Which states limit declarant control period?

I live in Virginia which does not limit the number of years that a developer as declarant has control over the HOA Board. But I've heard that there may be some states that place a legal limit on the number of years. If true, I would like to know which states have such laws and what necessitated or motivated the enactment. Also, how many years? 5, 10, 20, 30,....?

In Virginia, as possibly in other states, the declarant control period is set by the CC&Rs - in our community it is 40 years or when 90% of the lots are sold.

However, long declarant control periods can have costly consequences to the communities if there is a built-in conflict of interest where the HOA Attorney has an incentive to favor the declarant over the community due to fear of being fired by the declarant. The longer the control period, the greater the economic incentive. Therefore, Virginia may benefit from the experience and examples from other states in how they protect the interests of their HOAs.

Bob

Thank you Bruce. If we were in CT with the 60% sold transition trigger (in our case 840 lots out of 1400) then the community would have been gained control about 3 - 4 years ago. Now there are 950 lots sold out of the 1400 plannned.
Bob

Uh oh.

While that's an achievement to be proud of, it may have tax implications. I don't believe you can have a surplus and qualify for a tax exemption as an HOA. I believe that according to the IRS tax code you either have to return the surplus to the homeowners or file taxes as a standard corporation (and pay taxes on the surplus).

Check IRS code 26cfr1.528.

Bob,

One thing I didn't include from CT law is that when 1/3 of the homes to be built have been purchased by owners other than the declarant, the homeowners are entitled to minority representation on the board (1/3 of the board must be homeowners).

Bob,

Our story is quite different. Originally, when under declarant control, we had a 3-member board: two relatives of the declarant with the declarant as president. When it came time to elect a homeowner to the board, the homeowners elected a person who was previously a president in another HOA. Armed with previous HOA experience and a desire to vigorously study the association's documents and state HOA and corporate law, this individual became a very vocal minority member of the board. He and I would often consult on issues facing the homeowners, transition, and discuss strategy. Even though a minority board member, he succeeded in convincing the board to change management companies after he discovered that the original MC was not properly handling the association finances. He also succeeded in obtaining a new lawyer for the association by convincing the board that having the declarant's lawyer represent both parties would be a conflict of interest. At my suggestion and urging, he succeeded in getting the bylaws amended to require a 5-member board after transition. By the time we were 60% sold out the association was in a much better position for transition and a homeowner majority board.

Encouraged by our dialogue I attempted today to see if there was a way that the declarant would allow two way communication among members regarding the legality of the millions being charged to association members. I used a web site I set up to discuss the issues and I wanted the 900 member community to know about it. Below is the exchange in sequence leaving all specific names out.

As you can see below, no communications are permitted between hoa members without declarant BOD control despite what the law says. You would never guess that this is taking place in the USA.

Here is the relevant law: http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+55-510.2

§ 55-510.2. Distribution of information by members.

The board of directors shall establish a reasonable, effective, and free method, appropriate to the size and nature of the association, for lot owners to communicate among themselves and with the board of directors regarding any matter concerning the association.

Bob
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to: declarant
subject: hoa news letter submittal

Do I send submissions for the Communicator to XX or you?

Below is my submission to the Communicator. Let me know if it can still make the September/October 2011 edition.

Submittal for the Communicator

At www.abcdxxx.com several questions have been raised regarding the acquisition of the XXXX assets by the HOA including - whether it was legal, does the HOA own the XXX assets and if so why isn't it keeping any records, where are the receipts for the millions of HOA funds spent, where are the complete 2010
HOA financials and why don't members have access to documents or answers regarding these months after written requests were made? If any questions, contact Bob xxx-xxxx or email: [email protected]
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reply from staff employed by declarant:

New submissions for the Communicator are sent to XX for approval. However, I can tell you now that this article won't go in the Communicator as written since all property owner questions are to be submitted to the Board of Directors for the Q/A section done by one of the Board of Directors for inclusion in their article which is done in accordance with VPOA 55.510.2.
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to: declarant
When is the Q/A section done and which Board member does it?
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reply:
They do the column when they have questions submitted. I believe they assign it among themselves so you would want to submit it to all 3 of the
resident board members.
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to: declarant
Thank you ZZ. And what is the method the BOD set up when members want to freely communicate among themselves about the association as stipulated by the law you referenced - 55.510.2?

