Your Community and the Law
Excerpted from the Spring 2019 edition of Communities, “Community Land”—full issue available for download (by voluntary donation) here.
If your community has a dreadful legal problem, one thing that doesn’t work is to not get real about the worst potential outcomes for your community. It doesn’t work to prevaricate, to use euphemisms, and to tiptoe around the subject because of the belief you’d be “negative” if you speak directly about the horrible things that could potentially happen. A dangerous yet common theory is that talking about such a thing might cause you to mentally picture it, which might make it manifest!
What a load of hooey! A doctor first needs to know which leg is broken and in what way it’s broken before it can be set. A plumber has to know where the leak is, how bad it is, and where the valve is to shut off the water. Not looking at a big problem doesn’t work. A community and its lawyer must know the worst things that could happen from their legal problem before they can protect the community with an effective legal strategy.
I learned this the hard way. My community, Earthaven Ecovillage in North Carolina, first realized in 2010 how dreadful our financial and legal arrangements were. It’s as if the shock of this news disoriented and disempowered us. Many felt stuck and helpless and unable to act. Some didn’t believe there was really a problem. Or they believed there was one but they didn’t understand it and couldn’t bear to think about it. Some thought if we ignored it it would go away.
I finally realized how strange we were behaving. Even though our lawyer suggested a truly effective legal solution I realized that in our meetings deciding whether to accept his legal solution we were only talking around the issue. We used euphemisms; we never broke the apparent social taboo against graphically describing what in fact could happen if we didn’t fix the problem. I thought it was high time for community shock therapy.
“We need to take into account the worst things that could happen,” I blurted out at our next meeting. “The county could start fining us for not complying with their subdivision regulations—fining us retroactively for every day since we started. Or someone could successfully sue us and the Court could go after Earthaven property. Or someone could sue one of us individually for some reason, like a car accident or owing money, and the Court could go after the person’s biggest asset, ownership in Earthaven. Or a departing member or former member could successfully sue us for, um...” (Readers, I apologize but I’m not going to describe what we’d been doing wrong.)
“If any of this happened, we couldn’t afford the legal fees,” I continued. “We couldn’t pay fines for violating regulations or pay any punitive damages. If we couldn’t pay them, the Sheriff could come out here and hold a public auction and sell part of our land to the highest bidder. It would severely damage our community. And land that got sold could include your neighborhood or mine; your house or mine. Or all of our land might need to be sold off. Earthaven could be disbanded permanently. Some of us, or all of us, could lose all the money we’d ever put into building our house and developing our homesite. Some of us could lose our life savings. Or end up bankrupt and homeless.”
“Stop being negative!” yelled an angry member.
“Fearmonger!,” accused another.
“If you’re feeling fear it’s not because of what I said,” I responded heatedly. “This actually is our situation.”
“But no one would ever try to sue us!” protested another.
“Oh yes they would,” I said. “Seven different departing members over the years have sent us lawyer letters implying, warning, or outright threatening us with legal action if we didn’t reimburse the money they paid for a homesite here. Even though we told them up front we don’t reimburse this.” At that point I read out loud the names of each former member who’d sent a lawyer letter—people we all knew well and were friends with.
Shock hit in the meeting. Some people felt more scared or demoralized than before. What I said was too blunt and too horrible. And too real to ignore. Some people were angry with our founders for inadvertently creating a problem this bad. Others were mad at me—how dare I be so negative and unspiritual in our community business meeting?
Yet this graphic description of what could happen to our community helped some people burst through the fog of denial and realize we had a real problem and we needed to act. With my “shock treatment” at the meeting, and with the efforts of tireless community members who worked on this issue for years, we finally resolved our financial and legal challenges. Whew!
Friends, if your community suddenly falls into a financial and legal pit, please don’t let it take eight years to resolve, as it did for us. Get right to the heart of the worst of what could go wrong, face it, and deal with it. If you personally understand the worst possible things that could happen if the community doesn’t change things, but people are skirting the issue and using euphemisms, don’t be shy; don’t be New Agey; don’t be politically correct. Take courage and speak right up! People who are shocked and angry that you may have broken a community taboo by being so blunt and direct could be jolted out of passivity and into taking action. And they’ll surely forgive you in time (and will probably forget you ever said it). So, if something like this happens to your group, stand up and tell it like it is!
