Along the route of forming a community you will need legal advice at several different points:
- At the formation of your umbrella or core group as a legal entity (partnership or corporation)
- Investigation of regulatory, zoning and environmental investigation of land that your group intends to purchase, and applications for any necessary modifications or governmental approvals
- Negotiation and drafting of option agreements and contracts for purchase and sale of land
- Negotiation and advice regarding acquisition, development and permanent financing
- Examination of title, surveys and coordination of the closing process
- Negotiation and drafting of agreements between the group of future residents and the developer and/or contractor
- The decision of which form of ownership to use (e.g., condominium, cooperative or planned unit development)
Finding and dealing with lawyers
There are at least two kinds of attorneys you will need: A general attorney familiar with incorporation or partnership law, and an attorney familiar with Real Estate law. One way to find qualified lawyers is to use the resources in your group. Have group members ask friends and relatives experienced in real estate development for recommendations. Another way to find a qualified lawyers is to ask local non-profit developers for recommendations. Location of the firm and its political influence or reputation are probably only relevant to the land use & zoning issues. This area is governed largely by local (city, township or county) laws and requires knowledge of local laws and sensitivity to, and an ability to work with, the local special interest groups, administrators (planners) and law makers. The other areas of specialty mentioned above are governed primarily by state law (with some local variations in custom) and do not usually require local expertise. As a bare minimum, all lawyers that you hire should be licensed to practice in the state in which the development will be located and have extensive experience with real estate development.
Don’t forget that cohousing and communities are new and most lawyers have never even heard of it, let alone worked with it. You might consider providing to your prospective lawyer(s) a copy of the cohousing video (containing news clips) compiled by The Cohousing Company, or the professionally produced Cohousing video, in order to convey the overall picture of what you are trying to create.
It is possible to do some of the work yourself, such as creating draft documents and having a lawyer review and edit them, rather than having the lawyer create them from scratch. However, this sometimes results in more, rather than less, legal work and expense. Most qualified lawyers have a good collection of sample documents to work from, as a matter of fact, most use a boiler plate from a previous job and modify it. If you plan to create a first draft of certain documents, work from sample documents used by other community developments within your state. It is a waste of time to use legal documents from other states because land ownership rules differ from state to state.
Don’t forget that your lawyer is just a paid professional advisor. You are the client and are entitled to be heard. You also have both the right and the responsibility to oversee and govern the tone of negotiations. In the absence of clear instructions from the client, most lawyers will take a hard line in negotiations, reasoning that they do not have authority to “give anything away”. It is helpful for a representative of the group to be available during negotiations, to let your lawyer know what the group will and will not do, or what matters need to be discussed by the group before being decided. Your lawyer’s job is to advise the group of issues and potential consequences and to make recommendations. It is then up to the group to make appropriate decisions.
Legal Forms of Association for Core and Umbrella Groups
Long before deciding to buy a particular site or build a particular form of community, your group will probably need a convenient means of organizing itself and presenting itself to the world. Such legal organization is useful in providing a sense of group identity, creating criteria for admitting and identifying members, limiting the liability of the members, allowing the group to open a bank account bearing a name other than that of its individual member and providing for the management of the group.
A very common form of association used by community groups is the non-profit corporation. This is also the form most commonly used by homeowners’ and condominium associations. The non-profit corporation is easy and relatively inexpensive to form and document, and has available to it simplified tax reporting forms and procedures. It shields its members from liability to persons dealing with the corporation, provides a widely accepted and understood method of delegating management to the officers of the corporation, and has “perpetual existence” (the legal existence of the entity is not threatened by the comings and goings of individual members).
Joint venture or partnership
A partnership is a legal agreement among individuals stating their intentions, obligations, and responsibilities. A joint venture partnership can be used when groups first join together and buy land. In a simple partnership, each individual has an exactly equal share of the responsibilities and liabilities. The partnership is written up by an attorney and signed (usually notarized) by all the participants. It is important to spell out in writing the property rights and compensations for members for every foreseeable contingency, especially covering situations where a partner leaves. One of the advantages of a partnership legal agreement is that individuals called limited partners may become investors in the project, helping to raise funds. For example a community founding group form with the founders as general partners, and could seek contributions and investments from relatives or friends, whom they designate as limited partners, investors who would have no say in the day-to-day management of the community.
