The real estate development industry is full of trends. Usually, the trends involve design aspects of the home or community or the latest in amenities, but recently new trends in land banking are arising. One of these new trends is land banking by homebuilders, which has added complications for common interest ownership communities.
What is Land Banking?
As traditional banks have become more hesitant to issue loans for land acquisitions and large-scale projects, homebuilders and developers are turning to alternative options for funding.
An option that many are turning to is private credit or private equity to seek the capital needed to achieve the goals of the project.
A land banking transaction normally involves the private financier purchasing or holding the undeveloped or partially entitled land until the land can be sold for the wanted value.
For developers working with homebuilders choosing to use a land banker, there are some risks.
Risks
Homebuilders using land banks are becoming increasingly common in a number of developments across Texas. Some of these land banking arrangements involve a transfer of fee simple title to the lots from the homebuilder to the land banker, which may put the land banker in the category of an “owner” per the terms of the governing documents. Typically, “owners” have the obligation to pay various assessments which attach to the lot. Note, if the land banker holds an interest in the lots more akin to a deed of trust rather than fee simple title, it may technically not be an “owner” depending on the language in the governing documents and thus may not owe assessments.
Some homebuilders may request the developer or POA to waive various assessments and other fees during the time the land banker owns the lots. This is leaving the development team and the developer-controlled POA to address questions as to how the various assessments required in the governing documents are administered.
Ultimately, it is a business decision for the development team as to whether to exempt the transfers of fee simple title involving the homebuilder and its land banker from some or all of the assessments typically charged on transfers of title. However, it is imperative that the governing documents for the community permit this action or amendments will be necessary.
Keep in mind that the governing documents for every community are unique, and the analysis below is based on a general set of CCRs as to assessments and fees. Developers and declarant controlled POAs should work closely with their legal counsel and examine what their CCRs allow before taking action.
Developers should consider the following when working with a homebuilder using a land banker:
1. No authority to waive or exempt assessments: In most governing documents, neither the developer nor the association have the authority to waive the payment of assessments. This is considered a best practice in the real estate development industry. However, certain transfers of title may be exempt from payment of certain assessments per the terms of the governing documents. These exemptions vary from community to community. However, transfers of title to the land banker often do not fall under any exemption from these assessments.
2. Best practices: It is a best practice to avoid placing an association in the position of trying to determine whether a certain land banking/financing arrangement between an owner and another party qualifies for an exemption under the governing documents. The goal is to keep the exemptions to a minimum, and to make it as straightforward as possible for the Association to determine whether an exemption applies to a particular transfer of title.
3. The development team should carefully consider whether it should entertain an amendment to the governing documents in order to accommodate an owner’s financial arrangements with its lender or land banker. This could establish a bad precedent for future requests from other owners requesting amendments to the governing documents to accommodate their financial arrangements.
Financial arrangements are generally best left to the Owners and their lenders/land banker and typically should not involve the development team or the POA.
Additionally, an amendment to the governing documents to provide for a land banker exemption could potentially place the association in the position of having to review and analyze land banking agreements, trusts, deeds, and deeds of trust (and any other unique financing arrangements or other details between an Owner and a lender or land banker that may involve a possible exemption) in order to determine whether an exemption applies. This could create a slippery slope for the association as to charging assessments as to one owner but not another owner.
It is widely considered a best practice to charge assessments (and follow the exemptions for same) in a consistent fashion as to all owners in the development and in accordance with the association’s governing documents. The increasing use of land banking in new creative ways has created a new twist in the real estate development process. As homebuilders continue to choose land banks as a source of financial capital, developers will need to consider the ramifications from the outset when preparing governing documents. Therefore, it is important for the developer to work closely with their legal counsel and the POA counsel to ensure the needs of both the developer and developer-controlled POA are met.
