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Subject: Developer Control of Architectural Review Committee post turnover
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MarkD8
(Illinois)

Posts:1


12/15/2011 10:16 AM  

Background: I own in a subdivision in IL (with approx. 40 one acre lots) that was started circa 2005. Due to the financial meltdown, only 7 homes have been built to date. The homes that have been built to date are all custom homes with brick/stone all around, cedar shake roof and range in size from 6,250 to 10,000 finished square feet. Of the lots that have not been built on, the original developer owns 11, several other builders own between one and five lots, and a few lots have private individual owners. The community was intended to be higher end with all of the existing homes costing well over a million dollars to build. Most of the lots that have been sold by the developer were sold in the $350k to 525k range prior to the meltdown; a couple went through foreclosure last year and sold in the $165k range. The required turnover date per the Declaratin was more than two years ago, but is only now in process with a target completion date of January 2012.

Situation: The original developer, which is under financial distress and is looking to exit, has entered into a contract to sell 10 of his 11 lots (for fire sale price of approx. $70k per lot) to a lower end developer whose focus has been townhouses and tract homes at much lower price points. It appears that the proposed buyer intends to focus on the minimum building requirements in the declaration (e.g., 3,250 square feet) and use floor plans from his tract home developments (substituting all brick and cedar shake roof as specified in our declaration).

The transaction has not been completed yet, but our understanding is that it has a targeted closing date of late December 2011.

Declaration/Bylaw Provisions:

Transfer of "Developer" status under the Declaration. The Declaration defines "Developer" as the initial developer and its successors and assigns, and also provides that "All rights which are specified in this Declaration to be rights of the Developer or Declarant are mortgageable, pledgeable, assignable or transferable. Any successor to, or assignee of, the rights of the Developer or Declarant hereunder (whether as the result of voluntary assignment, foreclosure, assignment in lieu of foreclosure, or otherwise) shall hold or be entitled to exercise the rights of Developer or Declarant hereunder as fully as if named as such party herein."

Control of Architectural Review Committee (ARC). The Declaration provides that the ARC is a "Committee of the Association" and futher provides that that "The objectives of the Declarant is to assure that all Dwellings, improvements or changes in the Development Property will be of good and attractive design, in harmony with the natural setting of the area, built with high quality workmanship, incorporating attractive materials and generally compatible with the other homes and other improvements in the Subdivision, so as to preserve and enhance the value of all of the Dwellings and the aesthetics of the Subdivision." ... To achieve Declarant's objectives, an Architectural Control Committee consisting of three (3) members, appointed by the Developer prior to the time that the Developer or Declarant no longer owns any interest in the Development Property, and by the Board after such time, is designated as agent with power to administer this Declaration with regard to approving or disapproving those matters which are expressed herein to be within the jurisdiction of Developers' objectives. The Committee shall have full power to approve or disapprove individual building plans and to create such architectural design guidelines as It may deem appropriate ("Architectural Design Guidelines"). Matters requiring approval of the Committee shall be submitted to it prior to construction and shall be subject to the Architectural Design Guidelines as set forth by the Committee.

The Declaration provides for a minimum sf (e.g., 3,250 above grade for a two story house), and specifies all brick or stone siding and cedar shake roofs.

Amendment of the Declaration requires 75% vote of Owners (existing developer's 11 lots represent 27%) and, if the amendment adversely affects a right of the developer, the written consent of the developer. Same requirements apply to Bylaw amendments.

Control of Board: We expect (in coalition with non-selling builders who are lot owners) to gain control of the Board (which are elected by a plurality standard, with one vote per lot and no cumulative voting). However, it does not appear that the turnover will be completed until after the proposed sale by the developer is completed.

The Board is authorized in the declaration to interpret the declaration, bylaws and rules and to settle all disputes between lot owners. The bylaws authorize the Board to adopt reasonable rules and regulations.

Issues/Questions: Any thoughts/input/experience on the following would be welcome and greatly appreciated.

