The Timeshare Beat: Jerry Sikes; With Regard to BOD part 1

- Marquis de Lafayette -
(In a letter to Congress, July 23, 1777.)

To avoid any confusion as to the subject matter is in reference to the Board of Directors (BOD) for any Timeshare or Vacation Ownership Property Owners Association (POA)/Homeowners Association (HOA). In order to address this issue we’ll refer to the legal documents relating to a typical resort. These documents usually consist of a Declaration of Dedication, Articles of Incorporation, By-Laws for the Corporation and a set of Rules & Regulations. These collective documents are usually refereed to as the Covenants, Conditions and Restrictions or C.C.&R’s.

Typically these Boards occur when Association is incorporated under the laws, or statutes that regulate Corporations within the State where the Association exist. These Associations are most often established as nonprofit or not-for-profit entities. While the number of such Directors will vary according to the specific regulations that apply, for purposes of this effort, we will assume that the Board will consist of five members.

[1] HOA Boards typically go through three phases as the Timeshare Plan and its Association evolves. The first of these phases will occur when the Declarant/Developer or Development entity appoints the initial Directors. This appointment will occur with the filing of the Articles of Incorporation with the appropriate governmental agency and will contain something like the following;

Article 6: Directors. The number of Directors of this Association shall not be less than five (5), with the first Board consisting of five (5). There shall be five (5) Directors until such number is changed by an amendment to these Articles of Incorporation. Directors need not be members of the Association, the names and addresses of the persons first appointed to act as Directors are:

[2] At some point in the evolution Directors will begin to be elected by the members of the Association other than the Developer to replace those appointed by the Developer. The By-Laws of the Association will contain an Article that will address all aspects of the BOD. With respect to the election of Board Members such an Article could be something like the following;

ARTICLE IV - Directors - Sub Section C. Election and term of office. After the first meeting of members of the Association, one (1) or two (2) directors shall be elected at each annual meeting of members, but if any such annual meeting is not held, or if directors are not elected thereat, the directors may be elected at any special meeting of members. All directors shall hold Office for three (3) years and until their respective Successors are elected, except that at the first annual meeting of members, the two (2) Directors receiving the second greatest number of votes shall serve two (2) years and the other shall serve one (1) year. Commencing with the first meeting of members, at least one (1) member of the Board of Directors shall have been elected by the votes of Members other than the Developer.

[3] Let’s assume that the Developer appointed his attorney Mr. Albert, a Real Estate Broker Mr. Boxer, his accountant Mr. Connor, his partner Mr. Dunn and himself Mr. Ellis to the initial BOD. At the time of this appointment all 10,000 interval interest at the resort were still owned by Mr. Ellis (Developer). During the initial year 2500 of those intervals were sold and title was transferred to others. By nature of acquiring such title those others would have become members of the resort HOA. The C.C.&R’s of the resort would contain several references to membership in the Association. Such references could be like these:

Declaration of Dedication Preamble: Declarant intends to create a horizontal property regime and to sell and convey the Residence Units, the improvements and the land on which such improvements are constructed so that each grantee shall have an undivided Fractional interest in a certain Residence Unit and in the Property and improvements subject to this Declaration.

Now therefore, by this Declaration, Declarant does subject the property and Improvements to the horizontal property regime created by this Declaration and to the covenants, conditions, limitations, reservations, liens and charges set forth herein. The provisions of this Declaration are intended to create mutual equitable servitudes-upon the Property and improvements and upon each of the Fractional interest... The XX Resort Association shall be bound with the same force and effect as any Fractional interest Owner.

Articles of Incorporation: Eighth: Membership. Each Fractional interest of the XX Resort shall carry one membership. No membership may be transferred or held separate and apart from the interval interest with which such membership is associated.

By-Laws of XX Resort Association, Inc.: Article II, Membership: A. Members. Each Fractional interest owner, and only a Fractional interest Owner, shall by reason of Ownership of a Fractional interest become a member of the Association.

[4] The importance of the Association and memberships in the Association is that the members gain the power of the Vote. The C.C.&R’s of the resort would contain several references to members Voting Rights. Such references could be like these:

Declaration of Dedication Article V. The Association. Section 5.04 Voting Members. Each Fractional interest owner shall be entitled to one vote per Fractional interest owned. Voting rights shall be exercised as provided in the By-Laws of the Association.

By-Laws of XX Resort Association, Inc.: Article III, section G, Voting: At all meetings every member entitled to vote shall have the right to vote in person or by proxy the number of memberships standing in his own name on the membership records of the Association. There shall be no cumulative voting. Such vote may be viva voce or by ballot upon demand make by a member before the voting begins. Except as the Declaration, the Articles and these By-Laws otherwise provide, all business shall be conducted by vote of a majority of the members present and voting in person or by proxy.

