About This Writer

2005 October 30

    As explained in the Welcome post, I am particularly interested in establishing communication with those of you who have a similar interest in democratic reform of property owners association law to broaden the collaborative effort.

    Click on the "ABOUT" link at the top of the left column for general information on this writer.  More specific information related to governance of property owners associations is given below. 

    I was a president of an owners association for four years (board member for five) during which there was major ligitation with the developer leading to conveyance of $5,000,000 in common property (golf course, clubhouse, community center, park on a lake, other) to the association and transition from developer control to member control. 

    Subsequent to the transition, the board of directors became an oligarchy and has plunged the association into major debt by overspending on improvement to common facilities based on defective financial justification and inadequate capabilities in budgeting and financial controls.  Many of their actions appear to have been inconsistent with the governing documents.  Expressions of concern, explanation of the provisions in the governing documents, and requests for corrective action were ignored. 

    Even though some amendments were made to the governing documents in preparation for conveyance of the common properties, the provisions in the governing documents were still largely based on the developer's interest as originally drafted by the developer — I call this the Developer's Model for Governance.  Consequently, the governing documents did not provide the basis for intervention by a few members who believed that the board was overspending and was not responsive to the collective interests of the members. 

    It was also apparent that the Michigan Nonprofit Corporation Act under which the association was organized (Michigan does not have a POA law) was of no help.  Moreover, there is very limited case law in Michigan regarding POAs to have any certainty as to how courts might rule.  Likely, case law concerning for-profit corporations would be applied to the POA as a non-profit corporation. 

    This leads to the conclusion that, even if all the "right" provisions had existed in the governing documents, the basis for the members to intervene through legal action was still uncertain because of lack of Michigan POA law concerning POAs. 

    The continuation of this post provides additional information on my involvement in property owners associations which should explain my interest in POA legislation. Specifically, it includes a brief history of the PUD and its owners association.  It is an interesting story of what can happen and does in common interest developments.  This story is not unique. 

Don Nordeen
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2005 October 30

    Prior to my retirement in 1991, we owned four different homes in four different Michigan communities.  The second was a development in West Bloomfield Township of Oakland County that was subdivided into residential lots on which the owners and/or builders built homes.  It had an active neighborhood association which primarily involved care of vacant property and principal entrance through voluntary donations.  The third was also subdivided into lots with restrictions limited to the zoning for the City of East Lansing.  The original land was the estate of former President Shaw of Michigan State University.  Obviously, the subdivision was known as Shaw Estates.  This is one of the few developments that provided abstracts as proof of title, rather than title insurance. 

    The fourth home was in Nottingham Forest Subdivision in the NW corner of the Village of Beverly Hills in Oakland County.  This was a deed restricted community with a few general restrictions on home size and placement, garages couldn't face the street, parking of some vehicles, etc.  These were all very general restrictions that enhanced the appearance of the community, and likely the property values.  The annual dues were $35 for maintenance of entrance ways and snow removal. 

    Perhaps five of more years before retiring, we concluded that the location would be northern Michigan and likely a year-around community of economic and other activities.  We bought a lot in a planned unit development as a likely possibility for a home location.  Beginning in 1971 and extending over the next 16± years, the developer subdivided the land into a number of individual subdivisions which had similar but not identical Covenants, Conditions and Restrictions (CC&R).  The developer built a clubhouse with a bar & restaurant and an indoor-outdoor swimming pool and a very nice 18-hole golf course (with many abutting lots) in the early 1970s.  The community center included a small lake, tennis courts, other playground and game facilities and a few picnic tables.  In addition, the common property included a separate park area on a larger lake with its own Lake House.  Cross country ski trails wound through lands not suitable for residential lots within and among the various subdivisions.  Some of the original land included a small ski hill, tows and hut which was not competitive with larger ski facilities with longer and better hills being developed in northern Michigan. 

    At the time of the lot purchase in the late 1980s, we were not aware of the severity of the issues with the developer over transition of control to the owners association (no such disclosure requirements in Michigan law then or now) and conveyance of recreational facilities to the association.  I did read the governing documents, but did not understand the intricacies relating to the methods of developer control over affairs.  With the ownership of the lot came the communications from the association.  The developer maintained control over the association by having a separate classification of membership (Class B) which the developer could use to override and/or veto any action of the board.  Initially, the developer had all seats on a seven-member board which was gradually reduced to zero by the early 1980s.  The board composition and election of directors were inconsistent with the provisions in the bylaws. 