1. The ARC currently is comprised of the initial developer, his sales agent (who also will be the sales agent for the proposed buyer), and a non-selling builder/lot owner. The non-selling builder/lot owner has expressed concerns and intends to carefully vet any proposed plans. However, he is only 1 of 3 votes. The Declaration and Bylaws do not state the required vote of the ARC to act.

(a) Can the developer really maintain complete control over the composition of the ARC after the Board has been turned over to the owners by maintaining ownership of a single lot? Or by assigning "developer" status to the proposed purchaser of lots representing less than 30% of the buildable lots in the community? Seems inequitable that the majority of owners (of unbuilt lots and total lots) have no say or influence on ARC matters. Is there a way for the majority to gain control of the ARC?

(b) What if the ARC approves projects that meet the specified minimums, but that the Board and the majority of lot owners believe fails to meet the stated objective to "preserve and enhance the value of all of the Dwellings and the aesthetics of the Subdivision"? What options are available in this circumstance?

(c) What is the required vote threshold if one is not specified? Can the required ARC vote be set by the Board via a bylaw amendment? What if the ARC (which is a Committee) has adopted or seeks to adopt its own rules?

(d) The developer and sales agent in their capacity as ARC members have personal interests that are not aligned with those of all lot owners. Is there a breach of fiduciary duty by ARC members who act on projects in which they have a financial interest? If yes, what remedies are available?

2. Is the existing developer breaching his fiduciary duties to lot owners by engaging in this proposed sale transaction? If not by the mere sale, what if he holds on to one lot in order to maintain control over the ARC and agrees with his buyer to appoint buyer's designees to the ARC? If yes, what remedies are available?

3. Given that the Board turnover will not (and we are told cannot prudently) be completed prior to the closing of the proposed sale by the Developer, what is the recourse of the non-selling lot owners if the developer uses his current positions on Board/ARC to rubber stamp his buyer's building plans prior to the new Board coming to power?

4. Can the violation of the Declaration by the developer in not turning over the Association to owners when required serve as a basis to eliminate his ability to control the ARC? Or is the remedy limited to handing over Board control as was required?

5. Anything current lot owners could/should do prior to the closing of the proposed sale by the developer? E.g., Letters or meetings with developer or proposed buyer? If so, what?

Thanks.
TimB4
(Virginia)

Posts:14948


12/15/2011 11:10 AM  
Hi Mark,

I'll offer my opinion:

Posted By MarkD8 on 12/15/2011 10:16 AM


1. The ARC currently is comprised of the initial developer, his sales agent (who also will be the sales agent for the proposed buyer), and a non-selling builder/lot owner. The non-selling builder/lot owner has expressed concerns and intends to carefully vet any proposed plans. However, he is only 1 of 3 votes. The Declaration and Bylaws do not state the required vote of the ARC to act.

(a) Can the developer really maintain complete control over the composition of the ARC after the Board has been turned over to the owners by maintaining ownership of a single lot? Or by assigning "developer" status to the proposed purchaser of lots representing less than 30% of the buildable lots in the community? Seems inequitable that the majority of owners (of unbuilt lots and total lots) have no say or influence on ARC matters. Is there a way for the majority to gain control of the ARC?

(b) What if the ARC approves projects that meet the specified minimums, but that the Board and the majority of lot owners believe fails to meet the stated objective to "preserve and enhance the value of all of the Dwellings and the aesthetics of the Subdivision"? What options are available in this circumstance?

(c) What is the required vote threshold if one is not specified? Can the required ARC vote be set by the Board via a bylaw amendment? What if the ARC (which is a Committee) has adopted or seeks to adopt its own rules?

(d) The developer and sales agent in their capacity as ARC members have personal interests that are not aligned with those of all lot owners. Is there a breach of fiduciary duty by ARC members who act on projects in which they have a financial interest? If yes, what remedies are available?





a) Based on your posting, Thats the way I read it.

b) Legal Action but if the minimum standards are met, you may lose the challenge.

c) Typically, if the Bylaws are silent, a simple majority of the votes cast would decide.
The required vote could be set by a policy resolution without the need to amend the governing documents (if they are silent).

d) If the ARC keeps to the minimum standards or above and are in compliance with governing documents, then there would be no conflict of interest. If the ACC is violating the covenants and the Board/Developer allows them to violate the covenants, then the only remedy I know of would be through the courts.

