More on HOA and Condo Association Conflicts of Interest

My last E-newsletter (which you can find on my website at in the E-News Archives) addressed conflicts of interest in homeowner associations and condo associations. The focus was on board and manager conflicts. In response, I received the following email followup question:

Just read your article on Conflict of Interest and have a question.  How
does the Builder get away with having employees being the majority of Board
Members on a Board of Directors until 5 years after the close of the first
escrow.  This to me is a big conflict of interest especially when it comes to
the Board handing problems with the Builder.”

My response is that there are reasons the builder gets weighted voting and the right to have employees serve on the board until 5 years adter the close of the first escrow (which is usually the case but the timing might be defined differently in your association documents).

The developer/builder has a vested interest in the association until all of the units are sold, which usually takes a few years. The developer has the responsibility to make sure the reserve studies are prepared and must have a hand in making sure the reserves are funded because it can be sued for breach of fiduciary duty in setting up the association the same as a board in a more mature association could be for failure to take reasonable steps to protect the financial viability of the association and the property values. The 5 year timeline is one that is approved by the DRE in the development documents and it also allows for time for “phasing” – building and selling in phases. However, even with the rights of putting employees on the board and weighted voting (which often allows for majority representation on the board), the builder/ developer still has the responsibility to make choices for the benefit of the association over itself.