privatization of HOA assets to exempt from POA

I am a member of a developer controlled HOA. The developer sold the HOA the money losing country club it owned for $2.5 million claiming it was near profitability. It had average losses of over $700K/yr for last 8 years and the public records of this public company showed a fair market value millions less. The deal was financed with a $3 million loan to cover closing costs and capital reserves.

After the deal closed, I asked in writing for the closing statement so I could verify where the $3 million went. I also asked for the lease and management agreement which became part of the deed restrictions placed on the country club assets. The developer has refused both documents arguing that the assets were never purchased by the HOA but by a shell company whose records are now private property with no HOA member access rights since no longer governed by the Virginia POA.

I then asked for the financial statements of the HOA and they provided income and balance sheets but there was no record of the purchase or our liability. They said they would provide complete financials later and it is now several months and the law says they have 5 business days. Now I'm asking for the IRS tax returns and again they said they'll look into whether the 2010 year has been closed. I'm expecting the same indefinite delays.

The developer also wants to transfer all our commons to the ownership of the HOA soon but without HOA control until 90% of lots are sold which could be another 20 years. If he transfers all those assets also to a private shell company with no HOA member document access rights as to how our dues are being spent then he will have eliminated the Virginia POA transparency and accountability law protections for all our HOA assets.

This seems like a dangerous precedent where a developer controlled BOD can privatize HOA assets and thus avoid all transparency and accountability to the HOA community. I'm particularly concerned that he will use our road reserve assets to subsidize the road development for the remaining 450 lots (out of 1400 total) to be developed since that is the next biggest asset we have.

So far, about 60% of our assets have been privatized but I fear the rest will come soon. At least right now I can still get records and receipts for HOA expenditures outside the $3 million involved in the country club. But it bothers me that we are now in debt unnecessarily and will be spending over $6 million in mortgage payments over the next 25 years without any accountability to HOA members.

My questions: Does anyone know of any other HOA in the country where its assets have been privatized so the members have no way of knowing where their dues are going? If not but it has been attempted before, what lessons can be learned from any community who has successfully been able to avoid this while still under the helpless state of developer control?

Thank you,

Bob

Thank you Tim for the links. Our situation does seem unique since probably few if any HOA's have had their assets given to another organization to avoid the transparency and accountability provisions of the law. Fear of violation of the declarant's fiduciary responsibility to the HOA probably inhibits most from taking such a drastic action.

A few years ago, there was a theft of several million dollars from about 400 Virginia HOA's by an employee of a different management company. However, our loss is at just one HOA so we may have the largest loss not only in Virginia but in the nation. It seems all property rights to the assets (own, hold, sell, assign, transfer, operate, lease, mortgage, pledge) were transferred to this other organization so when we asked to see the financial records and receipts for how our three million from our loan is being spent, the declarant said our HOA was not a party to the transaction so those financial records and receipts belong to the new organization. In fact, it argued that it was not required to keep any records of how that money is being used.

Just the same our association still has to pay the $3 million mortgage for the next 25 years. I'm still trying to account for how the $500,000 over and above the $2.5 million was spent. But that $500K still remains unaccounted for to our HOA members.

Bob

Hi Janet, thank you for your advice.

It seems like corporate as well as POA laws may be at issue here.

The bank would not finance the HOA purchase unless secured by an HOA pledge. Since the HOA was controlled by the seller, it was necessary that a majority of the HOA members consent to take out a loan for the HOA to purchase the club. But at the last moment, with no prior discussion with HOA members in any open meetings, we learned that an LLC and not the HOA would actually buy it and the ownership rights were given exclusively to the LLC.

When we tried to get access to the financial records such as the closing statement or deed restrictions placed on these assets, we were told we had no rights to it since all of those assets were now owned by the LLC. The declarant claimed that the LLC was not subject to POA laws of transparency and accountability even though the HOA was the sole member of the LLC.

The declarant had the corporate attorneys set it up in a way such that the sole member would have no property rights but would still be obligated to pay the mortgage. If we assume they are right about the LLC laws, still that doesn't mean they are right about putting the assets into such an LLC since it removed our property rights and our protections under the POA laws.

The declarant also recorded some deed restrictions on the assets purchased which remain secret. The seller holds a right of first refusal to buy it back at the market rate which may have been devalued if the deed restrictions make it worthless to any other buyer. The LLC is managed by an appointee of the declarant who is also listed as a realtor under the declarant as broker.

The bottom line for the HOA is that we're out as much as $ 6 million with interest over the next 25 years but have none of the property rights. If I bought a car but never received any ownership rights to the car then that would be a loss to me. Causing a loss to the HOA seems like a violation of the decarant's fiduciary responsibility to the HOA.

