Top 10 Property Owner's Association Questions.
If you live or own property in a subdivision with an owner's association, or serve on a property owner's association's board, this month's report from counsel will be especially helpful to you. I recently attended the 32nd Annual Advanced Real Estate Seminar in San Antonio, where two Texas attorney's presented an excellent paper on property owner's associations. Reprinted below are the top 10 Frequently Asked Questions regarding POAs, compiled by Sharon Reuller and Roy Hailey.
Ten FAQs About POAs
1. If a delinquent owner files bankruptcy should the POA write off the debt?
No! The mere act of filing for bankruptcy protection does not relieve a person of his debts. If the bankruptcy is "dismissed" because the debtor failed to fulfill all the requirements, the POA may pursue the owner as if he had never filed for bankruptcy protection. On the other hand, if the bankruptcy is "discharged" by the bankruptcy court, the owner/debtor may or may not be relieved of his debt depending on the type of bankruptcy and his plans for each asset. In a typical Chapter 7 discharge, the owner/debtor is relieved of his personal obligations other than those that he reaffirms. In a typical Chapter 13 bankruptcy, the owner/debtor tries to pay off his debts under a 3 to 5 year payment plan that is supervised by the bankruptcy court. The POA should not write off the debt unless the owner/debtor obtains a bankruptcy discharge and does not reaffirm his debt to the POA. A bankruptcy discharge does not effect the POA's lien against the unit or lot. The discharge merely extinguishes the owner's personal obligation for the debt.
2. As nonprofits, aren't POAs exempt from taxes?
Nope. Being a "nonprofit" entity is not the same as being "tax exempt." However, residential POAs are eligible for favorable tax treatments at all levels of government. Incorporated POAs may be eligible for an exemption from State franchise taxes. Common areas owned by a POA may be eligible for appraisal at nominal values for purposes of ad valorem taxes, under Texas Tax Code §23.18. Whether incorporated or not, POAs must file annual federal income tax returns, but may be eligible for alternate ways of calculating taxes provided especially for POAs in the Internal Revenue Code. Some small number of POAs may qualify as "tax exempt 501(c) entities", for purposes of federal income tax, in order to obtain a State exemption from sales tax.
3. Is a POA required to have open meetings under the "Open Meetings Act"?
No, not under that act. As a general rule, the "Open Meetings Act" refers to state and federal laws that apply only to governments and public bodies, but do not apply to private entities like POAs. In Texas, only a couple of huge master planned developments are required by unusual bracketed statutes to comply with the State's "Open Meetings Act" for municipalities. Although the "Open Meetings Act" does not apply, other laws and the POA's project documents may require that meetings of the POA board and POA members be open to all members of the POA. For example, every condominium in Texas is required by TUCA §82.108 to have open meetings, no matter what its documents say. And even if a law or a POA's governing documents do not require open meetings, a POA may want to open its meetings in a spirit of transparency and accountability.
4. Does the POA have to open its records to any owner who asks? What about the "Privacy Act"?
Like the "Open Meetings Act," the "Privacy Act" applies to government bodies and does not apply to private entities, such as POAs. On the other hand, the POA may be required to open its records under other authorities, including its own project documents. An incorporated POA is subject to the open records provision of the Texas Nonprofit Corporation Law. A condominium POA is also subject to the open records provision of TUCA §82.114. Other POA related statutes have requirements pertaining to the maintenance and availability of POA records. Even if a POA is not required by law or its documents to open its records, the POA may want to make its records avaiiable for inspection and copying in a spirit of transparency and accountability.
5. Who maintains a component of the property that is not specifically addressed in the POA project documents, the POA or the individual owner?
The answer relies on the interplay of two general rules. The first general rule is that the owner of property is responsible for maintaining the property. Under this rule, if the component is owned by the POA, it is the POA's responsibility to maintain It. Similarly, if the component is part of the unit or lot, it is the responsibility of the individual owner to maintain it. The other general rule is Tex. Prop. Code §202.003, which requires that the project documents be construed liberally to give effect to the intent of the document. Under this rule, the POA project documents must be read as a whole with an eye towards the overall maintenance scheme and the intent of the maintenance provisions of the project documents.
