HOA Lifecycle: Permanently Shifting the Control from the Board to the Homeowners.

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White Paper: Home Owners Association Lifecycle Framework

Home Owners Associations have a 3 stage Lifecycle that may be generally described as:

Stage 1: Developer

Stage 2: Transition

Stage 3: Maturity

Developer Stage 1: The developer has total ownership interest (subject of course to financing and similar encumbrances) in undeveloped real estate. The developer has a plan that they wish to implement on the real estate. To execute on that plan, the developer must have the ability to set the terms and conditions of what will be developed. Typically these terms and conditions specify who is allowed to build on the property and the scope and aesthetics of what may be built on the property. These terms and conditions are determined solely by the developer and are incorporated into the HOA documents. The Developer creates and controls the HOA Board and Documents. The purchaser determines if the HOA Documents are acceptable before the purchase is finalized.

Transition Stage 2: At this point, the developer has sold the majority of the developed properties. Now the control of the HOA Board and HOA documents shifts to the purchasers of the developed property. During this transition, any remaining undeveloped properties are developed and sold However, unlike the Developer, this transitional HOA Board has no financial interest in the properties being sold and should be limited to maintaining community property and ensuring that the final undeveloped lots are developed under restrictions compatible with the original HOA Documents.

Maturity Stage 3: This is the final stage in the HOA Lifecycle. The development is complete. The only financial interests in the development are the interests of the individual property owners. The developer is gone. The HOA Board has no financial interest in the development. The HOA Board and Documents should be focused strictly on the maintenance of any community property (parks, out-lots and the like). Individual properties must comply with the local governmental regulations but should not be subject to any interference from the HOA Board or Documents. At this stage all the rights of ownership are vested with the property owner.

Suggested Model Legal Structure:

Automatic Removal of Restrictions and Prohibition Against Adding New Restrictions

A restriction is anything that requires the property owner to use, not use, construct or maintain their property in a specific way. Requiring a specific building size, building style, building use, building color, building placement or easements would be example of restrictions.

Once the property is sold by the Developer to a Purchaser, no further restrictions may be placed on the property sold. This will prevent anyone from encumbering a property beyond how it was encumbered at the time the purchase was made.

If by pattern and practice a restriction is not uniformly enforced, it is considered dropped.

After 10 years all restrictions related to individual property are considered dropped. Restrictions and dues related to community property continue.

If a restriction is invalidated by any State or Local statute or final determination by a court, it is considered dropped

Once a restriction is dropped it is considered removed from any Documents it may not be reinstated. If the HOA Board tries to enforce a restriction that a property owner is able to show has been dropped, the property owner's costs including legal fees shall be paid by the HOA Board.

Dues, Liens, Fines and Penalties

The only property lien that is allowed is for unpaid HOA dues. The lien may not be foreclosed upon and may only be collected when the property is sold or transferred to another party. Interest (at 10% compounded annually) and lien costs would be part of the allowable dues lien amount.

The HOA Board has no authority to level fines or penalties. Code violations or similar issues should be referred to the local government authorities.

Property Owners Voting Rights

Any significant action of the HOA Board including changes to the Documents or rules enforcing those Documents must first be approved at the annual in person public meeting by 2/3 of the total number of homeowners present at the meeting for submission to all of the property owners. The action must then be approved by 2/3 of the property owners within the 60 days following the annual meeting (where the submission was approved) or it fails. These voting rights may not be removed, reduced or modified.

HOA Board and Committee Removal

The HOA Board (and any HOA Committees) may be removed at any annual, in person meeting, by a vote of 25% +1 of the property owners present or represented at any meeting.

The HOA Board (any any HOA Committees) may be removed by a petition for removal endorsed by 15% +1 of the property owners.

Public Policy

It is against public policy to restrict property use for a long period of time (rule against perpetuities) or to enforce ownership or restrictions when pattern and practice clearly indicate the restriction/ownership has lapsed (adverse possession).

It is against public policy to take the use of property without just compensation (lack of consideration), and any additional restrictions imposed after the property is sold by the Developer is a taking which lacks consideration.

As a matter of public policy, the judgment of the property owner which has a direct financial interest and incentive should supersede the judgement of the HOA Board which has no direct financial interest or financial risk.

As a matter of public policy, if the HOA Board through inappropriate action or inaction negatively impacts the property owners property value, that loss in value including costs and attorneys fees should be paid by the HOA Board.

As a matter of public policy, all property rights should vest with the property owner after 10 years. After 10 years, only community property should be managed and maintained by the HOA Board.