Forming HOA from existing 501 (c) (7)

Started by KevinR2 • 15 replies • 1725 views

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KevinR2 (California)
Posts: 9

Posted:

I am on the board of a very loosely knit organization first formed in 1957 as a Social Club under 501(c)(7) of the IRS code. A number of the property owners have expressed an interest in converting to an HOA. From the research I have done, it appears that existing homeowners would have the option of not joining the HOA. I was wondering if anyone on the forum has had experience with this issue? I'm also looking for information concerning the percentage of owners needed to approve the conversion. We are located in California

Thank you...

TimB4 (Tennessee)
Posts: 21,059

Posted:

All very good questions and something you will need to speak with an attorney about.

KerryL1 (California)
Posts: 14,550

Posted:

Tim is right, Kevin. And none of us on this forum are.

In CA, all "HOAs," whether detached homes, or condos etc., are Common Interest Developments or CIDs. A CA HOA law firm has an excellent web site where you can learn a great deal about CA HOAs. It's: Davis-stirling.com and is named after a large body of CID CA legislation, the Davis-Stirling Act.

Most HOAs are non profit mutual benefit corporations. So, how to incorporate might be a starting point....but I really don't know!

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By KevinR2 on 12/06/2016 2:07 PM
A number of the property owners have expressed an interest in converting to an HOA. From the research I have done, it appears that existing homeowners would have the option of not joining the HOA.

Forming an HOA in an existing community is tricky. You cannot force anyone to join. You will not be able to record liens or levy assessments against non-members. The minimum number of members required to form an HOA is one.

Quote:

I'm also looking for information concerning the percentage of owners needed to approve the conversion.

Rather than trying to convert an old organization to something else, just form a new non-profit corporation for your HOA and let those who wish to join do so. Transfer any assets from the old organization to the new one and then let the old one die.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Kevin,

What, specifically, do those who desire to convert from a social club to an HOA expect to achieve?
That is to say, what advantages do those individuals think will be obtained by doing this?

KevinR2 (California)
Posts: 9

Posted:

Thanks Tim. I know we will end up with an attorney sooner or later..

KevinR2 (California)
Posts: 9

Posted:

Tim, we would like to have the ability to collect dues from everyone, or to file a lien if unsuccessful. Our current status as a 501(c)(7) Social Club gives us little control of anything outside of our common areas (trails and beaches).

KevinR2 (California)
Posts: 9

Posted:

Thanks Larry. We have discussed the possibility of doing just this. It may all be a moot point because I'm not sure we would have the vote of a majority of the owners.

KevinR2 (California)
Posts: 9

Posted:

Thanks for the info Kerry, I will check the site out!

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By KevinR2 on 12/07/2016 1:08 PM
Tim, we would like to have the ability to collect dues from everyone, or to file a lien if unsuccessful. Our current status as a 501(c)(7) Social Club gives us little control of anything outside of our common areas (trails and beaches).

To collect assessments from everyone you would likely need 100% agreement to encumber such a requirement on their property (deed restriction).

If the Association is voluntary, you will likely be unable to prevent people from staying with the Association and will unlikely be able to file liens without going though the courts.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Kevin,

While this is an Arizona case this should give you some idea of what happens when you try to force owners into an HOA. See http://caselaw.findlaw.com/az-court-of-appeals/1262272.html

KevinR2 (California)
Posts: 9

Posted:

Thanks Larry. While I am not one of the property owners interested in forming an HOA, as a board member I tasked myself with researching the pros/cons of forming one after the fact. Knowing the owners of the properties in this very rural area, I don't think there will be much support. Thanks for your help!

BobD4 (up north)
Posts: 1,002

Posted:

Quote:

Posted By KevinR2 on 12/07/2016 1:08 PM
Tim, we would like to have the ability to collect dues from everyone, or to file a lien if unsuccessful . . . . Our current status . . .gives us little control of anything outside of our common areas (trails and beaches).

Kevin R2Cal Respectfully those who think the grass is greener on the other side of the fence, should also take a balanced look at some of the beefs brought even to this mild site.

If you do NOT have a substantial "built environment", would there be a gain by having those powers ?

I raise that because my own no-vires association is also voluntary with a bare co-ownership, large waterfront & hinterland & minimal roads ( unpaved at waterfront). Given the assets & good faith, this has worked reasonably for 35 years with only sporadic voodoo side-trips into attempted oppression . . .

Maybe you never had it so good.

SueW6 (Michigan)
Posts: 814

Posted:

If there is any chance of there being a liablity case, i.e. person hits head on rock on common area and sues the members, then you need to incorporate = For nothing else than to protect yourself.

BobD4 (up north)
Posts: 1,002

Posted:

Quote:

Posted By SueW6 on 12/11/2016 1:24 PM
If there is any chance of there being a liablity case, i.e. person hits head on rock on common area and sues the members, then you need to incorporate = For nothing else than to protect yourself.

Good insurance points but let me address :

1- If KevinR2's common lands are a bare co-ownership, you may be able ( like me & 67 other sets of co-owners ) to inexpensively purchase a liability rider extending your end user property's liability insurance to the co-owned property. Note that coverage should be adequate enough to address that an injured victim may choose to NOT uniformly recover against the co-owners but may choose to pursue the deepest pockets.

2 - Hope your jurisdiction (like mine) actually allows sale of D&O & fidelity insurance to an unincorporated organization's volunteer Directors & Officers.

KevinR2 (California)
Posts: 9

Posted:

Thanks to everyone for the info. We are currently incorporated as a 501(c)(7), and have liability insurance for our common areas, as well as insurance to cover our volunteer board. The club was incorporated in 1957, and this subject (switching to an HOA) comes up from time-to-time. The fact that membership would not be mandatory for any existing property owners is a deal killer for me. In my opinion we would not get anywhere the votes to even form the HOA at this time.

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