Capital Improvement Inquiry

NpS (Pennsylvania)
Posts: 4,216

Posted:

For the first 15 years of our existence, we never collected a fee when a house changed hands. Then in 2005, we began collecting a $500 Capital Improvement fee on every sale/transfer. We have never used any of the funds. They are held in a separate bank account. We are thinking about using the funds and raising the fee now.

Wanted to get your thoughts on the following:

1. There is no mention of the Capital Improvement fund or anything like it in our CC&Rs. Do you think we are on shaky ground?

2. For those of you who collect such fees, what restrictions have you put on the use of the funds?

3. How did you determine how much the fee should be?

4. Do you waive the fee when title is transferred to a family member?

Thanks.

Sikubali jukumu. Read all posts at your own risk.

RwT (Florida)
Posts: 154

Posted:

Interesting...

Florida is silent on restricting HOAs rights to impose reasonable fees, charges, etc.

However, be prepared to show the cost(s) associated with the need or reason to collect.

* Non-Lawyer spokesperson.

GeorgeR8 (Arizona)
Posts: 182

Posted:

Quote:

Posted By NpS on 08/26/2014 4:36 AM
For the first 15 years of our existence, we never collected a fee when a house changed hands. Then in 2005, we began collecting a $500 Capital Improvement fee on every sale/transfer. We have never used any of the funds. They are held in a separate bank account. We are thinking about using the funds and raising the fee now.

Wanted to get your thoughts on the following:

1. There is no mention of the Capital Improvement fund or anything like it in our CC&Rs. Do you think we are on shaky ground?

2. For those of you who collect such fees, what restrictions have you put on the use of the funds?

3. How did you determine how much the fee should be?

4. Do you waive the fee when title is transferred to a family member?

Thanks.

Our HOA doesn't but I like the idea and will bring it up this morning. The area I live in has one. $3000.

DaveD3 (Michigan)
Posts: 796

Posted:

You've collected money and socked it away for 15 years without using any of it?

If I were to be buying a home in your HOA and asked "What is the purpose of this fund?" what would the response be?

DaveD3 (Michigan)
Posts: 796

Posted:

oops, bad reading comprehension. 9 years of fee collection with no use. Same question though.

FredS7 (Arizona)
Posts: 927

Posted:

> what would the response be?

Well if it's not being used then essentially it is a reserve fund. And generally a good thing.

If this is encountered for a prospective purchase- I don't understand why buyers don't just consider it part of the purchase price- and make a decision based on that.

BillH10 (Texas)
Posts: 1,217

Posted:

The By-Laws of an association we manage specifically authorize an Initiation Fee. The Association was formed by the builder in 1996, the BOD voted to implement an Initiation Fee of $500.00 in 2009. When implemented, it was the intention of the Board that the Buyer of the property be responsible for the Initiation Fee; the title companies were instructed to collect it from the buyer at closing. $500.00 was chosen as it closely approximated the amount of three special assessments which were necessary to maintain association capital improvements.

The Board and management company learned over time that the parties (buyer and seller) were negotiating side agreements regarding the Initiation Fee: it was being split, the seller was paying it as an inducement to the buyer (hardly needed today in the red hot north Texas real estate market), etc. The Board and management company changed the instructions provided to the title company with the Resale Certificate stating it is the intention of the Board that the Fee be paid by the buyer but the Association has no objection to other arrangements agreed to by the parties so long as the fee is collected by the title company at closing and remitted to the Association on a check drawn on a title company account.

Initially, the funds collected were placed into a reserve account which was designated for maintenance of the capital improvements of the Association. The Association CPA noted that keeping the Initiation Fees in a separate account was creating unnecessary overhead on the treasurer and management company and recommended the funds be deposited to the general reserve fund.

With respect to transfers to a family member, it has not yet taken place. Some properties have been placed in trusts, in such cases the fee is not collected. The rule of thumb is, if a Resale Certificate is requested by a title company, an invoice for the Initiation Fee is included with the Resale Certificate documents provided to the title company. The Initiation Fee is not charged when properties are refinanced.

When we notice a property listed for sale in the Association, we sent a letter to the owner describing the sale process from the perspective of the Association. The letter describes both the Resale Certificate Preparation Fee (which is the sole responsibility of the seller), and the Initiation Fee. We ask the seller to inform the listing agent, and any prospective buyer and their agent, to avoid surprises at closing. The documents provided to the prospective buyer by the title company include the Initiation Fee invoice.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By DaveD3 on 08/26/2014 6:44 AM
You've collected money and socked it away for 15 years without using any of it?

If I were to be buying a home in your HOA and asked "What is the purpose of this fund?" what would the response be?

We've been collecting the fee for 10 years, but our houses don't turn over that often - Sometimes, we go years between sales - No more than 3 have been sold in any year. So this isn't a big pile of money we've accumulated.

We are thinking about letting the pile get a bit bigger and then spend it on upgrading the look of our community which is starting to get a bit dated.

No one has asked your question, but we would answer that, as the name of the fund suggests, it is for capital improvements.

We're not sure if we should commingle the funds with our regular reserve account. Looking for recommendations on that as well.

Sikubali jukumu. Read all posts at your own risk.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By BillH10 on 08/26/2014 9:36 AM
The By-Laws of an association we manage specifically authorize an Initiation Fee. The Association was formed by the builder in 1996, the BOD voted to implement an Initiation Fee of $500.00 in 2009. When implemented, it was the intention of the Board that the Buyer of the property be responsible for the Initiation Fee; the title companies were instructed to collect it from the buyer at closing. $500.00 was chosen as it closely approximated the amount of three special assessments which were necessary to maintain association capital improvements.