NOTE: If it's not in the governing documents (CC&Rs, Bylaws, Articles of Incorporation), then the board may typically adopt and/amend Architectural guidelines as they see fit. Guidelines are just that, guidelines. They are used by the approving authority (ARC) as a guide on what should or should not be approved. If the Association says you are in violation of a guideline, in reality you are probably in violation of the CC&Rs for failure to get prior approval for a change you made and that the change would probably not have been approved because it did not conform to approved guidelines for approval



Posted By MarkD8 on 12/15/2011 10:16 AM


2. Is the existing developer breaching his fiduciary duties to lot owners by engaging in this proposed sale transaction? If not by the mere sale, what if he holds on to one lot in order to maintain control over the ARC and agrees with his buyer to appoint buyer's designees to the ARC? If yes, what remedies are available?




None that I see. You may need to check with a local attorney on this one.




Posted By MarkD8 on 12/15/2011 10:16 AM

3. Given that the Board turnover will not (and we are told cannot prudently) be completed prior to the closing of the proposed sale by the Developer, what is the recourse of the non-selling lot owners if the developer uses his current positions on Board/ARC to rubber stamp his buyer's building plans prior to the new Board coming to power?




File legal action to make them comply with the governing documents.




Posted By MarkD8 on 12/15/2011 10:16 AM


4. Can the violation of the Declaration by the developer in not turning over the Association to owners when required serve as a basis to eliminate his ability to control the ARC? Or is the remedy limited to handing over Board control as was required?




If the complaint was that the Developer failed to turn over the Board when it was supposed to happen - the remedy a court would be most likely provide would be to turn it over now.

It sounds like the current or new developer will maintain control of the ACC until all the lots are sold or the governing documents are modified as those are the terms of the contract.



Posted By MarkD8 on 12/15/2011 10:16 AM

5. Anything current lot owners could/should do prior to the closing of the proposed sale by the developer? E.g., Letters or meetings with developer or proposed buyer? If so, what?




Try to have him transfer control of the Association prior to the Sale.

Request a copy of the financials.



Tim
SusanW1
(Michigan)

Posts:5202


12/15/2011 1:16 PM  
Mark - WHEN was the original turnover supposed to happen?

Is it based on a number of years OR when a certain percent of the property or homes sold in the development?

The new owner of the lots may not meet the threshhold for becoming the "declarant" but might just be a owner of several parcels.

If so, he/she still must abide by the CCRs in terms of home construction and size.

Like Tim suggested - get a "turnover " before this guy buys his properties within the subdivision. He may not even qualify to be a declarant anyway.

JoyceR2
(Virginia)

Posts:112


04/14/2017 5:28 PM  
In a multi development (townhouses, condos & single family) what authority if any does the homeowner association have to dictate ARC for condos or townhouses once all individual associations have been formed?
KerryL1
(California)

Posts:4458


04/15/2017 2:54 PM  
Better to start a new thread, JoyceR. Maybe be a little more specific since some or many of us might not be familiar with Multi-associations in one place (or whatever it is you're describing)
JanetB2
(Colorado)

Posts:3735


04/15/2017 11:17 PM  
Posted By MarkD8 on 12/15/2011 10:16 AM

Background: I own in a subdivision in IL (with approx. 40 one acre lots) that was started circa 2005. Due to the financial meltdown, only 7 homes have been built to date. The homes that have been built to date are all custom homes with brick/stone all around, cedar shake roof and range in size from 6,250 to 10,000 finished square feet. Of the lots that have not been built on, the original developer owns 11, several other builders own between one and five lots, and a few lots have private individual owners. The community was intended to be higher end with all of the existing homes costing well over a million dollars to build. Most of the lots that have been sold by the developer were sold in the $350k to 525k range prior to the meltdown; a couple went through foreclosure last year and sold in the $165k range. The required turnover date per the Declaratin was more than two years ago, but is only now in process with a target completion date of January 2012.

