By Deborah Goonan, Independent American Communities
Today’s post is a real life example of how opportunistic developers use association governance to serve their own profit motives, without any regard to the expectations of homeowners.
Some of my readers write to me saying that developers cannot wait to hand over control of the association to owners. That is true sometimes, but it depends on the intent of the developer, and the nature of the real estate investment.
Yes, often we see a developer quickly build and sell homes, eager to move onto the next project.
However, some common interest communities promise guaranteed revenue streams for developers. Those opportunities are particularly tempting for real estate brokers or owners of property management firms. Often times, if you investigate a bit, you’ll find that the developer, the developer’s family, or business affiliates hold onto vacant lots or unsold homes, retaining substantial voting interests in the association.
Look beneath the surface, and you may even find that your homeowners,’ condominium, or cooperative association is contracting for landscape services with the developer’s brother-in-law; purchasing insurance policies from a family member who happens to be an insurance broker; or that family and business colleagues are collecting substantial rental income, while ensuring that their commercial interests dominate the board of directors.
But if you purchased your home with the intent of occupying it full-time, or seasonally after retirement, this arrangement probably won’t meet your expectations.
Owner-occupants sue developer
Take this typical example from Delaware.
A group of concnerned homeowners of Estates of Fairway Village is suing Fairway Cap, because the developer has openly chosen to lease most of the townhomes under construction, rather than sell them.
Homeowners who intend to actually reside on their property often assume that most, if not all, future buyers intend to occupy their residence.
But, the reality is, quite a few townhomes and condos are purchased purely as investments, to be owned by private landlords and leased either on a short-term or long-term basis. Even detached homes or “villa” properties sometimes fall into this category.
The more “mature” the development, or the closer it is located to a vacation destination, university, or business district, the more attractive the real estate is to investors.
The problem is, when these communities are sold to early buyers, owner-occupants are the primary target market. Why? Because lenders are much more willing to finance HOAs with higher owner-occupancy rates. And it’s easier to sell the American Dream when the homes and community are shiny and new.
A decade or so later, if, or, more likely, when the association shifts to a majority of investor-owned units, it becomes nearly impossible to obtain a mortgage. That means your potential buyer, when you decide to resell, will most likely be an investor paying cash for the property.
To make matters worse, in this particular case, the developer has simply decided he and his partner can make more money as landlords of a de facto apartment home community.
Some homeowners are crying foul.
After all, if Fairway Cap wanted to run an apartment home enterprise, the housing project should have been zoned by city council as an apartment complex, and the landlords should be paying 100% of the costs to maintain and service the development.
As it stands now, members of the HOA are expected to pay mandatory assessments to maintain common property and provide community services for the homes they own, effectively subsidizing the operating costs of the developer’s rental business.
Oh, and, by the way, holding onto to dozens of units ensures perpetual control of the HOA board by Fairway Cap.
The Chancery Court has temporarily suspended the developer’s right to lease the townhomes it currently owns.
But the eventual outcome of the case remains uncertain at this point.
Chancery judge orders Fairway Cap to hold off on leasing properties (DE)
Date Published: March 23, 2018
By Maria Counts
Court of Chancery Vice Chancellor Joseph Slights III this week provided temporary injunctive relief to the Concerned Citizens of the Estates of Fairway Village and 36 Builders Inc./Insight Homes, preventing Fairway Cap, the developer of The Estates of Fairway Village, from leasing any of the townhomes it currently owns in the community.
The Concerned Citizens of the Estates of Fairway Village and 36 Builders had filed two separate complaints in the Court of Chancery earlier this year, after the developer of the property made it known that they would no longer be looking to sell the 120 townhomes they were building, but rather would lease them.
In their complaint, Concerned Citizens of the Estates of Fairway Village claimed Fairway Cap breached its contract, breached its fiduciary duty and was acting in a fraudulent manner.
In the 36 Builders complaint, they claimed Fairway Cap had breached the covenant of good faith and fair dealing, tortious interference with actual and prospective contracts, and breached the condo documents.
”This went from a traditional development to an apartment complex,” said Concerned Citizens’ attorney Richard Berl.