The Board and management company learned over time that the parties (buyer and seller) were negotiating side agreements regarding the Initiation Fee: it was being split, the seller was paying it as an inducement to the buyer (hardly needed today in the red hot north Texas real estate market), etc. The Board and management company changed the instructions provided to the title company with the Resale Certificate stating it is the intention of the Board that the Fee be paid by the buyer but the Association has no objection to other arrangements agreed to by the parties so long as the fee is collected by the title company at closing and remitted to the Association on a check drawn on a title company account.

Initially, the funds collected were placed into a reserve account which was designated for maintenance of the capital improvements of the Association. The Association CPA noted that keeping the Initiation Fees in a separate account was creating unnecessary overhead on the treasurer and management company and recommended the funds be deposited to the general reserve fund.

With respect to transfers to a family member, it has not yet taken place. Some properties have been placed in trusts, in such cases the fee is not collected. The rule of thumb is, if a Resale Certificate is requested by a title company, an invoice for the Initiation Fee is included with the Resale Certificate documents provided to the title company. The Initiation Fee is not charged when properties are refinanced.

When we notice a property listed for sale in the Association, we sent a letter to the owner describing the sale process from the perspective of the Association. The letter describes both the Resale Certificate Preparation Fee (which is the sole responsibility of the seller), and the Initiation Fee. We ask the seller to inform the listing agent, and any prospective buyer and their agent, to avoid surprises at closing. The documents provided to the prospective buyer by the title company include the Initiation Fee invoice.

Our situation sounds similar. Declaration was silent. Fee was instituted with an amendment to By-Laws.

Fee is collected at closing and is part of resale certification. We don't have any preference whether buyer or seller pays it as long as fee is collected. In PA, Buyer can back out of sale without repercussion up to 10 days after receipt of resale certificate - So I can understand that Buyer and Seller may negotiate who pays.

The problem with merging this fund with reserves is that our reserves can only be used for items in our Reserve Study - but some think that we should spend these funds on non-reserve items. So not sure whether one or two bank accounts would wind up being more cumbersome.

Thanks for your insights.

Sikubali jukumu. Read all posts at your own risk.

KerryL1 (California)
Posts: 14,550

Posted:

CA's civil code states that funds in reserves may only be used to repair and replace components that are listed in the reserves study (we have over 150 components). But I don't know what PA legislation might require.

So some of the improvements that you want to make, NpS, probably are for components in your reserves account.

I'm thinking that if your % funded isn't hugely healthy, use the funds in your capital improvements account for the improvements you mention. But it's very name makes it sounds as if the funds should be used for something new or in addition to your listed reserve components. Did your Board create any kind of document that states what the Cap. improvement funds should be used for?

Whatever the case, I would not commingle the funds.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By KerryL1 on 08/26/2014 10:36 AM
CA's civil code states that funds in reserves may only be used to repair and replace components that are listed in the reserves study (we have over 150 components). But I don't know what PA legislation might require.

So some of the improvements that you want to make, NpS, probably are for components in your reserves account.

I'm thinking that if your % funded isn't hugely healthy, use the funds in your capital improvements account for the improvements you mention. But it's very name makes it sounds as if the funds should be used for something new or in addition to your listed reserve components. Did your Board create any kind of document that states what the Cap. improvement funds should be used for?

Whatever the case, I would not commingle the funds.

You've identified the core of one of our issues Kerry. We are just now debating whether these are "improvement" funds or "replacement/reserve" funds. No way to tell where that conversation will wind up.

Documentation is minimal. By-Law Amendment and Q&A that introduces when the fee goes into effect but doesn't explain the intended use of the funds.

Sikubali jukumu. Read all posts at your own risk.

DuaneR (Washington)
Posts: 35

Posted:

What your MC has done is tap into the mortgage/closing process through the title company and raised more funds at the expense of an unsuspecting home buyer and justified it with the title of capital improvement funds. My MC calls this a transfer fee for title and recording costs. I question then to show me one receipt from the county where the HOA paid this fee - the room went quiet for a few seconds and then move on to another subject. The CC&Rs state that the semi-annual dues are to be the only source of income for the HOA. I bought my home in this HOA before a new MC was brought in and started this "transfer fee",which is now up to $300 per new home owner. If I was charge this fee and found out that there was no recording receipts retain by the HOA to show me I would be talking to my Lawyer about this unethical procedure and getting my money back because the MC LIED on a federal form and collected money under false intentions. Thanks for bringing that issue up.

DuaneR (Washington)
Posts: 35

Posted:

What your MC has done is tap into the mortgage/closing process through the title company and raised more funds at the expense of an unsuspecting home buyer and justified it with the title of capital improvement funds. My MC calls this a transfer fee for title and recording costs. I question then to show me one receipt from the county where the HOA paid this fee - the room went quiet for a few seconds and then move on to another subject. The CC&Rs state that the semi-annual dues are to be the only source of income for the HOA. I bought my home in this HOA before a new MC was brought in and started this "transfer fee",which is now up to $300 per new home owner. If I was charge this fee and found out that there was no recording receipts retain by the HOA to show me I would be talking to my Lawyer about this unethical procedure and getting my money back because the MC LIED on a federal form and collected money under false intentions. Thanks for bringing that issue up.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By DuaneR on 08/26/2014 12:01 PM
What your MC has done is tap into the mortgage/closing process through the title company and raised more funds at the expense of an unsuspecting home buyer and justified it with the title of capital improvement funds. My MC calls this a transfer fee for title and recording costs. I question then to show me one receipt from the county where the HOA paid this fee - the room went quiet for a few seconds and then move on to another subject. The CC&Rs state that the semi-annual dues are to be the only source of income for the HOA. I bought my home in this HOA before a new MC was brought in and started this "transfer fee",which is now up to $300 per new home owner. If I was charge this fee and found out that there was no recording receipts retain by the HOA to show me I would be talking to my Lawyer about this unethical procedure and getting my money back because the MC LIED on a federal form and collected money under false intentions. Thanks for bringing that issue up.

