Homeowner's Associations

Most Homeowners' Associations
Are Non-profit Corporations

A homeowners' association (abbrev. HOA) is a legal entity created by a real estate developer for the purpose of developing, managing and selling a development of homes. It allows the developer to exit financial and legal responsibility of the community, typically by transferring ownership of the association to the homeowners after selling off a predetermined number of lots. It allows the municipality to increase its tax base, but reduce the amount of services it would ordinarily have to provide to non-homeowners association developments. This article covers this type of HOA.

Most homeowners' associations are non-profit corporations, and are subject to state statutes that govern non-profit corporations and homeowners' associations. State oversight of homeowners associations is inconsistent from state to state. Some states have a strong body of homeowner association law such as Florida and California, and some states have virtually no homeowner association law such as Massachusetts.

The fastest growing form of housing in the United States today is common-interest developments (CIDs), a category that includes planned-unit developments of single-family homes, condominiums, and cooperative apartments. Since 1964, homeowners' associations have become increasingly common in the USA. The Community Associations Institute trade association estimated that HOAs governed 23 million American homes and 57 million residents in 2006.

An alternative to CIDs is the multiple-tenant income property, or MTIP, known in the United Kingdom as housing estates. CIDs and MTIPs have fundamentally different forms of governance. In a CID, dues are paid to a nonprofit association, whose members vote on how to spend the money. In an MTIP, ground rents are paid to a landowner, who decides how to spend it. In both cases, certain guidelines are set out by the covenant or the lease contract; but in the latter scenario, the landowner has a stronger incentive to maximum the value of all the governed property in the long term (because he is the residual claimant of it all) and to keep the residents happy, since his income is dependent on their continued patronage. These factors are cited as arguments in favor of MTIPs.

History

The Federal Housing Administration in 1963 authorized federal home mortgage insurance exclusively for condominiums or for homes in subdivisions where there was a qualifying homeowners' association. The rationale was that homes in tracts where there was a homeowners association would be more likely to maintain their value. The effect, however, was to divert investment from multifamily housing and home construction or renovation in the inner cities, speeding a middle-class exodus to the suburbs and into common-interest housing. The federal highways program further facilitated the process. In the 1970s, a growing scarcity of land for suburban development resulted in escalating land costs, prompting developers to increase the density of homes on the land. In order to do this while still retaining a suburban look, they clustered homes around green open areas managed by associations. These associations provided services that formerly had been provided by municipal agencies funded by property taxes; yet, the residents were still required to pay those taxes. Accordingly, local governments began promoting subdivision development as a means of improving their cash flow.

In 1973, Community Associations Institute (CAI) was formed to deal with problems with association management. It is an educational organization and later also became a business trade group which now lobbies state legislatures on behalf of HOAs and their causes. The CAI membership base consists of volunteer members of HOAs (Board members and committee members), as well as common service providers for HOAs; lawyers, property managers, and other association vendors.

Another primary driver in the proliferation of single family homeowners' associations was the U.S. Clean Water Act of 1977, which required all new real estate developments to detain stormwater so that flow to adjoining properties was no greater than the pre-development runoff. This law required nearly all residential developments to construct detention or retention areas to hold excess stormwater until it could be released at the pre-development flow level. Since these detention areas serve multiple residences they are almost always designated as common area, which results in the need for a homeowners' association. Although these areas can be placed on an individual homeowner's lot eliminating the need for an association; nearly all U.S. municipalities now require these areas to be common area to insure an entity rather than an individual has maintenance responsibility. Real estate developers, therefore, have been forced to establish homeowners' associations to maintain these Federally mandated common areas. And if a homeowners' association already is required, the developers have utilized them to provide other amenities desired by homebuyers.

Authority

Powers

Association boards appoint corporate officers, and may create subcommittees, such as "architectural control committees," pool committees and neighborhood watch committees. Association boards are comprised of non-paid volunteers from the community elected at the annual meeting to represent the association.

Assessments

Benefits

These bylaws can be limited in various degrees by state laws, with some overriding federal judicial or statutory limits. In every association, board members and officers are chosen by election from its property owner-members, with the ability in some states for the membership to remove board members even during term.

Homeowners Associations generally have meetings for the entire Board and community. These meetings are generally monthly or sometimes quarterly, and focus on handling the Homeowners Association's business. In some states, the meeting's minutes must by law be made available for viewing 24 hours a day online, requiring the HOA to launch or purchase a website.

Many homeowners' associations include management of a community's recreational amenities, maintained for exclusive use of its members. This can allow an individual homeowner access to a maintained pool, clubhouse, gym, tennis court or walking trail that they may not be able to otherwise afford to maintain on their own.

Each member of a homeowners' association pays assessments that are used to cover the expenses of the community at large. Some examples are landscaping for the common areas, maintenance and upkeep of community amenities, insurance for commonly-owned structures and areas, mailing costs for newsletters and other correspondence, employment of a management company or on-site manager, security personnel and gate maintenance, and any other item delineated in the governing documents or agreed to by the Board of Directors.