Seven Things Every Community Should Know
I want communities everywhere to be well aware of legal-financial realities. The founders of my community didn’t know this, and it absolutely came back to bite us! Here’s what I want you to know:
(1) Your forming community will be (or your existing community already is) embedded in and subject to local, state, and federal laws and regulations. Federal tax requirements, federal laws regarding illegal substance use, firearms, and other issues. Federal and state laws regarding the rights and responsibilities of one’s legal entity(s). Annual reporting requirements with the state, and state health department and environmental quality regulations. County subdivision regulations, zoning regulations, building codes, and property tax requirements.
(2) Learn what these laws and regulations in your area are, how they affect your community—and what the legal and financial risks may be to your community and to each member if you don’t comply with them.
(3) Educate your community members about this.
(4) Decide to either comply or not comply with laws and regulations affecting you. Or comply with some but not others.
(5) If your group decides not to comply with some laws, be willing to take the associated legal and financial risks. Tell all potential members about these risks. Full disclosure!
(6) Orient all members, especially new ones, to the legal entity(s) your group uses, and the benefits, responsibilities, and challenges of each.
(7) Especially educate your members about lawsuit and liability issues, so everyone understands the degree of liability protection the community does and does not have.
Good thing for us that most communities do understand the law and make sure their communities are legally sustainable!
Why Have a Legal Entity at All?
“Legal entities,” created and regulated by states or provinces, offer a legally recognized set of rights, protections, and requirements. They are used to co-own property, run a business, provide a nonprofit service, or manage investments. Legal entities can own assets, buy property, and enter into business contracts with other organizations or individuals.
Your community definitely needs a legal entity. If you don’t have one to co-own your property, but put all founders’ names on the deed, it could be hard to get a loan to buy and develop the property, since most lenders and financial institutions don’t lend to a group of individuals. Without a legal entity it could be difficult to add new members in property ownership and remove departing ones. With a legal entity you’ll probably owe less money for federal, state, and county taxes than if you owned your property or ran your educational organization or community business as individuals—and for educational projects and businesses you’ll probably need separate legal entities. If your community, educational organization, or community business were successfully sued—or even if one of your individual community members were sued—you’d need the liability protection of a legal entity.
The Six Legal Entities Most Communities Use
Most communities in the US use one or more of the following business or nonprofit entities. Each offers limited liability protection for community members, board members, etc.
Homeowners Associations (HOA) and Condominium Associations are designed for individuals or households who have a deed to their own lot, house, apartment, or housing unit, and shared ownership of common property. These entities offer tax advantages—all funds collected from members and spent on buying, developing, managing, repairing, or maintaining the property are tax deductible. These entities differ in how the individual property is owned.
Limited Liability Companies (LLC) offer the same limited liability advantages as for-profit corporations but are easier to set up. While created for a businesses, an LLC can also be used to own property.
Housing Cooperatives are typically used to own a house or apartment building, but can also own land. Co-op members own one or more shares of undivided interest in the property, and have an Occupancy Agreement for use rights in a particular co-op house, apartment, or plot of land. Shareholders can choose their community members, unlike other legal entities in the US and Canada to co-own property. Housing co-op members can say “Yes” or “No Thank You” to potential new members who don’t support the community’s purpose, or who raise red flags.
Non-Exempt Nonprofits are nonprofits which offer liability protection and can be used to co-own land or manage community activities, but whose founders don’t seek a tax-exempt designation from the federal government.
501(c)(3) Nonprofits can receive tax-deductible donations. They’re best used to run educational programs or create land trusts, but not to own the community’s property. A 501(c)(3) tends to attract younger people with few assets, and deflect away people seeking to build equity in the community. So communities that own their land as a 501(c)(3) tend to have high turnover.
See sidebar, “Why Not to Use Joint Tenancy or Tenancy in Common,” p. __. For more general overview information on legal entities for communities, please see “Legal Structures for Intentional Communities in the US” in Communities #173 (pp. 46-55), reprinted in Wisdom of Communities Volume 1, Starting a Community (pp. 48-57), and also appearing in slightly longer form in Edition VII of Communities Directory (pp. 576-586). For good advice about which legal entity(s) would be best for your community, please seek a lawyer licensed in your state or province who specializes in one or more of these legal entities—and who already understands intentional communities.
If One Is Good, Two (or More) Could Be Better
Since no one business or real estate entity really matches an intentional community, some communities combine them to better fulfill their purpose and meet their goals.
