By Deborah Goonan, Independent American Communities
One of the biggest myths perpetuated by homeowners’ association (HOA) industry trade groups – among them Community Associations Institute (CAI) – is that homeowners freely and democratically elect their Board of Directors/Trustees from amongst their neighbors.
While a democratically-elected HOA Board might be the ultimate, ideal goal, reality plays out much differently for millions of homeowners across the U.S.
One glaring factor that all of the industry’s marketing and PR hype glosses over is that, during construction phases of any planned community, the Developer appoints the HOA board and controls virtually all aspects of the community – for better or for worse.
(Some readers may be under the erroneous impression that the HOA does not actually exist until the developer exits. But in reality, the developer creates the HOA before ground is broken for the first home sale. The HOA must exist before collection of assessments can take place.)
The larger and more complex the subdivision plan, the longer the period of developer-control. We’re talking about a time frame of at least 7-10 years, if not decades.
Many master planned communities, resort-style communities, retirement communities, and active adult communities are built out in phases. While individual phases of the community are turned over to the control of homeowners as they are completed, in almost all cases the entire large community is governed by one umbrella “Master” Homeowners/Property Owners’ Association.
And it is this umbrella organization that ultimately controls the financial health, maintenance plan, architectural control standards, and governance of all residents within the larger boundaries of the entire subdivision. The Master Association typically remains under full developer control for many years, and the developer often retains disproportionate voting power as long as his corporation continues to own unsold properties in phases of the master planned community.
But developers can also hold onto control in relatively small communities (less than 50 homes), by retaining ownership of a few lots or homes, and then managing the HOA through an affiliated company. Another developer might rent properties she owns to tenants as an ongoing source of income, and as a way to hold a controlling interest in the corporate association.
Some HOA governing documents allow a developer to retain at least one or two seats on the board as long as she owns even one lot.
While a developer is in full control of a homeowners’ association, the governing documents – written specifically for self-protection by attorneys for the developer – grant weighted voting rights to that developer. In other words, while each homeowner gets one vote per home or lot owned, the developer gets at least 3 votes per unsold lot – and I’ve seen documents allowing 9 votes per lot! That makes it very easy for a developer to amend the governing documents and annex additional land parcels to the Association, without any input from homeowners.
Also during developer control, homeowners generally have no meaningful input to the establishment of an annual operating budget or a reserve fund, and the developer can opt out of paying assessments on unsold lots and spec homes, opting to cover the budget deficit instead.
But since the Developer essentially creates the budget, operating expenditures may be set artificially low in order to minimize his share of contribution to the Association, while maximizing profits from home sales. Additionally, in order to sell homes for higher prices, it’s very common for assessments on new homes to remain lower than actually necessary, to give buyers the impression that they are getting a good value.
But…that often comes back to bite the homeowners after the first decade or so.
And if homeowners happen to be stuck with a developer that fails to adequately maintain the common areas, or that engages in self-enrichment at the expense of the Association, things can get very ugly and quite costly.
Below are just three examples of what can go wrong when a developer holds onto control and fails to meet homeowner expectations.
In this example, a 36-lot HOA has been managed by the developer’s company for at least 6 years since all but two of the lots were conveyed to homeowners. The Developer/Manager has been billing homeowners $450 per lot to maintain nothing more than an entry gate and a small median strip. It has taken nearly 6 years of expensive court battles to finally prevail in a jury trial.
Residents prevail in Thistle Hill case (TX)
By Caitlyn Jones Staff Writer firstname.lastname@example.org
Published: 19 August 2016
Residents in a south Denton neighborhood let out sighs of relief and even shed a few tears when an 11-member jury ruled in their favor Friday.
After a two-week trial and eight hours of deliberation, the jury determined in a 10-1 decision the management system in Thistle Hill Estates, run by local developer Deborah Johnson-Stafford, fell under the definition of a property owner’s association.
As such, it is subject to transparency statutes set forth by state law in 2012 that aimed to prevent abuses by those groups.
The jury also found, however, homeowners were not excused from paying any assessments Johnson-Stafford previously levied. Future hearings may come before a final judgment is submitted, but residents were overjoyed with the verdict.
Previous news release (2014)
Judge sides with homeowners (TX)
Here’s a subdivision that goes back to 1973. The current developer has stacked the board with his affiliates, and has allegedly changed the governing documents to allocate an additional 800 voting interests to himself, ensuring perpetual control of the HOA board. Homeowners are suing both the developer and the HOA board, with a long list of complaints and substantial claims for financial damages.
Property owners sue governing board
Dispute between owners in Pine Mountain ongoing (NC)
BY SHARON MCBRAYER,Staff Writer. Sep 5, 2016
The situation in the Pine Mountain development has become a stickier situation, pitting neighbor against neighbor in a new lawsuit recently filed.
More than 25 property owners in the development, as well as Pine Mountain Property Owners Association Inc., signed onto the lawsuit against developer Ray Hollowell, his associated businesses and at least eight other property owners in the development. Hollowell and the other defendants of the lawsuit also are members of the association’s board of directors. Hollowell, by far, owns the largest number of properties in the development.
The plaintiffs are suing Hollowell and the other owners mentioned for breaches of fiduciary duty, unfair and deceptive trade practices, nonpayment of assessments, unjust enrichment and the removal of the board of directors and officers of the association, according to the lawsuit, which was filed in Burke County in late July. Each plaintiff is a member of the Pine Mountain Property Owners Association, the lawsuit says.
In this subdivision, homeowners in Phase 1 are dealing with poor maintenance, construction damages to their roads and retention ponds, and after hours construction noise while the developer continues to build Phases 2 and 3. They are asking their local government council for assistance, particularly with the torn up roads, which are to be turned over to the municipality in the future.
Frustrated Homeowners in Legacy Lakes Seek Help (NC)
Laura Douglass, August 23, 2016
Bruce Parker presented a petition of 120 signatures from residents who oppose any plans by developers to build a sales trailer at the site. McKee Homes, one of four builders associated with the planned community, had submitted a proposal for a trailer for Board review, but that item was pulled from the agenda prior to the meeting.
The 400-acre private community consists of 600 home sites, a golf course, clubhouse and tennis facility. Building is currently restricted to Phase 1; however, approved plans include two additional phases of development.
“We want to go on record that we are opposed to a sales trailer in our community, now and in the future,” Parker said. “We are not interested in a trailer period.”
“This is one of many issues we are having in our community. It has been our desire to work in a constructive and cooperative manner with our management team but we have not been able to do it,” he said.
The petition presented to the Town Board included photographs of several areas of concern by residents. Specifically, Parker cited erosion and silt in lake water because of land clearing and construction, failure to provide adequate screening and landscape maintenance, community appearance complaints, trash issues, and violations of noise ordinances with development work being conducted on Sundays and holidays.