    All of the common facilities were operated by the developer with association dues used for administration and operation of the facilities, which was a questionable use of dues since the association did not have title.  Competitive fees with a slight discount were charged members for golf and downhill skiing.  Successful operation depended upon green fees, downhill skiing and bar & restaurant sales to the general public.  By 1982, the dues were $120 per year — the maximum dues permitted under the CC&R as long as the developer maintained Class B vote control.

    Begun in 1971, this Planned Unit Development (PUD) was one of the first common interest developments in northern Michigan.  Initially, a broader array of recreational facilities was planned consistent with the representation as a "four-seasons" resort community.  The initial marketing was primarily as vacation and second homes.  Interstate 75 had recently been completed which made this PUD a 3+ hour drive from the metropolitan Detroit area.  The land was sufficient for 2850 lots.  Several builders made home building in the PUD their primary businesses. 

    The original projections were for most lots to be sold in five years, and certainly by the late 1970s.  The projections were overly optimistic resulting in major financial problems for the developer.  By 1982, only about 1600 lots were subdivided with maybe 1500 sold.  About 400 homes had been built.  With the downturn in the economy and the high gas prices in the early 1980s, the financial burden on the developer increased including greater losses in operating the recreational facilities.  This led to a plan by the developer to convey the recreational facilities to the association. 

    Part of that plan was a transition from developer seats on the board to "election" by association members which was completed by 1982.  The transition of the operational control of the recreational facilities was made in 1982, but the developer reneged on conveyance of the common property.  This then resulted in the expenses of operation of the common properties being borne by the association, initially without even a lease.  The developer retained title to the common properties and did not fund any reserve account for repair, replacement or renovation.  Additional efforts were made to attract more non-member customers to increase revenues.  In 1985, the developer took the conveyance "off the table" but the association continued with operation and covering expenses. 

    In 1986 and 1987, additional investment was made by the owners association (indoor swimming pool and other facilities with a $500,000 special assessment) and a separate investment group (second 18-hole golf course).  Another group planned to invest in lodging facilities, but reneged.  These new facilities were intended to function together to attract new "non-member" business for all involved.  For the association, the new investment only increased the costs.  The new indoor swimming pool was operated for only a short time.  The second golf course was built, but has never been financially viable.  Though located within the PUD, it continues to be owned by an investment group, not affiliated with the owners association.  It was jointly operated with the existing golf course from 1987 through 1993.  In this same time period, the association and the developer agreed to a lease of the recreational facilities in exchange for the dues on developer-owned lots.

    This "status quo" existed for another six years through 1993 with a gradual deterioration of the association's financial condition.  We bought an existing home in the PUD in 1993 and moved north.  In further studying the governing documents, I concluded that the developer's claimed Class B vote control was not necessarily based on clear language in the documents.  As a new face, I thought that I might be able to be part of an effort to find common ground with the developer.  After one meeting with the developer in November of that year, I realized that the "heals were pretty deeply dug in." 

    Also in early 1993 or maybe late 1992, a nonprofit corporation "Owners for a Better (name of PUD)" was formed to consider litigation against the developer for conveyance of the recreational facilities and transfer of full control to the association.  The communications from this group defined the issues involved.  I re-read the governing documents and began to have an understanding of how the developer was maintaining control over association affairs.  The complaint was filed with the nonprofit corporation as plaintiff, but was subsequently dismissed because of lack of standing.  However, the court allowed the complaint to be amended to a class action which was done in early 1994.  In 1994, three members — myself and two others — decided to run for the board to address the issues with the developer directly.  Even though "elected" by about 2:1 margins, the developer refused to seat us through the Class B vote control, which resulted in a second immediate lawsuit.  The matter regarding seating of the "elected" board members was settled with the developer agreeing to not exercise the Class B vote control over the election (obvious conflict of interest).  The lease of the recreational facilities was terminated by the new board.  The developer couldn't use the Class B vote control to oppose the termination of the lease because of the obvious conflict of interest.  The termination of the lease made the owners association financially viable, though saddled with large debt. 

