I was recently moderating a panel on short-term rentals (STRs) at the Indiana Apartment Association’s Multifamily Industry Summit, and a question came from the audience about the implications of Government Sponsored Enterprise (GSE) policies regarding STRs on the ability of owners to have as liquid a funding and sale market as possible.
This is a question that occasionally comes up in other STR panels and discussions though surprisingly not as often as one might expect. When I first heard this question in 2017, I did some research in early 2018 on this subject; and somewhat coincidentally, I had just updated this research following conversations leading up to NMHC’s OpTech.
First, let me say that our work and experience is completely on the operating side. Neither my team nor I have extensive experience in the financing side of the business. So everything here is a) the result of research into an area a bit out of our sweet spot and b) meant to start a conversation should anyone out there have information more contemporary and/or more accurate.
Back in early 2018, I found two interesting primary source materials:
- Fannie Mae: Multifamily Mortgage Business Lender Letter 17-24 from Rob Levin (VP for Multifamily Credit, Underwriting) issued on December 11, 2017. It very clearly defines STRs as including Master Leases for the purpose of the third party then sub-leasing along with any direct STR leasing. It also defines STRs as “an individual dwelling unit for which the intended occupancy of the unit is for a period of fewer than 30 days, irrespective of the stated lease term” (i.e. it excludes traditional corporate “short term” leases that are typically 2-4 months). It then gives very clear guidance that such leases must be counted as “Commercial Leases” and are thus “subject to the 35% commercial limitations for the total rentable area and Effective Gross Income (“EGI”) described in Form 4660.”
- Freddie Mac: The only documentation I found was Bulletin 2017-12, Rental Income Revisions issues August 9, 2017. Unfortunately, this specifically applies only to investment properties up to 4 units so it wasn’t much use to me. I found one experienced multi-family executive that described Freddie Mac as a “hard no” on STRs. I wasn’t able to find any primary source material, but that was good enough for me at the time and I stopped searching further.
Fast forward to a month ago, and with the kind assistance of Kim Duty at NMHC, I’ve learned:
- Fannie Mae: Fannie Mae is sticking with the definition discussed above, but this contact says they are intending to limit STRs to no more than 5% of units at a property. That represents a radically more constrained view of STRs than the late 2017 guidance.
- Freddie Mac: Announced in late October that they will consider allowing home sharing in up to 10% of the units contingent on a number of things (e.g. the home-sharing platform is a reliable and reputable operator, subject to market support and subject to sub-market vacancy). That last one is interesting as Freddie Mac won’t allow underwriting whereby STRs that translates to an underwritten vacancy below the respective submarket average.
It should be emphasized that neither of the updates has been codified in policy. These are all from discussions of what the GSEs are saying they intend to do. Through a Google search, I have not found any written primary source material on the above, but candidly I only spent 10 minutes trying. Also, of course, none of the above directly affects any loans through private capital.
If you have any information that provides primary source documentation or otherwise supports, clarifies or corrects any of the above, please share. This is obviously one of those cases where the energy of entrepreneurial markets has gotten more than a bit ahead of the regulatory process, so I expect it to be a bit volatile over the coming months and maybe even years.