Hi Friendos,
I have a friend who owns a home in a development with an HOA. After buying the home, they had an arborist examine certain trees on the property. The trees were dead and needed to be removed before they fell over, potentially right into the house. They had the arborist remove the trees. Unfortunately, due to certain local environmental regulations, the HOA needed to give approval before the trees could be removed. My friend did know of the rule, but assumed approval would take a long time and was unwilling to risk a tree falling into their house in the meantime. They figured, better to ask forgiveness then permission. In fact, the HOA could have expedited approval in a day or two. The HOA had recently been embroiled in a massive fight with a different (totally nutso) homeowner involving the exact same type of trees, and was highly sensitized to litigation risk if they did not treat all homeowners in the same way, imposing by-the-books fines on my friend. The board was worried about the high cost of potential litigation and how this could impose costs on everyone in the development. Ultimately, the board did not have to impose fines on my friend, but it took months to resolve and was very stressful. If only they had better understood how their HOA operated.
If you live in multi-family housing, like a condo or a coop, or a home in a development with an HOA (homeowners association), your housing corporation has a board of directors, shareholders, and corporate officers. It is helpful to understand these different roles and how they function.
What is a board of directors?
If a residential building has a single owner, that owner is responsible for all the maintenance, complying with local laws, and everything else. It is always easy to know who has the power to make the decisions and who is financially responsible.
If you own a condo and your fridge breaks down, you have to pay for a new one, arrange for it to be delivered, and deal with disposal of the old fridge. It’s your fridge. But what if the building has a steam heat system that serves the whole building and the boiler stop working? A multi-family building where different units are owned by different people needs some kind of system for maintaining common areas and other shared elements of the building. There also needs to be a way to handle anything that impacts the building as a whole (like local regulations or…the unpermitted construction next door that is threatening the building’s retaining wall), to deal with issues that might arise among unit owners (noise complaints, leaving personal items in the hallway, renovation work outside business hours), or to address any other number of building-wide issues that might crop up.
The building corporation (“condo corporation,” “coop corporation,” or “homeowners association”) is the legal entity empowered to do all of that, and that legal entity has a board of directors that has ultimate control of the housing corporation. The individual people who are on the board are called “board members” or “directors” or “members of the board.” In my condo building, our governing documents call it the “Board of Managers” instead of the “Board of Directors.” To-may-toe, to-mah-toe.
The board is empowered to make certain decisions on behalf of all the owners. For example, I live in a condo building where the board decided to hire a property manager. That property manager does certain things for the building like pay our monthly water and sewer bill. The board could decide to change property management companies if it wanted to, or not have a property manager at all. The board is also empowered to determine the dollar amount of our monthly common charges, which is a monthly fee each owner pays to cover costs like the property manager’s fee, the water bill, and importantly, the insurance policy for the common elements of the building (e.g., if the roof is damaged by a tree falling on it, the building’s policy will pay for the repair).
HOAs can be present in a development with multi-family homes, but also single-family homes where the development was established with certain rules that apply to all the properties in it. The HOA may maintain common elements of the development, such as landscaping at the entrance to the development, or provide certain services like sidewalk snow shoveling. HOAs also have a board of directors.
Board members of these kinds of housing corporations don’t get paid for their work. They volunteer because they want to help their building/development, influence things in a certain way, and get to know their neighbors. Each board member is elected by shareholders to serve for a particular length of time, a “term.” Typically, the building’s governing documents allow a board member to be reelected multiple times. In some buildings you have board members who have served for decades.
In publicly traded corporations, board members do get paid. For many non-profit organizations, board members don’t get paid and in fact, are often the largest donors to the non-profit. Board members of different types of organizations have different types of activities and responsibilities.
I served on the board of my old coop building for five years. The most common agenda item at our meetings was garbage. Sometimes we talked about required building repairs, the stroller hooks in our tiny lobby, or how maybe it was time to replace the carpet on the stairs, but we always talked about garbage. Everyone I have ever known on a housing board says garbage talk is big.