Bob

Thank you, Janet - great research and quite helpful.

The country club (CC) certainly wasn't part of the commons over the years as it was explicitly excluded in the declaration (exhibit A page 12). Also, the association governing documents book provided to new members states: "Members of the association are liable only to the Association and Declarant for mandatory XX Community Association fees. The XX Country Club is located within the community of XX but is not part of the XX Community Association and requires application for membership and payment of dues not associated with the fees, costs and levies of the Association."

Since the acquisition it seems the CC still is not part of the commons since HOA members have no rights of access to the CC property like they do with the commons such as pool, lake, nature trails,.... Also, the LLC is levied a property tax and no HOA in our county is assessed property tax on its commons. Lastly, HOA members have not been able to get financials or records relating to the CC assets yet we can get the same for all our commons - only CC paying members can get some limited access to the CC financials.

However, the declarant may make a claim to the county for property tax exemption arguing that it was purchased by a loan paid by the HOA members and that those members are allowed one day/quarter to use golf facilities but must pay normal guest fees whereas before the acquisition no such access was allowed.

Using an attorney in Virginia to gain access to our documents can be counter productive since VA POA http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+55-510 states "C. Books and records kept by or on behalf of an association may be withheld from inspection and copying to the extent that they concern: ,....3. Pending or probable litigation. Probable litigation means those instances where there has been a specific threat of litigation from a party or the legal counsel of a party; "

Therefore it seems better to use persuasion of argument than litigation. Getting legal advice is critical but can be difficult when attorneys lack interest. They seem to prefer litigation just like doctors who make their money on tests and not office visits.

Transparency seems like an effective way to protect HOA interests so we're focusing on that right now.

Bob

Janet, we all agree on avoiding litigation, it is the attorneys we talk to that can have a different motivation.

The issue for attorney advice is critical but not as easy to obtain as it might appear when the issues involve multiple areas of expertise.e.g. corporation attorney, tax attorney, POA attorney, SEC and/or financial disclosure attorney,... Later, I could start a topic just on the attorney issues. Here I want to focus on disclosure of HOA documents relating to use of HOA funds.

I have already accessed the governing document amendments and the public record e.g. county deed records,... The deed restrictions are kept secret by only referring to them. e.g. "In the event of a conflict between the terms and conditions of this Memorandum of Lease and the terms and conditions of the Lease, the terms and conditions of the Lease shall prevail." The Memorandum of Lease is public but the Lease is private and that contains the critical deed restrictions. We have not been able to get copies of this Lease and Management agreement so have no idea what deed restrictions were placed on the assets our HOA purchased with the mortgage we are paying.

The declarant should clarify if the country club (CC) assets are part of our HOA's commons or not.
If they are commons then why isn't the HOA maintaining records of those commons including all the financial records such as closing statement and deed restrictions placed on those assets and allow us access to those records.
If not commons then how can HOA members be assessed for the mortgage payments given VA statute § 55-509.3. Association charges - which says " no association may make an assessment or impose a charge against a lot or a lot owner unless the charge is a fee for services provided or related to use of the common area. "

The declarant may claim that the "use as common area" occurs whenever any member as HOA member is allowed to play golf once per quarter at the guest fee rate. I doubt few would have signed the consent if that is all we get from the $6 million to be spent on the mortgage and interest since the guest rate is higher than the local golf course. In other words, there is no financial benefit to the HOA members that justifies the millions spent and the millions at risk. It is only a benefit to the declarant as seller of the CC and who controls the association for the next 20 years so it was able to structure the deal to its advantage.

Bob

Janet, what are the rules for posting hoa docs that are not in the public domain? Of course I would delete all identifying information with XX or such. But this discussion would benefit by seeing the exact wording of the consent agreement.

Thanks,

Bob

I would love to see the consent agreement. If needed you could upload to a free site such as Google Docs then post the access info: http://www.google.com/google-d-s/documents/

Otherwise as Tim stated there is a size limit, so depending on how large the document it can be uploaded here on this website.

Janet and Tim -

Answers to questions:

1) Did the declarant amend the CCR’s and include the CC and/or LLC or is the original verbiage you quoted above still in effect?

The LLC was created just for the purpose of the acquisition and never existed before. The declarant claims the HOA will maintain no records on it.

The only declaration change I'm aware of is the waiver of the declarant's claim to be reimbursed for capital contributed over the years when there were not enough residents to cover the operating costs of the HOA such as maintaining the commons. However, our HOA is a nonstock corporation which doesn't allow return of capital. So the deal included some vapor fund discount that didn't exist making the price higher than we thought. There was no HOA tax consequence since there was no real debt forgiveness.