Situation: The original developer, which is under financial distress and is looking to exit, has entered into a contract to sell 10 of his 11 lots (for fire sale price of approx. $70k per lot) to a lower end developer whose focus has been townhouses and tract homes at much lower price points. It appears that the proposed buyer intends to focus on the minimum building requirements in the declaration (e.g., 3,250 square feet) and use floor plans from his tract home developments (substituting all brick and cedar shake roof as specified in our declaration).

Substituting should require amending the CCR's. The builder and buyer would only have 11 votes between themselves.

The transaction has not been completed yet, but our understanding is that it has a targeted closing date of late December 2011.

Declaration/Bylaw Provisions:

Transfer of "Developer" status under the Declaration. The Declaration defines "Developer" as the initial developer and its successors and assigns, and also provides that "All rights which are specified in this Declaration to be rights of the Developer or Declarant are mortgageable, pledgeable, assignable or transferable. Any successor to, or assignee of, the rights of the Developer or Declarant hereunder (whether as the result of voluntary assignment, foreclosure, assignment in lieu of foreclosure, or otherwise) shall hold or be entitled to exercise the rights of Developer or Declarant hereunder as fully as if named as such party herein."

The above transfer info is similar to what is contained in most CCR's.

Control of Architectural Review Committee (ARC). The Declaration provides that the ARC is a "Committee of the Association" and futher provides that that "The objectives of the Declarant is to assure that all Dwellings, improvements or changes in the Development Property will be of good and attractive design, in harmony with the natural setting of the area, built with high quality workmanship, incorporating attractive materials and generally compatible with the other homes and other improvements in the Subdivision, so as to preserve and enhance the value of all of the Dwellings and the aesthetics of the Subdivision." ... To achieve Declarant's objectives, an Architectural Control Committee consisting of three (3) members, appointed by the Developer prior to the time that the Developer or Declarant no longer owns any interest in the Development Property, and by the Board after such time, is designated as agent with power to administer this Declaration with regard to approving or disapproving those matters which are expressed herein to be within the jurisdiction of Developers' objectives. The Committee shall have full power to approve or disapprove individual building plans and to create such architectural design guidelines as It may deem appropriate ("Architectural Design Guidelines"). Matters requiring approval of the Committee shall be submitted to it prior to construction and shall be subject to the Architectural Design Guidelines as set forth by the Committee.

The above bold items could be an issue unless your STATE LAW says otherwise. In some states such as mine the Developer looses all control of the HOA after turnover. Also, in some states the developer has to "reserve" the right to make changes to the construction guidelines. Keep in mind sometimes developers will put items in CCR's which may violate state laws OR they will leave out items they do not want to follow because they know most people will believe what they read in the documents without questioning. For example in my state some developers will put that they can change "anything" in the CCR's which in those cases they screw themselves ... because that statement in the CCR's becomes null and void as it violates CO Real Estate Statute of Frauds.

The Declaration provides for a minimum sf (e.g., 3,250 above grade for a two story house), and specifies all brick or stone siding and cedar shake roofs.

Amendment of the Declaration requires 75% vote of Owners (existing developer's 11 lots represent 27%) and, if the amendment adversely affects a right of the developer, the written consent of the developer. Same requirements apply to Bylaw amendments.

Control of Board: We expect (in coalition with non-selling builders who are lot owners) to gain control of the Board (which are elected by a plurality standard, with one vote per lot and no cumulative voting). However, it does not appear that the turnover will be completed until after the proposed sale by the developer is completed.

The Board is authorized in the declaration to interpret the declaration, bylaws and rules and to settle all disputes between lot owners. The bylaws authorize the Board to adopt reasonable rules and regulations.

Issues/Questions: Any thoughts/input/experience on the following would be welcome and greatly appreciated.

1. The ARC currently is comprised of the initial developer, his sales agent (who also will be the sales agent for the proposed buyer), and a non-selling builder/lot owner. The non-selling builder/lot owner has expressed concerns and intends to carefully vet any proposed plans. However, he is only 1 of 3 votes. The Declaration and Bylaws do not state the required vote of the ARC to act.

