Can HOA develop and sell new units?

Started by JW7 • 17 replies • 1469 views

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JW7 (Tennessee)
Posts: 15

Posted:

Our 100-unit HOA, established in the 1970's in Tennessee, now wants to act as a developer and build/sell additional units on our wooded common area. The HOA Board will soon be paying contractors $$$ to study the feasibility of this development. This would be on top of a steep hill with problem soil, which already suffered multiple landslides costing the Homeowners almost a million dollars to repair. To pay for the repairs, the HOA received an SBA loan with said parcel of land as collateral. Still, the Board, cozy with some local developers, is pursuing what seems to be a very bad idea. Eventually the Homeowners will be asked to vote on this, but meanwhile the Board is denying that they even have a plan to develop our woods. Can they do this?

SheliaH (Indiana)
Posts: 6,964

Posted:

Since the homeowners will have the final say on this, why not wait a little and see how all this shakes out? If you suspect this is a bad idea, one would hope the feasibility study would bear that out, but you might also want to talk to the board to see why they're interested in pursuing this. If you have concerns, say so.

There may have been discussion on whether to develop the woods, but if nothing's been put to a formal motion and vote, and you haven't seen any specifics, I wouldn't worry right now about the denials.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Our CC&R's I believe allowed us to do this. However, in our case there just was no more land to actually expand. It doesn't necessarily mean it's a bad idea to do this. If your HOA is a for-profit corporation it makes even more sense. However, this addition could mean more revenue overall for the HOA in the looooong run.

Developer's make their profit (EXAMPLE) by buying 100 acres of land. Let's say the buy it for 100K. Well they then divide that land into 100 acres. Selling each lot for 20K a piece. Well they just doubled their money. Now when the builders come in they make their profit by building a house they spend 100K building but sell for $200K. Doubling their money. Now what happens is they form a HOA. That HOA essentially is formed to take fund itself and it's amenities. The Developer/builder may put up the costs of pools, tennis court, clubhouse, or other amenity. The HOA will have the burden of the most cost of long term maintenance/replacement expenses. The Developer by that time is long gone. The HOA is by then be owner operated and supported.

So the HOA when it wants to expand can act like the developer/builder relationship. You and your neighbors footing the bill for developing/building the homes. However, that also means you all share in the profit if your HOA sells these homes at a significant profit. Plus there will be new homes to contribute to the HOA funds. There are still tax and voting ramifications.

Now I left ALOT of details out. Just wanted to give an idea of what benefit may exist and the complexity. If my HOA ever had the money, it would be something to consider. It would depend on how funded/supported my HOA was. Plus how the members feel about taking such an investment gamble. Which this is. No guarantee the homes sell at a profit or the expense of the project swallows such profits. Just don't be ready to throw the baby out with the bath water...

Former HOA President

JW7 (Tennessee)
Posts: 15

Posted:

Thank you for your informative responses.

The Board wants to take advantage of the hot real estate market here, and they say they want to build senior-friendly one story units (on top of a steep hill.) It does concern me that the Homeowners could be forced to pay for the development (gamble) and for any damages that the construction could cause due to our unstable hillsides. The Board will not be sharing any of the profits with the Homeowners. The Board has already said that we would have to keep paying for the SBA loan, even if the loan is paid off. Not to mention, many trees would need to be cut down, degrading our woodsy environment. I have voiced my opposition and will keep trying to inform others, but the Board controls and withholds information.

By the way, our HOA is a nonprofit; do you think this might cause them to lose nonprofit status? Thanks again.

TimB4 (Tennessee)
Posts: 21,061

Posted:

Read your governing documents.

Ours specify that the Board may sell common area "provided, however, that at all times the open space shall remain as such;"

Your governing documents may have similar language.

If they do, simply be ready to cite it at the meeting and insist that it goes in the minutes.

JW7 (Tennessee)
Posts: 15

Posted:

DouglasK1 (Florida)
Posts: 2,046

Posted:

Quote:

Posted By JW7 on 03/18/2016 10:46 AM
The Board will not be sharing any of the profits with the Homeowners.

This is somewhat confusing. Are you saying board member personally are planning to keep the profits? If so, that would be grossly wrong. Otherwise the "Board" has no assets of it's own, it only manages HOA money and assets so any profit should become an HOA asset and be added to HOA funds.

Escaped former treasurer and director of a self managed association.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By JW7 on 03/18/2016 11:36 AM
The Board wants to take advantage of the hot real estate market here, and they say they want to build senior-friendly one story units (on top of a steep hill.) It does concern me that the Homeowners could be forced to pay for the development (gamble) and for any damages that the construction could cause due to our unstable hillsides.

The powers of an HOA are usually limited to whatever is stated in the CC&R's. Unless the declaration specifically gives the association power to sell off real estate I would think the board cannot confer that power on themselves.

Check the recorded plats for your development. If the land the board wants to develop has been dedicated as common area then the board would have no power to sell it. It would require the consent of 100% of the property owners at a minimum to remove that dedication.

Quote:

The Board has already said that we would have to keep paying for the SBA loan, even if the loan is paid off.

