Article Detail

News & Knowledge

Acquiring Failed Subdivisions: The Risk of Tyrannical HOAs

September 14, 2015

By: Gary M. Kaleita & Adam Lewis

Developers and builders who wish to acquire a failed developer’s residential subdivision, when there are existing homeowners in the subdivision, should BEWARE that a statutory turnover of HOA control may have occurred!

It is generally recognized that, under Florida law, members of a residential homeowners’ association (HOA) other than the developer member, are entitled to elect at least a majority of the Board of Directors of the HOA within 3 months after 90% of the parcels in a community have been conveyed to the homeowners (or a lower percentage if provided by the Declaration of Covenants for the subdivision).  This occurrence is commonly referred to as the “transition of association control,” in that it allows the homeowners other than the developer to control the HOA’s Board of Directors and thereby direct the activities of the HOA.

What many people don’t know is that such a transition is also triggered by the occurrence of any one of the following events specified in Florida Statutes Section 720.307:  (i) the developer abandons its responsibility to maintain and complete the infrastructure as specified in the governing documents, (ii) the developer files a bankruptcy petition, (iii) the developer loses title to its property through a foreclosure action or deed in lieu of foreclosure (unless the successor owner has accepted an assignment of developer rights and responsibilities), or (iv) a receiver for the developer is appointed and is not discharged within 30 days (unless the court determines that transfer of control would be detrimental to the association or its members).

If one of these trigger events occurs, control of the HOA would pass to the members or parcel owners other than the developer, who then have the right to elect a majority of the Board of Directors of the HOA.  A specific subsection of Florida Statutes Section 720.307 states in relevant part that, “[f]or the purposes of [Section 720.307], the term ‘members other than the developer’ shall not include builders, contractors, or others who purchase a parcel for the purpose of constructing improvements thereon for resale.”  This means that any successor developer, builder, contractor or other party that purchases a vacant parcel for construction of a home on the parcel will not be entitled to vote in the election for a majority of the HOA’s Board of Directors.

These statutory provisions create a potentially significant issue when a failed or abandoned community is purchased by a new developer or builder who intends to perform deferred maintenance, complete the build-out of the subdivision and sell the remaining parcels to homeowners.  For example, suppose that Builder A is an initial developer that records a Declaration and establishes an HOA for a new community of 100 homesites, but then goes bankrupt, is foreclosed, or abandons the community after building and selling only 5 homes.  Suppose then that Builder B wishes to buy the rest of the community and finish it.  If the statutory trigger for transition of association control has already occurred, Builder B will not be able to exercise certain developer rights that, under the terms of the recorded Declaration, would otherwise arise by virtue of the developer’s control of the Board of Directors of the HOA.

Why is it important for Builder B to maintain control of the HOA Board as a successor to Builder A’s developer rights?  There are several reasons.  By holding such rights, among other things, Builder B could control the Board of Directors of the HOA and thereby establish the HOA’s budget and administer the common areas of the community, and choose to fund deficits in the HOA’s operating budget in lieu of paying regular assessments on its homesites.  The Declaration may provide for other rights to be exercised by the developer while it is in control of the HOA’s Board, such as appointing the members of the Architectural Review Board or Committee responsible for approving new construction (and thereby ensuring that Builder B’s proposed homes are approved), and obtaining the benefit of developer-friendly provisions in the Declaration that typically grant special privileges to developers for the purpose of facilitating ease of completion of the subdivision (such as the right to amend the Declaration, grant easements within the subdivision, utilize common areas for marketing, build and operate model homes, and similar matters).  Sometimes a Declaration gives a developer these additional rights so long as it owns at least one homesite, but sometimes they are tied to developer control of the HOA Board.

In our scenario involving Builder A and Builder B, given these statutory provisions, Builder B would own 95% of the homesites but have no voting rights in the HOA that could be exercised to elect a majority of Directors to the HOA’s Board.  Instead, the owners of the 5 homes already sold by Builder A would vote for a majority of the Board.  While such a Board might be composed of benevolent homeowners willing to be reasonable in addressing Builder B’s concerns about the HOA’s budget, the condition of the common areas, the types of homes that it wants to construct and sell, the need to build and operate model homes, the need to maintain marketing signs and similar matters that are essential to a builder’s completion of a residential community, Builder B may fear that the Board might instead view Builder B with suspicion, perhaps even as a deep pocket capable of paying exorbitant amounts in HOA assessments to cure every possible ill in the subdivision, or even fund substantial enhancements that the Board may wish to make to the common areas.  It is not beyond belief that Builder B could be tyrannized by a minority of homeowners for the entire time that it takes Builder B to complete the subdivision and sell off all 95 of its homes.  Such a situation could be disastrous for any developer or builder seeking to acquire, rehabilitate and complete the development, and there is no way for Builder B to know in advance what might happen.  In sum, such an authoritarian HOA could significantly impede a rescuing developer’s efforts to complete a failed project.