§ 55-510.2. Distribution of information by members.

The board of directors shall establish a reasonable, effective, and free method, appropriate to the size and nature of the association, for lot owners to communicate among themselves ,... regarding any matter concerning the association.
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reply:

As previously notified in 2009, the Q&A section of the newsletter meets 55.510.2's requirement according to our attorneys and the CIC Ombudsman as the newsletter is distributed to ALL property owners
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end of exchange

David - very successful outcome - but having that forum to begin with gave you a leg up. We don't have that.
What was the legal basis for threatening you to shut down your forum and then your email newsletter?
How did a non-stock Corp solve that problem?

Thanks for the ideas,
Bob

Bob,

Lawyers sometimes have no real legal basis and use intimidation and their status as a lawyer to bully individuals into complying with their client's wishes. That's the least expensive way to get what they want for their client. It's based on the assumption they know the law and the average person doesn't, and the individual will be unwilling to hire and/or unable to afford their own lawyer and so will capitulate. That strategy can backfire, though, when the individual (or a group of individuals) decides to hire their own attorney.

I, personally, faced a similar situation several years ago. I received a threatening letter from a lawyer ordering me to cease and desist a business relationship with a friend of mine. The claim was that by doing business with me, my friend was in violation of his contract with the lawyer's client, and therefore, by doing business with my friend, I was aiding him. I knew enough to recognize that the lawyer's claim was hogwash. I also knew that this lawyer was a "general purpose" lawyer and a friend of the client, so it was likely the lawyer did not have in-depth knowledge of contract law and was likely performing this simple service for his client for free. I also realized that if I replied to the cease and desist order it would be useless, since I am not a lawyer.

It appeared the best response was to "up the ante", so to speak, so my friend and I agreed to split the cost of an initial consultation with the best contract lawyer we could find in the area. After reviewing all the facts our lawyer sent a response to the other lawyer and also directed the other lawyer that all future correspondence should go through him. We never heard another word in the matter. It cost us $250 apiece for many more nights of restful sleep and a continued business relationship.

The declarant replied that the HOA attorney and the Board believe that only allowing the board to communicate with the HOA members meets the laws requirement that members be given a free method to communicate among themselves about association matters.

This is the typical response that the declarant makes for many of the laws that protect the interests of our HOA. So what do you do when an HOA has no legal representation to protect its interests and restore the rule of law. The unanimous response is to hire an attorney for legal advice on how to represent the interests of the association.

In our situation, attorneys have recommended that a group of homeowners get together and fund the legal effort. But I see a fundamental flaw in that approach where a few individuals fund an effort that the declarant opposes and is willing to use the resources of the very victims who are trying to restore the rule of law.

The rule of law versus the law of the jungle revolves around the principle that brute bullying should not determine the outcome of justice but that laws should govern the application of justice. If laws can be flaunted at will by the brute force of more money against a few individuals then we have the law of the jungle.

That is why I prefer to get a law enacted that would guarantee that all HOAs have legal representation for the purpose of gaining the benefits of the very laws designed to protect them.

The heart of the problem and a structural problem of Virginia HOAs under declarant control is that the declarant has fiduciary responsibility to the HOA but there is no legal mechanism using the resources of the HOA to enforce that responsibility. There needs to be a law that any HOA member can invoke that says when a POA law appears to be violated that member can provide the evidence to a Common Interest Community Ombudsman open to the public and press. The Ombudsman or a board decides in an open forum if there is enough evidence to hire an independent attorney using the resources of the HOA to investigate and recommend action in the fiduciary interests of the HOA. Open to the press is essential to avoid the problem of regulatory capture where the Ombudsman has a conflict of interest due to future employment opportunities from the same developer or legal firms under question.

