Paradise Lost: What to Do With the Homeowners Association When the Developer Goes Down

A few years ago, with the housing market at its peak, many developers created housing developments known as “planned communities.”  These neighborhoods were cities within cities, and they came complete with their own form of quasi-government, i.e., the homeowners association.  These associations are established for purposes of maintaining – and financing the maintenance of – common amenities such as neighborhood pools and community centers.  Residents of the neighborhood are members of the association, and these members pay dues – typically monthly, quarterly or semi-annually, depending on the nature of the association – in order to cover the expenses of maintaining these common amenities.  The trade off for these amenities are tight controls on what a homeowner can do to his or her own property, at least until the developer sells off its lots, completes the development and moves on.

As housing prices escalated, these developments were held out as upscale and exclusive because of these common amenities, in contrast to other developments with no such benefits.  As the housing market went south, however, the residents of these neighborhoods found themselves in charge of their associations much sooner than anticipated.  Developers lost their remaining lots to their lenders, and early transitions of the homeowners associations to resident control occurred in numerous circumstances.  In some instances, the lender ended up controlling the association.

The transitions have, in many instances, not been easy.  In part, this is because these types of homeowner association are often times not governed by any state statutes.  In Minnesota, for example, single family homes are not governed by the Minnesota Common Interest Ownership Act (which governs townhomes and condominiums).  Instead, these associations are governed by the declaration of covenants (which was prepared by the developer and/or its attorney), state non-profit corporation statutes, and any rules and regulations which have been passed by the board of directors.  Some of these associations hire professional management companies, while others make a decision to be “self-managed.” 

For associations which have been transitioned to resident control prematurely, there are a number of issues which must be dealt with.  First, the articles of incorporation, bylaws, declaration of covenants and any previously enacted rules and regulations should be reviewed by an attorney and any provisions which existed solely for the developer’s benefit should be expunged.  Second, the association’s Board should review its operating budget and determine how to fulfill its maintenance obligations using only the dues from existing homeowners, and budget cuts and/or dues increases may be necessary to compensate for the fact that less than all of the expected dues paying homes are yet constructed.  Third, a clear collections policy should be established and communicated to the residents so that the dues that can be legally assessed are paid in a timely manner or, if not so paid, the Board can move quickly with legal action to recover these dues from the non-paying homeowner. 

I know whereof I speak, as my own association went through a very painful transition in 2007-2008.  I served as a member of our Board during these times, and we inherited over $50,000 in debt left in the association from the time of developer control for unpaid lawn maintenance and snow removal bills, faced threats of liens being filed against our homes for these bills and dealt with large amounts in outstanding dues from homeowners who were in foreclosure.  Fortunately, we were able to get the bills paid, dues collected and liens removed. 

One last word of caution to homeowners who find themselves on the Board:  if you do not already have a conflict of interest policy, get one in place ASAP!  Conflict of interest policies set forth guidelines of what constitutes a conflict of interest, and if one arises, how it is to be disclosed and how the Board member with the conflict is supposed to act (typically abstaining from the decision making process as to a particular course of action).  Conflict policies have become standard for almost all non-profit organizations in order to ensure that the Board members are putting the organization’s interests ahead of their own.

The consequences of not having a conflict of interest policy can be disastrous.  For all the good our initial resident Board did for our association and our neighborhood, we allowed a major problem to be created when a general contractor who lived in the neighborhood took over our architectural control committee (which has authority to review and approve designs for decks, patios and additions – all things that he does in his business).  The perception became, rightly or wrongly, that unless you used that individual to build your deck, you would not obtain approval from the committee for your planned improvement.  In one instance, this Board member took action at the behest of a resident who had hired him to build a deck.  It took me resigning in protest of these actions for the remaining Board members to realize the need to enact a conflict of interest policy and make the Board member at issue, as well as the other Board members sign it. 

The issues in my association, which have arisen in many associations where the developer left before completion of the neighborhood, are an unfortunate side effect from the residential real estate market’s decline.  These planned neighborhoods, billed as “paradise”, have become anything but.