Wisconsin lawsuit involving for-profit rental of property could disrupt HOA market

Bear Lake Shores Association is suing a new property owner who arranged to lease his home to a violent sexual offender

By Deborah Goonan, Independent American Communities

 

What if an association-governed community could restrict a property owner’s right to lease their property to tenants,  just by including a prohibition against commercial use of the property in the covenants?

HOAs across the U.S. will be closely following a case in Forest County, Wisconsin, that could set a new precedent for defining commercial use of residential property.

At first glance, the headline of this WSAW report appears to involve the issue of whether or not an HOA can ban sexually violent persons from living in a restricted neighborhood. But the underlying issue at hand is whether a property owner has the right to “commericalize” residential property by purchasing it with the sole purpose of creating an income stream by collecting rent from tenants.

 

Case involving placement of Forest County sexually violent person likely to set precedence for homeowners associations

By Emily Davies | Posted: Fri 8:18 PM, Feb 23, 2018 | Updated: Fri 8:23 PM, Feb 23, 2018

BROOKFIELD, Wis. (WSAW) — 7 Investigates is looking deeper into the nearly 10-hour long hearing in Shawano County Thursday that’s now likely to set a precedence for homeowners associations in the state.

The case involved a homeowners association in Forest County that’s suing the new owner of a property that planned to lease to the Department of Health Services to house a sexually violent person.

Ultimately the precedence set is the definition of “commercialization” when it comes to rental properties.

“It’s likely the action that GWB does by purchasing property not by living in there, but purchasing for the sole purpose of leasing it to a third party who does not reside in there, but then has other individuals, that’s commercialization,” Shawano County Circuit Court Judge William Kussel explained. “In fact, it’s clear that this is done as a money-making type of a venture.”

The judge granted a preliminary injunction – stopping the lease from going forward until the case can be officially complete – but did say it’s likely the association will win its case.

Read more (Video):

http://www.wsaw.com/content/news/Case-involving-placement-of-Forest-County-sexually-violent-person-likely-to-set-precedence-for-rental-properties-475017453.html

Consider the possible implications of this lawsuit.

Associations that were originally conceived and planned with the  intention of functioning as residential property for owner-occupants, including seasonal-occupancy, would finally have the legal ammunition to prevent takeover of their association by investors who are merely interested in acquiring multiple income streams from rental properties.

In effect, it would be possible to eliminate the core conflict in association-governed communities between owner-occupants and investor-owners.

There’s a downside, though.

If leasing one’s home to a tenant is deemed to create commercial activity inconsistent with restrictive covenants, a property owner might have to sacrifice the right to rent out the home in the future, regardless of a compelling reason such as financial hardship or career relocation.

On the other hand, quite a substantial number of association-governed communities — particularly apartment-syle and townhouse condominiums — are already heavily occupied by tenants rather than owner-occupants. A growing number of communities have become popular as short-term rentals through Airbnb, Home Away, and VRBO.

Would these majority investor-owned, de facto rental and travel destination communities be classified as commercial associations? Could they then lose their non-profit status? That would seem to be both logical and appropriate. The tax implications are enormous.

And, as commercial real estate and business ventures, buyers (investors) would be entitled to a corporate prospectus of the association. Sales agents would no longer be able to lure in buyers seeking to occupy a home under the guise of being “affordable.” A buyer would be made well aware, up front, of the true commercial nature of the “community.”

Would association members demand to play more active roles in the commercial corporation, or would they be content to sit on the sidelines as silent investors?

What would become of a minority group of owner-occupants trapped in the midst of newly-classified “commercialized” units? Could condo termination be forced upon the association, even without a vote of the members?

Looking at the big picture, perhaps future development would designate a single use for the housing from the start:

• residential housing for owner-occupancy,

• leased residential housing administered by a non-profit (to provide affordable housing),

• leased residential housing at market rate

• mixed income leased residential housing

• or short-term rentals administered by for-profit enterprises.

How would financial institutions, including lenders, respond to this sort of disruption? Would they offer different financial products to developers, true homeowners, and real estate investors?

Would “commercialized” units, common areas  — and perhaps entire communities — be required to invest in  ADA-compliant renovations?

Perhaps residential and commercial communities should be governed differently?

