Leasing Common Areas

Has any of your HOAs leased their Tennis Courts for lessons (or Clubhouse for aerobics or pilates etc)? Is there some type of lease agreement? We have a resident owner who is a tennis pro. He wants to teach tennis on our HOA court. (Most of his clients will be non-residents, he carries liability insurance). We currently have no rules regarding court time. Some people (owners) have said he can't because he cannot run a business on our common areas however I have not found anything in the CC&Rs, bylaws, or Rules & Regs that states that. I don't have a problem with him giving lessons on the court, just want to know if anyone else has experience with this situation.

Rhonda,

Tim's advice is sound. Once your association starts renting its common facilities for use by non-members, it becomes a public facility and is subject to all the same federal, state and local requirements as any other public facility. (A public facility is one that is available for use by the public).

The articles Tim provided links to are good, but neither discusses the tax implications of such use. Income derived form rentals or leases such as this is not considered assessments and is considered by the IRS as non-exempt income. Such income is subject to income tax. You can deduct from that income certain expenses (which gets complicated to figure out), but, if your associations files Form 1120-H, any taxable income is taxed at a flat 30%. If the rental income is great enough compared to assessment (exempt) income, then the association may not even be eligible to file Form 1120-H and may need to file the standard corporate Form 1120. For that you may need the help of a CPA. Also, under some circumstances, associations have found it advantageous to file 1120 instead of 1120-H anyway. Again, you will likely need the help of a CPA to figure all of that out.

By the way, once your association files Form 1120 instead of Form 1120-H, the income from assessments which is placed into reserves, which is not taxable when filing 1120-H, becomes taxable when filing 1120.

As you see, there are a lot of things that have to be figured out before deciding on this venture.

This seems to come up annually in my HOA- some entity or individual asks if they are offer tennis lessons, swim lessons, or rent the clubhouse to have classes. There are tax implications, especially if your organization is incorporated as a non-profit. Then there is the liability insurance. The provider may offer their own personal liability insurance but this may not typically cover your HOA should someone become seriously injured on your property.

It is a can of worms in other ways as well. If you allow Business X to give swim lessons but homeowner Suzie wants to give swim lessons and she has liability insurance, who takes precedence to offer such lessons for profit---a business or a homeowner? If Joe wants to give a rhumba class at 4pm on Sundays at the clubhouse but the Smith family wants to rent the clubhouse at 4pm next Sunday, do the homeowners have precedence to rent the clubhouse over Joe's for-profit rhumba lessons? Then there has been the fizzle: ten people decide to get all jazzed up over an event/classes in the clubhouse and it collapses over the next 6-7 weeks as people decide not to attend. In the meantime, the other 1000+ community members have been unable to book or use the clubhouse each Wednesday for those 6-7 weeks because Janie holds a ten person class on Wednesdays at 7pm and must have the clubhouse, even though the attendees are dwindling. These are scenarios that have happened in my HOA. Avoid the can of worms.