HOA spending money on non-HOA property

Started by RobertT7 • 11 replies • 3914 views

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RobertT7 (Georgia)
Posts: 5

Posted:

My HOA Board decided to take out a bank loan for tens of thousands of dollars to purchase fountains, have them installed, and maintained for five years. The ponds where the fountains have been placed belong to the developer and the owner of the local golf course.

The state law that governs HOA Boards clearly states that HOA funds can only be spent on "common area," within the HOA. The law goes on to describe HOA common area as property either owned or leased by the HOA.

When I met with our Board members they said the community covenants say they can do what they have done. The Board said the covenants are what rule and not the state law. They also said the ponds would dry up and become unhealthy for the residents, if they didn't install the fountains and maintain the ponds.

I asked the Board why the golf course owner wasn't taking care of his ponds and they said he wouldn't.

I don't really believe the Boards explanation is accurate, because a couple of these ponds were there for years without fountains or maintenance. There are many other HOAs in the area with ponds without fountains.

The Board said they didn't have any studies done to prove their point, except the opinion of the company from whom they bought the fountains and who has the five year contract to perform maintenance.

Does this sound legitimate?

TimB4 (Tennessee)
Posts: 21,059

Posted:

Robert,

Can you provide a link or name the section of State law that funds may only be spent on the common areas?
Often State laws will defer control to the governing documents. However, without knowing what section of law you are referring to I can't tell if that is what is happening here.

Additionally, if the law does defer to the governing documents, can your cite the section of the governing documents your Board referred to when they justified the expenditure (just make sure to remove the name of the association or golf course)?

Also, when the declarant turns control of the Association to the membership will the golf course be part of the Association or a separate entity on it's own?

JohnO6 (Georgia)
Posts: 424

Posted:

In Georgia some will think that the POA Act is what governs all HOAs. This is not the case. Unless so stipulated in the CCRs (which is rarely the case in the original covenants written for the developer), an HOA must "submit" itself to be covered by this law.

So, Tim you are wise to ask for the specific portion of the GA code, but please recognize it might not apply.

DaveD3 (Michigan)
Posts: 796

Posted:

Spending money to maintain or beautify non-HOA properties sounds a lot like charity to me. Fundamentally no different than if they were spending money to make the local youth center more appealing, and justifying that it, in turn, helps property values in the HOA.

That could also raise some tax ramifications as money is not being spent on the association common areas.

DaveD3 (Michigan)
Posts: 796

Posted:

RobertT7 (Georgia)
Posts: 5

Posted:

The golf course is a privately owned business and in no way a part of the Association.

The developer has "titled" other properties over the Association in the past, but not in the case of the ponds where the Association assumed responsibility for their maintenance, in writing, and placed the fountains.

Below is the state law.

The Georgia Property Owners’ Association Act
OCGA 44-3-220 through OCGA 44-3-235
44-3-220. This article shall be known and may be cited as the 'Georgia Property Owners´ Association Act.'
44-3-221.
As used in this article, the term:
(1) 'Board of directors' or 'board' means an executive and administrative body, by whatever name denominated, designated in the instrument as the governing body of the association.
(2) 'Common area' means all real and personal property submitted to the declaration which is owned or leased by the association for common use and enjoyment of the members.
(3) 'Common expenses' means all expenditures lawfully made or incurred by or on behalf of the association together with all funds lawfully assessed for the creation and maintenance of reserves pursuant to the provisions of the instrument.

The HOA By-Law says that the Association is a "Non profit corporation organized and existing under the laws of the State of Georgia."

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Robert

Devil's advocate for a moment:

(2) 'Common area' means all real and personal property submitted to the declaration which is owned or leased by the association for common use and enjoyment of the members.

Were the ponds leased to the association?

That is the route I would take to skin that cat.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

I don't know about your state laws, but I do know that the IRS code requires that HOA funds be spent on your common property (either owned, leased, or granted by an easement). Well, sort of. Let me explain.

