By Deborah Goonan, Independent American Communities
South Carolina legislators may once again consider regulation of developers.
Senate Bill S.106 proposes phased-in transition from developer to homeowner control for Association Governed common interest communities. If enacted, the law would require developers (also knows as declarants) to allow homeowners to begin electing a share of board members, as soon as one-third of units or parcels have been sold to non-developer owners. The bill would phase in additional owner-elected board members as more properties are sold.
But, if you read the details of the bill, the developer maintains majority control of the board until 90% of units or parcels have been sold.
Pre-Filed South Carolina Legislation Signals Push to Regulate Developers
John P. Carroll, Nexsen Pruet (Lexology)
USA January 11 2017
2017 Senate Bill S.106, sponsored by Senator Chauncey K. Gregory (Lancaster County) seeks to amend the Code of Laws of South Carolina by requiring a declarant of a common interest community to transfer control of the community’s homeowner association’s executive board to property owners such that:
- After selling one-third of the total properties within the community, at least one quarter of the voting interest of the association’s executive board must be elected by property owners
- After selling half of the total properties within the community, at least one-third of the voting interest of the association’s executive board must be elected by property owners
- After selling two-thirds of the total properties within the community, at least forty-five percent of the voting interest the association’s executive board must be elected by property owners
- After selling ninety percent of the properties within the community, at least fifty-one percent of the voting interest of the association’s executive board must be controlled by homeowner elected members
While this proposed transition plan would be an improvement over the current situation – homeowners typically have no elected representatives on the executive board, and the developer maintains control indefinitely – the status quo would be essentially maintained.
In practice, without a defined deadline date for the developer to fully relinquish control of the association, a developer can hold onto a sufficient number of parcels to maintain majority control of the association indefinitely.
Why is this a problem for consumers?
Of course, home builder lobbies oppose any legislation that dilutes their control. Developers say that maintaining control over a common interest community protects their investment and prevents unwanted interference from homeowners.
On the other hand, homeowners feel they should have the right to run their own community as they see fit. But the fundamental flaw of developer-created common interest communities is that the governance model is designed with the primary goal of maximizing profit potential for the Declarant and affiliated investors.
From Day One, an HOA is all about selling homes that fit a trendy new-home “look” and “lifestyle.” Despite the marketing hype, it is definitely not about creating a neighborhood with a true sense of community. If it were, the governing documents would be written with future residents in mind.
Slick marketing brochures and videos won’t reveal the truth about planned communities. At best, while under developer control, property owners can expect nothing more than a benevolent monarchy.
Typically, with no defined transition of a common interest association to its members, developers can continue to make unilateral decisions with regard to ongoing maintenance and funding of long-term reserves. A developer wants to maintain a healthy profit margin, bit is also generally required to pay a share of assessments for unsold properties. As a result, assessments tend to be set artificially low during developer control. Likewise, reserve fund contributions tend to be low or non-existent. Therefore, the longer it takes for transition of control to property owners / shareholders, the more likely the association will start out at a disadvantage, with insufficient reserves.
That’s why assessments often increase signficantly following transition of association control to property owners.
Another consideration is that, while the developer’s affiliates serve on the board, they tend to prevent valid warranty and legal claims involving construction defects in the common areas. The reason is obvious.
Therefore, the need for limiting developer control over Association Governed common interest communities is critical to protecting the rights and financial interests of owners and residents. S.106 is a move in the right direction, but, clearly, does not go far enough to shift control to where it rightly belongs – with homeowners and residents.
Other bills filed in South Carolina include:
Senate Bill S.122, proposing magistrate court for minor disputes over HOA restrictions, and
House Bill H.3065, a proposal to create a Homeowner Association Ombudsman and a registry of homeowners associations.