Important note: Until you form some other type of legal entity the courts will consider your group to be a limited partnership. One disadvantage to a partnership is that everyone in the group can be held liable for the costs incurred and so any or all of each members personal assets can be taken to pay a debt owed to the partnership. For example, if you write up an agreement that defines a member, and then someone sues the group, everyone who is a member can be held liable, to the full extent of their assets, for any judgment against the group. This is why many group incorporate instead.
Limited Liability Company
This is a very good form for creating the legal entity for title holding and development. The LLC offers the corporate advantages of limited personal liability and also allows for decision making to be connected to ownership, one share, one vote. All the profits and losses are passed through to the owners for tax purposes so the company is not taxed directly, rather the owners claim profit and losses on their own taxes. It allows for outside investors (often referred to as “members”, rather than “shareholders”). This allows non-profits, trusts, other partnerships or corporations to invest in the development, with all the members having whatever level of decision-making the group decides. So for example, investors may be limited to voting only on expenditures exceeding a certain dollar amount, so the day to day decision making could be restricted to the sub-group of residents. However, all members would have limited liability. LLC’s are available in many western states and are rapidly expanding so check with your local attorney if your state allows LLC’s.
Key Documents Used to Create and Administer a Small, Non-Profit Corporation
Articles of Incorporation
A non-profit corporation (or any other corporation) is formed by filing with the Secretary of State a document called Articles of Incorporation. The Articles state only the most basic information about the corporation, such as its name, type, address and a person to contact concerning matter affecting the corporation (referred to as the “registered agent”). The primary role of the Articles is to let the world know that the corporation legally exists and to let the world know how to contact the corporation. The Articles seldom address the internal affairs of the corporation. Acticles should only contain information about the organization that will not change.
The Bylaws govern the most fundamental internal affairs of the group, such as decision making processes, election processes, delegation and definition of authority of the board, definition of members, how meetings are conducted, etc. They are usually private and not filed with any public agency (except in the cases of some homeowner’s and condominium associations). The Bylaws contain provisions fundamental to the operation of the group which most groups want to be stable and reliable. For this reason, most Bylaw provide that they can only be changed by consensus or some super-majority (e.g., two-thirds or three-fourths) of the members. Bylaws often become long, detailed and “dense” documents for those unaccustomed to reading this sort of thing. Some groups have found it useful to create simplified summaries of the most commonly used portions of the Bylaws so that they are more accessible to most members.
Months and years after members leave and human memories fade and disagree, a well kept set of minutes will provide a reliable and objective reminder of what has been agreed to, and the context in which those agreements were reached. Minutes are the legal record of the decisions that the corporation makes. Keep them safe.
The agreements are the repository, summary and codification of the many group decisions made at general meetings, plucked from the minutes and placed in one convenient, well organized, frequently updated document. Like the Bylaws, the agreements govern the internal affairs of the group. However, the agreements tend to be much more fluid and changeable than the Bylaws. The agreements tend to address more interpersonal and daily operational issues than do the Bylaws. While it is possible to rely on the minutes of meetings for such things, it can be extremely inconvenient since the minutes are much lengthier, contain much information that is not relevant to the decision sought, and are organized chronologically, rather than by subject. A well-drafted set of agreements should include citations to the minutes from which the agreements were extracted.
Tax issues for non-profits
Once your corporation has been approved by the appropriate state office you need to send in the IRS form SS-4 to get an Employer ID number. This tax ID number is what you need to start a corporate bank account, and it also registers your corporation with the IRS. A state non-profit corporation must keep records of its financial information, and file tax form 1120A. A limited liability company uses a different process. For all issues regarding taxes it is advisable to check with a qualified tax accountant for details. Typical taxes are 15% of the gross income, which for most groups will be a very small amount. Non-filing of taxes can generate severe economic penalities from the IRS that can be several times the cost of the tax actually owned.
Forms of Ownership
Most cohousing groups to date have focused on building dwellings that are owned (directly or indirectly) by their occupants, as opposed to rental cohousing apartments, owned by a common “landlord”. Other types of communities handle owership differently. In the US there are only three mainstream alternatives for creating multi-unit residential developments: (1) Subdivision (with or without platting), (2) Condominium, or (3) Cooperative.
Why use only the mainstream forms of ownership? There are several reason that it might be best to stay within the three “mainstream” choices (subdivision, condo or coop): The first is the resale market, which is, in part a function of the familiarity of buyers and their lenders with the form of ownership. The second reason is the ability to refinance. It’s nice to have a choice of lenders when you want to take some equity out of your house or feel that you are paying more in interest to your current lender than you should be, given current interest rates. Another reason is availability of extensive laws to help resolve questions and disputes not clearly addressed by your documents.
