Does a two-tier fee system violate IRS rules?

If these are common areas, then the HOA must maintain them with revenue coming in - every Member paying the same. That is your function as members of the HOA.

One for all, all for one

Hi Randal:

If the developer set them up as two separate entities, other associations also have them separate, and IRS personnel said did not violate then they were most likely OK as initially established.

Exactly how were you "transitioned"? Because now you could potentially have as you stated a "money pit" attached to and running with your property. This is probably why they wanted everyone to buy in to their proposal was to financially support the recreational facility, which was probably not doing well. So, depending on what or how this was done will determine if you have any potential options.

OK ... next question:

1. Keep in mind having a pool and tennis courts is something that potentially increases home value if you were to sell your home down the road. That being said, do you and all the other homeowners want to keep and continue to financially maintain the facilities?

If the answer is YES, then the transitioned HOA is probably your best choice to spread the maintenance costs equally between all homeowners.

If the answer is NO, then your choices may or may not be as follows depending on circumstances:

1. Find a legal loop hole to overturn the “transition”, if possible.

2. Convince the homeowners to go back to the two-tier system. However, if as I suspect the “transition” was done due to financial issues in maintaining the recreational facility this may be an uphill battle.

3. Because the recreational facility was later added is it on a separate "lot" or piece of property from the other commons area? Check either the county assessor or the plat for this information. If it is and depending on accessibility and how the land is situated … also depending on your state statutes, governing documents, etc., another option would be to potentially sell this property. However, this is not a decision to take lightly as those who sell their homes in the future will lose an amenity they currently have attached to their homes and which could be considered a desirable asset to some buyers.

One potential idea could be to spread the cost for operating the recreational facility across all property owners AND also charge a use fee for those who use the facilities. The money from the use fee could go into a “recreational reserve account” for repairs and updates in the future. This at least would potentially reduce the chances of requiring everyone to pay a special assessment in the future for repairs. However, this idea would depend on your state statutes and governing documents, if allowed.

Just trying to think out of the box with an idea that could make the majority happy.

The recreation facilities (pool/tennis) should be supported by those that use it. If they become a burden on the neighborhood and the users are not willing to take up the slack then maybe it's time to close them once and for all. It's amazing how socialistic people can become once they figure out a way to make someone else support their lifestyle! Our recreation area was well until the swim team got enough votes on the Board to let them close the pool from 5-7pm (for practices) for about 5 years running. Fortunately that has been stopped but the damage is done. The irony of it was that it turned out that there are only 10-14 of our households that even had a kid on the team and it was being run by people that didn't even live in our neighborhood!

As for the covenants I think we've got enough loopholes to win a case in Chancery court but there's a lot of apathy (as in most HOAs) and lawsuits take lots of money. The Board held an open ended signature campaign and it took 18 months to collect even 50% of the signatures to pass. And the only way they could even reach the 50% was to put a grandfather clause in stating that liens would not be filed against current residents. Residents were told that the clause meant that mandatory dues would only apply to NEW residents as they moved into the neighborhood. Now residents are being told that the clause only prevents liens from being filed but it doesn't prevent the HOA from suing in General Sessions Court which they have been threatening. They've only actually won one judgment and they used it to scare other residents into joining the HOA. The economics is that it's cheaper to pay the dues rather than $1000s to an attorney to fight them. The tide has turned a bit though. One resident sued them in Chancery Court and the Board settled out of court to keep it from being heard in Chancery. They had to promise never to bother the resident again. Another resident actually beat them in General Sessions having to do with their signatures possibly being forged during the voting. The Board president then had to "admit" that residents that didn't sign the covenants couldn't be sued (wonder why they never told US that?)! Of course he's now trying to backtrack on that statement saying that he didn't understand the question? I'm expecting a big backlash on memberships this year since that one came out.

What I think is that a majority of the membership would support going back to the two-tier system where there is an HOA fee to cover the expenses for the commons, and letting those that use the pool provide the financial support for it. If residents think the pool adds value to their property, then by all means, they should support it for that reason if nothing else.

I don't agree that a rec area such as ours necessarily adds value. Our homes are selling for the same price per square foot as similar homes in other neighborhoods that don't have recreation areas, all other things being equal. If there are any sound statistical studies (not opinions) that anyone knows of please send me the link, I'd like to read them. Things like pools, tennis, association fees, etc., are considerations and they can cause someone not to purchase a property just as easily.

But again I ask, can anyone definitively answer the question as to whether an HOA can operate a two-tier fee system without being in violation of IRS non-profit regulations? As big as this group is there's got to be some CPAs that have had experience in the matter. Help PLEASE!

RandalR, I think it is a wise thing to transition to a manditory HOA. I think the CPA's opinion is correct. It is my understanding that if the HOA's income from outside of the HOA is its primary source of income that the HOA may not use form 1120-H and your HOA will be subject to taxes on the income which is separate from HOA assessments.

Some questions for you.
1) Have those who disagree with the transition been members of the voluntary HOA? Or have they been getting a free ride while the voluntary members have paid to maintained the whole community?

2) If the recreation area is owned by the community and were not maintained by the HOA wouldn't all owners of the community be legally responsible to maintain it?

3) Does the recreation area improve the value of all homes in the community?