The Property Rights of Private Communities

by on July 17, 2013 at 7:20 am in Economics, Law | Permalink

I am one of the amicus curiae, along with Richard Epstein, James W. Ely, Donald Kochan, Adam Mossoff, and Ilya Somin, in an amicus brief urging the Supreme Court to hear Mariner’s Cove Townhomes Association v. United States. The case is about whether the right that a homeowner’s association has to collect dues is a compensable right in a government taking. The U.S. Court of Appeals for the Fifth Circuit held that “the right to collect assessments, or real covenants generally” is not a compensable right under the Takings clause. The brief, consistent with many lower court rulings, argues that it is a compensable right. The case is important as Ilya Shapiro and Trevor Burrus explain:

The U.S. housing market has seen a major shift in the past 30 years: the rise of the community association. In 1970, only 1 percent of U.S. homes were community association members; today, more than half of new housing is subject to association membership, including condominium buildings.

…Such associations often shoulder the burden of providing and maintaining infrastructure, services, and utilities, which allows for more diverse and customizable amenities for homeowners than if those decisions were left with remote municipal governments. Because of these benefits, and because they increase the tax base, local governments are increasingly requiring developers to structure developments as community associations.

…The perverse implications of the Fifth Circuit’s ruling are clear: it would allow for local governments to require the creation of a community association, benefit from the resulting private delivery of services while collecting taxes from its members, and later take the property without even paying back the very fees that enabled the government’s benefit.

…The ruling also clashes with the Supreme Court’s recent decision in Koontz v. St. John’s River Water Management District: that an income stream from real property is a compensable interest under the Fifth Amendment. For these reasons, we urge the Supreme Court to take the case and to recognize the compensable property rights of the Mariner’s Cove Townhomes Association and the millions of other Americans choosing—and paying—to live in a community association.

Roy July 17, 2013 at 8:01 am

So basically you are arguing that state intervention in homeowners’ associations and condo boards can never reduce their dues without paying them off?

Should tax authorities such as school districts, sewer districts, etc… also be compensated when higher government bodies reduce their revenue streams?

Since homeowners associations are already quasi governmental bodies that have real power over their constituents and like governments don’t allow them the right to exit, this seems like a formal privitizing of the law. Some many JPs are funded by court fees, should they also be protected?

This is godawful

Hazel Meade July 17, 2013 at 10:12 am

I agree. Are we going to compensate the Safeway because they have fewer customers coming to their store?
If New York deregulates the taxi business, should it pay compensation to the current owners of taxi medallions?

Alex Godofsky July 17, 2013 at 10:48 am

No, I think the argument is analogous to this (it is slightly clearer from the original source):

A community association is created to provide various minor public works for a community. It issues a bond to finance a neighborhood pool, and will pay off that bond with dues from people living in the association. If the government then takes half of the houses and frees those houses of the obligation to help pay for the pool, the dues for the other half of the houses double. It seems clear in this example at least that the requirement to pay dues should remain attached to the houses, and that if the government bulldozes the houses to build a highway or whatever then it should probably have to pay what those houses need to pay to retire the association’s debt.

Dan Weber July 17, 2013 at 1:37 pm

I couldn’t follow all the lingo in Alex’s post but this comment seems entirely reasonable to me.

J1 July 17, 2013 at 11:09 am

HOA dues are not analogous to taxes, as the latter is involuntary in all cases You can decline to move into a neighborhood with a homeowner’s association, but there isn’t anywhere (in the US, possibly on earth) you can move that will allow you to dodge local taxes. Even in a different jurisdiction, you’re still subject to that type of taxation.

The third paragraph in the “explanation” quote is compelling. If a government entity requires me to do something, then strips me of the ability to do so, that government entity needs to compensate me. Personally I have a (huge) problem with governments requiring an HOA; when the entity that required one takes away its ability to collect dues, that government entity should feel some pain.

Re Hazel’s question about taxi medallions: If taxi medallions are private property (I believe that’s the case in NYC), when a government entity destroys their value by fiat then yes, they owe the owners compensation.

NPW July 17, 2013 at 11:48 am

J1, you have the option to pay higher or lower taxes depending on where you live. I could pay lower taxes in several other nations, states, or counties. But I have a job, my wife is going to school…etc.

Where I live and work, finding a place within my price range without an HOA wasn’t available. I had the option of renting an apartment or buying a condo with HOA. It is extremely rare to even find a single family home for sale within a half hour radius that is not under a HOA.

I’m not taking a position on the actual subject of the post, just pointing out that the “Live somewhere else” response isn’t as straight forward as portrayed.

Roy July 17, 2013 at 1:16 pm

When the taxi medallions were issued, did the city promise to create no more? In NYC’s case that is not my understanding.

HOAs: So this year in Texas the legislature passed some laws re HOAs, they said that an HOA can’t foreclose without going before a judge and they put restrictions on foreclosing by HOAs on homes owned by deployed National Guardsmen. These measures increase the expense of foreclosure to HOAs, does the State of Texas need to compensate for this?

