For homeowner associations that have already transitioned from the developer of the community to membership control, voting classes, rarely come up. It typically only comes up when boards of directors are thinking of making amendments to their declaration of covenants, conditions, and restrictions (CC&Rs). Voting rights and amending the CC&Rs will be covered later in this blog. An understanding of why there are different voting classes and how they can affect memberships still under developer control the main topic of this blog.
Very often, for any myriad of reasons, the membership becomes less than happy with the HOA’s developer. Many times, these reasons are legitimate issues of the developer not carrying through with their obligations. The best example that was most common during the last housing crisis was the combination of economic issues affecting everyone, the developers, builders, and the HOA memberships. In most of these housing crisis cases, it was beyond everyone’s control. However, this economic reality seemed to be of little solace to anyone.
In the last housing crisis everyone, developers, builders, and the memberships were being economically squeezed. This was especially the case if the member was attempting to sell their home in an uncompleted HOA development. When the crisis began many HOA developments were not completed or in a position where they could be turned over to HOA membership control. Which, in many instances, resulted in a great deal of tension between developers, builders, and the membership.
Three factors are affecting a new development that weighty correlate between the developer, builders, and the HOA membership. First, it is safe to say that every developer wants to sell the last lot in their development as fast as possible for the highest profit possible. The second factor is that every home builder wants to build and sell their last home in an HOA development as fast as they can and sell it for the highest amount of profit possible. Thirdly, in most instances, the membership wants the developer and the construction work completed and out of the neighborhood as fast as possible. So, when any of these factors do not occur or are slowed down, there are almost always going to be problems.
The top three reasons the membership becomes upset if the development is not completed in a timely fashion. First, construction traffic, (muddy streets, construction delivery trucks tearing damaging the HOA’s streets, construction noise.) continually disrupting the community. Second, it can be much more difficult for a member to sell their home when they are competing against brand new homes that could be right next door that is being sold. Even worse in economic slumps, the brand-new house could be selling for less than what the member paid originally for their home. Third, because of economic reasons, the developer is not finishing amenities or completing other developer responsibilities as promised. The author of this blog was asked to visit a development in 2009 that had a clubhouse that had cost close to two million dollars for the developer to construct in 2006. One of the nicest clubhouses this author had seen within an HOA. The developer had finally completed the larger second swimming pool. However, instead of putting up an expensive black powdered coated aluminum fence like what was around the first pool and clubhouse, a treated wood and hog wire fence was surrounding the new pool.
The developer and/or builder’s main concern is the slow pace of construction and selling their product can eat into or eliminate profits altogether. Lenders can also be putting pressure on developers and homebuilders to repay loans at a faster pace during economic downturns. A distant third to these previous two items is the membership being unhappy and continually voicing their unhappiness. This brings up the different voting classes and why this can be frustrating to the membership when they have developer issues.
Voting rights or even if they are applicable will vary from state to state. State statutes can vary drastically. So, anything stated in this blog should be reviewed and confirmed by the association’s attorney who is experienced in homeowner association law to ensure it applies to the particular HOA’s situation.
First, why are there different voting rights allotted to certain parties. Simply, and in most cases, it is to prevent the developer from losing control of the association before a certain time. An argument can be made that this prevents select HOA members from gaining control and interfering with the developer in developing the rest of the property. The most reasonable explanation for these types of provisions is that the developer has much more of a financial commitment to the development and protects his interests.
An argument can also be made that the membership, for lack of a better term, can be at the mercy of the developer until the developer completes the HOA. In 2010, the author of this blog was invited to a board of directors meeting where the membership had just taken control of the association. The developer had reached the point in the CC&Rs where he had to relinquish control. The economy was still in very poor shape and the developer was selling his remaining unbuilt lots at a snail’s pace. The first action of the new membership board was to ban all construction vehicles from the HOA’s private streets because of the damage the trucks were causing. This ban did not hold up to the legal challenge, and it did not accomplish anything positive.
Voting rights typically allocate so many votes to a certain class of homeowner association members. One class of voting will get one vote per membership or owning one lot within the association. While another voting class will typically receive multiple votes per owned lot. The multiple can be anything unless otherwise mandated by state statute. Three times to ten times is probably the most common multiple. This multiple voting class is for the developer to maintain control of the association. Typically, there are at least two classifications and sometimes more. In the following example, there is a third classification that can address third-party interests. This third-party category can be for lending intuitions that have liens on the developer’s unsold real estate.