I think you are talking about something different Duane.

Yes, some MC's charge transfer and recording fees. And yes, it is unlikely that such charges are actual expenses.

But this is something different. This is money that the HOA collected and intends to spend on improvements to the property. Whatever doesn't get spent now continues to be held in a separate bank account to be used for later improvements. Detailed records are kept and an HOA member can always inspect the books.

The Buyer is not unsuspecting because we publicize the fee. Buyers may be misinformed because a particular RE listing agent doesn't put the fee in the listing. But we have no control over how a RE agent chooses to list a property.

Sikubali jukumu. Read all posts at your own risk.

DuaneR (Washington)
Posts: 35

Posted:

Do you CC&R's talk about special Capital improvment assessments levied on everyone? To single out specific people to pay for a program instead of everyone across the community may be illegal. If I came to an hoa and found out I single out to pay for a program while the old guard with-in the community got off free I would take a suspicious and untrustful view of my community.

GeorgeR8 (Arizona)
Posts: 182

Posted:

Quote:

Posted By DuaneR on 08/26/2014 5:50 PM
Do you CC&R's talk about special Capital improvment assessments levied on everyone? To single out specific people to pay for a program instead of everyone across the community may be illegal. If I came to an hoa and found out I single out to pay for a program while the old guard with-in the community got off free I would take a suspicious and untrustful view of my community.

Its not illegal. Most places that have done this have set a date, and sales after that date are the only ones that pay. Amending the CC&Rs isn't that big a deal in most places.

DaveD3 (Michigan)
Posts: 796

Posted:

Quote:

Posted By NpS on 08/26/2014 9:52 AM

Posted By DaveD3 on 08/26/2014 6:44 AM
You've collected money and socked it away for 15 years without using any of it?

If I were to be buying a home in your HOA and asked "What is the purpose of this fund?" what would the response be?

We've been collecting the fee for 10 years, but our houses don't turn over that often - Sometimes, we go years between sales - No more than 3 have been sold in any year. So this isn't a big pile of money we've accumulated.

We are thinking about letting the pile get a bit bigger and then spend it on upgrading the look of our community which is starting to get a bit dated.

No one has asked your question, but we would answer that, as the name of the fund suggests, it is for capital improvements.

We're not sure if we should commingle the funds with our regular reserve account. Looking for recommendations on that as well.

This may sound critical, but you went through a by-law change to institute this fee, have been collecting it for 10 years, but you don't know what you would do with it? No prioritized list of "improvements"? I would have expected that to be part of the discussion to implement the fee to begin with.

And if it's not a big pile of money, what exactly is the point? Not sure how big your HOA is, but over the past 10 years, how much of a dues increase would it have taken to fund the account to the current level? I would think that if the capital improvements were specified and publicized, a majority of the members would be on board with funding them.

From the buyer's perspective, I see an HOA that's taking even more of my money above and beyond any dues, with no plan for the funds.
From the seller's perspective, I see an HOA that's making my property more expensive and less attractive to buyers.

DavidW5 (North Carolina)
Posts: 565

Posted:

In our HOA, in addition to funds from the $500 new member fee, we have established a Capital Improvement Fund via planned transfers to this fund from each year's operating budget (similar to the planned transfer of operating funds to the Replacement Reserve Fund). Each spring the General Manager solicits "Community Enhancement Suggestions (CES) from the staff, committees, Board and residents. These are reviewed (in an open meeting) and prioritized by the Board for further study (e.g. preliminary design, cost estimate, schedule, etc.) If the suggestion proves practical and is deemed a high enough priority, it is carried out.

Examples of CES's that have been implemented include: drilling a well to allow irrigation of additional common areas, purchase of a small tractor and equipment to allow in-house staff to apply lime and fertilizer at a much lower cost than having a contractor do it, installation of a state of the art sound system in the ballroom, etc.

Our developer left us without many facilities and capabilities we feel we need to operate effectively and efficiently. The CIF process allows us to plan and add them in a structured process.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By DavidW5 on 08/27/2014 4:54 AM
In our HOA, in addition to funds from the $500 new member fee, we have established a Capital Improvement Fund via planned transfers to this fund from each year's operating budget (similar to the planned transfer of operating funds to the Replacement Reserve Fund). Each spring the General Manager solicits "Community Enhancement Suggestions (CES) from the staff, committees, Board and residents. These are reviewed (in an open meeting) and prioritized by the Board for further study (e.g. preliminary design, cost estimate, schedule, etc.) If the suggestion proves practical and is deemed a high enough priority, it is carried out.

Examples of CES's that have been implemented include: drilling a well to allow irrigation of additional common areas, purchase of a small tractor and equipment to allow in-house staff to apply lime and fertilizer at a much lower cost than having a contractor do it, installation of a state of the art sound system in the ballroom, etc.

Our developer left us without many facilities and capabilities we feel we need to operate effectively and efficiently. The CIF process allows us to plan and add them in a structured process.

Very cool David. I like it and will try to get applied to our situation.

Sikubali jukumu. Read all posts at your own risk.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Transfer fees or "New Member" fees should compensate a management company for its costs in transferring the account and updating the books. It's an expense.