[5] The importance of this voting power becomes obvious at the first annual meeting of the HOA. According to our scenario [2] upon establishment of the Association there were 10,000 Fractional interest all of which were held by the Developer. During the first year 2,500 of those Fractional were sold and those owners became members of the association and acquired the right to vote [3] those interest. The By-Laws of the Association will contain several references to the Annual Meetings of the Members. Such references could be like these:

Article III, Meeting of Members B. Annual Meetings. The annual meeting of members shall be held not less frequently than annually at a day and time fixed by the Board of Directors. The first annual meeting shall be held not later than one year after the close of escrow on the sale of the first Fractional interest.

Article III, D. Notice. Written notice of each annual or special meeting, together with, in the case of annual meetings, a list of orders of business to be considered and a biographical sketch of each member of the association who has announced his intention to stand for election to the Board of Directors, shall be given to each member entitled to vote thereat, either personally or by first class mail...

[6] One year has past and it is time to replace the existing appointed BOD with an elected [2] one as prescribed in the By-Laws. The membership received a bio of each member who has announced his intention to stand for election [5] along with an agenda for the annual meeting. Those who are standing for election are four (4) incumbents Mr. Albert, Mr. Connor, Mr. Dunn, Mr. Ellis (the developer) and owners Mr. Frank a real estate broker and Mrs. Gill a banker. The final vote count (including those via proxy) indicated the following: Mr. Ellis 9,027, Mr. Dunn 9,018, Mr. Albert 9,012, Mr. Connor 9,008, Mr. Frank 472 and Mrs. Gill 597.

In accordance with the C.C.&R’s [2] Mr. Ellis and Mr. Dunn were elected for three (3) year terms, Mr. Albert and Mr. Connor for two (2) year terms and Mrs. Gill for a one (1) year term. At some point the balance of voting numbers will shift from the developer to the members other than the developer. This will occur somewhere after sales have exceeded fifty percent (50%). Even after there are more owner votes than developer, it will be difficult to exceed the developers total because of the difficulty of getting owner/members to actually cast their votes. It is unlikely that any assertive effort to get more owners to vote as long as the developer is in control.

[7] At a pre-designated point the Developer will have to relinquish control of the Association and the owners (other than the developer) will have to assume the responsibilities. The C.C.&R’s of the association will contain some reference to this occurrence. Such references could be like these:

Declaration of Dedication Article V The Association. Section 5.05 Control of Association by Developer. During the period that the Developer’s Fractional interest in the Common Area exceeds one fifth (1/5), Developer shall have the right to disapprove any action approved by an independent majority except an action to enforce an obligation of the Developer. During said period, Declarant shall not, without approval by an independent majority, (a) cause any of the Association’s Property to be dedicated for public use, (b) cause the Association to be dissolved, (c) pledge, encumber or hypothecate any of the Associations property, or (d) cause the Association to borrow funds, except to purchase furnishings, in which case a purchase money security interest in such furnishings may be given to the seller or a financial institution. From and after said period, actions requiring approval by the membership of the Association must be approved by the required percentage of an Independent majority.

Simply stated the above means that even though the owner/members may have cast enough votes to elect a majority of the BOD, the Developer maintained the power of veto until over 80% of the Fractional interest had been sold. The phrases with regard to the Developers control of the association will be a varied as the color of coral in the sea, however, it behooves the owners other that the Developer to gain a clear-cut understanding of those terms, as they are contained in their Associations documents, to insure a smooth transition of power from the Developer to the owners other than the Developer.

Final Thought

Way back in the year 2000 With Regard about Owners Associations its Final Thought was about Owner-elected Board Members; three + years later I don’t believe I can say it any better:

“A good and effective Board Member will understand the purpose of the Owners Association, perceive the interest and needs of the member, individually and collectively and be able to respond to them appropriately. They will be, when necessary, able to submerge their own desires and see all issues in regard to the total community. The demands on the time and energy of those who volunteer to serve as Directors of Owners Associations can be both immediate and continuous. They must be prepared to devote, for the time they serve, a distinctive part of their lives to the Associations purpose, interest and objectives.

The attitude of its individual and collective members can cause the Owners Association and its Board to appear as an oasis holding out a welcome to all or an island surrounded by sharks. If you are an owner, participate in some fashion, the returns will multiply tenfold.”

SEE: a BOD Part 1; a BOD Part 2; a BOD Part 3; a BOD Part 4