2) How long ago did all this take place?

The proposal to sell the CC to the HOA was announced to the community in Feb. 2010. The consent process ran for about six weeks and ended first week of June 2010 and got about 76% acceptance. The announced switch from the HOA to an LLC buying the CC with our loan funds occurred first week of October and the deal closed first week of November 2010.

3) Is the loan paid via in regular assessments or as a special assessment?

The annual assessment includes an increase of $250 for the mortgage and were first due January 2011. It is not a special assessment.

4) My understanding is assessments or special assessments in your state are suppose to be provided for or authorized in the Declaration, so what does your most current documents state regarding this area.

Our HOA's web site's copy of the declaration is a bit map and not text so too time consuming to retype now but if one can upload a jpg then I'll do that of the relevant sections. Let me know if pics are allowed. In summary, it says assessment purpose is acquisition, improvement and maintenance of properties, services, facilities and commons to promote recreation, health, safety, welfare of lot owners and to pay expenses like property taxes, insurance,... as well as reimburse the declarant for its capital contributions to operational expenses - though that part no longer applies as part of the acquisition deal.

5) Per your recent statement: “I doubt few would have signed the consent if that is all we get from the $6 million to be spent on the mortgage and interest …” What exactly was the document that everyone signed?

Will send consent agreement in separate post so don't trigger size limit. It is about one page of text.

6) Are there any homes owned by current homeowner's for sale? If so, I would be curious what was included in the HOA required disclosure packet regarding the situation.

There are 35 MLS listings in this community but I haven't seen the latest disclosure packet. The declarant said that new buyers are being informed about the acquisition and the loan but I haven't seen any documentation to support that. e.g. declarant hasn't provided any financial statements (now months after my written request) that capture the impact of the acquisition e.g. no balance sheet changes such as a $3 million liability for the mortgage.

7) How many units in the subdivision and how many homeowner vs. declarant owned?

450 declarant owned out of about 1400 planned so about 950 have been sold. Control passes to our HOA at 90% of lots sold. At the current rate of lot sales it will be decades though only 20 more years out of the original 40 are allowed.

Next will send the consent agreement with edits that remove specific names.

Bob

Hi Bob:

Per this information it appears the Association now “owns” the property:

The acquired assets would include the "Big Shot" designed golf course, the Dining
Room, the Har-Tru tennis courts and all associated buildings, property (approximately 184
acres), equipment and supplies. Following consultation with the XX’s Board of Directors,
improvements would be made to the Dining facility. The increase in per-Lot property owner
dues related to the acquisition would be limited to no more than $250.00 per year. Operational
costs would be the responsibility of the users of the Club. No Lot Owner* would be
required to join the Club but, should the XX acquire and become the owner of the Club assets,
there would be a sixty (60) day period during which Lot Owners could either join as Social
Members without the need to pay the Club’s Initiation Fee or, alternatively, elect to join at
a different membership level and receive a credit in the amount of the Social Initiation Fee. The
recommendation will be made to the XXCC Board that, upon transfer of ownership, all property
owners be permitted limited access to the Club (Golf, Tennis, Dining) upon payment of a fee.
The XXCA’s Board has determined that a loan in the amount of $3.2 million dollars would be
necessary to consummate the acquisition of the Club and that such loan would be secured by
future assessments of the XXCA.

I (we), the undersigned, as the Owner of the Lot identified below, hereby acknowledge
my/our approval and consent of the XXCA’s acquisition and ownership of the Club as described
above.

*Note: for the purposes of this document, “Lot Owner” shall mean and refer to the record
owner(s) of a Lot, which is subject to that certain Declaration for XX date July 16, 1990
and recorded on July 17, 1990 in the Clerk’s Office of the Circuit Court of Y County,
Virginia in Deed Book "abc", Page "def", as amended.

Also per both the Corporate and HOA statutes homeowners are allowed access to the association documents. Have you sent a "Certified Return Receipt" letter making your request to the association board? If the developer is not willing to allow access per the statutes, then you may need to acquire an attorney to demand access. I know you were concerned regarding a section in the HOA statutes; however, in the corporate statutes the following is stated:

§ 13.1-933. Inspection of records by members.

E. This section does not affect:

1. The right of a member to inspect records if the member is in litigation with the corporation, to the same extent as any other litigant; or

2. The power of a court, independently of this Act, to compel the production of corporate records for examination.

So now here are more questions:

1) How many of the 950 homeowners agreed and signed the consent?

2) Now that the association owns the property what happens with regards to any potential profit from said property, if any profit is made?