Could you explain this better as it makes no sense at all? I would expect that there is some sort of lien on real estate in question if it was used as collateral. If the property is sold the loan would have to be paid to remove the lien.

Quote:

By the way, our HOA is a nonprofit; do you think this might cause them to lose nonprofit status?

"Non-profit" does not prohibit a corporation from selling things for more than they paid; it only means that the profits must stay with the corporation and not go into the pockets of some individual.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

JW

The hill, the erosion, the SBA loan, etc. seem to be just roadblocks you are attempting to use to stop the potential development.

That said, I see no way in he!! the BOD could do this development without the permission of the owners. The next question would be how many owners approving such would be required?

JW7 (Tennessee)
Posts: 15

Posted:

OK, will do, even though our Board will not allow us to speak during their meetings or enter our comments into minutes, if they don't choose to. Is this a CAI policy to keep homeowners at bay?

JW7 (Tennessee)
Posts: 15

Posted:

OK, will do, even though our Board will not allow us to speak during their meetings or enter our comments into minutes, if they don't choose to. Is this a CAI policy to keep homeowners at bay?

JW7 (Tennessee)
Posts: 15

Posted:

Thank you, Doug, I honestly don't know what the Board members plan to do with the profits, except that the Board president is a longtime friend of the developer she is favoring. I have asked, in our unrecorded "homeowners's forum" which is allowed before a recorded Board meeting, what the benefit would be to the Homeowners, and got no answer. One assumes, going with what you said, that all funds have to go back into the HOA, but it seems to me, the Homeowners bear all the financial risk for this development, and no rewards.

JonD1
Posts: 2,350

Posted:

Seems JW you are missing some key details as to this plan.
Just where is this information you have coming from?

Has the board made any public indication they wish to pursue this course?
How many units make up your property?
Is their any concern from other owners about this possible development?

If the HOA were to develope common property I would assume arofit of some amount how would you then conclude the HOA would not see a benefit?

Some of what you have posted needs to be explained. As at thisointbit makes little sense.

JonD1
Posts: 2,350

Posted:

"Developer's make their profit (EXAMPLE) by buying 100 acres of land. Let's say the buy it for 100K. Well they then divide that land into 100 acres. Selling each lot for 20K a piece. Well they just doubled their money. "

Please help me on this as increased age and a long week have left me a little run down.

They buy 100 acres for 100k or at 1k per acre

They then sell each acre they paid $1,000 for at a price of $20,000 and that results in them doubling their money.

Does that sound about right to you?

JW7 (Tennessee)
Posts: 15

Posted:

Sorry, I don't see much sense in this either. Will try to explain in order of questions.

Has the board made any public indication they wish to pursue this course? From the Board meetings I attended and from minutes. Yes the Board says they have allocated (HOA) money to pursue this, yet they deny they have any development plans.
107 units.
Yes, esp those on the road affected. We voted the same plan down seven years ago, but it has reappeared.
The HOA would see a profit, but this would not be passed on to Homeowners, and are not the Homeowners individually on the hook for utilities and construction overages (very likely.)
Thank you in advance.
JW

JW7 (Tennessee)
Posts: 15

Posted:

The Board says 51%, but I am checking on that.

JonD1
Posts: 2,350

Posted:

Quote:

Posted By JW7 on 03/18/2016 5:47 PM
Sorry, I don't see much sense in this either. Will try to explain in order of questions.

Has the board made any public indication they wish to pursue this course? From the Board meetings I attended and from minutes. Yes the Board says they have allocated (HOA) money to pursue this, yet they deny they have any development plans.
107 units.
Yes, esp those on the road affected. We voted the same plan down seven years ago, but it has reappeared.
The HOA would see a profit, but this would not be passed on to Homeowners, and are not the Homeowners individually on the hook for utilities and construction overages (very likely.)
Thank you in advance.
JW

Well we seem to be hung up on whether the HOA and the home owners are one in the same.

If the HOA were to make money that should lower costs to the individual owners. Perhaps in the form of paying off your loan.

The HOA is made up of the owners.

Should any profit be divided up and split among the owners? Guess that would depend.

Wonder how much the board admits they allocated to a project they have no plans to pursue.

My opinion the board would owe the owners an explanation.

Any overages and who would be liable would depend upon the conditions of the contracts agreed to by the board on behalf of the HOA.

BobD4 (up north)
Posts: 1,002

Posted:

Quote:

Posted By JW7 on 03/18/2016 5:48 PM
The Board says 51%, but I am checking on that.

JW7 Tenn : Respectfully whether 100 % consent or vote , 50 % plus 1 vote, or 51% (not the same), a mere common element "modification" change is a lot less than terminating all or most of the amenity areas.

Besides your CCRS/Declaration you should check out whatever legal type of community yours is, bearing in mind that Tennessee is apparently still considering a HOA law to supplement existing condo /horizontal property laws.

You should also check to see whether & how much mortgage lenders or other encumbrancers, also get to kick the can.

Besides reducing amenities & possibly market value, adding voting units would water down your voting weight and add to any capital replacement burdens. Infill redevelopment can bring a lot of physical disturbances during construction period alone.

Worth getting a good handle on this upfront.

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