Attractive communal gathering spaces are one of the many perks often found in co-op and condo living – both in the city and in more suburban communities. Rooftop patios, resident libraries, screening rooms, clubhouses – these amenities are often major selling points in unit ownership and treasured resident use spaces.
They may also hold the potential for extra income for the community. The practice of renting out communal spaces for private use, both to residents and non-residents, can seem like a logical and lucrative way of making use of a building’s resources, but doing so successfully comes with some significant considerations and obstacles for boards and building managers. Industry professionals have a wide range of point of view on whether the potential gains outweigh the risks a board will take on in monetizing their spaces and amenities. Such risks include not only legal, liability and security considerations, but disruptions to day-to-day life in the building or association.
Communal Space and Private Use
Whether or not these common spaces should be used for private events is a matter of some debate. Some say that the use of common space for private events is one of the things that makes communal living work, while the obvious nature of a private event means that for the time, the majority of the residents would not have access to amenities or spaces that they’re entitled to by dint of owning units in the building or development. Some feel rentals go against the interests of the majority and create more problems than the potential income is worth.
“I’m a big proponent of community living for a wide range of reasons, both ethical and economical,” says Nicholas P. Bartzen, an attorney with Levenfeld Pearlstein, LLC, which has offices in Chicago and Northbrook, Illinois. “The use of the amenity spaces are a nice feature – almost a necessity – because people often sacrifice the kind of space that having a stand-alone residence affords when living in a co-op or condo. Communal spaces can and should be used by residents when needed to host larger groups than their individual units can accommodate.”
Residents using communal spaces for personal private events is not necessarily the same thing as using these events as a way to generate income. “My personal view is that co-ops were designed to be residential communities and have facilities that serve that end,” says David Brauner, counsel to the law firm Windels Marx Lane & Mittendorf LLP, which has locations in New York, New Jersey, and Connecticut. “It is very seductive to start trying to monetize areas of the building, but most conventional co-op buildings weren’t designed to generate income, and in many cases doing so would compromise the residential character of the building itself.”
Beyond logistics, “Rentals are a logistical nightmare, in a sense,” says Denise Becker, senior vice president of the New Jersey-based Homestead Management Services, Inc. “Someone needs to be there with a checklist on either end of the event, a pre- and post-party walk-through to determine if there is any damage to the space. And if you don’t have an on-site manager, who is going to do that?”
Specialized communities have additional considerations and questions to raise when the common amenity spaces are opened up. “If it is an adult community, at what point do you put restrictions in place for multi-generation use?” says Becker. “One of the ideas about living in a 55-plus community is that multi-generational activity will be limited. Potential restrictions around defining private use and what a resident could consider simply enjoying the communal space should take this into account.”
James Cervelli, a principal at Cervelli Real Estate & Property Management in North Bergen, New Jersey, says, “I feel that this is a great way to generate extra revenue for a typically unused space, as long as the potential use by the person renting the space is not going to be too disruptive to the other residents in the building.”
Whether or not they were in favor of the practice, all consulted professionals agree that preserving the interest of the whole community is key, something that gets even more precarious with non-resident rentals.
Resident Versus Non-Resident Events
According to most of the pros consulted for this article, the idea of opening up communal spaces to non-residents is viewed as pretty high risk and generally ill-advised.
“As legal counsel, it’s pretty clear,” says Bartzen, “renting to residents can be a good idea, but non-residents [is] a bad idea, for four main reasons. First, there are insurance and liability issues. Second, if you rent to an outside party, all of the sudden you have taxable income, which leads to a whole new area the accountant and building need to be responsible for. Third, if you open up a building to become an event space to the public, the building needs to immediately comply with accessibility terms of the Americans with Disabilities Act (ADA), whereas a residential building only needs to be compliant with the Fair Housing Act. This can lead to costly renovations if a building is not already ADA-compliant. The fourth reason – and this is not a legal matter, but more on the practical side of things – most unit owners simply don’t like the idea of communal space becoming public, and that dissatisfaction quickly becomes a board issue.”
