental. So the developer is going to write these documents for their own benefit in a way that allows them to sell the most homes or lots. So that is why generally we try to, especially when we’re working with associations that are newly turned over, that’s one of those topics we usually address right away with the board. Is this something you want to implement? Now would be a great time to include this, as we know it becomes a bigger and bigger problem if it’s left unaddressed over the years.

So, concerns for community associations with rentals. So, we’ve talked about the fact that associations are jumping on these, trying to limit them or ban or restrict short-term rentals and other types of rentals. Certainly, safety is always a concern. What we hear from board members is there’s a concern when you have people who are unknown in the community walking around, it’s a little bit different than your neighbor who you’ve seen every other day for five years. So it just generally creates a safety concern with people coming and going. Maintenance of the property in violation. So, for as long as I’ve been practicing, there has always been just sort of a fundamental thought, whether it’s true or not, that tenants do not tend to maintain property in the same way that an owner does. If a window breaks or a piece of wood is peeling off the front door and affects the aesthetic of the front door, the tenant might not care about it, but an owner probably would and certainly the association that is trying to maintain a uniform appearance and maintain the aesthetics of the property does care about things like that. And so, again, whether it’s warranted or not, we know there are thousands of amazing renters in various states but within community associations that’s kind of the reasoning behind the concern about so many rentals.

Covenant violations, we have seen increased violations with properties that are being used as rentals, certainly by some of these investment groups. Just general concerns, again, about safety and maintenance of common areas and amenities. Insurance concerns, there have been issues when owners are taking out insurance, there is different insurance for homeownership versus renters and we have seen issues arise where it just creates some issues with claims and liability when you have renters on the property and an issue occurs. Protection of property values. As I said earlier, previously there was a lot of focus on what the banking industry was saying about the levels of rentals and generally there was a direct correlation between the high number of rentals and property values and the value of individual homes and resale values and things like that. So again, I think many associations are trying to target and jump on this issue to not just maintain the property and ensure safety, but also to protect generally property values. And then lastly, we just mentioned the local state and city regulations. Obviously, this has been a big issue in a number of different communities in the Indianapolis area as far as attempts by different groups or municipalities to implement bans and other restrictions under zoning laws, things like that. Many of which did not apply to homeowner associations or condominium associations.

So we’re just generally aware of what’s been going on with many of the municipalities. So what can you do as far as your community looking to implement one of these types of restrictions or short-term rental bans? Certainly, we will look to your governing documents to see what you have in place already. We have board members or owners who are just not aware of what terms are actually already defined in the governing documents. We had an association that issued a covenant violation recently to a woman and there was actually a very lengthy debate about whether or not the association had ever properly amended their governing documents to include a specific type of leasing restriction. So, there was a lot of focus on the history of the process that they had gone through and what was drafted and recorded. So just be aware that if you are looking to implement some kind of rental restriction or short-term rental, we’ll be walking you through the process of amending your governing documents and that’s a whole presentation in and of itself.

Short-Term rental policies. So often along with creation of amendments, we will work with associations on actually creating a policy. So, many times with associations when you’re adopting an amendment and making a major change to your governing documents, not all of the details are necessarily included within the amendment itself. For example, if you implemented a rental restriction by percentage within your community we wouldn’t necessarily include all of the language about the wait list and how the board or management was going to maintain the list and when it would be updated and how people could apply to be on the waitlist. So with those types of amendments, we create policies and very similar short-term rental policies along with an amendment if we’re doing some type of restriction to restrict short-term rentals, we want to be very clear about what is and isn’t included. Many associations, there is a distinction between a short-term rental if the owner lives at the property versus a short-term rental if the owner doesn’t live at the property. So there are some rentals out there where the owner lives and continues to live in the home and then allows a separate lease through one of these third party platforms. So, a lot of different types of arrangements.

Owner occupancy requirements, so again, we talked about those owner occupancy clauses. So, we might have some separate requirements or details explaining what does and doesn’t qualify. I recently had a situation where there was some confusion about an owner occupancy requirement for an owner who just simply lived in Florida half of the year. And so, there was a thought that they were violating that and we had to explain, no, actually, the owner occupancy requirement doesn’t actually require you to physically live in the property. It just essentially means you can’t be renting it out to someone else. It has to be owner occupied either physically or it’s vacant. And then fines and enforcement procedures. So, I didn’t previously discuss this, but kind of going back to what we talked about earlier with our desire to overhaul the HOA act and the condo act, with respect to the clarification on an association’s ability to assess fines for any type of violation, the violation of an association’s rental restriction or short term rental restriction is a violation of the covenants. So, we pursue those violations in the same way that we pursue any other type of violation.