Assessing transfer fees as a quasi-Reserve Fund is unethical as it's applied to new buyers who have never used a single amenity inside the neighborhood into which they are moving. HOA members are to pay their dues with such dues being applied to maintain amenities as they are used by the existing membership and to replace exhausted amenities as the membership exhausts the life from it, wearing it out. It's pay as you use and why Reserve Funds exist as special assessments let long-term HOA members avoid responsibility for their amenity use.

What you're doing is applying a special assessment on EVERY new homeowner before they can move in, especially at a $500 level of assessment. Acknowledge it as such, be transparent that you special assess every new home and then watch your values drop. If that fee revenue is critical, adjust your budget to compensate and raise your dues slightly to build this slush fund. If you're not spending that money, eliminate the fee to the point that it covers the cost of an account transfer.

There is no leadership or representation offered when HOA boards simply reach deeply into their members' pockets. The art of HOA leadership is a focused collections and budget strategy. How many homes didn't sell once a buyer learned of a $500 fee being tacked on to the sale?

RwT (Florida)
Posts: 154

Posted:

In Florida it's a No-No...

An excerpt below from the following web page titled
"Threats to HOA Transfer Fees: What You Must Know":

http://www.hoaleader.com/public/498.cfm

"The problem with the fees is that often they're buried deep in documents that buyers seldom read, and they can make homeownership more expensive. As a result, 17 states have banned or restricted transfer fees, according to The New York Times. "In Florida, we've banned them," says Berger. "Our statute specifically prohibits it. Other states haven't banned it, which is why the FHFA has proposed banning it.""

* Non-Lawyer spokesperson.

DavidW5 (North Carolina)
Posts: 565

Posted:

Quote:

Posted By KellyM3 on 08/27/2014 6:12 AM
Transfer fees or "New Member" fees should compensate a management company for its costs in transferring the account and updating the books. It's an expense.

Assessing transfer fees as a quasi-Reserve Fund is unethical as it's applied to new buyers who have never used a single amenity inside the neighborhood into which they are moving. HOA members are to pay their dues with such dues being applied to maintain amenities as they are used by the existing membership and to replace exhausted amenities as the membership exhausts the life from it, wearing it out. It's pay as you use and why Reserve Funds exist as special assessments let long-term HOA members avoid responsibility for their amenity use.

What you're doing is applying a special assessment on EVERY new homeowner before they can move in, especially at a $500 level of assessment. Acknowledge it as such, be transparent that you special assess every new home and then watch your values drop. If that fee revenue is critical, adjust your budget to compensate and raise your dues slightly to build this slush fund. If you're not spending that money, eliminate the fee to the point that it covers the cost of an account transfer.

There is no leadership or representation offered when HOA boards simply reach deeply into their members' pockets. The art of HOA leadership is a focused collections and budget strategy. How many homes didn't sell once a buyer learned of a $500 fee being tacked on to the sale?

Kelly,

Our $500 new member fee here in Virginia is less than the "capital contribution" fee of 3 months dues that the developer imposed on first time buyers. So there is nothing particularly inequitable about the fee. Furthermore, the existence of the fee has not impeded resales of homes. Homes here don't stay on the market for long.

We are looking into purchasing a home in a similar community in North Carolina to be nearer to our grandchildren. That HOA charges 1/3 of one percent of the purchase price to the buyer as a capital contribution. That will amount to well over $1,000 for us. I really don't get what your objection is.

BillH10 (Texas)
Posts: 1,217

Posted:

Kelly

The Homeowner Initiation fee of $500.00 was agreed to by the Board as the developer had not properly funded the reserve accounts and it was necessary to bill three successive special assessments to obtain the funds for maintenance of capital improvements. The Board in place at the time wished to "level the playing field" as it were, establishing parity between the parties from the payments made by property owners in place when the special assessments were levied with payments received from new property owners.

I can understand the logic of a portion of your argument: the new homeowners are essentially being levied a special assessment upon purchase prior to any use association common areas. It is a topic open for discussion by reasonable people.

However, your comments about a decline of property values and lost sales did not occur. Prior to implementing the Homeowner Initiation fee, the board consulted with association resident real estate agents along with other agents members of the board happened to know. The response was universal: implement the fee, it would have no effect on property values or sales, which has proven to be the case. Several of the agents consulted commented that this particular association was the only one in this area, to their personal knowledge, that did not have an initiation fee. That does not justify implementing the initiation fee but it does mitigate a suggestion of declining property values or a chilling effect on sales.

The Homeowner Initiation fee is clearly invoiced by the Association to flow into the Association reserve account and that is explained to the seller and the buyer in documents provided to the title company by the MC. The Resale Certificate Preparation fee is invoiced to the seller by the MC on an MC invoice. That fee includes the costs incurred by the MC to prepare the documents required by the Texas Property Code, inspect the property, review documents at the office of the County Clerk, and make administrative changes to files, accounting systems, directories, etc.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

There can be no parity between existing homeowners and people who buy into the community at a later date. If you are transparent about a $500 to $1,000 upfront fee, in anything other then upper-middle class to upscale neighborhoods (where such amounts may be trivial), you can certainly make a buyer think twice. You don't know the sales you lose because the offer is never made and if you hide the fee until the closing statement, then your HOA is running a hustle where it's too late to really back away from the closing.

Only existing homeowners should pay into the Reserve Fund. Period. The other reasonable expenses incurred by the management company should be levied. Once a buyer becomes an owner, then they begin paying their share.

HOAs can do this is as it's legal but it's a high-minded ripoff. A new buyer gets NOTHING but a bill in exchange for being "initiated." Really?

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By DaveD3 on 08/27/2014 3:31 AM

This may sound critical, but you went through a by-law change to institute this fee, have been collecting it for 10 years, but you don't know what you would do with it? No prioritized list of "improvements"? I would have expected that to be part of the discussion to implement the fee to begin with.