Some residents are happy to have a governing body in place to enforce shared values and community standards. A survey of 709 people by Zogby International showed that for every owner-member who rated the overall experience of living in a community association as negative, seven saw it as positive.

But another survey, conducted by a home improvement trade organization vendor, of over 3,000 people found that two-thirds found their HOAs were "annoying" or worse. 25% of those who responded had never lived in an HOA, 19% had been in a "war" with their HOA, and the remaining 56% had never had a conflict or resolved it quickly / considered it no big deal. 54% percent of the respondents said they would rather live with a sloppy neighbor than deal with an HOA. 24% responded positively about an HOA, and 45% responded positively or felt the HOA was a minor nuisance.

Advocates often maintain that people choose to live in HOAs, but some note that "choice" is misleading. HOAs have been mandated by municipalities for decades either directly or indirectly. This is often accomplished by conditioning plat or other approval on the creation of amenities such as roads, open areas, greenbelts, retention basins, etc. and an obligation to maintain them. Perhaps a large percentage of the population has no choice but to live in an HOA: Finding a non-HOA neighborhood of homes built in the last several decades is virtually impossible. The choice for most buyers seeking a newer home is not HOA or non-HOA but which HOA.

The imposition of an HOA accomplishes several benefits for the municipality. First, these amenities may be burdened with property taxes which would not be the case if the amenities were owned by the municipality. Thus the mandated private amenities are cash generators for the municipalities. Second, the municipalities bear no obligation to maintain the amenities given that they are owned by the HOA. On the other hand, HOA communities are exempt from taxes on certain services provided by the municipality, if the HOA is providing them instead.

In The Voluntary City, Donald J. Boudreaux and Randall G. Holcombe argue in favor of homeowners associations, citing the advantages they have over traditional governments. These include the fact that the association's creator, e.g. a developer, has an incentive to set up a government structured in such a way as to maximize value and thus increasing the selling price of the property. If a certain decision would increase the value of certain parcels and decrease the value of others, he will choose the option with the highest net value. Moreover, as experience demonstrates which rules produce the highest values, entrepreneurs will seek to emulate successful rules and abandon unsuccessful ones; thus, the quality of contractual government should increase over time.

Criticisms

Onerous regulations

Undemocratic

At their own expense, a homeowner-member may sue a board of directors for perceived breach of duty. Association insurance provides not only for a board member's legal expense, but any judgment attained against them. Homeowners must pay out of pocket for any case they bring to court and risk being personally liable for any judgment and/or Association's legal fees as well as their own, the prevailing party being responsible for liability and legal expenses when judgment is rendered.

Corporation and homeowner association laws provide a limited role for HOA homeowners. Unless either statutory law or the corporation's governing documents reserve a particular issue or action for approval by the members, corporation laws provide that the activities and affairs of a corporation shall be conducted and all corporate powers shall be exercised by or under the direction of the board of directors.

Critics argue that homeowner associations establish a new community as a municipal corporation without ensuring that the residents governed will have a voice in the decision-making process. Voting in a homeowner association is based on property ownership, per the by-laws and covenants of each association. Only property owners are eligible to vote in elections, and voting by renters is prohibited, since the association has contractual agreements solely with owners. Additionally, only one vote per unit may be cast, rather than one vote per adult occupant, so that voting representation is equal to the proportion of ownership. In the case of partially built-out subdivisions in resort areas with a homeowners association, the majority of property owners may not live in the community. Homeowners have challenged political speech restrictions in associations that federal or state constitutional guarantees as rights, claiming that certain private associations are subject to the same constitutional restrictions as municipal governments.

However, in general, courts have held that private actors may restrict individuals' exercise of their rights on private property, especially considering that individuals are under no obligation to build or purchase private property in a planned unit development governed by a homeowners' association. Any individual considering such a purchase has not only the right but the obligation to read associated governing documents carefully. A recent decision in New Jersey held that private residential communities had the right to place reasonable limitations on political speech, and that in doing so, they were not acting as municipal governments. With few exceptions, courts have held private 'actors' are not subject to constitutional limitations — that is, enforcers of private contracts are not subject to the same constitutional limitations as police officers or courts. In 2002 the 11th Circuit Court of Appeals, in in Loren v. Sasser, declined to extend Shelley beyond racial discrimination, and disallowed a challenge to an association's prohibition of "for sale" signs. In Loren, the court ruled that outside the racial covenant context, it would not view judicial enforcement of a private contract as state action, but as private action, and accordingly would disallow any First Amendment relief. In the Twin Rivers case, a group of homeowners collectively called "The Committee for a Better Twin Rivers" sued the Association, for a mandatory injunction permitting homeowners to post political signs and strike down the political signage restrictions by the association as unconstitutional. The appeals court held the restrictions on political signs unconstitutional and void, but the appeals court was reversed when the New Jersey Supreme Court overturned the Appellate courts decision in 2007 and reinstated the decision of the Trial Court. The Court determined that even in light of New Jersey’s broad interpretation of its constitutional free speech provisions, the "nature, purposes, and primary use of Twin Rivers property is for private purposes and does not favor a finding that the Association’s rules and regulations violated plaintiffs’ constitutional rights." Moreover, the Court found that "plaintiffs’ expressional activities are not unreasonably restricted" by the Association’s rules and regulations. Finally, the Court held that "the minor restrictions on plaintiffs’ expressional activities are not unreasonable or oppressive, and the Association is not acting as a municipality."