Combining forms of ownership. Some communities have found it advantageous to use two or more forms of ownership. For example, the individual houses may be constructed within a subdivision or condominium having few or no common areas. The group might then locate its common house/ community center, forest land or other open space on adjacent land owned by a cooperative or land trust of which all the individual unit holders are members.
Subdivision involves buying a parcel of land and then going through a procedure governed by local law for breaking it up into smaller parcels of land (usually referred to as “lots”) upon which individually owned houses are constructed. The individual members then own title to a lot and their home. The subdivision may also include some “common areas” (such as a common house) owned by a homeowner’s association (a non-profit corporation) in which all of the individual lot-owners are members. Subdivisions can contain single-family (free-standing) homes and/or town (attached) houses. Developers have a great deal of latitude in structuring and managing the development via a homeowners association.
The subdivision process can be very costly depending upon the zoning and requirements in the area although this form of ownership may be the best suited if your goal is individual homes on lots and the land you buy is already zoned compatible with your plans. Some areas allow for “zero lot line” subdivision which makes it possible to join homes into duplexes or triplexes. Other areas allow for cluster development, where a lot size may be reduced, and a bonus amount of lots allowed, if the homes are clustered together and open space is preserved. Any number of lots can be held by a homeowners association for use as common elements, such as a commonhouse or a shop. Planned residential developments (PRD) are often required for subdivisions that include more than a particular number of homes. PRD’s often have extensive checklists of requirements, although a PRD may be required for condominium or coop ownership as well.
Condominiums usually involve common ownership by a condominium association (a non-profit corporation) of all of the land upon which the separately owned condominium units are constructed. The association maintains the common areas (sometimes called “common elements”) and governs the outside of the units. Condominiums can also contain “single-family (free-standing) homes” and/or “town (attached) houses” constructed upon land defined as a “unit” in the condominium documents. The condominium form of ownership is suitable for both “vertical” (multi-story) and “horizontal” (single-story and/or detached) developments. All the states have their own extensive codified laws governing condominiums.
Condominium law in in many states allows for several definitions of air space condominium, which cover all forms of attached wall dwellings as well as single family detached homes. For example, one type of air space condominium can be used to describe individual building lots, a situation that allows for using condominiums rather than subdivision to develop land into lots. Condominium units are almost always separately financed and individually mortgaged, with a monthly assessment covering the common costs.
The condominium ownership, details about its operation, and covenants are defined in a legal document called CC&Rs, (Covenants, Conditions and Restrictions). Condominiums, like cooperatives, are often controlled by a non-profit home owners association, with a board of directors or some other governing structure.
Condominiums are a common legal structure for cohousing because they are well defined, allowing groups to control common areas and giving individuals title to units. They have the added advantage of being well understood and accepted by the banking industry. However condominiums can be undervalued especially if they have been over built in a particular area.
Cooperative Associations (or simply “cooperatives” or “coops”) are used by a few cohousing groups. Their usual common features include ownership of the land and all improvements (common house, as well as individual houses/units) by the cooperative association (a type of non-profit corporation). Instead of private ownership, each member in the association owns shares in the association and receives a proprietary lease of the unit in which the member lives. The primary advantage of a cooperative is that members have a great deal of control over sales of units, such as limiting equity on sales, or specifying membership requirements. The equity level for sale of the home can be set at the initial purchase which can be used for maintaining low income housing. Another advantage is sometimes having corporate ownership of the units can offer development benefits such as group drain fields or parking space reductions. Cooperatives are usually financed by a single blanket mortgage rather than individual mortgages and so the whole group has to qualify together, which can sometimes be an advantage.
Cooperatives have several disadvantages. First, all of the members have joint and several liability (to the extent of the equity in their shares) for the obligations of the association. This means that if one member stops paying his/her share of the blanket mortgage, the other members have to pick up the slack. Although the association may have a lien against the delinquent member’s shares, enforcement (by foreclosure) can become very confrontational and in the mean time community cash flow can be strained (especially in small coops). Although an analogous situation exists in condominiums, condominium units are usually separately financed. As a result, monthly charges payable to the association are comprised mainly of maintenance costs and tend to be much smaller in amount that the rent payments made to a cooperative association. Another problem with cooperatives is obtaining financing to purchase one’s shares. Many banks are unfamiliar with cooperatives and are unwilling to finance such purchases, especially if the cooperative agreement restrict resale, the primary advantage of coops in the first place. In addition, FNMA, which buys loans from banks, does not buy coop loans, further reducing available financing. Another problem with coops is that they can be hard to appraise (due to a lack of comparable sales).
