Build-to-Rent (“BTR”) is a subsector of Single Family Rentals (“SFR”).  As a subsector of SFR, BTR occupies a unique space within the U.S. residential rental market.  The broader category of SFR includes scattered homes for rent, while BTR communities are entire neighborhoods of new homes being rented instead of sold to homebuyers.

Traditional homebuilders are making their way into the SFR market through their BTR communities.  Rather than building homes and selling them as soon as they are completed, many homebuilders have adopted a different strategy.  They are holding the homes after completion and renting them.  For homebuilders, BTR presents an alternative revenue stream that may provide some protection from the cyclical fluctuations of the traditional homebuilding market.  This diversification has insulated some homebuilders from slowed sales in the last two years due to higher mortgage rates.  This is good news for shareholders in the publicly traded homebuilders, and also for the tenants in the brand new homes who otherwise could not qualify for or afford to buy a new home.

Additionally, some institutional investors are buying entire communities in one transaction.  Both scenarios result in the institutional investor having control of the applicable HOA.  Some investors operate their SFR communities like multi-family rental projects whereby the homes are not built on separately platted lots but are constructed on one large lot that can only be conveyed as one property.  The norm, however, is that rental homes are individually transferrable lots within community associations.  When one entity owns all of the lots within a community association, the need to operate the community association in accordance with its governing documents may be questioned.  It is my position that there are benefits to institutional owners in keeping community associations operative and in retaining the expertise of common interest development (aka HOA) experts.

In some neighborhoods, the development and permitting process included a requirement by the municipality that a community association must be formed to maintain shared facilities such as private streets or drainage facilities.  In those cases, local law requires that the community association remain active and conduct the required maintenance.

Some communities have common area amenities shared by the residents which are often owned by the community association.  If an institutional owner who owns all of the homes does not keep the association’s corporate status active and compliant, there may be title issues with the ownership of the shared amenities.  Without an active association, it may not be possible to insure the common amenities.

Additionally, for the institutional owner there is liability protection in the association owning amenities like a swimming pool, tennis courts, or a fitness center.  In the event of an injury on those amenities, the association would be the liable property owner, not the institutional owner.  This serves to limit liability to the assets of the association, while protecting those of the institutional owner.

The institutional owner may find operating an association burdensome because state laws vary widely and there are many corporate governance laws that apply to community associations differently than other types of business entities.  Therefore, institutional investors should consider retaining HOA managers to exclusively handle HOA-related issues within their communities.  Such managers have different knowledge and skill sets than the leasing or property managers that might otherwise be engaged by an institutional owner in the operation of a rental community.

Additionally, attorneys who specialize in HOA law and have regional expertise can provide benefit to institutional owners.  When an institutional owner owns an entire community, HOA counsel can ensure compliance with niche laws.  If you have any questions or would like more information on this subject, please feel free to get in touch with the author of this article.