Berl also argued that with the developer maintaining ownership of the leased properties, it would retain majority rule over the homeowners’ association — something the other property owners of Fairway Village had not anticipated.
The attorneys for Fairway Cap argued that there is nothing preventing any individual from purchasing four properties within the development and thus having majority vote over other property owners — why then should Fairway Cap be prevented from doing so?
They said the same can be true of renting — property owners may purchase and rent as many units as they want, so what is then preventing Fairway Cap from doing the same?
Fairway Cap’s attorneys also noted that Fairway Cap turned to renting properties after a poor selling stint — 29 townhomes sold in 10 years.
Here’s the background on Fairway Village, with relevant excerpts highlighted. The source link for the entire article included below.
Developer is apparently violating covenants of the community, Ocean View ordinances, and Delaware state law.
Loius Capano and Bill Krapf, of Fairway Cap, openly admit their intention to lease dozens of remaining townhomes to be constructed in Fairway Village.
Developers are unapologetic about their intent to maintain perpetual control of the HOA.
The Town of Ocean View and state of Delaware do not regulate HOAs. As long as the developer remains current on property taxes, the town will continue to issue construction permits.
The homeowners’ only option is to sue the developer in civil court.
Fairway Village residents voice concerns regarding developer, rentals
Date Published: Sept. 15, 2017
By Maria Counts
Ocean View Town Hall on Tuesday evening was packed with Fairway Village residents who had attended the town council meeting that night to voice their concerns about the community’s developer.
With standing-room-only spilling into the building’s foyer, more than 40 residents attended wearing “Fairway Village Homeowner” stickers and protesting the legality of the development company renting out properties that it owns within the community.
Fairway Village property owner Lisa Leary, a licensed attorney in Pennsylvania, said the entity Fairway Cap LLC has maintained ownership of five townhomes in Fairway Village. Leary opined that the developer maintaining ownership within the community created a for-profit commercial enterprise.
The townhouses were listed as rental apartments online, advertised as being located in the “Reserves at Fairway Village.”
“We homeowners learned of this for-profit commercial rental enterprise [FPCRE] by accident — not by notice from the developer or the Town — but rather via advertised on social media and the web for a rental apartment complex initially called The Reserves at Fairway Village, featuring the interior of 108 Augusta as a sample rental apartment.
“This FPCRE violates the FV Community Constitution and founding declarations. It also violates the laws of the Town of Ocean View and the State of Delaware, including the Delaware Uniform Common Interest Ownership Act,” she said.
Leary said the homeowners have legal standing to question the developer’s action.
“While our community documents allow individual owners to rent our homes and units, the developer cannot corrupt the community documents to unilaterally benefit itself at the expense of the entire community. By commencing such a rental scheme, the developer has engaged in self-dealing solely for profit and has thus breached the fiduciary duty it owes by law to all owners at Fairway Village.”
Saying she believed that the developer’s actions violate Delaware law and the development’s documents, Leary argued that the situation would “effectively allow the developer to control this community in perpetuity.”
Town meets with developer over concerns
Ocean View Mayor Walter Curran told the crowd that, upon being apprised of the issue, the Town took immediate action to investigate their concerns.
“A few weeks ago the town manager [Dianne Vogel] and I began receiving complaints from residents of the Fairway Village community regarding alleged name changes to the community and renting of townhomes by the developer.
“We investigated and discovered the developer, on at least two websites that we know of, advertised the renting of ‘apartments’ in the Reserve of Fairway Village — an entity that doesn’t legally exist within this town,” Curran noted.
“Since apartments are not allowed under the approved building plan, and a name change requires the developer to come before the Town’s planning and zoning board, and ultimately the town council, to receive approval, I instructed the town administrative official [Charles McMullen] to reach out to the developer and inquire as to what exactly is going on — what is their plans.
“At that same time,” Curran said, McMullen “advised them they were not allowed to create apartments or change the name without the approval of the Town.”
On Monday morning, Curran, Vogel and Town Solicitor Dennis Schrader had a conversation regarding the issues with representatives of Fairway Cap, Bill Krapf and Louis Capano.
“We had a full and frank discussion of these matters,” said Curran. “Before I relate the details of that meeting, it is important that everyone here understand that, while the Town can be sympathetic to your issues, we are limited in what our responses can be. We are a Town, a structured entity, and we have rules to go by.”