And if it's not a big pile of money, what exactly is the point? Not sure how big your HOA is, but over the past 10 years, how much of a dues increase would it have taken to fund the account to the current level? I would think that if the capital improvements were specified and publicized, a majority of the members would be on board with funding them.

I can't say for sure, but I expect that a prior MC approached a prior Board with this idea 10 years ago and the Board went with it. There's not much documentation on it from 10 years ago.

At less than 2% of the funds we manage, it is quite understandable that no one paid attention to it until now.

It's now on our radar, which is why I posted my questions.

Sikubali jukumu. Read all posts at your own risk.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RwT on 08/27/2014 6:34 AM
In Florida it's a No-No...

An excerpt below from the following web page titled
"Threats to HOA Transfer Fees: What You Must Know":

http://www.hoaleader.com/public/498.cfm

"The problem with the fees is that often they're buried deep in documents that buyers seldom read, and they can make homeownership more expensive. As a result, 17 states have banned or restricted transfer fees, according to The New York Times. "In Florida, we've banned them," says Berger. "Our statute specifically prohibits it. Other states haven't banned it, which is why the FHFA has proposed banning it.""

The article you cite was written before the final FHFA ruling was issued. Here is the FHFA's description of the final rule.

"The final rule excludes private transfer fees paid to homeowner associations, condominiums, cooperatives, and certain tax-exempt organizations that use private transfer fee proceeds to benefit the property. Fees that do not directly benefit the property are subject to the rule, and would disqualify mortgages on the property from being sold to Fannie Mae or Freddie Mac, or used as collateral for Federal Home Loan Bank advances."

See http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Publishes-Final-Rule-on-Private-Transfer-Fees.aspx

As you can see, Private Transfer Fees whose proceeds benefit the property are exempted from the rule.

Again, our fees are not buried deep in documents and are fully disclosed as part of the mandatory resale certification process that PA law requires.

Sikubali jukumu. Read all posts at your own risk.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By KellyM3 on 08/27/2014 11:13 AM
HOAs can do this is as it's legal but it's a high-minded ripoff. A new buyer gets NOTHING but a bill in exchange for being "initiated." Really?

If I follow your line of reasoning Kelly, then anyone who buys a home in an HOA where the reserves aren't fully funded is being ripped off. The Seller is picking up the cost of the benefits that the Buyer enjoyed but didn't pay for.

In this case, the future benefits from the Capital Improvement Fund go exclusively to the Buyer, not to the Seller. So she reaps 100% of what she puts in. Or at least that's the way that we are thinking about using the funds.

Sikubali jukumu. Read all posts at your own risk.

DuaneR (Washington)
Posts: 35

Posted:

Wait till the MC charges you $75 for escrow fee and another $45 for Admin. fee, now your $500 doesn't look so good now does it?

RwT (Florida)
Posts: 154

Posted:

Quote:

Posted By NpS on 08/27/2014 12:07 PM

Posted By RwT on 08/27/2014 6:34 AM
In Florida it's a No-No...

An excerpt below from the following web page titled
"Threats to HOA Transfer Fees: What You Must Know":

http://www.hoaleader.com/public/498.cfm

"The problem with the fees is that often they're buried deep in documents that buyers seldom read, and they can make homeownership more expensive. As a result, 17 states have banned or restricted transfer fees, according to The New York Times. "In Florida, we've banned them," says Berger. "Our statute specifically prohibits it. Other states haven't banned it, which is why the FHFA has proposed banning it.""

The article you cite was written before the final FHFA ruling was issued. Here is the FHFA's description of the final rule.

"The final rule excludes private transfer fees paid to homeowner associations, condominiums, cooperatives, and certain tax-exempt organizations that use private transfer fee proceeds to benefit the property. Fees that do not directly benefit the property are subject to the rule, and would disqualify mortgages on the property from being sold to Fannie Mae or Freddie Mac, or used as collateral for Federal Home Loan Bank advances."

See http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Publishes-Final-Rule-on-Private-Transfer-Fees.aspx

As you can see, Private Transfer Fees whose proceeds benefit the property are exempted from the rule.

Again, our fees are not buried deep in documents and are fully disclosed as part of the mandatory resale certification process that PA law requires.

I am referring to FLORIDA.

Not interested in FHFA.

I used the article for reference.

Thanks anyways.

* Non-Lawyer spokesperson.

RwT (Florida)
Posts: 154

Posted:

Quote:

Posted By NpS on 08/27/2014 12:07 PM

Posted By RwT on 08/27/2014 6:34 AM
In Florida it's a No-No...

An excerpt below from the following web page titled
"Threats to HOA Transfer Fees: What You Must Know":

http://www.hoaleader.com/public/498.cfm

"The problem with the fees is that often they're buried deep in documents that buyers seldom read, and they can make homeownership more expensive. As a result, 17 states have banned or restricted transfer fees, according to The New York Times. "In Florida, we've banned them," says Berger. "Our statute specifically prohibits it. Other states haven't banned it, which is why the FHFA has proposed banning it.""

The article you cite was written before the final FHFA ruling was issued. Here is the FHFA's description of the final rule.

"The final rule excludes private transfer fees paid to homeowner associations, condominiums, cooperatives, and certain tax-exempt organizations that use private transfer fee proceeds to benefit the property. Fees that do not directly benefit the property are subject to the rule, and would disqualify mortgages on the property from being sold to Fannie Mae or Freddie Mac, or used as collateral for Federal Home Loan Bank advances."

