HOA Purchase of Golf Course

Started by RandyS4 • 11 replies • 2250 views

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RandyS4 (California)
Posts: 2

Posted:

I'm sorry if this question has already been posed, but I could not find anything in a search of this specific issue.

Our HOA Board is in the process of determining whether to purchase the golf course(and attached restaurant)from a private company. Needless to say, this has divided the entire community.

The CC&R's state (originally and currently)that: "If the Golf Course or any other improvements are constructed, they will not be owned, operated, maintained or controlled by the HOA, a Subassociation, or any other homeowners association and Owners will have neither a special right nor an obligation of use any of these improvements. The Golf Course, if completed as presently contemplated, is presently intended to be open to the public. No Owner is entitled to membership in the Golf Course or any other private facility operated within the overall project."

My questions: Can the HOA legally purchase this golf course with the CC&R's statement above? If the answer is no, and if the HOA changes the CC&R's to allow the HOA to "own, operate, maintain or control" the golf course, do those property owners who bought into the community under the current CC&R's have any recourse to opt out of any associated fees for the purchase/maintenance/management of the course?

Any information is appreciated, and thanks in advance.

JohnB26 (South Carolina)
Posts: 1,569

Posted:

no

however

the ccrs themselves may be changed if the procedure for such change as outlined in the ccrs is followed TO THE LETTER WITH ALL Is DOTED and ALL TEEs CROSSED

the 'current' owners have agreed to the ccrs INCLUDING any properly voted ammendments to same

your only inalienable rights are:

life

liberty

the PURSUIT of happiness

CAVEAT EMPTOR[/b[

ps. let the torric ka ka begin

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By RandyS4 on 04/09/2013 2:17 PM

Can the HOA legally purchase this golf course with the CC&R's statement above?

No. If they did, a member could challenge the purchase in court as a breach of contract and make the Association sell the course (or file a challenge to hold up the purchase until the court authorizes it). End result, a whole lot of money for the attorneys involved.

The CC&Rs would need to be amended first to remove that prohibitive statement.

Quote:
Posted By RandyS4 on 04/09/2013 2:17 PM

If the answer is no, and if the HOA changes the CC&R's to allow the HOA to "own, operate, maintain or control" the golf course, do those property owners who bought into the community under the current CC&R's have any recourse to opt out of any associated fees for the purchase/maintenance/management of the course?

If the CC&Rs were amended in accordance to the procedure for amending the document, then NO.
All would have to pay their fair share of the Association expenses which would now include expenses of the course.

As a side note, any income received from the golf course would be considered taxable income to the Association.

NOTE: I am not an attorney and I do not work in the legal profession. You should consult an attorney versed in contract law that will have access to your governing documents for a legal opinion and possible legal options.

MatthewW4 (Arizona)
Posts: 500

Posted:

The power of your board may be limited by the CC&R's. Normally there is a statement of the purpose of the association and operating a golf course and restaurant are not likely to be among the purposes. That would mean the association must amend its CC&R's.

But even if the association amends its CC&R's to operate these facilities, the question then arises whether the amendment is legal. There are conflicting court decisions from around the country as to whether the declaration can be amended to add a new financial burden for the homeowners.

The fact that the golf course and restaurant are for sale suggests that they are most likely losing money. My wife and I looked into buying several businesses a few years ago and found that without exception that every business offered for sale was a loser. I am not a golfer and have no desire to play, but my understanding is that in recent years the demand for golf courses has seriously dwindled. Your association could be stuck with a couple of white elephants.

There is one valid argument that could be made in favor of the purchase: your association would be able to control future development of the property. If you pass up the opportunity to buy, your future neighbors could be a toxic waste dump or el cheapo apartments crammed with Section 8 tenants.

RandyS4 (California)
Posts: 2

Posted:

Quote:

Posted By TimB4

No. If they did, a member could challenge the purchase in court as a breach of contract and make the Association sell the course (or file a challenge to hold up the purchase until the court authorizes it). End result, a whole lot of money for the attorneys involved.

The CC&Rs would need to be amended first to remove that prohibitive statement.

That is my understanding also. And yes............the attorney's (and money) are already involved (at least for those wishing to purchase.)

Quote:
Posted By TimB4

If the CC&Rs were amended in accordance to the procedure for amending the document, then NO. All would have to pay their fair share of the Association expenses which would now include expenses of the course.

So, the CCR's would need to be amended (according to governing documents) prior to any action to purchase the course? The Board has already spent several thousand dollars in legal and other fees.)

Quote:
Posted By TimB4

As a side note, any income received from the golf course would be considered taxable income to the Association.

That's another question I have. Can a not-for-profit association own a for-profit entity? Do HOAs have profit/loss potential?

