Loan with Baloon Payment

Started by JoeB18 • 24 replies • 1151 views

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JoeB18 (Georgia)
Posts: 31

Posted:

I live in a Developer controlled POA and no Homeowners are on the Board. I figured out the Developer has a $200,000 line of credit that they just converted to a loan with a balloon payment of around $160,000. Of course when the POA is transferred to the Homeowners they will assume the loan and make the balloon payment in 2021 or refinance the loan I guess.. Is this normal operating procedure? I live in GA.

PaininyourA
Posts: 215

Posted:

NO

either:

lawyer up

or

move.

NOW

TimB4 (Tennessee)
Posts: 21,059

Posted:

Joe,

The Board of Directors are able to obtain loans on behalf of the Association.
I don't agree with loans as the members will now have to pay the required amount plus interest.

You need to find out if the loan was taken out in the name of the Association or in the name of the developer. If it's in the name of the Association, the scenario you describe could occur.
If it's in the name of the developer, that would be a different story.

JoeB18 (Georgia)
Posts: 31

Posted:

Thank you for the advice.

Is a loan with a balloon payment a common business practice for Developers?

Are there any laws that prevent these type of situations even though
the Board/Developer can do whatever they want to?

If is determined that loan is in the name of the non profit LLC name does that
change anything?

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By JoeB18 on 11/30/2017 8:37 AM

Is a loan with a balloon payment a common business practice for Developers?

Not being a developer, I don't know how they structure their finances.

Loans with balloon payments are common for those who desire to keep payments low. The expectation being that they will earn more before the balloon payment is due, be able to refinance at a better rate or with more affordable payments before the balloon payment is paid or they would have sold the security (land, etc.) for the loan allowing them to pay off the loan in full.

In my opinion, it's a gamble. However, there are those who do this.

Quote:

Posted By JoeB18 on 11/30/2017 8:37 AM

Are there any laws that prevent these type of situations even though
the Board/Developer can do whatever they want to?

Not that I am aware of, but I don't know the statutes of your State.
You will need to do the research, ask an attorney or someone in the loan business to get the answer.

Quote:

Posted By JoeB18 on 11/30/2017 8:37 AM

If is determined that loan is in the name of the non profit LLC name does that change anything?

Expecting that the non profit LLC is the homeowners association, I answered that in my first posting.

If the loan is in the name of the Association, the Association is responsible for the loan.

If the loan is in the name of the developer, the developer is responsible for the loan.

PaininyourA
Posts: 215

Posted:

Quote:

Posted By TimB4 on 11/30/2017 2:44 PM

Posted By JoeB18 on 11/30/2017 8:37 AM

Is a loan with a balloon payment a common business practice for Developers?

Quote:

Posted By JoeB18 on 11/30/2017 8:37 AM

Are there any laws that prevent these type of situations even though
the Board/Developer can do whatever they want to?

Not that I am aware of, but I don't know the statutes of your State.
You will need to do the research, ask an attorney or someone in the loan business to get the answer.

Quote:

Posted By JoeB18 on 11/30/2017 8:37 AM

If is determined that loan is in the name of the non profit LLC name does that change anything?

ERGO:

NO

either:

lawyer up

or

move.

NOW

JeffT2 (Iowa)
Posts: 880

Posted:

No, the board/developer cannot do whatever they want. Yes, there are laws that may cover this situation.

Assuming your POA is incorporated, the GA nonprofit law says that each of the board members, including the individual who is the developer, must act in good faith and in the best interests of the nonprofit corporation (POA) when functioning as an POA board member. In general this means that the POA board cannot take out a loan (in the name of the POA) that unfairly benefits the developer and make the POA pay it back. On the other hand, it can be a gray area as to what the developer is supposed to do and what the POA is supposed to do.

What was the loan for? What things has the POA paid for?

Also, I suggest you check with the local government body that approved the plans for the development, and see what they think of it. They may help you figure out the loan, and also tell you what the developer promised to complete. There is often a bond that the government releases when the development is done, and they can hold that back if there is wrongdoing or funny business.

JanetB2 (Colorado)
Posts: 4,219

Posted:

Quote:

Posted By JoeB18 on 11/29/2017 1:57 PM
I live in a Developer controlled POA and no Homeowners are on the Board. I figured out the Developer has a $200,000 line of credit that they just converted to a loan with a balloon payment of around $160,000. Of course when the POA is transferred to the Homeowners they will assume the loan and make the balloon payment in 2021 or refinance the loan I guess.. Is this normal operating procedure? I live in GA.

Developers will take out loans at various times when developing subdivisions. Yes sometimes they will be ballon payment type loans which will keep initial payments low and a balloon at the end when by then has constructed and sold homes to pay off. What you need to make sure is whether the loan was taken out under the Developer's name or the HOA. My bet is most likely was under developer name because to do otherwise would put a burden against his unsold lots thus making them harder to sell.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By JanetB2 on 12/02/2017 7:07 PM

Janet understands it. If under the developers name, not an issue.

JoeB18 (Georgia)
Posts: 31

Posted:

Well some additional information has become available. The loan was taken out to pay for the pool and playground area. This seems like a 100% Developer cost and not an POA funded venture. Should I look at the PUD to see if these amenities is detailed and if it is the Developer should have 100% paid for the amenities. Any feedback on this would be greatly appreciated.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Why wouldn't the developer pay 100% for these amenities? They still own the development. It's not turned over to the owners yet. Plus I am sure it was part of their sales pitch for people to purchase. It's just when that developer leaves, you and your neighbors are 100% responsible for those amenities.