Advice about legal issues
- Bylaws can always be changed later; they do not have to include every nuance and detail in the first draft. If issues block the process, evaluate whether you can put them off until later. Any issue you are likely to change in a couple of years, such as pet policy, guns or other controversial issues should not go in the bylaws, but rather in a separate agreements document.
- Be clear about agreements and write them down! Always. A very common mistake within communities is to hold a small meeting, then assume everyone agrees. Don’t move forward on important issues without written minutes stating the agreement, when it was made and by whom.
- If your bylaws become a long, dense document, no one will read them. Create a separate summary in simple language of decisions and rules for the members.
- After you move in, you may want to review your agreements and bylaws for consistency with the way you are living. Unless this is critical, give yourself some time (perhaps a year) to fully explore how living together changes your agreements.
- Use competent legal advice early in the process. Guessing can waste time and cost money.
- How you choose to govern your community is up to you and how you organize your lives will be largely independent of any bylaws. Keep a separate list of your organizational agreements.
- You might want to create your own membership certificate and have people sign it to indicate yes they are in agreement with what ever bylaws or vision statements you create. Be careful about this however because if it restricts membership in any way, and the banks see it, it can make it difficult to get mortgage funding.
- Include indemnification of members and abrogation in your bylaws. Indemnification means if a community representative acts in good faith in the best of their knowledge they won’t be held liable for a screw up. Abrogation means if a rule is not enforced it doesn’t loose validity.
- Be careful about using the word “consensus” in your bylaws. Banks may not accept consensus as a reasonable decision making structure, even if that’s what you have used all along with success. You can define consensus in your agreements, then use a super majority in your bylaws which the banks see and to which you can fall back on should consensus fall apart some day.
- Homeowners associations have tremendous legal authority, almost like miniature governments. You can use this authority as a negotiation point by writing in covenants certain agreements. For example, you may be able to negotiate a smaller parking lot by agreeing to a covenant to limit the number of cars per owner.
- As you make decisions and agreements, be sure to consider the banks point of view. If you create agreements and covenants that restrict resale, a future bank may not be willing to provide a mortgage on a resale until the restriction is removed.
- If you incorporate, every year the registered agent listed on the Articles will be sent a corporate reporting form which you must fill in. If you miss the deadline for this report, your corporation may be nullified. Be sure the address you use as your registered agent (part of the articles of incorporation) is an address the group will be able to get mail from for the foreseeable future. You can change this, but if you forget, and miss the corporate report notice, your corporation may be legally invalid in some cases.
- If you use copies of other cohousing groups legal documents to create your own, only use those from the same state you are in. There is huge variation in property ownership and corporation law from state to state and so what is legal in Virginia, may not be legal in Washington.
- In some court cases, members of an organization that did not get a copy of the organizations bylaws and requirements documents, were relieved of responsibilities or obligations in court judgments. When you reach the point where membership in the group has significant financial obligations you should create a membership packet of all the legal and other decision documents and give one to every member. Have recipients either sign for them, or record their distribution in the minutes of the board, with specific details of whom the packets were given to.
This started as an article by Rob Sandelin, distributed in various forms and published online by NICA. Rob gave permission to post it here, knowing that it may morph into something new as we "wiki" it...
- Legal Structures for Intentional Communities in the United States, by Dave Henson (2000)
- The Tyranny of Structurelessness, by Joreen (1995)
- Intentional Communities as Laboratories for Learning about Direct Democracy, by Mildred Gordon (1995)
- Consensus Ingredients, by Caroline Estes (1995)
- The Rhythms of Home: Perspectives on a Communal Lifestyle, by Tom Starrs (1995)
- Legal Options for Intentional Communities, by Albert Bates, Allen Butcher, and Diana Leafe Christian (1995)
- Buying Your Community Property, by Frances Forster and Byron Sandford (1995)
- Tips on Financing Realty, by Robert H. Watzke (1995)
- Community land trust
- Condominium association
- Homeowners association
- Housing cooperative
- Limited liability corporation
- Limited partnership
- Mutual benefit corporation
- Non-profit corporation
- Private land trust
- Simple partnership