Quote:
Posted By MatthewW4

But even if the association amends its CC&R's to operate these facilities, the question then arises whether the amendment is legal. There are conflicting court decisions from around the country as to whether the declaration can be amended to add a new financial burden for the homeowners.

This is also an issue that has been raised, whether a HOA can actively purchase and control a "for-profit" entity without converting it into an "amenity" (such as a swimming pool or tennis court) for the members.

Quote:
Posted By MatthewW4

There is one valid argument that could be made in favor of the purchase: your association would be able to control future development of the property. If you pass up the opportunity to buy, your future neighbors could be a toxic waste dump or el cheapo apartments crammed with Section 8 tenants.

This is the main argument being put forward (and an honest one in my opinion) by those favoring the purchase. The association will have control over the future maintenance of the course (but there has been little talk about the actual expenses involved in upgrading or maintaining the course.)

Thanks to all for the quick replies. Just so happens a Board meeting regarding this issue takes place in a few hours.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Rand
Tim and Matt pretty well hit the nail on the head. I am anxious as the what happened at the meting. Please keep us informed.

MatthewW4 (Arizona)
Posts: 500

Posted:

Randy,

A common misconception is that non-profits cannot make a profit. They can and routinely do. The difference is that the profits cannot be distributed or paid out to the owners. The profits stay with the non-profit for whatever their needs are, but, as others have pointed out, there may be tax consequences when an HOA takes in money from sources other than assessments.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By MatthewW4 on 04/09/2013 6:38 PM
Randy,

A common misconception is that non-profits cannot make a profit. They can and routinely do. The difference is that the profits cannot be distributed or paid out to the owners. The profits stay with the non-profit for whatever their needs are, but, as others have pointed out, there may be tax consequences when an HOA takes in money from sources other than assessments.

I agree with Matt. One infamous case is a Del Webb community in NV? that had income from golf course, rental stores, etc. that went to court with the IRS. The court ruled the association had to pay taxes (a large amount but I foget how much) on the additional income.

One must be very careful with income in a non-profit corporation. Income can be made and not taxed if it is poured back into the corporation but an over simplification on my part. Bottom line, be careful.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By RandyS4 on 04/09/2013 4:31 PM

So, the CCR's would need to be amended (according to governing documents) prior to any action to purchase the course?

No.

The CC&Rs would need to be amended prior to the actual purchase. The Board is free to spend money on all the preliminaries before the amending the CC&Rs.

Quote:
Posted By RandyS4 on 04/09/2013 4:31 PM

The Board has already spent several thousand dollars in legal and other fees.

Looks like the Board chose to spend money on something that isn't a sure thing. Not something I would have voted to do (if I was on the Board) but it might not have been possible to avoid in order to secure the deal.

I see it sort of like signing a contract for a new home and putting down a deposit prior to seeing if you could obtain a loan. If the loan doesn't come through, the deposit would be lost but not placing the deposit could have resulted in the home being sold prior to the loan being approved.

Therefore, what the board is doing might not have been avoidable.
You may have to write it off as the cost of doing business and learning a lesson.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By JohnC46 on 04/09/2013 7:04 PM

Over simplified, yes.

The IRS also considers the source of the income as well when determining whether or not the income is taxable, not just whether it is "poured back" into the corporation. The rules regarding sources and uses of income vary widely depending on how the organization is classified as tax-exempt by the IRS. There are many, many tax-exempt categories.

In NV case the issue was the source of the income.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By JohnC46 on 04/09/2013 7:04 PM
Income can be made and not taxed if it is poured back into the corporation but an over simplification on my part.

Messed up the editing. My previous post should have read:

Over simplified, yes.

The IRS also considers the source of the income as well when determining whether or not the income is taxable, not just whether it is "poured back" into the corporation. The rules regarding sources and uses of income vary widely depending on how the organization is classified as tax-exempt by the IRS. There are many, many tax-exempt categories.

In NV case the issue was the source of the income.

Hope I did it right this time.

KevinK7 (Florida)
Posts: 1,343

Posted:

While currently the HOA cannot purchase the golf course I had a couple questions.

Are there any other common properties? Are there any other covenants and restrictions granting the HOA authority to purchase properties for the neighborhood? And is the membership mandatory?

The reason I ask is because say there are no other covenants stating the HOA can acquire properties but the HOA decides to change the documents to permit such purchases and undertake future maintenance of such properties. Those who purchased into the neighborhood with an understanding of expected expenses would have an argument against acquisition changes. Similar to a voluntary to mandatory conversion requiring 100 percent approval to proceed. To create a possible huge expense for the community would IMO require more then a simple amendment.

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