New Member HOA Transition Concerns

Started by PaulR8 • 6 replies • 1158 views

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PaulR8 (Pennsylvania)
Posts: 2

Posted:

Hi folks, as mentioned above, new here and i (we) have some HOA Transition concerns. I have searched both online and here but i cant seem to find a specific question being answered. The question i have is:

Should any HOA carry/have a negative balance? Some homeowners in the community have had issues with our builder - from construction defects to issues with our roads. The residents are concerned that they will attempt to pass off an HOA that carries debt. Obviously none of us have experience in the transition process so no one can seem to find an answer to this.. Is this even possible, is it legal etc etc..

any help or guidance is appreaciated.

Paul

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Your HOA most likely will be a "non-profit" corporation once transitioned. It is NOT a charitable one of which tax deductions are taken for contributions. What it basically means is your HOA should collect as much money in as it spends out. They can have a savings or a capital expense fund.

The goal is to have as close to a "zero" balance at the end of the year in theory. Any money extra may be subject to taxes. However, it's not that black and white. There are plenty areas of gray in a HOA's budget. Negative balances do happen as do positive ones. It will depend on many factors. However, at the end of the day you want a balance it all out as best you can.

A HOA is ONLY funded by it's members FOR it's members. Take some time out to check out what your HOA will have to budget for after the transition. There will be insurance needs, continued maintenance on amenities, and legal expenses... Best to figure out what your HOA faces early so you can plan ahead.

Former HOA President

PaulR8 (Pennsylvania)
Posts: 2

Posted:

Thank-you!! Will do.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Paul,

There is a bit of common law that covers this. See, for example, Dunes West v. Georgia-Pacific, at
http://www.judicial.state.sc.us/opinions/displayOpinion.cfm?caseNo=25453

"In Goddard v. Fairways Dev. Gen. Partn., 310 S.C. 408, 426 S.E.2d 828 (Ct. App. 1993), the Court of Appeals held that the developer of a planned unit development ("PUD") owes a fiduciary duty to the property owners association and its members, much like that owed by promoters of a corporation to investors. As such, the developer has a responsibility to insure that the common areas are in good repair at the time they are conveyed to the property owners association or to provide the association with funds sufficient to effectuate any needed repairs to those areas." [Emphasis added.]

My personal opinion is that it would not be legal for the developer to hand over to the homeowners an HOA that owes money and/or owns common areas that are in need of repair. Developers are, however, a thick-headed lot and it may take a lawsuit to get yours to do what the law requires.

SheliaH (Indiana)
Posts: 6,964

Posted:

You might want to visit the Community Associations Institute (CAI) website, which is a national organization of HOAs and related vendors. Some people like them, others don't like the political stances they take, but one thing they do very well is education. There are a number of books and webinars on HOA management, reserve funds, rule enforcement, etc - the stuff the developer doesn't bother to educate homeowners about (too many seem to just turn over the community and say good luck!)

Take a look at their information on HOA boards and I believe they also have stuff on transitioning from a developer - invest in a few of their education materials and share them with the new board. You have a lot to learn, but the materials should give you a good start. You can also check if there's a local chapter in your area - if so, attend some of their event, where you can network with HOA board members and residents and get tips that way. Good luck!

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

KerryL1 (California)
Posts: 14,550

Posted:

Along with Sheila & Larry's replies. Well before I was involved in my HOA board, the transition occurred and the developer's rep and some board members & the PM did a walk through the premises and enveloped a punch list of items for the developer to correct, which he did.

We did not get up to speed with construction defects for a few more years, when us new board members realized there were statutes of limitation that might run out. We eventually had to take legal action to get the developer to pony up for the defects. But that is something you need o look into right away. Do not assume that there's some sort of 10-year warranty on your common area defects. In some cases, the statutes may be as little as three years.

It sound like some owners have defects in their residents, i.e., not common area. This might have to be taken up directly with the developer.

You also must make sure that a reserve account has been set up by the developer and scrutinize it closely. Developers often will assign too long a lifespan and too little for estimated replacement costs.

It seems to me your board needs advice from an HOA attorney.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Spend a few hundred on the Lawyer.....well worth the peace of mind in this case.

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