Consider Hurdles to Leasing Unused Common Areas to Businesses

April 26, 2018
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If your association is looking for new and creative ways to generate more revenue, can it lease underappreciated common area space to a commercial tenant as a way to add convenience to your members and income for your association? With the rise of mixed-use spaces, the convenience—and financial benefit—of having a popular bakery or a national bank locked in for a 10-year, income-generating lease may seem like an attractive option for a common area that’s going largely unused in your community. But proceed carefully: A steady stream of income from potentially high rents comes with a lot of advance planning and possible barriers that include issues with legality, zoning, governing document restrictions, and accommodations for persons with disabilities.

A major consideration is the association’s governing documents and covenants. Many provide that the common areas are to be maintained for the use and benefit of the homeowners. Changing this purpose, even if the space isn’t actually appreciated and used by the members, might not be as simple as it would appear, even if the proposed project garners favor from the membership and could be an alternative revenue stream for the association.

The articles of incorporation may limit what the community can do with its common area, and the CC&Rs could state that the board must use the common area for the benefit of all of the homeowners or third parties subject to homeowners’ approval—typically by a minimum margin of 662/3percent. Unless your governing documents say otherwise, which many do, provisions in the articles of incorporation or in the director’s duties may state that the common areas must be used for the benefit of the association and its members. In California, for example, changing the use of property in such a way as leasing it to a business could result in the taking of a benefit for some of the homeowners but not for all—a big no-no. 

However, properties designated as mixed-use space leave common areas intact. So if your community falls into that category, you might be in luck. Lots of community associations are being built with mixed-use space that’s not infringing on the common areas of the HOA.

The key here is to consult with the association’s attorneys to clarify what laws apply to your situation and to review governing documents to make sure you’re able to do what you’re proposing, even if it is allowed by law.

For four major issues you should be aware of, see “Use Caution When Considering Leasing Unused Common Space,” available to subscribers here.