    The developer closed the clubhouse including the bar & restaurant, but operated the golf course.  The facilities, now 20 years old, were in obvious poor condition.  The two lawsuits against the developer continued with partial settlement terminating the Class B vote control, which removed the restriction on the dues cap.  The members approved a dues increase to pay down the debt in early 1997.  The class action lawsuit proceeded with certification as a class action in 1996 and an order for conveyance of the recreational facilities in late 1996.  After certification as a class action, the board voted to fund the litigation with association funds since the class was all members of the association.  The conveyance order was appealed by the developer to the court of appeals which immediately stayed the litigation.  The court of appeals lifted the stay for a motion for appointment of a receiver.  This motion was heard in circuit court and granted.  The receivership placed additional financial obligations on the developer.  The critical orders were appealed by the developer to the court of appeals.  Some were granted and some not.  A critical order in favor of the association was appealed to the Michigan Supreme Court and was denied. 

    This set the stage to proceed with the litigation in circuit court.  The financial pressure on the developer from the receivership, and other orders favorable to the association were critical, and resulted in the developer likely to be declared in contempt of court.  The developer agreed to a comprehensive settlement just prior to the contempt hearing — "on the courthouse steps." 

    The comprehensive settlement included the conveyance of the golf course, clubhouse with its bar & restaurant, meeting rooms and indoor-outdoor swimming pool, community center, and other facilities.  Included was a cash settlement that was sufficient for renovation of the clubhouse.  The golf course was accepted as is.  The developer relinquished all voting influence in association affairs.  A master CC&R was created for all subdivisions, condos and other individual developments within the PUD.  Included in the new master CC&R were amendment requirements that were realistic but stringent.  The requirements for development of undeveloped lands within the PUD were defined.  Certain lands not likely to be developed will be conveyed to the association at defined future dates.  All of this was in the final order of the court that was ratified by default (opportunity to object or be excluded from the class) by the members (in the class action). 

    The implementation of the final order took a year or more.  Writing the new master CC&R was a major undertaking since there were CC&Rs for more than 20 separate subdivisions or property developments involved.  Extensive survey and legal descriptions were required to fully define the property being conveyed.  This work was done jointly with another prior board member, the association's attorney, a land survey company, and the developer.  The settlement included a requirement for a title policy on the common property conveyed.  Now, five years later, there has not been any problems with any of the title and legal work implementing the settlement. 

    Two major efforts were required on the governing documents.  The first was to create CC&R for the common properties as running with the land for all property units within the deed-restricted property units.  The second was an update of the master CC&R for the PUD as it has evolved.  Gradually, the homes have shifted from vacation and second homes to full-time residences, or half-time residences for the snow birds. 

    My involvement in a leadership position ended with the implementation of the provisions of the settlement and the governing document changes described above.  With the  elections of new board members a year earlier, there was virtually a complete turn of board members (seven members with staggered terms) by the end of the second year.  The new board quickly became an oligarchy (inadequate bylaws to prevent) which resulted in the events described in the introduction to this post. 

    My initial research was to study common interest developments and property owners associations for ideas on how corrective action might be taken.  This quickly led into the legislative arena, which is the principal subject for this weblog.  Good legislation concerning content in CC&Rs, POAs defined as a distinct legal entity (private government), defined members' rights, specific and enumerated (limited) powers of the board, required content in bylaws, low-cost methods to ensure board adherence to the governing documents, etc. could have prevented the above, or at least have made the corrective action through litigation easier.  To date, my research indicates that the Florida HOA law, the Virginia POA law and the New Jersey Senate bill have some, but not all, of the content described above. 

    A major change in thought process concerning common interest developments and property owners associations is required.  What exists today for many understandable reasons is a Developer's Model of governance (developers write the initial governing documents which are obvious crafted to meet their interests).  We need a "new book" — a new paradigm —  based on a Democratic Model for governance of the POA members, by the POA members and for the POA members. 

Don Nordeen
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Comments

[Rafael Pineiro]

2007 Mar 23

Please follow current Florida law effort to support paradigm shift. Many feel just like you.

Rafael Pineiro

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2007 May 06

We need a link to an website that posts the legislative status and activity by state — particularly for a state like Florida which has ongoing amendment to the CID/POA laws.

Don Nordeen