Becker concurs with his colleagues that renting such spaces to non-residents is not generally a good idea – and Cervelli agrees as well. “I do not think it would be a good idea to rent out the common space to non-resident related events,” says Cervelli. “I believe that the potential person renting the space will be unlikely to take as much care of the space and consideration of the other residents if they do not live in the building themselves.”
Those in favor of opening the space up to public rentals recommend doing so only as a last resort, as in the case of some unforeseen financial need. “If they don’t need the money, then this is probably not for them,” says David Berenson, vice president and partner at Dermer Management, located in Manhattan. “However, if you have a community that is under financial strain and doesn’t have many options other than going to the shareholders or association members, this could be a worthwhile endeavor. But before I would recommend opening up common spaces for outsiders, I would explore all other options to produce outside income for the building.”
Berenson adds that transparency between unit owners and the board decision is key to success in these cases – largely for the same reason Bartzen articulated above. “It should be taken to a vote at a special meeting to ensure that the other owners understand the financial concerns of the board,” and are on board with the use of their private space by non-residents.
Generating income from resident rentals can get tricky, and it would behoove a board or management company to be clear in terms of what is already articulated in their building bylaws, and included in their association fees.
“I’m in agreement with it costing a small amount of money for residents [to rent a common space in their building or HOA],” says Becker, “essentially a fee that would keep it at cost and a deposit for liability, but not as a means of gaining a profit for the association. In theory, upkeep for the clubhouse is included in association dues, so any income or fee gained from resident private use rentals should only be going towards replacement costs and damage deposits.”
Beyond the liability and legal concerns, when considering adopting this practice, boards and managers should take precautions to effectively maintain the building culture and not create an environment where unit owners feel that their own access to amenities is being compromised beyond the community benefit. One way of doing that is by letting the residents themselves set the hours for space availability. “The boards need to determine when the spaces have the least amount of usage,” says Berenson, “Owners purchased their apartments with the understanding that these spaces are available to them. Given that, a board wants to make sure that they are not selling the space during prime time.”
Tips for Successful Rentals
Beyond private events, successful blueprints for the kind of licensing that would be needed to cover liability, indemnity, and security can be found in contracts made in other areas of building usage. “Any liability concerns you have for a contractor or moving company also applies to rentals,” says Berenson, “perhaps even more so. Anytime someone walks into the building to do work, regardless of how they ended up there, is a potential lawsuit. Whether it was their own doing or a problem in the building, you have to have the right documents in place and ensure that the vendor has the right insurance so that when a problem does happen, it doesn’t fall back on the building.”
Bartzen offers another area where rental of the space has successfully turned a profit: Hollywood. “With the increase in filming activities in Illinois, a lot more television and film crews are requesting roof and lobby access and the like, especially in downtown Chicago,” he says. “When this happens, they pay a fee, and we need to draw up a licensing agreement that is pretty tightly drafted and covers insurance, indemnification, and basic security – which is a concern anytime a building opens up to public traffic. This still raises the issue of taxable income, but because you are licensing private space to a specific group of people and not making a public event, it does not raise the issue of ADA compliance.
“There’s no bright line rule in so far as unit owner private events that might bleed into public events,” Bartzen continues. “It needs to be reviewed on an event by event basis.” Responsible managers and boards should go with their gut impulse, he adds. “If a manager’s hackles go up, they should consult with the association’s legal counsel. It’s the responsibility of the building manager or board to make sure all of the legal bases are covered.”
It is the responsibility of the building managers and boards to make sure the building community is serving members and the overall health and longevity of the building itself. “I just don’t think co-ops should be engaging in commercial ventures whose only benefit is to the corporation,” says Brauner. Pretty hard to argue with that, and a good board and management team will know better than anyone if private rentals will benefit the community they are serving or just be more trouble than they are worth.
K Valada is a freelance writer and a frequent contributor to The Cooperator.