What is a shareholder?
Shareholders are owners of the housing corporation. If you own a condo and rent it out, you are still a shareholder of the condo corporation because you are the owner. The renter of the condo is not a shareholder; they are a resident.
I mentioned above that directors are elected by shareholders. You can be a shareholder and a director. You can be just a shareholder. It is also possible to be just a director (e.g., a resident who is not an owner) but this is less common and may not be permitted by local laws or the governing documents of the housing corporation.
When you buy a home that is part of a housing corporation, you obtain a specified ownership percentage of that corporation. The percentage usually relates to the size of your property, with owners of larger homes also having a larger ownership stake in the housing corporation. The monthly fees levied by the housing corporation will be proportional to each shareholder’s ownership percentage, so if one owner has an ownership percentage twice as large as another, they will pay twice the monthly fees.
Is it fair for different units to have different ownership sizes? It’s hard to give a blanket answer, but I do think this is the best approach when considering both fairness and practical efficiency. Larger units tend to house more people, and therefore tend to use and enjoy more of the building’s shared utilities and services (e.g., water and sewer: if you have 2 people in a unit, they probably bathe and flush the toilet about twice as much as a unit with just 1 person). In my building, the condo corp’s insurance policy is one of its largest costs. You could argue that because the larger units are worth more, they benefit more from that insurance policy and therefore should shoulder more of its cost. Does someone living in a smaller unit enjoy a building’s well-maintained entryway less than someone in a larger unit? Arguably not, but what would you do, bill shareholders for some costs based on # of people and others based on unit size? Do you adjust if one of the people is a baby? A child who spends part of the time with their divorced parent who lives elsewhere? I can’t think of another system that would be practical for actual use.
Here is an excerpt of the actual ownership table for my 6-unit condo building:
Units 1A and 1B are larger in size than the others. The people who chose to purchase parking spaces at the building also get a tiny bit of extra ownership and pay a couple bucks more each month in common charges. There are six units in the building, but because of these differences in ownership percent, you can get a majority (51.75%) with only 3 units if you add together units 1A, 1B, and either 2B or 3B. Does that matter? Not to me.
My former coop building also had slightly different ownership %’s due to slightly different square footage of units. In that building, nearly everything was done on a consensus basis and people were extremely reluctant to come out “against” a neighbor. Different housing communities will each have their own culture. On a practical level, I think culture and norms have a more important impact on the experience of living somewhere than governing rules and laws.
What is a corporate officer?
Corporate officers have titles like Secretary, Treasurer, and President. Each corporate officer will have its own duties and responsibilities. For example, the Secretary may be responsible for maintaining minutes (notes) of board meetings. The Treasurer probably has to keep an eye on the finances of the housing corporation. Corporate officers are elected/appointed by the Board.
The governing documents of the housing corporation will state if there are required corporate officer positions, and local laws may also have certain requirements. My condo building is required to have President, Vice President, Secretary, and Treasurer. It may have other positions, such as Assistant Treasurer, but this is not required. Corporate officer positions may be a useful way to divvy up various responsibilities without having to constantly assign them and figure out who will do what. The board can reconfigure corporate officer position based on changing needs of the building.
You can be a shareholder, a director, and a corporate officer. Or just one of those. For example, in my old housing coop we had a shareholder who was single when they bought their unit and later got married. The spouse was neither an owner (a shareholder) nor a board member. But they did play an active role in the building and served as a corporate officer: VP of Outdoor Maintenance (chief responsibility: maintain a steady supply of garbage bags for the big outdoor bins).
If you live in a home that has some type of housing corporation, whether you rent or own, I think it is helpful to have some basic understanding of how that housing corporation works. Who runs it? What kinds of things is it responsible for? What are the monthly costs it levies on owners and what are the primary expenses those costs cover? Personally, I feel less anxiety when I understand these sorts of things and feel like I know what to do and who to ask for help if something goes wrong.
-Stephanie
Frequently Taxed Questions 