Assessments from new buyer

I have been reading this forum since I volunteered to join the Board of my HOA late last year, filling a vacancy. I would like to thank those of you who post frequently for taking the time to provide your input and advice on this message board.

As a retired financial professional with a career spent managing budgets for an international corporation, I was immediately named Treasurer for my HOA to fill the immediate need. In just a few months, I have learned that parenting and serving as a Board member have much in common.

We are a condo highrise tower of almost 100 units, the building is about 15 years old. My wife and I have lived here for 2-1/2 years and we absolutely love it, having downsized after the children are now on their own (well, most of the time). The HOA has zero delinquencies on monthly assessments, an operating budget of almost $1M per year, a management company provides the accounting and general support and we have an onsite Building Manager who coordinates maintenance, inspections, contracts, etc.

The Reserve Study was last updated in 2008 and was not complete and accurate. Following the advice taken from reading this message board, my first order of business as Treasurer was to include a line item in the 2015 operating budget to hire a Reserve Specialist and perform a 30-year study. We met with the reserve specialist this week to begin that effort, so all is progressing well.

My question: One of the owners in my HOA asked about how we handle the first two monthly assessments included at closing when a buyer purchases a unit. To date, this has been considered a pre-payment; the new owner begins paying does not have to pay their monthly assessment until their 3rd month. The owner suggested that this should be a non-refundable addition to reserves and the new homeowner should begin paying monthly assessments immediately. This would be a relatively easy way to increase reserves, although we usually have only 7-8 units sold each year.

Our bylaws are silent on the handling of this and 2/3 of the ownership interest would have to agree to implement this change.

I would be interested to hear your thoughts on this suggested change. Any legal issues??

Hi Tim
Welcome

We charge a Capital Improvement Fee for any non-family-member title transfer. It's always been in our organizing docs. The funds are kept separate and can only be used for capital improvements, which can include use toward reserve components. The fee amount was roughly equal to 2 months of fees. Our board just increased it via a Bylaw amendment (with HO ratification) to approximately 3 months of fees.

While many here disagree, we think that it is an appropriate means to accumulate funds towards satisfying our reserve needs. It is common practice in this neck of the woods.

I guess I should have asked, Tim. Are your CC&Rs also silent on this matter?

My spouse & I also retired to a high rise--urban--in or case. Crazy about this style of life.

I handle any escrow transaction in my company. This sounds like accounting numbers on their settlement statement.

For example, an escrow company will contact our management company via an online document service and ask for a payoff. and the escrow opens in early January but won't close until late February. Three months of dues may be collected two for Jan and Feb (seller) and one for Mar (buyer). On the settlement sheets for both parties, the seller is paying two and the buyer one, but one check for all three months are paid by the buyer, even though the seller contributed the first two months. This happens with property taxes also.

Disagree John.

First, capital improvement funds are treated just like reserve funds for tax purposes. Same is true for capital improvement expenditures and reserve fund expenditures.

Second, unlike other countries like Canada, the US does not have a value added tax on improvements. Increased value is recognized when the property is sold. Typically, any increased value from capital improvements to the common elements is reflected in the selling price of the individual homes.

Ahh ... I see what you are doing. You are basing your opinion strictly on the word "improvement." That's not the way the IRS regs worked the last time I looked. They don't care what you call it - they care how you use it.

Your example of the aging roof is an interesting one, but not necessarily realistic. Roofs generally last 25+ years - and by the time you're ready for replacement, the technology has changed, and the old style is no longer available or the new style is so close in price to the old style that the cost differential is minimal. And the labor cost component would be the same whether you installed old or new (so your 50% upgrade probably wouldn't apply anyway). Sure there could be a tax impact if you replaced a shingle roof with terra cotta tiles, but I don't know of many associations that would be making those kind of upgrades in today's economy.

IMO, if your reserves are less than 100% funded, and you are setting aside money that cannot be used for operating needs and is limited to future capital expenditures (whether replacement or upgrade), then the amount you put away is shielded from fed tax.

Which raises an interesting question - For those of you whose reserves are at least 100% funded, do you pay taxes on the funds you collect in excess of your operating needs? Or do you give those funds back to your HOs? Or do you ignore the tax consequences?