Upon further review, the challenge of implementing the HOA will be quite complex and may take awhile. It will definitely require real estate legal counsel. Are their any neighbors with the skills and time to help on this? Particularly, how will we efficiently and cheaply re-record deeds if a new HOA is formed?
We will need to form a non-profit Mutual Benefit Corp and form an HOA with CC&Rs (Covenants, Conditions, and Restrictions - our purpose is restricting dimensions of 2nd story construction in the neighborhood or planting of trees which would impact views of neighbors by more than 25%, or whatever a committee determines). The next two sections detail these processes. Darrell and I will not be able to execute this on our own in a reasonable time frame.
Forming a Mutual Benefit Corp
Most HOAs in California are set up as nonprofit mutual benefit corporations, not nonprofit public benefit corporations or charities. This structure allows them to operate for the benefit of their members without distributing profits.
Being a nonprofit is different from being tax-exempt. HOAs are nonprofits by nature because their purpose is governance, not profit, but they generally don’t qualify for 501(c)(3) tax-exempt status, according to Clark Simson Miller.
2. Choose a Name and Recruit Initial Board Members
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Name Your Organization: Select a unique name for your HOA and check its availability.
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Initial Directors: Recruit incorporators and an initial board of directors. While California law allows for just one director, the IRS generally requires at least three for tax-exempt status, so it’s often beneficial to have multiple directors from the start.
3. File Articles of Incorporation
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Articles of Incorporation: This document is the core of your HOA’s legal formation. It includes basic information about the corporation.
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California Secretary of State: File the Articles of Incorporation with the California Secretary of State.
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Filing Fees: Be prepared to pay the required filing fees.
4. File Statement of Information
- This form provides basic information about the HOA’s management and addresses.
- Registered Agent:
- Designate a registered agent for service of process, who will receive legal documents on behalf of the corporation.
5. Obtain an Employer Identification Number (EIN)
- IRS EIN: Apply for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) for tax purposes.
6. Comply with Ongoing Requirements
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Store Records: Maintain all required records for the nonprofit corporation.
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Annual Reports: File annual reports as required by the state.
Forming an HOA
1. Obtain and organize developer-filed documents
The HOA must receive and securely store all records from the developer, which serve as the official record of the association’s formation and the properties within it. Key documents include:
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Subdivision plat or parcel map: This map, filed with the County Recorder, legally divides the property and delineates the boundaries of each lot, as well as any common areas.
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Declaration of Covenants, Conditions, and Restrictions (CC&Rs): This document, also recorded with the County, establishes the rights, obligations, and restrictions for the association and its members. It is a permanent and binding record for all properties in the development.
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Articles of Incorporation: This document establishes the association as a non-profit corporation in California.
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Bylaws: These define the mechanics of the association’s operation, such as election procedures, meeting protocols, and the duties of the board.
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Condominium Plan (if applicable): If the development includes condominiums, this specific plan is recorded and describes the airspace and boundaries of each unit.
2. Establish a systematic record-keeping process
A new HOA should implement a reliable record-keeping system from day one. In California, these records must be available to members upon written request.
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Physical storage: Use a secure, dry, fireproof location for permanent physical documents.
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Digital storage: Maintain electronic backups of all permanent records in a secure, password-protected online location. A cloud drive or a dedicated portal is ideal for providing controlled access to board members and homeowners.
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Management company: If the HOA hires a professional management company, they will typically handle the secure storage of records and financials.
3. Formalize record retention policies
To ensure compliance with the Davis-Stirling Act and other laws, the HOA should establish a formal record retention policy.
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Permanent records: Store documents like CC&Rs, bylaws, plats, and meeting minutes indefinitely.
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Financial records: Retain financial records, such as bank statements, invoices, and tax returns, for specified periods (e.g., four to seven years).
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Maintenance records: Keep maintenance records for at least ten years, especially early in the association’s life, in case of construction defect claims against the developer.
Legal considerations under the Davis-Stirling Act
California’s Davis-Stirling Common Interest Development Act dictates how HOAs must manage records.
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Member access: Homeowners have a right to inspect and copy most association records. Timelines for production vary depending on the document type (e.g., 10 business days for current fiscal year records, 30 calendar days for previous years).
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Redaction of sensitive data: The HOA must protect sensitive information by redacting it from records provided to homeowners. This includes personal information (Social Security numbers, bank accounts) and legally privileged documents.
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Enforcement: If the HOA unreasonably withholds records, members can take the association to small claims court. The court may impose civil penalties and award legal fees.