So often when we’re looking at an association’s rental restriction or working on an amendment to update their language with whatever they’re looking to do as far as leasing, we might also be looking at the association’s enforcement procedure. So, like many of you who are in this industry or who have been involved with violations in the past or where we are required to send an initial letter, a grievance letter, and then a second letter, the owner has an opportunity to ask for a meeting with the board and then when we send that second letter, the owner has an opportunity to ask for arbitration and if they do not, then we move to the very costly litigation. Similar or it’s the same enforcement procedure as far as rental restrictions. I’ll tell you, one of the biggest trending issues that we are seeing with the associations right now with the investor groups is the transfer internally of property. You might have a company called Progress Residential Five, transfer the deed for a property to Progress Residential HOA Commercial LLC. And so, that’s been quite a big issue that we have had to address with these investment companies, with their internal transferring, you know, we’ve kind of taken a hard line with many of the investment companies about if you’re transferring the property just like an owner transferring ownership to someone else you might no longer enjoy the benefit of a grandfather provision that previously allowed prior owners to continue to rent.

And so, that’s kind of where we’re seeing the big issue is they’re saying, well, we were owners before this amendment was adopted, and we’re still entitled to be able to continue renting. So, we’re sort of navigating that. There’ve been some unique situations with some of them, but many of them, we’ve told them unfortunately once you transferred it that grandfather provision no longer applies. So, I’m going to stop quickly and answer a couple of questions. “If You are not on the title, are you an owner? Asking for occupancy by a close relative or an owner?” So, that is a great question. We generally get a lot of questions about what qualifies as owner occupied and is a son or a daughter or a cousin, is that considered a renter? So first and foremost, when we talk about rental restrictions or rental amendments, things like that, we’re generally talking about situations where there is consideration being exchanged for the rental of the property. So first and foremost, if you have a cousin living in a property and you’re just allowing them to stay for a few months, they’re going to school, IUPUI, and they want to just come and stay for a few months, that’s not considered a rental. There’s no consideration, there’s no exchange of funds.

Generally speaking, the ownership designation also for purposes of a rental restriction extends to the direct relatives. So, spouse, daughter, son, et cetera. It starts getting a little bit trickier when you go outside of immediate family, however, that is where it’s very important when we are drafting your governing documents to clarify what does and does not qualify as an owner for purposes of the amendment or family member. Unfortunately, we have seen a lot of situations where people have tried to abuse the language, someone claiming that someone’s a family member, the board has direct evidence that they’re not actually related. So unfortunately, there have been some poor situations handled by owners in that situation but I think for the most part people understand owner occupancy, it’s the title owner, spouse, immediate family member and then kind of generally going beyond, it depends on the association.

“Is It legal to require zero renters and require at least one owner living in the home, unless approved by the board for a year or less under a hardship clause?” So legal to require zero renters and require at least one owner living in the home unless, okay, so I guess if the base question is, can our community prohibit all renters in the community? The answer is yes. If your association meets the requirements for amendment under the declaration and it’s properly approved by the association and recorded, yes, you can have a situation where the community does not allow any rentals and then with respect to a hardship clause. So the hardship clause is usually included as a provision in many rental restriction amendments and it allows the board the ability to have some discretion to allow an owner to rent due to a hardship. So sudden loss of a job, military service and deployment, a lengthy hospital stay, something like that. So I would say just generally speaking, the board has a lot of discretion under the hardship clause.

Bernie: That was KSN attorney Kelly Elmore. Kelly practices condominium, townhome and homeowner Association law and has extensive background as a litigator. KSN is an experienced legal resource ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we’ve earned the trust of thousands of clients since 1983. If you’d like to reach Kelly or any of KSN’s experienced attorneys, please call 855-537-0500. You can also visit ksnlaw.com and complete the contact form to send us a message. Thanks for listening.

Outro: The music for this show is provided by podcastthemes.com. Please note the material contained on the KSN podcast is for informational purposes only and does not constitute legal advice. No attorney-client relationship is established by your review or receipt of the information contained on the KSN podcast. You should not act on the information discussed on the KSN Podcast without first obtaining legal advice from an attorney duly licensed to practice law in your state. While KSN has made every effort to include up-to-date information on the KSN podcast, the law can change quickly. Accordingly, please understand that information discussed on the podcast may not yet reflect the most recent legal developments. Material is not guaranteed to be correct, complete, or up to date. KSN reserves the right to revise or update the information and statements of law discussed on the podcast at any time without notice and disclaims any liability for your use of information or statements of law discussed on the podcast or the performance of the podcast generally. The KSN podcast may be considered advertising in some jurisdictions under applicable laws and ethical rules for regulations.

Please note the material contained on the KSN Podcast is for informational purposes only and does not constitute legal advice. No attorney-client relationship is established by your review or receipt of the information contained on the KSN Podcast. You should not act on the information discussed on the KSN Podcast without first obtaining legal advice from an attorney duly licensed to practice law in your State. While KSN has made every effort to include up-to-date information on The KSN podcast, the law can change quickly. Accordingly, please understand that information discussed on the podcast may not yet reflect the most recent legal developments. Material is not guaranteed to be correct, complete, or up to date. KSN reserves the right to revise or update the information and statements of law discussed on the podcast at any time, without notice, and disclaims any liability for your use of information or statements of law discussed on the podcast, or the performance of the podcast generally. The KSN Podcast may be considered advertising in some jurisdictions under applicable law/s and/or ethical rules/regulations. © 2023 Kovitz Shifrin Nesbit, A Professional Corporation.