J1 July 17, 2013 at 5:39 pm

I’m not sure about the taxi medallions either, though given their price it certainly would seem there’s a perception their availability is and will continue to be limited. The larger question is why a permit is private property.

Re the question about Texas law, the change in the law doesn’t prevent the HOA from recovering what it’s owed, and the increased expense is still borne by the homeowner.

I know foreclosure is an option in some areas, but why an HOA would want to do so vs a property lien and a lawsuit is a mystery; foreclosures can do serious damage to the value of other properties in the neighborhood. Indeed, foreclosure might well invite a lawsuit from other residents for that very reason. I can’t imagine someone running an HOA delinquency so high that foreclosure would make any sense. The only reason I could see a board taking that path would be out of malice.

IC_deLight July 17, 2013 at 10:06 pm

The amicus brief reads like someone asked a law student to write the brief having only the marketing propaganda from Community Associations Institute.

Community Associations Institute is a trade-lobby group that lobbies AGAINST homeowners in preference for the HOA Corporation. The authors of this article (just like the industry) use the term “association” to blur the distinction between the involuntary members and the corporation. The comparison to the Koontz case is absurd. I sincerely hope that by pushing this argument, the Cato Institute will find the Supreme Court deciding that perpetual liens that can never be paid off were never legitimate to begin with. If you want a “government” then vote to have one. An HOA corporation is an illegitimate substitute.

Now J1 you need to understand that the “HOA” is not a “group of people” but rather a corporation run by a very few. You are absolutely correct about the malice issue but there is also another reason. More often than not, the HOA management company and HOA attorney are running the show. These vendors profit mightily by threatening homeowners with foreclosure. One reason the laws changed was to prevent the HOA vendors from engaging in various tactics to pyramid up fees for themselves. After pyramiding up fees they would then use the threat of nonjudicial foreclosure to extort such fees from the homeowners. This foreclosure scheme is particularly lucrative when the HOA management company and attorney targeted homes that were owned outright or otherwise had large amounts of equity in them. Texas had problems curbing these unscrupulous practices because there was and is a senator who was the owner/founder/ceo of one of the largest (now) HOA management company organizations in the U.S. His road to wealth started right after he introduced legislation that enabled his business practices.

Jacob July 17, 2013 at 6:29 pm

Your examples aren’t 5th amendment eminent domain takings. The question is not one of damages, but of property interests. Does the establishment of an HOA covenant produce an interested similar to mortgage lien? If it does, then the taking of such a property requires compensation. If it does not, regardless of the damages realized, then there is no 5th amendment basis for ‘just compensation’.

If hypothetically taxi medallions were seized in an eminent domain taking because they were originally construed as property (rather than a license which is my understanding) would their be a case for compensating lost an advertiser lost revenue from the absence of continue advertisement? The medallion owner would be compensated regardless in this odd scenario.

Alex Godofsky gave a good HOA example above.

Rahul July 18, 2013 at 3:04 am

As an aside, what happens if the Government decides to exercise eminent domain over real-estate that has a lien on it or has been offered as collateral for another transaction?

Jacob July 18, 2013 at 1:25 pm

(in reply to Rahul)

>As an aside, what happens if the Government decides to exercise eminent domain over real-estate that has a lien on it or has been offered as collateral for another transaction?

I don’t know. This is an interesting question. Some googling turned up this interesting case as an example in NJ law:
http://www.law360.com/articles/454029/nj-justices-mull-lien-holder-rights-in-eminent-domain-cases

simian July 17, 2013 at 8:19 am

Home-owner associations certainly sound like a handy way to eliminate progressive taxation.

ThomasH July 17, 2013 at 11:57 am

Sounds like there is a problem with forced creation of the “community associations.” If they are voluntary, any taking from them is not separate from the taking of the member units.

Jacob July 17, 2013 at 6:34 pm

I’m not sure. They question is if, factually, there really was a ‘taking’. Certainly all parties seem to agree that the associations suffered harm, but it is under dispute if that harm is due to a taking of their interest in a property or incidental to the taking of a third party’s property. In the latter case, there might be a damages in tort action possible under state law, but not a violation of the constitution. Although I don’t know if this is possible either in this case or louisiana law. In the former, the government would be required to hold a hearing to determine just compensation for the taking itself.

MD July 17, 2013 at 12:29 pm

If those 14 townhomes had not been part of an HOA, would the federal government be required to compensate the local government for the loss of the tax revenue stream of those 14 townhomes? If a municipality runs a natatorium for a small profit, and the federal government takes that natatorium, would the federal government be required to compensate the municipality for the lost income stream? Would it make a difference if that municipality used that income stream to fund some requirement placed on it by the state government?

Jacob July 17, 2013 at 6:38 pm

Does the local government have an ownership interest in the townhomes? Taxation authority does not derive (in our legal regime) from ownership.