See http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Publishes-Final-Rule-on-Private-Transfer-Fees.aspx

As you can see, Private Transfer Fees whose proceeds benefit the property are exempted from the rule.

Again, our fees are not buried deep in documents and are fully disclosed as part of the mandatory resale certification process that PA law requires.

I am referring to FLORIDA.

Not interested in FHFA.

I used the article for reference.

Thanks anyways.

* Non-Lawyer spokesperson.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Buyers are not being ripped off if reserves are underfunded. Full-funding is difficult to achieve but HOA budget writers should have a good-faith plan and good reasons for expensing from Reserves.

Buyers cannot enjoy benefits enjoyed by the previous resident (seller). The seller absolutely has an obligation to pay their share of regular operations costs AND the future replacement cost of the amenity they are enjoying. The day the new buyer gets his/her deed, they assume the payment once paid by the seller and (most importantly) the HOA and its other members are protected financially as the revenue stream is preserved.

Anytime new residents pay a special fee, "tax" or assessment to fund a Reserve Fund or Capital Improvement fund, it's because the HOA leadership believes its in a state of underfunding at some level. The seller "eats" from the garden but the new buyer is charged for the seller's consumption as well as for his own use. Everyone who bought a house in your community since 2005 has paid this fee, which is really a penalty of residency in your community.

Regarding your Capital Improvement Fund:

1. New buyers pay $500.

2. The HOA has never found reason to use the Capital Improvement Revenue (was it ever necessary to assess it?)

3. If the HOA spends the Capital funds, it wants an increase (despite never proving the Fund's need by never using it)

Your Capital Improvement Fund is erratically funded, making it inherently undependable and dependent on home sales. Your HOA board can't reasonably schedule uses of that fund because you can chart its growth. That makes it an HOA slush fund and slush funds should not be part of your HOA portfolio. A Reserve Fund strategy, with regular deposits on a budget, is your best strategy as it's transparent. The slush fund will only fund a project one time but obligate your operations budget to maintain it forever.

I understand your position and opinion that this is an important revenue source. HOA's, mine included, don't like rising expenses and stagnant revenues but I see through this long-term strategy of your HOA. Your regular dues should rise a tiny amount to offset this Capital Improvement Fund and the ideas for that Fund (projects, included) should roll into the greater budget.

Otherwise, you've outlined where your HOA board keeps its "Beer Money."

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By KellyM3 on 08/28/2014 6:56 AM
Buyers are not being ripped off if reserves are underfunded. Full-funding is difficult to achieve but HOA budget writers should have a good-faith plan and good reasons for expensing from Reserves.

Buyers cannot enjoy benefits enjoyed by the previous resident (seller). The seller absolutely has an obligation to pay their share of regular operations costs AND the future replacement cost of the amenity they are enjoying. The day the new buyer gets his/her deed, they assume the payment once paid by the seller and (most importantly) the HOA and its other members are protected financially as the revenue stream is preserved.

*** True.

Anytime new residents pay a special fee, "tax" or assessment to fund a Reserve Fund or Capital Improvement fund, it's because the HOA leadership believes its in a state of underfunding at some level. The seller "eats" from the garden but the new buyer is charged for the seller's consumption as well as for his own use. Everyone who bought a house in your community since 2005 has paid this fee, which is really a penalty of residency in your community.

*** Not necessarily. The Capital Improvement Fund is for future expenditures that benefits the Buyer, not the Seller. Since the funds will be spent in the future or will be held until spent in the future, I don't recognize your claim that there is any connection to the Seller's consumption. You can call it a penalty of residence if you like, but it is legally prescribed under Pennsylvania's Uniform Planned Community Act. I expect that any State whose legislature adopted the UPCA establishes the right to collect such a fee (unless the legislature struck that provision.)

Regarding your Capital Improvement Fund:

1. New buyers pay $500.

2. The HOA has never found reason to use the Capital Improvement Revenue (was it ever necessary to assess it?)

*** Wrong question. I have no I idea what the thinking of the Board was 10 years ago. I served on the Board around 20 years ago. It wasn't there when I left. It's there now. The question I posed is what do we do with it now that we have it?

3. If the HOA spends the Capital funds, it wants an increase (despite never proving the Fund's need by never using it)

*** Not sure what you are saying here.

Your Capital Improvement Fund is erratically funded, making it inherently undependable and dependent on home sales. Your HOA board can't reasonably schedule uses of that fund because you can chart its growth. That makes it an HOA slush fund and slush funds should not be part of your HOA portfolio. A Reserve Fund strategy, with regular deposits on a budget, is your best strategy as it's transparent. The slush fund will only fund a project one time but obligate your operations budget to maintain it forever.

*** Calling it a slush fund attempts to taint it but adds nothing to the conversation. IMO, the reason something is called a slush fund is that the use of the funds can be hidden. We have no desire or intent to hide any of what we do with the funds.

I understand your position and opinion that this is an important revenue source. HOA's, mine included, don't like rising expenses and stagnant revenues but I see through this long-term strategy of your HOA. Your regular dues should rise a tiny amount to offset this Capital Improvement Fund and the ideas for that Fund (projects, included) should roll into the greater budget.

*** I think that it is not uncommon in this forum for people to be so familiar with and attached to how things work in their own States that they lose sight of the fact that other States have other regimes that, when looked at as a whole, protect the interests of communities and community members. Our State makes it legal, and provides specific statutory limits on Capital Improvement Funds. As long as we stay within those limits, I don't think that moral judgments should be made.

Otherwise, you've outlined where your HOA board keeps its "Beer Money."

*** Nice closing shot. But you have side-stepped the real issue. Whenever there is under-funding, and I expect that applies to at least 70% of all HOAs, when a sale occurs, someone is reaping a benefit that someone else pays for. That's basic math.

