For many reasons, common-interest communities such as co-ops, condominiums, and HOAs prefer that the people living in the community’s units be the actual owners of those units – rather than renters, or subtenants, or relatives of the owners. The conventional wisdom here is that owner-occupants have a more deeply vested interest in the overall health and smooth operation of their community than non-resident owners, because it’s their actual property – not some faceless landlord’s. Same goes for board members – it seems pretty obvious that someone serving on their building or association board will be more effective and engaged if they actually live in the building or association, and not several states away.
In the world of common-interest communities, the vast majority of owners are also occupants. They purchase their unit as a primary residence, and live there the majority of the time. But other possibilities do exist. In some communities, particularly in existing apartment buildings that have been converted to co-op or condominium ownership, any number of units may be owned by the original landlord or building owner – usually referred to in this instance as the sponsor. These units may be encumbered by holdover tenants who didn’t opt to purchase their unit when the building converted, and who in turn may be subject to various rent regulations, such as rent stabilization in New York City.
In newly-constructed buildings, there may be some number of units still owned or retained by the developer. These may also be rented to non-owners, but are not likely to be subject to older rent regulations designed to protect tenants who chose not to purchase their units, such as in the above-mentioned conversions.
Lastly, in either existing conversions or new construction, there is the possibility of investor units; apartments that have been purchased by a third party and operated as a source of investment income as one would any rental property. An investor could own one unit or many; the maximum number usually dictated by the community’s governing documents.
Board of Directors: Who May Serve?
According to Phyllis Weisberg, an attorney with Montgomery McCracken Walker & Rhoads, which has locations in New York, Pennsylvania, New Jersey and Delaware, in many states, “There is no residence requirement to serve on the board of a co-op or condo.” Rather, “one must look at the bylaws.” Co-op corporations or condominium associations can prescribe other requirements if they so choose.
According to Stuart Halper, an attorney and Co-Founder of Impact Real Estate Management, which has offices in New York, anything is possible with respect to board participation. “Unequivocally the answer is yes, [non-residents can serve on their board], provided that it’s allowed by the bylaws of the co-op or condominium. When a sponsor is involved, it’s very common for there to be non-resident shareholder board members.”
Weisberg also points out that the logistical issues that might have made it difficult or impossible for a non-resident owner or shareholder to participate meaningfully in board activities and administration are no longer really much of a problem, thanks to video and telecommunications capabilities like Skype and FaceTime that allow board members to actively participate in meetings and other board functions from pretty much anywhere in the world. “People don’t need to be close enough to attend meetings,” she says. “They can participate by speakerphone,” or other technologies. “Some boards today meet entirely by conference call.”
Filling Seats and Navigating Agendas
A common problem in common-interest communities – whether they are co-ops, condominiums, or HOAs in urban, suburban or planned communities – is filling the seats on the board. Volunteers are hard to find. That difficulty may result in non-residents sitting on the board. “We recently had a situation where two board members were out getting proxies for their slate,” says Halper. “They didn’t have a third person, though, to run against another block of candidates. We looked at the bylaws. It turned out that only the president was required to be a resident shareholder. So we decided that if they have the proxies and the votes, the managing agent would be the third board member.”
At the heart of the quandary is the differing agendas held by resident owners versus non-resident owners. “Their interests are different,” says Halper. “An investor wants to keep maintenance low. They make money on the spread between maintenance paid to the co-op, or the common charges paid to the condominium and rental income they receive from their tenants. They bring a different gestalt to the equation.”
Ellen Shapiro, an attorney and Principal with Goodman, Shapiro & Lombardi, a law firm located in Dedham, Massachusetts, offers a similar opinion to Halper. “The agenda of an investor/owner is somewhat different than those of an owner/occupant. Investors/owners are thinking of tax consequences, depreciation, different concepts of curb appeal designed to renters. They have a different attitude. That’s not to say a negative attitude or one contradictory to the welfare of the property. For an owner/occupant it’s an investment as well, but not the same kind. When you talk about an investment that’s strictly business motivated, you’re going to be approaching things from a different perspective than if you live there.”
Another factor that may cause friction is the economic status of the residents. Older residents living on fixed incomes who bought in at low prices many years earlier may not want to spend money on improvements that appear of the utmost importance to younger more affluent residents who have purchased their units more recently. These older, more financially cautious residents may side with non-resident investor types in keeping expenditures down.
Sponsors add a whole other dimension to the problem. Typically, they allow sponsor representation on the board, but limit the period of sponsor control. Both Weisberg and Halper maintain that sponsors have interests more akin to investors than to resident owners. They are more interested in short-term appearance and value than to the long term health and stability of the property or building. That strategy is dictated by the fact that they are seeking ultimately to dispose of their assets in the co-op or condo association in a much shorter period to time than resident owners who have made a much longer-term investment. “Sponsors,” says Weisberg, “may not want board members to look too closely at the building construction or financial issues, lest they decide to assert claims against the sponsor.” Long-term resident owners serving as board members may be more diligent about such issues.
Special Circumstances in Florida
Florida is considered by many experts to be ground zero for both the development of common interest communities and common interest community law. Unlike in New York, Florida’s state statutes cover co-ops, condos and HOAs in great detail in three separate statutes. The unique circumstances of the Florida market have led to situations not common elsewhere.
Lisa Magil, a common interest community attorney with Kaye Bender Rembaum, which has offices in Pompano Beach and Palm Beach Gardens, outlines two such situations. The first relates to investor units. After the financial collapse in 2007, there was a flood of defaults on condominiums and other common interest units. In many cases, investors, many of them real estate operators, sought to buy blocks of units. “In the past,” she says, before the collapse, “there was a concept of being a ‘subsequent developer.’ You bought or owned a certain number of units and were leasing or selling them on a regular basis; you could be pigeonholed into the ‘developer role,’ and prohibited from regaining majority control of the board. That changed with the enactment of the Distressed Condo Relief Act. There were a lot of condos going belly-up and investors wanted to buy them, but they didn’t want to buy 50 percent of the units in a complex when they had no ability to control the use, maintenance or direction of the project. If they were to buy that much of a project they wanted to be in control. The act carved-out an exception for bulk buyers. They are able to vote their shares and possibly even get majority control of the board of directors.”
Another problem unique to Florida is the large number of part-time residents, often older adult ‘snowbirds’ who live in the state and usually own common-interest units for six months a year. “If you have an entire board,” says Magill, “that leaves in March and doesn’t return till October or November, decision making is bootstrapped because they can’t convene a meeting for people to attend. The use of technology has improved that situation dramatically.”
What’s Best for the Community?
In the final analysis, the participation of non-resident owners or even non-owners on co-op, condo and HOA boards is a fact of life in most common-interest communities. Clearly, unless otherwise stipulated by the bylaws or other governing documents, one does not have to be ‘in-residence’ to serve. In some cases, one does not even need to be an owner to serve. With that said, what is the real effect on the health and operation of the community by having non-resident board members?
Halper says “It’s not particularly in the interest of the resident shareholders of the community to have non-residents on the board. They have different interests. It also makes management more complicated. It creates tensions on boards as the non-residents don’t have the vested stake in many issues that residents do.” In an imperfect version of a perfect world though, Halper suggests, “Everyone brings different things to the table, and a healthy board has a good mixture of that.”
Perhaps then a little diversity can be a good thing.
A.J. Sidransky is a published novelist and staff writer for The Western Florida Cooperator.