Despite that such a consequence may not have been intended by the legislature, the provisions of the Florida Statutes governing this situation can have profoundly negative effects on a successor developer’s attempt to “rescue” a failed subdivision.  There may be options available to reduce the risks associated with these circumstances, but they depend on the specific facts involved, the status of the HOA, the history of the project and the provisions of its governing documents, and each presents its own unique concerns.  A developer seeking to acquire a failed developer’s residential subdivision should consult a real estate attorney before signing a purchase contract, in order to reduce the likelihood that it will find itself at the mercy of a tyrannical HOA upon closing.


Adam

Adam Lewis focuses his legal practice on real estate development, commercial litigation, finance and transactions, condominiums, commercial leasing, commercial lending, and title insurance.


Specifically, Adam is responsible for contract and lease negotiation and drafting, real estate acquisitions and dispositions, negotiation and structuring of credit facilities and review of title insurance matters. He represents clients in the acquisition, financing, development and disposition of retail centers, hotels, golf courses and other resort related developments, industrial properties, office buildings, restaurants, retirement communities, shopping centers and vacant land.

Gary

With more than 30 years of experience in real estate law, including over 20 years as a Board-certified expert in the field, Gary Kaleita has acquired the ability to navigate the complexities of sophisticated real estate deals with relative ease.


Gary has a wide variety of experience in real estate development, finance and transactions, condominiums, property owners’ associations, commercial leasing, commercial lending, and title insurance.

Gary enjoys a reputation for anticipating and avoiding problems, rather than merely reacting to them. He has years of experience handling purchases, sales and financings of commercial and residential projects, including office, industrial, retail, multi-family, single-family, condominium, resort, hotel and golf course properties. Gary has prepared and negotiated contracts for sale and purchase, performed due diligence investigations, and handled all aspects of closings, including issuance of title insurance and legal opinions. He has also performed tax free exchanges (both forward and reverse) under Section 1031 of the Internal Revenue Code, and has handled closings for housing revenue bond financing transactions with the Florida Housing Finance Corporation and various local housing finance authorities.

In the area of real estate development, Gary has assisted developers in obtaining land use approvals, plat approvals and permits for various developments from a number of jurisdictions in Central Florida, including planned developments (PD’s) and Developments of Regional Impact (DRI’s). He has drafted and negotiated complex land use documents, including development agreements, cost-sharing agreements, declarations of covenants, conditions, restrictions and easements. He also has experience in mall and shopping center developments, including outparcels, and has assisted developers with the selection, formation and operation of business entities, including commercial and residential property owners associations. He has extensive experience with the formation and operation of both commercial and residential condominiums as well.

In addition, Gary has established somewhat of a boutique practice by acting as local counsel to help out-of-state lenders, investors and law firms navigate the complexities of Florida real estate law. He is frequently engaged by large national and international law firms needing assistance on a variety of issues for their clients doing business in Florida. Gary regularly provides advice on Florida law and custom pertaining to purchase and sale contracts as well as loan documents, addresses local due diligence issues, answers questions involving titles, surveys and title insurance, and provides Florida legal opinions.

Not just another real estate lawyer, before pursuing his career in law Gary served as a U.S. Naval officer on active duty for 4 years in the Mediterranean Sea, first with a patrol gunboat squadron in Italy and then at a communications station in Greece. During this period he traveled extensively throughout Europe, the Middle East and North Africa. He believes his military experience is the source of the practical approach he has developed to problem solving.

Gary also took the initiative, after a homeowner in his own neighborhood was mauled by a Florida black bear in 2013, of researching what his homeowners’ association could do to limit the likelihood of future attacks. In the process, he became an expert in the subject of “bear-wise” communities and drafted a policy that his own homeowners’ association adopted, thereby becoming the first residential community to be officially recognized as bear-wise by the Florida Fish and Wildlife Conservation Commission (FWC). He has since written and spoken extensively on this subject, serves on the FWC’s Central Bear Management Unit Stakeholder Group, and has become a resource for FWC to educate other communities on the importance of bear-wise practices in areas of Florida containing black bear habitat.

Gary focuses on finding pragmatic solutions to complex problems, recognizing that clients want sensible and realistic advice in a timely manner so they can go about their business.

Chambers USA (2015)* reports that Gary has substantial experience acting as lender’s counsel and is acclaimed by market sources as an “extremely responsive, very practical and reasonable” practitioner.


*We make no guarantees or promises that the reader will realize the same or similar results

Meritas Law Firms Worldwide logo
Do Your Part Logo