6. How much should the POA charge as standard fines for violations of the rules?
Although POA leaders and managers like the concept of fines for violations, as a practical matter they are difficult to collect. As a general rule, courts frown on monetary penalties. The purpose of a fine is to encourage conforming behavior and discourage violations. A fine must be large enough to be "felt" by the violator but not so high as to be outrageously punitive. Further, the amount and frequency of the fine should be reasonable in light of the nature of the violation and the frequency of its occurrence. The bottom line is that the POA should be discouraged from setting an inflexible fining schedule or a predetermined amount of fine for any violation regardless of its nature. Also, the POA should be encouraged to establish a "cap" for accruing fines to prevent them from reaching astronomical amounts. Faced with repeated or continuing violations, the POA should not sit back and merely allow fines to accumulate. Instead, the POA should seek other avenues for curing the violation, such as marching to the courthouse or exercising self help remedies if available. Finally, condominiums are subject to the fining provisions ofTUCA §82.102(d)&(e).
7. Does the POA have to pay for an audit every year?
Depends. If the governing documents of the POA require an annual audit, failure to obtain an audit may be a breach of duty. Every condominium in Texas is required by State law to have an annual audit of its financial records. That has been the law for condos since 1963, nothing new. See TUCA §82.114(c). If the POA is incorporated, the Texas Nonprofit Corporation Law (§22.352(b) of Tex. Bus. Orgs. Code) requires only that the board prepare or approve a financial report for the prior year. If an impoverished POA can't generate the funds for an audit that is required by statute or its documents, a decision to dodge a duty is best made by the general membership, and not by the board alone.
8. Don't you have to be an owner who lives at the property - or even an owner - to serve on the POA's board of directors?
Depends. Many folks think that officers and directors of a POA must be owners or residents of the community. No law has that requirement. The qualifications for service on the POA board are determined by the POA's governing documents, usually the bylaws. State corporation law does not require that the officers and directors of a nonprofit corporation be members of the organization. For condominiums, TUCA §82.103(e) states that directors need not be owners. If the project is new, the developer has probably reserved (in the declaration) the right to designate all the directors in the POA's early years. Those appointees are typically not owners or residents of the property. Bottom line, if the project documents say only owners or owner occupants may serve (after the developer is gone), then that is the case for that POA. Otherwise, neither ownership nor occupancy is required. However, as a practical matter, who wants to serve on a POA board who is not a member of the POA, a resident of the property, or involved with the property's development?
9. Can the POA be "disbanded"?
Not easily. This question is usually asked by owners who are so angry with their POA that they want to make it go away. If the POA is incorporated, the State has procedures for dissoiving the corporation. However, dissolving the corporate status of the POA does not by itself get rid of the POA, which may become an unincorporated nonprofit association under Chapter 252 of the Tex. Bus. Orgs. Code. What this question overlooks is the fact that the obligations and duties under the POA's governing documents that are publicly recorded against the land are unaffected by a corporate dissolution through the Secretary of State. To get rid of functions like common area maintenance and the obligation for assessments would require procedures and consents that are beyond the scope of these FAQs, and may require the involvement of platting authorities, city councils, special districts, and the owners' mortgage lenders, in addition to the owners themselves. Suffice to say that dissolving the corporation does not make the POA go away.
10. How can we get rid of a board that makes bad decisions?
Depends. First, try working within the system by constructively sharing your concerns with the board and volunteering to serve on a task force that gathers information or proposes options for the board to consider. Been there, done that? If your perspective is shared by a sizable percentage of owners, you may be able to remove the board and elect new directors by following the recall provisions of your POA's governing documents. If you are in the minority, support reform candidates in the next election. If you can afford to litigate and are willing to gamble with your money, you can try getting a court to see things your way. However, the POA may be using your assessments to pay for the defense of your lawsuit. If none of those options seem feasible, consider that differences of opinion exist in every POA and that the leadership will change .... eventually. Even so, it is possible that your POA will never embrace your point ofview. Different strokes ...