MD July 17, 2013 at 6:58 pm

Let’s say, no ownership interest in the townhomes, but definately an ownership interest in the natatorium. (This is all a thought exercise, because the Takings Clause only applies to private property. But it interests me, because I believe that more and more power/authority will be located in private governments.)

Rahul July 17, 2013 at 1:56 pm

>>>and because they increase the tax base,<<<

How does requiring a home to be a part of an association increase the tax base? Not a rhetorical question, genuinely curious. The home, even if stand alone would still have paid taxes, right?

Enrique July 17, 2013 at 3:09 pm

The “rights” talk by Alex is not helpful … he is just using “rights” as a trump … an anti-libertartarian could simply invoke the “rights” of the government to regulate private behavior, and then we are at an argumentative standstill … in fact, all rights are relative, not absolute

mike July 17, 2013 at 5:55 pm

I don’t know what an “anti-libertarian” is, but “someone who believes government has rights too” sounds like a pretty good definition

Eric H July 18, 2013 at 8:23 am

And here we have the evolution of social contract theory. The Hobbesian and Lockeian contract was between citizens to create a government. Today, it is a contract between citizens and the government. Nobody bothers to explain where the state got its right to enter into a contract, though they may occasionally get confused and assert that it came from the social contract itself.

Joe Smith July 17, 2013 at 3:18 pm

The explanation does not say what is being taken and what Tyler thinks should be compensated so there is no basis to agree or disagree with him.

MD July 17, 2013 at 3:53 pm

“The perverse implications of the Fifth Circuit’s ruling are clear: it would allow for local governments to require the creation of a community association, benefit from the resulting private delivery of services while collecting taxes from its members, and later take the property without even paying back the very fees that enabled the government’s benefit.”

I’m not especially knowledgeable about the Takings Clause, but I don’t see how you would ever get back fees already paid, except as reimbursement for the taking of the physical property itself. You paid fees which went towards maintaining or raising the value of the land and improvements thereon, which is what you are unquestionably entitled to reimbursement where there is a taking (as opposed to the disputed issue of whether the income stream from the HOA dues is a compensable interest under the Takings Clause). Reimbursement for fees already paid would essentially be a double recovery.

MD July 17, 2013 at 3:53 pm

Sorry, that was not meant to be a response to Joe Smith.

IC_deLight July 17, 2013 at 10:15 pm

That comment by the author of the amici petition was truly absurd. First of all municipalities are already requiring the creation of HOA-burdened property and the municipalities already benefit from abrogating their responsibilities while collecting taxes from the involuntary members of the HOAs. However, the property that is later taken was NOT the property of the members. Moreover, when the government takes real property it PAYS the owner. The HOA corp did not own the townhomes – and it did not “own” a restrictive covenant either. The government compensated the owners of the townhomes.

If the Supreme Court hears this case perhaps it will address the larger issue of whether perpetual liens that can never be paid off are enforceable to begin with.

mpowell July 17, 2013 at 4:02 pm

On the face of it, this sounds like a ridiculous complaint to me. HOA dues are not an income stream from real property (if they are, you’re doing it wrong!), they are a fee for services rendered. If you take the houses, then the HOA doesn’t have to maintain the sidewalks, common areas, etc in that area. The fact that the head of the HOA now commands less revenue is not a taking. It’s possible that certain features common to the entire community (a pool say), will now get more expensive (but will see lower use as well). It is possible that at the margin you could regard this as a taking, but that is a stretch. Anyhow, the explanation linked doesn’t detail any further. Instead it includes a lot of language that sounds ludicrous:


It would allow for local governments to require the creation of a community association, benefit from the resulting private delivery of services while collecting taxes from its members, and later take the property without even paying back the very fees that enabled the government’s benefit.

This is simply an absurd interpretation of the way an HOA functions. The primary benefit of those services is experienced during the period that the fees are paid. So the government is not getting any unusual benefit with this taking nor is anyone suffering by having to have paid fees in the past and not being recompensated by the gov. If there is some unusual circumstance at play here, you have to explain what it is.

IC_deLight July 17, 2013 at 10:27 pm

The statement is a ludicrous statement.
First, municipalities already mandate HOAs both directly and indirectly and this decision doesn’t persuade municipalities to act differently no matter what the outcome..

Second, the HOAs typically have no obligation to deliver “services”. You’ll find most restrictive covenant purport to authorize or empower the HOA corporation to do something without imposing any obligation to do so.

Third, note the switch pulled with the claim “without even paying back the very fees that enabled the government’s benefit”. The owners of the real property that was taken were compensated. If more is due it is due to the involuntary members of the corporation who already paid assessments to the corporation and not the corporation itself. Payments to the corporation do NOT benefit the members and would serve primarily as a windfall for the corporation vendors. You’ll find that the primary organizations seeking review of this decision are the management company and HOA attorney trade groups who fear the demise of the community corporation.

IC_deLight July 17, 2013 at 10:28 pm

By saying “the statement is a ludicrous statement” I was agreeing with your characterization of the statement quoted from the article

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