Curran reported that the two men said it is their plan to maintain permanent control of the HOA via majority votes.
“As the largest property owner, we have the most to lose if the property devalues,” they said, adding that there would be a process to appoint homeowners to the board.
Currently, the developer is in the process of constructing a number of townhomes within the community.
“Do you intend to ever sell those 70 townhomes or maintain them in perpetuity as rental units?” Curran had asked.
“They will retain in perpetuity as rental units. They weren’t selling in the market, and we want to build them quickly and get them into the rental market.’”
Town bows out of dispute, urges direct discussion
Curran said town officials strongly recommended the developer communicate directly with the homeowners, and do so quickly and face-to-face.
“They said they are sending out a letter to homeowners and will meet with you in a few weeks.”
Curran, speaking to the homeowners in attendance at Tuesday night’s meeting, said he, as the mayor of Ocean View, has the authority to demand developers live up to their commitments to the Town.
“I will strictly enforce that authority,” he said, noting that he temporarily suspended the issuance of permits and licenses because “we had proof of actions that were inconsistent with the approved plan. … Those issues essentially now have been addressed.”
He added that, as of that evening, the developers were delinquent with property taxes for those undeveloped lots.
“The minute that check arrives and clears, we have no choice but to allow them to recommence the process of issuing licenses and permits.”
Curran encouraged the property owners to contact attorneys, as they could have a case against the developer.
Curran said the documents are reviewed by the Town solicitor; however, they are reviewed for specific reasons, such as ensuring the long-term maintenance cost of streets would be addressed.
“You don’t regulate homeowners’ associations?”
“No, we do not,” said Curran.
Homeowner Liz Reynolds voiced her disapproval of the Town’s response to the residents’ concerns.
“This was supposed to be my forever home,” she said, noting that she had moved to the area from Pennsylvania two years ago. “I come from a county and a state that backs their people… You need to support us… What more needs to be done to one community before our representatives back us as individuals, except saying, ‘Hire a lawyer.’? I can get us a lawyer. I’m not worried about that. I’m worried about the fact that we’ve respectfully come to you and you’re turning your backs. That’s how I feel.”
“I’m not saying it’s fair at all. I’m saying it’s factual,” responded Curran. “Whatever violations, perceived or real, on the HOA side are now at this point solely HOA issues. You are all individual signers of private contracts with that company. That is a private-enterprise deal this Town cannot get into. We cannot… We are a town. We have rules. We have limits to what we can do.”
He added that, while Fairway Village may be a large community within the Town, it is one of many communities within the Town and it would not be right for the council to allow taxpayer money to pay for the legal battle of one community.
Homeowner Ed Leary voiced his upset with the situation, noting that his family relocated to Ocean View because they believed it would be a good place to live.
“Many of us here — our life’s work is in Ocean View and in Fairway Village. All of us in good faith came to Ocean View and decided it would be a good place to live. We met in good faith with builders… And we made a decision based on the fact that our life’s work would be in Fairway Village. This is what we thought.
“This builder knows good and well that the original intent of Fairway Village was single-family and homeowner-owned homes. If we would’ve known for one minute that this was going to be a rental community, this room wouldn’t be filled today. That’s not what we bought into.”
“We are enforcing everything we are legally empowered to enforce,” responded Curran. “We cannot go after someone because we don’t like the way they do business.”
Louis Capano is a name well-known in the community, for the role he played in his brother’s (Thomas J. Capano) murder conviction and trial in 1997.
The players, places in the Capano murder case
The News Journal Published 10:11 a.m. ET Nov. 17, 2017 | Updated 10:21 a.m. ET Nov. 17, 2017
Louis Capano is a commercial developer. He admitted to lying to investigators about why he emptied trash bins at his firm’s construction sites ahead of schedule. His brother, Thomas, had asked him to get rid of trash because it contained a sofa and rug allegedly stained with Fahey’s blood. In the fall of 1996, Louis confronted Gerard, who admitted he’d help Thomas dump a body in the ocean. In November 1997, he agreed to began [sic] cooperating with the authorities in November 1997 to avoid federal charges.