Commercial communities could operate as businesses under the prevalent corporate model. That should please industry trade groups who have been insisting that all HOAs are nothing more than “contractual” communities. But will commercial investors insist on more power to negotiate the terms of their “contracts” with the association?

Will they push for legislative reform that would permit property owners to withhold assessments if or when the association fails to fulfill their duties under the contract? Would there be a return to regulation under the Securities Exchange Commission (SEC)?

Would residential association-governed communities re-enter the “American Zone” described by Shu Bartholomew (On the Commons)? Could U.S. residents experience the return of individual property rights?

Would all residential communities — no longer heavily influenced by the special interests of commercial enterprise — be subject to the full constraints of U.S. and state Constitutional protections? How many restrictive covenants (deed restrictions) and association bylaws would survive Constitutional challenge?

What happens in Bear Lake Shores Association is certain to have ripple effects that could seriously disrupt the HOA industry.

For more details on this important case, including statements from the judge with regard to the pre-purchase lease arrangement to house a sexually violent person, see also:

Judge grants preliminary injunction involving placement of Forest County sexually violent person (WSAW video)

Local businesses express concern about potentially adverse economic impacts if criminal offenders are housed in Blackwell.

Forest Service may close Bear Lake Campground if sex offender is placed in Blackwell (WJFW video)

Note: according to a 2013 HUD Rule and subsequent guidance issued by HUD in 2016, criminal and sexual offenders may be considered a protected class under U.S. Fair Housing Acts. Each placement must be considered on a case-by-case basis. Therefore, the right of communities to restrict commercial use becomes a critically important safety issue for all residents.

References:

CRIMINALS: THE NEW PROTECTED CLASS (Caldwell & Kearns, P.C.)

HUD Seeks to End Housing Discrimination Against Ex-Offenders (NBC News)

 

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3 Replies to “Wisconsin lawsuit involving for-profit rental of property could disrupt HOA market”

  1. Is the use of the word “precedence” throughout WSAW-TV 7’s coverage of this story a mistake in usage? Should the word instead be “precedent”?

    Determining whether the correct word should be “precedence” or “precedent” is complicated by the possibility that WSAW’s intended meaning could be that the/a homeowners association’s rights may take priority over other considerations, as in, “Case involving placement of Forest County sexually violent person likely to set precedence for homeowners associations.” If that is the intended meaning, then using “precedence” could be the correct term.

    However, subsequent use of “precedence” in the coverage strongly suggests that the intended meaning – the intended word – is “precedent,” an example or a standard that can be used for determining judgement regarding similar future instances. A banner on one of the WSAW videos says, “CASE LIKELY TO SET PRECEDENCE.” Within one of the written stories, we find, “Ultimately the precedence set is the definition of ‘commercialization’ when it comes to rental properties.” The link to one of the stories reads: “http://www.wsaw.com/content/news/Case-involving-placement-of-Forest-County-sexually-violent-person-likely-to-set-precedence-for-rental-properties-475017453.html.” These three examples of WSAW’s use of “precedence” seem to indicate that the case in question could set a legal “precedent,” not that one thing could be determined to take precedence/priority over other things. If I am correct, then WSAW has erred in its use of “precedence” because its intended meaning is “precedent.”

    It is regrettable that WSAW did not manage to identify and correct this error, especially since the idea of “precedent” is a key concept in the Bear Lake Shores’ lawsuit stories.

    Speaking of fallibility in usage of language, in my previous comment posted on this blog a week ago (https://independentamericancommunities.com/2018/02/25/new-suburban-concepts/comment-page-1/#comment-4460), I inadvertently used the word “commercial” in, “I received in the mail an extensive survey – seemingly on behalf of a commercial real estate interest – about what I had been looking for when I recently bought my house.” By “commercial,” I meant “engaged in for-profit commerce” – not commercial as in “non-residential.” The survey seemingly was on behalf of a for-profit residential real estate interest, such as a home developer. Since today’s post (“Wisconsin lawsuit involving for-profit rental of property could disrupt HOA market”) on Deborah Goonan’s magnificent Independent American Communities domain relies on the fundamental difference between “commercial” and “residential,” this is a good opportunity for me to explain my (admittedly unimportant) use of the wrong terminology. Thanks.

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