Bob

David, you are right and I did contact them in 2009 about the declarant not following certain laws such as holding our funds in federally insured accounts. As you observed, the Ombudsman did nothing useful. In fact, it was worse than useless.

Their response was harmful to the association by taking the side of the declarant who argued that it was worth the risk of holding millions of our funds in non-federally insured accounts (this was in September 2008 at the height of the banking crisis and for the next few years) because the developer needed the loan funds which it could not get if they didn't place our money with the loaning bank. It turns out that bank was failing and was taken over by another stronger bank with a $7 billion TARP subsidy.

Two years later some lawyers looked at what was done and said it was illegal not keeping our money safe as the VA/POA law required. So why spend tax dollars on an Ombudsman's office that recommends illegal actions and not only does nothing to stop them but supports them.

The VA Ombudsman's responses seem to act as a trade association lobby building business for the HOA legal industry. Its standard response is hire an attorney. In my opinion, tax payer money would be better spent with a simple sign on their door saying "hire an attorney" if that is all they do.

Just the same there is a need for an Ombudsman's office to actually contribute some useful protections for the HOA members as I said before.

So to summarize what I learned on this topic regarding the original question of "which states limit the declarant control period":
1. only a few states - the 16 who have adopted the model code CT uses as Bruce mentioned. Possibly other states though I don't know who they are.
2. legislation that demands mandatory HOA funding for legal advice when HOA's are the victims of illegal acts by the declarant and that legal resource must be selected by the community and not the declarant. Perhaps leave out the Ombudsman's role due to regulatory capture problem as exists in VA.
3. a mechanism to limit declarant control period
4. protect rights of members to criticize the declarant just like we do any government we disagree with so declarant cannot force silence through bully tactics.
5. a mandatory mechanism to insure HOA members can exchange information among themselves easily e.g. mandatory access to the email list the declarant uses just like their is manadatory access now to the physical addresses of all members.

I plan to start another topic "Scammed or not" on how our HOA was duped out of millions so others can better appreciate the severe risk HOAs are under when they have no legal protection. The conventional wisdom is that the HOA attorney reports to the HOA board which represents the community and not the individual HOA members. This seems reasonable until our developer discovered a flaw in that structure and exploited it.

The flaw was that any decision made independent of the HOA Board by the HOA members that is binding on the whole community (e.g. bank requires written consents from a majority of members to take out a $3.2 million loan backed by the pledge of HOA assessments) has no legal representation since the HOA attorney only reports to the board. So the HOA members acting alone are vulnerable since without any legal guidance. That vulnerability is worth millions if the members are relatively naive compared to the declarant. The HOA pledge is extremely valuable because it is backed up by almost half a billion dollars of home equity in our community as valued at the top of the bubble.

Though only $3 to $4 million has been taken by the scams so far, we still may be able to avoid the tens of millions I fear the declarant sees as easy pickings. The financial schemes are quite sophisticated so over 99% here never knew it had happened and thus the need for open communications among members so they can arm themselves next time to avoid being duped.

I remember a few years back that Northern Virginia had about $3 million stollen by a management company employee victimizing about 400 HOAs. Our story is worse since our losses are from one HOA alone and worse than outright theft since harder to recover. Many of the losing HOAs recovered their losses through insurance. Doubtful we will be able to collect unless we can get it through the CIC management insurance fund for licensees.

Bob

Which threads or topics did you discuss the CICB? I hadn't read it.
It is good to hear that others are starting to address these problems.

There is also a radio program in VA that discusses these issues at 2pm on Saturdays.
Their web site is:
on the commons dot org or dot us

There are probably other sources out there but that is one whose library of past programs is very extensive and a rich source of help for HOA members like this forum. Education and exchange of information is a great way to assist anyone with what are the best laws that protect HOA members.

Look forward to reading the discussion on ombudsman performance with others. I wonder if VA is unique or if other states have the equivalent and does it really assist HOAs or is it just a PR cover while using the arm of state government to drive up the cost and business for the HOA industry.

Bob