*** Now that we have the Fund, I kind of like it. It gives us an opportunity to spruce up the joint in ways that our reserves may not allow. Nothing hidden. I think I'd rather call it a rainy day fund than beer money. It has a better ring to it here.

Sikubali jukumu. Read all posts at your own risk.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By KellyM3 on 08/28/2014 6:56 AM
Buyers are not being ripped off if reserves are underfunded. Full-funding is difficult to achieve but HOA budget writers should have a good-faith plan and good reasons for expensing from Reserves.

Failed to comment on this in last post. I was not saying that Buyers are ripped off when reserves are underfunded. I was making an analogy. I was saying that, if the Capital Improvement Fund is a ripoff (your claim), then an Underfunded Reserve Account (which you say is somehow different) is also a ripoff.

Meanwhile all you have done is describe the regularity and predictability of reserves as being preferred. Preferred as it may be, the underfunding means that the Seller got the benefit that the Buyer is going to pay for.

Sikubali jukumu. Read all posts at your own risk.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Quote:

Posted By NpS on 08/28/2014 8:50 AM

Posted By KellyM3 on 08/28/2014 6:56 AM
Buyers are not being ripped off if reserves are underfunded. Full-funding is difficult to achieve but HOA budget writers should have a good-faith plan and good reasons for expensing from Reserves.

Failed to comment on this in last post. I was not saying that Buyers are ripped off when reserves are underfunded. I was making an analogy. I was saying that, if the Capital Improvement Fund is a ripoff (your claim), then an Underfunded Reserve Account (which you say is somehow different) is also a ripoff.

Meanwhile all you have done is describe the regularity and predictability of reserves as being preferred. Preferred as it may be, the underfunding means that the Seller got the benefit that the Buyer is going to pay for.

An HOA board that purposely or intentionally creates budgets and sets dues rates with full knowledge it's underfunding Reserves is acting unethically. Yes, it's a form of rip off because the HOA gets ripped off. The same people who underfund savings will cry loudest when the special assessment is needed. On Reserves, HOA boards are easily not informed on the topic and don't understand it. While it's their obligation, volunteers board members are worth what you pay us.

Sellers and existing resident certainly benefit, at the new buyer's expense, if high initiation fees are levied on buyers IF the fees are really offsetting what the current dues members should be funding. The odd wrinkle in your case is that the 2005 funds have never been touched, which opens the question of these funds being needed. There is a fine line with HOA leadership between prudence and decadence given HOA boards have the power to seize their members' money. It's confiscatory by nature.

You are correct. This is really a philosophical approach and your thread is very interesting. I see about one such comment thread per month that really makes me think. This is it.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By KellyM3 on 08/29/2014 5:47 AM

Posted By NpS on 08/28/2014 8:50 AM

Posted By KellyM3 on 08/28/2014 6:56 AM
Buyers are not being ripped off if reserves are underfunded. Full-funding is difficult to achieve but HOA budget writers should have a good-faith plan and good reasons for expensing from Reserves.

Failed to comment on this in last post. I was not saying that Buyers are ripped off when reserves are underfunded. I was making an analogy. I was saying that, if the Capital Improvement Fund is a ripoff (your claim), then an Underfunded Reserve Account (which you say is somehow different) is also a ripoff.

Meanwhile all you have done is describe the regularity and predictability of reserves as being preferred. Preferred as it may be, the underfunding means that the Seller got the benefit that the Buyer is going to pay for.

An HOA board that purposely or intentionally creates budgets and sets dues rates with full knowledge it's underfunding Reserves is acting unethically. Yes, it's a form of rip off because the HOA gets ripped off. The same people who underfund savings will cry loudest when the special assessment is needed. On Reserves, HOA boards are easily not informed on the topic and don't understand it. While it's their obligation, volunteers board members are worth what you pay us.

Sellers and existing resident certainly benefit, at the new buyer's expense, if high initiation fees are levied on buyers IF the fees are really offsetting what the current dues members should be funding. The odd wrinkle in your case is that the 2005 funds have never been touched, which opens the question of these funds being needed. There is a fine line with HOA leadership between prudence and decadence given HOA boards have the power to seize their members' money. It's confiscatory by nature.

You are correct. This is really a philosophical approach and your thread is very interesting. I see about one such comment thread per month that really makes me think. This is it.

Kelly

You are right when you say it's a philosophical difference. Please realize that this philosophical difference is taking place not at the individual HOA level but at the State legislature. They enact laws and we live under them as fairly and equitably as we know how.

You are also correct when you say that most HOA boards are not adequately informed about reserves. My guesstimate is that 75-80% of all HOA's are under-funded. And I would also guesstimate that 80% of those under-funded HOAs don't have a viable and reliable plan in place to reach 100% funding. I have also met many MC's who knowingly or unknowingly misdirect Boards on how Reserves need to be addressed. I wouldn't want to live in such a community or be managed by such an MC, but there's a lot of them out there. I don't think it's about being ethical or unethical. It's more about running scared. People rarely get a pat on the back for collecting money today for future expenditures.

I do not understand your concern about our failure to spend the Capital Improvement Funds until now. We have never spent a dime out of our Reserve account either. Until now, we have paid everything out of our operating fund. If I applied your logic, then our Reserve Fund should also be suspect. But you and I both know better.

Nor can I agree with your inflammatory characterizations of rip-offs, decadence, seizures, and confiscation. This is a conversation about money - how we collect it and how we spend it. If our HOA members had such concerns, they would be knocking our doors down. But they aren't. If you want to challenge how we do things, fine. But that change should be based on the total package, not one particular program or policy.