In order for an association to be eligible to file its tax return on Form 1120-H and claim the preferred tax status of an HOA, at least 90% of its annual expenditures must be spent to maintain, care for, or acquire its common property. There are also income source requirements. As long as the association qualifies to use form 1120-H, none of the association's exempt function income (assessments) is taxable. If the association fails to qualify to use Form 1120-H, it must file its income taxes using the standard corporate Form 1120 and will be taxed accordingly.

By the way, your covenants rule only when state law says they do. Otherwise, if there is a conflict, state law rules. No contract or covenant provision can violate any federal or state law.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Robert,

What you cited were definitions of terms used within that act. Those definitions alone do not support your claim in your original post that "The state law that governs HOA Boards clearly states that HOA funds can only be spent on "common area."

I'm not saying that what the Board did was right or wrong. I'm pointing out that your original argument that it is a violation of State law is not supported by what you provided. I've read through that statute and cannot identify a section that specifies what assessments may be used for. I did find many sections of that law which defer control to the Associations governing documents. When I say defer, I mean that if there is a conflict between your Governing documents and State law, the law says to do what the governing documents say.

Examples of the language used to defer control are: "Except to the extent prohibited by the instrument and subject to any restrictions and limitations specified therein" "Unless the instrument provides otherwise," "Notwithstanding anything to the contrary in this article or in the instrument," "To the extent that the instrument expressly so provides:"

Can you provide the section of the governing documents the Board told you allowed them to make such a decision?

Tim

RobertT7 (Georgia)
Posts: 5

Posted:

If the ponds were leased, they should have shown it in the minutes, but it isn't there. The Board members, surely would have proudly shown the lease to me, when I met with them.

RobertT7 (Georgia)
Posts: 5

Posted:

I believe they quoted a paragraph titled: Member's Rights IN COMMON AREAS AND ENJOYMENT, which states the following

"Every member shall have a right and easement into any streets, roads, parks playgrounds, commons or any other portion of such facilities that may be owned or maintained by the Association now, or hereafter acquired, leased to or controlled by the Association for the common use and enjoyment of the members which are hereinafter referred to as "Common Properties" and such easement shall be appurtenant to and pass with title to every lot, subject to the following:"

The remainder of this section addresses the Association having the right to establish rules and regulations over Common Properties and the right of the Association to transfer ownership to the local government.

I believe they were relying on the words "or maintained" and dismissing the part about ownership or lease.

RobertT7 (Georgia)
Posts: 5

Posted:

Here is what the Covenants say-

The Owners Association shall have the right and duty to levy and assess fees and assessments against each lot in the subdivision. Such assessment shall be for the purpose of maintaining and administering the Associations to provide for the maintenance and upkeep of common areas, maintenance of private streets, security guards, entrance ways and any other common areas or activities that the Owners Association shall own or control.

The Article of Incorp.-

“The Corporation is not organized and shall not be operated for pecuniary gain or profit. No part of the property of the Corporation and no part of its net earnings shall inure to the benefit of any director, officer or private individual.”

The Georgia Property Owners’ Association Act
44-3-220. This article shall be known and may be cited as the 'Georgia Property Owners´ Association Act.'
44-3-221.
As used in this article, the term:
(1) 'Board of directors' or 'board' means an executive and administrative body, by whatever name denominated, designated in the instrument as the governing body of the association.
(2) 'Common area' means all real and personal property submitted to the declaration which is owned or leased by the association for common use and enjoyment of the members.
(3) 'Common expenses' means all expenditures lawfully made or incurred by or on behalf of the association together with all funds lawfully assessed for the creation and maintenance of reserves pursuant to the provisions of the instrument.
In the Articles of Incorporation for the (intentionally blank) Association, INC. A Domestic Nonprofit Corporation, Article IV state: “The Corporation is not organized and shall not be operated for pecuniary gain or profit. No part of the property of the Corporation and no part of its net earnings shall inure to the benefit of any director, officer or private individual.”

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