(a) Can the developer really maintain complete control over the composition of the ARC after the Board has been turned over to the owners by maintaining ownership of a single lot? Or by assigning "developer" status to the proposed purchaser of lots representing less than 30% of the buildable lots in the community? Seems inequitable that the majority of owners (of unbuilt lots and total lots) have no say or influence on ARC matters. Is there a way for the majority to gain control of the ARC?

The potential issue you have is what you stated above in your documents. I would recommend having a list of questions and schedule a consultation with an attorney to verify your thoughts and research. The following is what I found in state statute:

http://www.ilga.gov/legislation/ilcs/ilcs4.asp?ActID=3273&ChapterID=62&SeqStart=100000&SeqEnd=1850000

The definition states:
"Developer control" means such control at a time prior to the election of the board of the common interest community association by a majority of the members other than the developer.

One question I would ask the attorney is due to the above definition does that make the Developer's statement in the CCR's null and void?

I would also argue it based on:
Sec. 1-15. Construction, interpretation, and validity of community instruments.
(a) Except to the extent otherwise provided by the declaration or other community instruments, the terms defined in Section 1-5 of this Act shall be deemed to have the meaning specified therein unless the context otherwise requires.

You also need to look at the definition in your governing documents.


(b) What if the ARC approves projects that meet the specified minimums, but that the Board and the majority of lot owners believe fails to meet the stated objective to "preserve and enhance the value of all of the Dwellings and the aesthetics of the Subdivision"? What options are available in this circumstance?

None ... everyone agreed to the specified minimums when they purchased and every owner has reliance on what was stated. If anyone wants to build meeting just the minimum requirements that is their right with regards to their property. The minimum is what was determined from the beginning as needed to "preserve and enhance the value ...".

(c) What is the required vote threshold if one is not specified? Can the required ARC vote be set by the Board via a bylaw amendment? What if the ARC (which is a Committee) has adopted or seeks to adopt its own rules?

It is majority of the ARC. If you have three members the majority would be two, and if you have five the majority would be three, etc.

(d) The developer and sales agent in their capacity as ARC members have personal interests that are not aligned with those of all lot owners. Is there a breach of fiduciary duty by ARC members who act on projects in which they have a financial interest? If yes, what remedies are available?

I would contend not when it is the developer. If there is a change in declarant watch for and make sure following happens because if not recorded then there is no successor:

Sec. 1-47. Successor developers. Any assignment of a developer's interest in the property is not effective until the successor: (i) obtains the assignment in writing; and (ii) records the assignment.

In my scenario when the new developer had laws they did not want to follow they would try to state they were not the Declarant and this document filed with my County Records was my proof they were ... LOL


2. Is the existing developer breaching his fiduciary duties to lot owners by engaging in this proposed sale transaction? If not by the mere sale, what if he holds on to one lot in order to maintain control over the ARC and agrees with his buyer to appoint buyer's designees to the ARC? If yes, what remedies are available?

What is developer violating??? He can sell to anyone desires and they have to meet the minimum guidelines in the contract. He can potentially hold onto one, and whether continues ARC control is a question to ask an attorney

3. Given that the Board turnover will not (and we are told cannot prudently) be completed prior to the closing of the proposed sale by the Developer, what is the recourse of the non-selling lot owners if the developer uses his current positions on Board/ARC to rubber stamp his buyer's building plans prior to the new Board coming to power?

Not much I can see, unless violates the CCR's or your laws.

4. Can the violation of the Declaration by the developer in not turning over the Association to owners when required serve as a basis to eliminate his ability to control the ARC? Or is the remedy limited to handing over Board control as was required?

Check with an attorney ... otherwise a Court could potentially take away control of ARC if the court feels it is being abused. However, that would require filing a lawsuit.

5. Anything current lot owners could/should do prior to the closing of the proposed sale by the developer? E.g., Letters or meetings with developer or proposed buyer? If so, what?

Read this entire section of your State Statutes carefully to see if may help:

Sec. 1-50. Administration of property prior to election of the initial board of directors.



Thanks.
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