Finally, you speak as if a Board is some kind of well oiled machine. I have met very few that are. Every Board inherits headaches and opportunities it didn't create. It can take years to change philosophical perspectives especially if you don't want to lose your volunteers (and we have too few of them to be able to lose any). That's why our HOA is going through this exploratory discussion. It's not about right or wrong. It's about how we can take advantage of what we have and make it better for our particular circumstances.

I do enjoy your comments. They help us get prepared when it is time to put out an announcement.

Sikubali jukumu. Read all posts at your own risk.

GlenL (Ohio)
Posts: 5,491

Posted:

Np going back to the first question in your original post: 1. There is no mention of the Capital Improvement fund or anything like it in our CC&Rs. Do you think we are on shaky ground?

In my lay opinion yes. In most cases the Covenants set out what fees are assessed for and what they can be used for. Unless your Covenants or state law gives the Board the power to amend the by-laws to add fees then the Board at the time acted improperly to impose this fee. IMO it should have been voted on as an amendment to the Covenants and if passed, filed with the County.

Studies show that 5 out of 4 people have problems with fractions

JohnC46 (South Carolina)
Posts: 14,265

Posted:

I know of several HOA's that do have a transfer fee (one was 2% of sales price) and they put it in a Capital Improvement Fund. One HOA I was in wanted to do such and decided it would require a Covenant change thus requiring 66% vote in favor of. It was defeated.

Personally, I am all for such. Kind of like an initiation fee to join a club.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By GlenL on 08/29/2014 12:20 PM
Np going back to the first question in your original post: 1. There is no mention of the Capital Improvement fund or anything like it in our CC&Rs. Do you think we are on shaky ground?

In my lay opinion yes. In most cases the Covenants set out what fees are assessed for and what they can be used for. Unless your Covenants or state law gives the Board the power to amend the by-laws to add fees then the Board at the time acted improperly to impose this fee. IMO it should have been voted on as an amendment to the Covenants and if passed, filed with the County.

Thanks Glen. I have since done a bit more investigation, and am more comfortable now.

PA adopted the Uniform Planned Community Act about 10 years after our CC&Rs were put in place. So it is not surprising that there is no reference to a CIF in the CC&Rs. But neither is such a fee specifically excluded by our CC&Rs. The UPCA applies retroactively to HOAs if not specifically excluded, so I think we are on safe ground without amendment.

Below is the text of PA's UPCA on Capital Improvement Funds. 3 things of note - It must be maintained in a separate bank account - It cannot be used for general operations - and the big surprise to me, it protects house flippers (See Section iv).

Transfer Fees are also discussed in this section. And I would think that the same rule applies - If not specifically prohibited in the CC&Rs, HOAs in PA can charge transfer fees even if not specifically stated in the CC&Rs.

UNIFORM PLANNED COMMUNITY ACT
68 Pa.C.S. §5302. Power of unit owners' association
(A) GENERAL RULE.-- Except as provided in subsection (b) and subject to the provisions of the declaration and the limitations of this subpart, the association, even if unincorporated, may:
(12) Impose reasonable charges for the preparation and recording of amendments to the declaration, resale certificates required by section 5407 (relating to resales of units) which shall be one charge that may be made by the association solely because of the resale or retransfer of any unit or statement of unpaid assessments. In addition, an association may impose a capital improvement fee, but no other fees, on the resale or transfer of units in accordance with the following:
(i) The capital improvement fee for any unit shall not exceed the annual assessments for general common expense charged to such unit during the most recently completed fiscal year of the association, provided that:
(A) in the case of resale or transfer of a unit consisting of unimproved real estate, the capital improvement fee shall not exceed one-half of the annual assessments for general common expenses charged to such unit during the most recently completed fiscal year of the association;
(B) in the case of resale or transfer of a unit which was either created or added to the planned community in accordance with section 5211 (relating to conversion and expansion of flexible planned communities) at some time during the most recently completed fiscal year of the association but was not in existence for the entire fiscal year, the capital improvement fee shall not exceed one-half of the annual assessments for general common expenses charged to a unit comparable to such unit during the most recently completed fiscal year of the association; and
(C) capital improvement fees are not refundable upon any sale, conveyance or any other transfer of the title to a unit.
(ii) Capital improvement fees allocated by an association must be maintained in a separate capital account and may be expended only for new capital improvements or replacement of existing common elements and may not be expended for operation, maintenance or other purposes.
(iii) No capital improvement fee shall be imposed on any gratuitous transfer of a unit between any of the following family members: spouses, parent and child, siblings, grandparent and grandchild; nor on any transfer of a unit by foreclosure sale or deed in lieu of foreclosure to a secured lending institution as defined by the act of December 3, 1959 (P.L.1688, No. 621), known as the Housing Finance Agency Law.
(iv) No fees may be imposed upon any person who:
(A) acquires a unit consisting of unimproved real estate and signs and delivers to the association at the time of such person's acquisition a sworn affidavit declaring the person's intention to reconvey such unit within 18 months of its acquisition; and
(B) completes such reconveyance within such 18 months.

Sikubali jukumu. Read all posts at your own risk.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By JohnC46 on 08/29/2014 12:51 PM
I know of several HOA's that do have a transfer fee (one was 2% of sales price) and they put it in a Capital Improvement Fund. One HOA I was in wanted to do such and decided it would require a Covenant change thus requiring 66% vote in favor of. It was defeated.

Personally, I am all for such. Kind of like an initiation fee to join a club.

John
If SC operates under some version of the UPCA, you might want to check into it. See my previous post to Glen with copy of PA's version.

Sikubali jukumu. Read all posts at your own risk.