HUD Issues Best Practice Guidance for Guest Suites

HUD recently released HUD Notice 2018-10, which provides best practice guidance for determining under what circumstances guest suites are permissible in multifamily housing. This best practice guidance is effective immediately for all new and existing FHA-insured and HUD-held multifamily rental and cooperative projects with a HUD Regulatory Agreement containing the Section 513 prohibition and will be considered for incorporation into the next versions of the MAP Guide and HUD Handbook 4350.1

The National Housing Act prohibits a multifamily borrower from renting or permitting the rental of a multifamily housing project for “transient or hotel purposes.” To comply with the law, leases, subleases, and occupancy agreements for less than 30 days are prohibited. In addition, neither a borrower nor its residents may rent a room or unit with customary hotel services such as room service for food and beverages, housekeeping service, furnishing and laundering of linens, and bellhop service, regardless of the length of stay.

In certain circumstances multifamily borrowers may set aside a unit or otherwise create a limited number of guest suites as an amenity for residents. The guest suites are typically available for reservation by residents as overnight accommodations for their relatives and guests. Depending on the site, a guest suite may be a minimally furnished unit (bed including pillows and bed linens, a chair or loveseat, and bathroom furnished with towels) or may be a completely furnished unit with living room furniture and a full kitchen.

HUD recognizes that having guest suites as an amenity may contribute to the marketability of certain multifamily projects. However, guest suites are permissible only to the extent their use is consistent with the National Housing Act’s prohibition against use of FHA-insured multifamily projects for transient or hotel purposes. The following are best practices to help ensure that amenity guest suites don’t violate the law. In assessing whether guest suites comply with the law, HUD will take the following factors into consideration:

• Rental charges are not imposed, and except for the charge described in the next item, the site doesn’t derive income from any guest suite.
• To prepare the guest suite for the next guest’s stay, a one-time cleaning and laundering fee may be charged to the resident that reserves the guest suite, at cost, for services provided after the conclusion of the guest’s stay. Guests are not responsible for or directly charged any fees for use of the guest suite.
• The site doesn’t provide cleaning, linens, or other customary hotel services to the guest during his stay in the guest suite.
• Use of any guest suite is limited to residents’ friends and family. Guest suites are not available to the public.
• Only site residents are permitted to reserve the guest suite; the site doesn’t independently rent the guest suite.
• Residents are limited to two reservations within a one-year period, and up to a maximum of seven reservation days per resident.
• The number of guest suites are no more than 2 percent of the total number of units at the site. This will ensure that the operation of the site isn’t skewed in such a way as to affect its statutorily required residential character.