In some HOA's, the developer may have multiple votes for each lot it retains, while the homeowners are limited to only one vote per lot owned. This has been justified on the grounds that it allows residents to avoid decision costs until major questions about the development process already have been answered, and that as the residual claimant, the developer has the incentive to maximize the value of the property.

Board misconduct

“It is obvious from the complaints to DCA that that home owners did not realize the extent association rules could govern their lives.”

"Curiously, with rare exceptions, when the State has notified boards of minimal association legal obligation to owners, they dispute compliance. In a disturbing number of instances, those owners with board positions use their influence to punish other owners with whom they disagree. The complete absence of even minimally required standards, training or even orientations for those sitting on boards and the lack of independent oversight is readily apparent in the way boards exercise control"

Overwhelmingly ... the frustrations posed by the duplicative complainants or by the complainants’ misunderstandings are dwarfed by the pictures they reveal of the undemocratic life faced by owners in many associations. Letters routinely express a frustration and outrage easily explainable by the inability to secure the attention of boards or property managers, to acknowledge no less address their complaints. Perhaps most alarming is the revelation that boards, or board presidents desirous of acting contrary to law, their governing documents or to fundamental democratic principles, are unstoppable without extreme owner effort and often costly litigation.

California has severely limited the prerogatives of boards by requiring hearings before fines can be levied and then limiting the size of such fines even if the owner-members do not appear. Any rule change made by the board is subject to a majority affirmation by the membership if as few as five percent of the membership demand a vote. This part of the civil code also ensures that any dissenting individual who seeks a director position must be fully represented to the membership and that all meetings be opened and agenda items publicized in advance.

Double taxation

Financial risk for homeowners

A report self-published by a professor at Washington University disputes the claim that HOAs protect property values, stating, based on a survey of Harris County, Texas (which had an unusual legal regime regarding foreclosures): “Although HOA foreclosures are ostensibly motivated by efforts to improve property values, neither foreclosure activity nor HOAs appear linked with the above average home price growth.”

Homeowners association boards can also collect special assessments from its members in addition to set fees, sometimes without the homeowners' direct vote on the matter, though most states place restrictions on an association's ability to do so. Special assessments often require a homeowner vote if the amount exceeds a prescribed limit established in the Association's by-laws. In California, for example, a special assessment can be imposed by a Board, without a membership vote, only when the TOTAL assessment is 5 percent or less of the association's annual budget. Therefore in the case of a 25 unit association with a $100,000 annual operating budget, the Board could only impose a $5,000 assessment on the entire population ($5,000 divided by 25 units equal $200 per unit). A larger assessment would require a majority vote of the members. In some exceptional cases, particularly in matters of public health or safety, the amount of special assessments may be at the board's discretion. If, for example there is a ruptured sewer line, the Board could vote a substantial assessment immediately, arguing that the matter impacts public health and safety. In practice, however, most Boards prefer that owners have a chance to voice opinions and vote on assessments.

Increasingly, homeowner associations handle large amounts of money. Embezzlement from associations has occurred occasionally, as a result of dishonest board members or community managers, with losses up to millions of dollars. Again, California's Davis-Stirling Act, which was designed to protect owners, requires that Boards carry appropriate liability insurance to indemnify the association from any wrong-doing. The large budgets and expertise required to run such groups are a part of the arguments behind mandating manager certification (through Community Association Institute, state real estate boards, or other agencies).

The AARP has recently voiced concern that homeowners associations pose a risk to the financial welfare of their members. They have proposed that a homeowners "Bill Of Rights" be adopted by all 50 states to protect seniors from rogue Homeowner Associations.

HOAs Can't Ban Sex Offenders

Hunter, who specializes in community and condominium association law, says adding such a restriction to bylaws or covenants would likely be found unenforceable by the courts and could expose the HOA or community organization to a civil rights claim.

The best way to deal with the issue, Hunter says, is to ensure that all residents are aware that a registered sex offender is residing in the community. The board should avoid identifying the sex offender by name or address because of potential liability in the event that a resident reacts irresponsibly.

Source: Charlotte Observer (03/27/2010)

Limits to powers

In Florida, state law prevents covenants and deed restrictions passed after Oct. 1, 2001, from prohibiting xeriscaping. In spite of this law, at least one homeowner has faced harassment and threat of fines from a homeowners' group for having insufficient grass after xeriscaping his yard to reduce his water usage. Similar legislation was introduced and passed by the legislature in Colorado but was vetoed by governor Bill Owens. Residents in Colorado have continued to call for regulation to protect xeriscaping, citing homeowners' associations which require the use of grasses that consume large quantities of water and threaten fines for those who do not comply with the covenants.

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