Initiation Fees

well, after a 4 year hiatus I am back on my board and have a mess:

1. Reviewing past bank statements has led the new board to believe there has been some usage of association money for personal uses. What would be the first step in this situation?

2. The outgoing treasurer told me that in the state of Kansas HOA's can no longer charge initiation fees upon the sale of a home. I have found no documentation to verify that, does anyone have any insight?

1. Since the board now suspects some financial impropriety, you owe it to yourselves and the association to conduct a full audit of your books. If you have someone on the board with auditing experience - great, if not you'll have to consider hiring an outside accounting firm or forming a committee. Even if you have an experienced accountant / auditor / etc on the board, you'll need to weigh the possibility that the membership will perceive a conflict of interest vs. the cost of an outside firm. If you suspect the improprieties are egregious enough to warrant prosecution of the offenders, you'll should consider the benefits an outsider auditor may bring to your potential case.

The audit should intend to accomplish a couple of things:

(a) determine if and in what amount any improprieties exist, and the nature of them so as to decide upon the next step (if any).
(b) identify where the failures occurred which allowed the improprieties in the first place, and devise a means to prevent them in the future.
(c) consider all accounting / bookkeeping / financial procedures to ensure the proper "checks and balances" are in place.

2. I can't speak to Kansas law, sorry.

Last year we got the following quotes based on an annual budget of about $300K:
Certified audit $8K
Financial review $2.4K

Thanks, our annual budget is about 22k

It is authorized by our docs, I really don't know what he is referring to

thanks Richard, that is what i need.

Melissa has a point. What may appear as personal expenses may be reimbursement to a board member for HOA expenses. Hopefully, there will be a paper trail. The expense should be authorized (hopefully, it's in the minutes) and backed up by receipts. Whenever I used my own money I tried to make the purchase separately so that my personal expenses were not on the receipt. When that was not done, I would mark on the receipt which items were for the HOA (or other organization). I always made a copy of any receipts, turned in the original with a brief explanation, and kept a copy of what I submitted in the event there was ever a question.

Richard,

Can you elaborate, or share a doc regarding your initiation fees? I'm a new Board member and wanting to investigate ways to bring new funds into our association.

Anything you can provide would be most appreicated.

PS - Actually, anybody can feel free to jump in (grin)

Here is the language used by one HOA in Georgia:

'Initiation Fee. Upon the conveyance of ownership of a Unit, including all resales, an initiation fee shall become due and payable to the Association by each new Owner. The amount of the initiation fee shall be Five Hundred Dollars ($500.00), to be paid immediately upon the conveyance of ownership. The Board may periodically adjust the amount of the initiation fee. Such adjustments shall not exceed ten (10) percent annually.

The initiation fee shall not be deemed to be an advance payment of any assessment and may not be paid in lieu of any assessment. The initiation fee shall be the personal obligation of the new Owner and shall constitute a lien against the Unit.

Notwithstanding anything to the contrary herein, no initiation fee shall be due as the result of a conveyance of a Unit to an Owner’s spouse, child, or a corporation, partnership, company or legal entity in which the Owner is a principal. No initiation fee shall be due from any Person who takes title through foreclosure upon the lien of any priority mortgage covering the Unit.'

To BradP (Kansas):

Brad, last July you asked whether initiation fees can still be collected from new homeowners in light of Kansas HB2092, which was signed into law in 2009. That bill prohibits "transfer fees" or those charges payable upon the transfer of an interest in real property. (For your reference, the bill has been codified as KSA 58-3821 and KSA 58-3822, both of which are available here:

http://kansasstatutes.lesterama.org/Chapter_58/Article_38/58-3821.html
http://kansasstatutes.lesterama.org/Chapter_58/Article_38/58-3822.html

When you originally asked the question, I reported what I had been told by our MC's attorney as well as others: initiation fees payable to an HOA are not covered under this law. However, last week I met with an attorney who specializes in HOAs and she told me that HOA initiation fees ARE COVERED under this law and subsequently they are now banned. This attorney has since instructed all her HOA clients (20+) to stop collecting the initiation fee. Her interpretation doesn't square with how I read the law.

In KSA 58-3821, paragraph (2), it states:

"transfer fee means a fee or charge payable upon the transfer of an interest in real property or payable for the right to make or accept such transfer, regardless of whether the fee or charge is a fixed amount or is determined as a percentage of the value of the property, the purchase price or other consideration given for the transfer. The following shall not be considered a "transfer fee" for the purposes of this section:"

Then in sub-paragraph (2)(G), it states:

"any tax, fee, charge, assessment, fine or other amount payable to a homeowners', condominium, cooperative, mobile home or property owners' association pursuant to a declaration or covenant or law applicable to such association;"

My interpretation of the statute is that HOA initiation fees are not applicable to this law, but she argues that any initiation fee specified in the covenants is a "transfer fee covenant" and therefore is covered under this law. So, I have two attorneys giving me conflicting opinions!

Have you gathered any additional input from your attorney on how to properly read this law?

Richard:

I have not but have a pile of stuff at our attorney getting reviewed now, will bring this up.