It appears there are potentially a few unanswered questions in the documents regarding this property and which should have been covered prior to the purchase.

Good discussion and here are more answers to your questions:

1) How many of the 950 homeowners agreed and signed the consent?

About 720 lots consented. Some owners owned multiple lots.

2) Now that the association owns the property what happens with regards to any potential profit from said property, if any profit is made?

Only the assets were acquired. There are three corporate entities involved: the HOA (nonstock corporation) which pays the mortgage and is the sole member of the LLC, the LLC which owns the assets only and the club (nonstock corporation) which runs the operations. The club's membership rates are set to cover the costs so no profits are expected. The LLC leases the assets to the club but is run secretly so HOA members have no idea what the lease rate is. If the LLC had a profit then it can be taken at the LLC level or at the sole member level which is our HOA. I hope to find that out when the declarant releases correct 2010 financials to HOA members. So far they have been missing key data. The finance committee chair also hadn't seen the correct financials. The declarant uses nondisclosure agreements when it wants to keep things confidential. But that is more restrictive than executive session so is really a misuse and exploits any who don't understand the very limited scope of executive session exclusions.

3) Also per both the Corporate and HOA statutes homeowners are allowed access to the association documents. Have you sent a "Certified Return Receipt" letter making your request to the association board?

I didn't because I thought emails were considered legal under VA POA and I didn't intend to take any legal action, only persuasion. See § 55-515.3. Use of technology. http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+55-515.3

In the next post I want to address the issue of who owns what was purchased with our HOA loan money. Is it possible for an HOA to own something but have no property rights and no rights to any information about the assets purchased? If so then what does it mean to own it?

Bob

Here is my reply to the CIC ombudsman.

"Thank you for your reply and the opportunity to clarify my position.

Yes, you are right when you said that I believe that YYLLC should be licensed since I believe that YYLLC meets the conditions required by the definitions of § 54.1-2345 as follows:
1. YYLLC meets the definition for a "common interest community manager" in § 54.1-2345 namely it is an LLC who, for compensation or valuable consideration, provides management services to a common interest community as described next,
2. YYLLC carries out most of the "management services" as defined in § 54.1-2345 where only one is required as a condition namely: (i) it acts with the authority of the association in business and legal activities such as signing the deed for the acquisition of the XX Country Club (XXCC) assets on 11-5-10 as recorded, (ii) it executes the decisions of the XX Community Association (XXCA) such as the Operating Agreement approved by the XXCA Board on 11-1-10, (iii) it collects money belonging to the association such as the lease payments earned by the XXCA owned XXCC assets which revenues it can use for XXCC asset maintenance and other expenditures including its own compensation, (iv) it must prepare financials for the association since all its income and losses are allocated to the XXCA as defined in the Operating Agreement (item # 10) which the XXCA signed and which state and federal tax laws require, (v) it should though it doesn't presently hold open meeting for the association members regarding its management of the XXCA owned XXCC assets, (vi) it has authority to operate, lease and otherwise deal with the XXCC assets as permitted in the Operating and Lease and Management Agreements, (vii) and it offers the aforesaid services on behalf of the association though only one of them is required to meet the definition of "management services".

I do not believe that XXCA members have rights to YYLLC financial records because they are records of YYLLC but because they are also records of theXXCA's owned assets. When a management company pays the HOA electric bill using HOA funds that is not only a financial record of the management company but also a record of the association and is made available to HOA members accordingly. Similarly, when YYLLC collects the lease payments for the XXCC use of the XXCC assets it is not only a record of YYLLC but also a record for the XXCA which must pay the taxes on that income since tax law attributes that income to the owner of the asset and therefore must keep those records for its documentation. Just because a record belongs to YYLLC does not preclude it belonging to others - usually 2 - 3 parties: the payor, the payee and the party acting on behalf of either of the other two when applicable.

(Declarant) may argue that the XXCA does not own the XXCC assets because the XXCA did not sign the deed and because the Operating Agreement for YYLLC as signed on 11-1-10 states that the purpose of YYLLC among others is "To own, hold, sell, assign, transfer, ...and otherwise deal with the real property and assets of the XX Country Club,...". Therefore, (Declarant) may claim, YYLLC is not a management company acting on behalf of the XXCA but actually acting for itself (YYLLC) and therefore the XXCA does not own the XXCC assets so the XXCA doesn't have any of the normal disclosure property rights under the VA POA law that otherwise would apply to HOA owned assets.

