What is a Homeowners’ Association?
Homeowners Associations (HOAs) in Texas are separate stand-alone entities (non-profit corporations) used by developers and Master Planned Communities to establish and enforce rules, regulations, and Covenants, Conditions, and Restrictions (CC&Rs), as well as to manage and oversee HOA financials, facilities, amenities and other improved or managed areas.
Once an owner purchases property within the community, that owner automatically becomes a mandatory member of the HOA, and must pay assessments to, and abide by, the rules of the HOA. In return, the homeowner/member is able to participate in the HOA’s governance through eventual Board Elections and/or possible Committee participation as well as being able to use the amenities offered by the HOA and participate in HOA functions, provided that they are in good standing with the HOA.
Once an owner sells, or otherwise transfers interest in the property owned within the HOA, the owner ceases to be a member of the HOA and loses all rights previously held.
Based on Texas law (other States may be different) these stand-alone HOA entities themselves may ultimately own, or manage the amenities, common areas and other facilities. Under the common HOA structure used in Texas, individual homeowners do not have a personal ownership interest in HOA facilities and do not participate in the day-to-day operations or management of the HOA unless elected to the Board of Directors or appointed to a Committee. This legal entity setup is done to protect the developer and homeowners from legal liabilities/lawsuits that might arise from the operation and use of the facilities.
Like other non-profit organizations, such as the YMCA, the HOA entity is governed by a Board of Directors (BOD).
Initially, and during the majority of the construction development of the community, the board is composed of developer-appointed members. These members seek to maintain the vision and character of the community that the developer has envisioned for the project and any regulations imposed by governing bodies during the community entitlement process. As the percentage of ownership shifts from the developer toward homeowners over time, the developer-appointed member positions will transition to elected resident homeowners. Ultimately this Board will consist solely of homeowner-elected members as the developer finishes the build-out of the community.
State law currently mandates that once 75% of the homes within the Community are sold, the transfer of the HOA leadership begins and 1/3 of the Board Members must be homeowners and elected by the Membership.
The BOD is responsible and solely controls the decision making regarding the HOA, including management of the HOA’s finances, operation of day-to-day activities and protecting the HOA’s real and intangible assets (generally by insuring and maintaining the amenities that are constructed and dedicated/donated by the developer) including legal liability and risk management.
The BOD also oversees the Architectural Control of the community and enforcing the governing documents; including the CC&Rs, Architectural Guidelines, Articles of Incorporation and Bylaws, and other various rules.
Due to the fact that managing an HOA can be time consuming and complex, the vast majority of HOA’s hire outside (or 3rd party) management companies to handle the governing duties of the association. These management companies become the registered agent of the Association through the filing of a Management Certificate in County Records, thus becoming Agents of the Association under direction of, and to apply and administer, BOD decisions.
Management services are typically divided into three categories:
- Financial only – Typically cover administration of bank accounts, bookkeeping, assessment collection, and the HOA’s budget.
- Full management – Typically includes the financial services plus helps with the Board meetings (keeping minutes, agenda etc), Board elections and maintenance duties (obtaining contractor bids, etc.) and oversight of maintenance contracts.
- On-site management – Typically includes all of the full management services plus directs assistance to homeowners with an assigned manager to the HOA. On-site managers are employees of the Management Company and have no authority to act outside of the BOD approved expenditures (budgets), or allowed to make changes to BOD policies or procedures without specific actions taken by the BOD. The on-site manager can speak for the Board but only with specific direction.
Through its Board of Directors (BOD), the HOA provides operation and maintenance of amenities. These amenities are originally paid for and constructed by the developer, and ultimately dedicated after construction and stabilization to the HOA.
The HOA regulates activities within the community, provides insurance, levies assessments, impose fines for noncompliance, and in extremely drastic circumstances, can even place liens on properties for non-payment of assessed dues and fines.
The specific power of the HOA is the ability to make sure property owners pay a share of expenses for the overall maintenance of the HOA and the Amenities. These expenses generally arise from the operation and maintenance of property and include management fees, repair cost, utility bills, and insurance premiums for facilities.
During the early phases of community build-out, the developer appointed BOD has financial models produced and creates budgets that take into account the expenses associated with the operation, maintenance and insurance of the full build-out amenity package to be dedicated to, and managed by, the HOA and the number of homeowners sharing this cost at the developer’s completion.
Even though the amenities are phased in over time and not all constructed when the community opens, this is required so that early homeowners don’t see continually rising dues each year as new amenities come online and since HOA dues are also considered by lending institutions during the mortgage approval process.
Due to the fact that HOA dues are based on the total number of homeowners at build-out of the community, during the early phases of community development, the dues collected each year by the HOA from individual homeowners only cover a portion of the actual yearly HOA budget. Developers of Master Planned Communities understands this yearly budget shortfall and may choose each year to supplement and plan each year to basically supplement the shortfall and cover the dues/expenses that would be paid by the future homeowners that have not yet been built. As an industry rule of thumb, and depending on the amount of assessed dues and total facilities the HOA ultimately manages, the HOA is usually not self-sufficient, or self-supported by dues paying members until the number of homeowner’s reaches approximately 80% to 85% of total homes in the community.
Dues collected by an HOA cover the ongoing maintenance expenses of the Association, including utilities, regular maintenance contracts, HOA insurance policies and normal operating maintenance for the facilities. HOA dues are not used to install or build new amenities, new landscaping or irrigation, or build roads or lots while the community is under development. That cost is part of the normal community construction built and paid for by the Developer.
The Board of Directors (BOD) can create advisory committees made up of residents to assist in coordination and recommend policies to the BOD. These recommending committees can be valuable stepping stones for future resident BOD members, as these volunteers are exposed to, and trained in, the legal limits, liabilities, and the fiduciary responsibility of the BOD.
These committees can include event and pool committees, architectural control committees, and/or finance committees, and are able to dive deep into their specific field. The recommending/voting seats on the committee are usually filled with residents that are willing to commit to regular meetings and with backgrounds in the specific fields (like accounting), or a keen desire to fully understand the inter-working of the committee’s specific area (like pools).
Once the community has a significant number of homeowners, the developer begins to request volunteers for committees. Developers generally begin committees when community home ownership reaches about 50%.
Once these committees and their members are established, committees (through their official voting members) will hold meetings where other residents can provide valuable insight and feedback on subjects covered by the committee and will then give official recommendations for their assigned areas to the BOD. The BOD then balances the recommendations from all committees and any additional information, before recommending their official policies, yearly budgets and sets dues for members.
What is a Special District?
A Special District is a local, governmental taxing entity that provides limited services to its customers and residents. Examples of water districts include municipal utility districts, water control and improvement districts, special utility districts, and river authorities.
The Texas Commission on Environmental Quality (TCEQ) is responsible for general supervision and oversight of water districts, including:
- Monitoring water district activities and their compliance with state laws.
- Providing information to district customers, consultants, board members, and employees.
- Reviewing applications and petitions for appointment to district boards.
- Reviewing the issuance of bonds that finance certain district infrastructure.
These Special Districts assess property taxes (ad valorem taxes) and pass bonds to pay for infrastructure facilities (through direct construction or reimbursements), and operation and maintenance of certain District facilities, as defined by TCEQ for each individual District. These facilities can include, but are not limited to, water infrastructure, wastewater infrastructure, storm water quality and detention facilities (ponds), open space areas, and roadways.
Each individual Special District has its own unique rules and regulations, including governance structures. More information can be obtained by visiting TCEQ’s website at https://www.tceq.texas.gov/waterdistricts/districts.html