My community, Earthaven Ecovillage, resolved its legal and financial issues by dividing its 329-acre mountain property into 12 different 11-acre neighborhood parcels and the remaining 197 acres of shared land, and creating 14 different legal entities. Each neighborhood has title to their parcel. Nine neighborhoods use housing co-ops to own their parcel, two neighborhoods use an LLC, and one uses a 501(c)(3) nonprofit. Each neighborhood is a member of the Earthaven Homeowners Association (HOA), which owns the remaining 197 acres, which it manages, repairs, and maintains. Each individual Earthaven member is also a member of the Earthaven Community Association (ECA), a non-exempt nonprofit that manages all non-property aspects of community life—website, visitors, tours, membership, work exchangers, social and spiritual events, and so on.
EcoVillage at Ithaca (EVI), a rural ecovillage community in New York State with three different cohousing neighborhoods on its 175 acres, uses six legal entities. “One of the reasons for creating so many different entities,” wrote Bill Goodman, a community member and lawyer, “was our need to satisfy...the town of Ithaca, the New York Attorney General’s Office, banks, and insurance companies....We had to create a complex framework to fit both our needs and the expectations of the legal and financial worlds.”
EcoVillage at Ithaca, Inc., a 501(c)(3) nonprofit, owns all the property outside the boundaries of the cohousing neighborhoods. Each of the community’s cohousing neighborhoods owns its buildings and (except for SONG neighborhood) owns the land beneath it: the FROG Housing Co-op, SONG Housing Co-op, and TREE Housing Co-op. The EcoVillage at Ithaca Village Association (EVIVA) is a non-exempt nonprofit which owns and manages roads, water and sewer lines, parking lots, swimming pond, and the land immediately around the FROG and TREE neighborhoods. The Center for Transformative Consciousness, a second 501(c)(3) nonprofit, was instrumental in developing each neighborhood and runs the community’s educational programs.
Occidental Arts and Ecology Center (OAEC) in California has two legal entities and a commercial lease: Sowing Circle LLC owns the land, Occidental Arts and Ecology Center (OAEC), a 501(c)(3) nonprofit, owns and manages their educational programs. The OAEC nonprofit leases most of the community’s property.
Los Angeles Eco-Village (LAEV) uses two entities. Urban Soil/Terra Urbana, a Limited Equity Housing Co-op, owns two adjacent two-story apartment buildings and a fourplex unit, but not the ground beneath these buildings. The Beverly-Vermont Community Land Trust, a 501(c)(3) nonprofit, owns each of these land parcels but not the buildings.
Yes, You Need a Lawyer!
Please don’t create or manage your community without legal advice! A lawyer can save you heartbreak, wrenching conflict, and thousands of dollars. (Earthaven’s first lawyer, for example, warned our founders against what they wanted to do. Unfortunately they ignored her advice.)
So, first, you need a lawyer who specializes in whatever kind(s) of legal entities you do use or will use to co-own your property and/or to manage any nonprofit educational organizations or run any community businesses. I recommend finding other intentional communities in your state or province who use the same legal entity(s) and asking who their lawyer was. Their lawyer will already know what an intentional community is, so you don’t have to spend expensive billable hours educating him or her about it!
It’s also wise to use a real estate lawyer to protect your interests when you buy the property.
You can choose one or more legal entities and then hire a lawyer who specializes in those entities. Or, you can hire a lawyer first and ask them which legal entity(s) they recommend for your situation. But please make sure you’re hiring a lawyer already familiar with intentional communities!
Diana Leafe Christian, author of Creating a Life Together and Finding Community and former editor of Communities, speaks at conferences, offers consultations, and leads workshops internationally on the tools and processes to create successful new intentional communities, and on Sociocracy, an effective governance and decision-making method. She has written on community legal issues for Communities; the FIC’s Communities Directory; the Gaia Education book, Gaian Economics; and several chapters of Creating a Life Together.
Real estate law provides two legal entities for co-owning shared property with undivided interests. This means all co-owners have an equal financial interest in and equal rights in the property and share equally in its liabilities and profits. But each of these entities has serious drawbacks for communities. With both entities a community member could sell, mortgage, or give away their interest to another person without the membership approval of the community. It could end up with a resident they don’t know and don’t want as a member. In Joint Tenancy, if a community member goes into debt, the creditor seeking collection could force the sale of the property to get the cash value of that member’s share in the property. In Tenants in Common, if a member wanted to sell their interest and move away but the community couldn’t afford to buy them out at that time, that member could also force the sale of the property in order to get the value of their equity in the property as their portion of the sale. So please don’t use either of these!
—DLC
Excerpted from the Spring 2019 edition of Communities, “Community Land”—full issue available for download (by voluntary donation) here.
Posted from my blog with SteemPress : https://www.ic.org/your-community-and-the-law/