But if this were true, then that would conflict with the written consent agreement signed by 76% of the XXCA authorizing the XXCA to take out a mortgage for it, the XXCA, to purchase the XXCC assets. It would also conflict with all the XXCA BOD pronouncements regarding the XXCA purchasing the XXCC assets. Also, the XXCA pays the mortgage, YYLLC does not nor does it have any means to do so. The owner of the assets pays the mortgage otherwise it becomes a taxable event to the non-paying owner e.g. if YYLLC owned the XXCC assets then the XXCA mortgage payments are income to YYLLC. Also, the funds that YYLLC operates with come from the XXCA either from the loans which the XXCA signed and were secured with pledges from the Association or from the income derived from the assets for which the XXCA pays the mortgage. Thus all of YYLLC's financial activities involve XXCA assets and funds, it has none of its own.

Finally, (Declarant) is a CIC licensed management company who also manages the XXCA assets and funds since the XXCA is under declarant control and doesn't manage itself. So it would be a violation under CIC law § 54.1-2353 if it failed its fiduciary responsibility to the XXCA by implementing a deal that was harmful to the association - namely inducing it through false and misleading information to pay millions for an asset whose ownership it never acquires and as a result would not get the derivative POA disclosure property rights and benefits of transparency and as a consequence of that, cost the XXCA millions due to lack of accountability.

Therefore, XXCA ownership of the XXCC assets is more consistent with all the written representations made to the community. On that basis, I believe that YYLLC acts on behalf of the XXCA and for the above reasons should be licensed. Then it follows that the records of YYLLC's management of those assets also belong to the XXCA as owner of those assets and as XXCA documentation required for tax purposes.

Thank you,

Bob
member, XXCA"

Next post is the Common Interest Community answer.

When the declarant is stating as you noted:

>> “The declarant uses nondisclosure agreements when it wants to keep things confidential. But that is more restrictive than executive session so is really a misuse and exploits any who don't understand the very limited scope of executive session exclusions.”

This is potentially could be due to possibly he is pocketing the money himself. If anything, rent paid to the LLC for using the facility should go to pay down the principal of the loan taken out by the HOA.

I would recommend “Certified Return Receipt” for any requests made to the board or developer. The reason is you then have proof of requests sent and also proof that the information was received by the other party.

Your state agency per their statement acknowledges that the HOA should have access to the records, but it is under the corporate regulations under which they do not control:

>> “While you are certainly correct that you should be given access to the books and records of the association, there is no provision or language in the POA Act that provides for access to the books and records of any entity other than the association, even if it is an entity in which the association is the sole member.”

After reviewing § 54.1-2345. “Management services” I would have to tend to agree with CIC Ombudsman in that the LLC is not a Management Services. I am not an attorney; however, let me try to explain my thoughts on this issue:

1) A management services company would be an entity hired by an HOA board to perform duties as designated by an HOA board. They are in essence an “employee” or “subcontractor” of the HOA.

2) The LLC in this circumstance is a sub corporate entity owned by the HOA. The HOA is the entity which owns and is suppose to manage this sub corporate LLC entity.

Now because it is a sub corporate entity owned by the HOA and is defined as HOA assets and common area owned, when I think about it in this manner I may respectfully have to disagree with the CIC Ombudsman in that the LLC does not fall to some extent under POA guidelines regarding access to records. The POA Act provides for access to the books and records of an association and the LLC records should potentially be part of said association records.

Where do all the homeowners stand with regards to this issue and how far are they willing to go regarding outcome?

Janet, earlier you referred to the nonstock corp laws of VA that give members access rights to documents. But they seem to be based on the HOA having the records. The declarant refuses to keep any records of the LLC. Also, the declarant refuses so far to give any financials relating to the HOA since the acquisition showing that their key objective is to not allow members access even when we have been given access to documents in the past such as tax returns. The declarant doesn't outright refuse the documents but rather provides delaying tactics or partial financials without disclosing that they are partial.

For example, at the finance committee meeting the financials for the 4th quarter had all the CC acquisition impacts missing e.g. balance sheet did not show any liability for the mortgage. Though the law says they must provide documents within 5 business days of written requests it is now months. When I remind them of that the declarant says that it has not been informed by the licensed management company that does the reports, that they are complete. Since the management company is the same company as the declarant they could be deliberately not informing a fellow employee so she can say she was never informed that they were completed even after they were completed. We have no way of knowing how long this could go on.

Since the purpose of my inquiry is the financial risk to the HOA due to serious red flags on the what has been seen already, time is of the essence to find out what is really going on.

Bob

The next HOA board meeting is first week of June. Let me know of any statutes of limitations - I hadn't considered that. Perhaps that is why the declarant is stalling. My time concern was that the community would gradually just accept the way the things are and take no action even if they later believed they lost millions in the deal through misleading and false information.

Bob