Former HOA President

JoeB18 (Georgia)
Posts: 31

Posted:

Do you think this new revelation is standard practice in the industry or fraud? I don't have a good feeling
that POA funded this activity when the Developer included the pool and other amenities in the PUD. Whats steps can I
take for the Developer to get rid of the loan?

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By JoeB18 on 12/04/2017 8:42 PM

Whats steps can I take for the Developer to get rid of the loan?

Gather support from others.
Check with an attorney on the correct procedure and file a claim with the performance bond the Developer filed with the city/county (if the city/county required one).

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By JoeB18 on 12/04/2017 8:42 PM
Do you think this new revelation is standard practice in the industry or fraud? I don't have a good feeling
that POA funded this activity when the Developer included the pool and other amenities in the PUD. Whats steps can I
take for the Developer to get rid of the loan?

Joe

If the loan is in the builder's name, what concern is it of yours when and how he gets rid of it?

JoeB18 (Georgia)
Posts: 31

Posted:

My concern is that the interest expense is in the POA financials and we will assume the loan when the POA is turned over.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

How many times do we need to explain to you. The loan is in the DEVELOPER's NAME! It is NOT in the POA's!!! Which means the DEVELOPER is all in on this loan NOT any of the POA! You don't own your POA yet so nothing is in your names!!!

Plus what is going to happen is when he leaves, your POA is going to take over the pool/playground care. NO LOAN just ASSESSMENTS. You should be more concerned about evaluating the long term costs of having these amenities than fighting a loan someone else takes out to get them.

I am running late for work or I would explain why this loan by the Developer is really not a big deal or a concern. Matter of fact, it's kind of not your business to put it bluntly. Your POA name is not on the loan nor should it ever be. It's just a situation where one has to spend money to make money. Which is exactly what your developer is doing.

Former HOA President

JoeB18 (Georgia)
Posts: 31

Posted:

I understand what you are saying but if is not the homeowners loan why would a line item for loan payment and interest expense be in our annual
Financials. The POA is fully funded by Homeowners dues and no other sources. I have it on record
that the Developer is positioning to transfer this loan one the board is 100% transferred to Homeowner control to us. The frustration
lies that the Homeowners paid for th pool and amenity construction and not the Developer as expected.

DouglasM6 (Arizona)
Posts: 724

Posted:

Joe, it's time for you to talk to a lawyer. I understand your concern. If the developer took out the loan in the name of the POA, which is conceivable, it may become yours. I doubt there's anything you can do about it. But true legal opinion is what you. and you fellow residents, need at this time.

PaininyourA
Posts: 215

Posted:

as was stated WAY earlier:

Quote:

Posted By PaininyourA on 11/29/2017 2:22 PM
NO

either:

lawyer up

or

move.

NOW

JanetB2 (Colorado)
Posts: 4,219

Posted:

Quote:

Posted By DouglasM6 on 12/05/2017 8:41 AM
Joe, it's time for you to talk to a lawyer. I understand your concern. If the developer took out the loan in the name of the POA, which is conceivable, it may become yours. I doubt there's anything you can do about it. But true legal opinion is what you. and you fellow residents, need at this time.

I agree ... it is best now to know now if the Developer is allowed via your state statutes to take out a loan in the name of the POA. It could depend on what the loan is for ... such as constructing a common area item vs personal developer use. Now is the time to ask and make sure of your rights so any statute of limitations are protected.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

This is a bit complicated so going to do my best to break this down...

Developer purchases 101 acres of land. Splits that up to 100 parcels plus 1 parcel for POA use. (Clubhouse, pool, or other amenity). The Developer owns all this land and teams up with a builder to build homes. A buyer purchases the lot/home with agreement to the restrictions the Developer has placed on the development. They form a HOA/POA under their name to execute those restrictions onto the members. The members then pay the Developer dues to cover it's expenses. Which later when Developer leaves that money will then go to Members/owners owned HOA/POA.

Even though the developer is receiving money from the members, that money is going to fund the HOA running expenses. However, the Developer is also in the business of selling those parcels of land so they can leave. What makes those parcels attractive? Offering amenities. People want a pool, a clubhouse, tennis court etc... They also like the idea they can have restrictions to keep the neighborhood looking attractive to potential buyers. A HOA/POA is basically a sales tool for a Developer by combining both these desires.

Now the Developer is to provide the amenities for the HOA/POA. Just like they purchased the parcels of land, they need to put on that land those amenities. Which will be paid for out of the developer's pocket to provide. It's not the HOA/POA's budget directly. It may be in the ledger. However, most likely any expenses the developer incurs will also be there. They still do own the HOA/POA.

Basically your not going to be able to stop this loan. Your not likely to inherit either. All going to inherit is the responsibility to maintain these amenities in the future.

Former HOA President

JanetB2 (Colorado)
Posts: 4,219

Posted:

I think you tend to forget that various states will differ on these issues.

Quote:

Posted By MelissaP1 on 12/05/2017 3:42 PM
This is a bit complicated so going to do my best to break this down...

Developer purchases 101 acres of land. Splits that up to 100 parcels plus 1 parcel for POA use. (Clubhouse, pool, or other amenity). The Developer owns all this land and teams up with a builder to build homes. A buyer purchases the lot/home with agreement to the restrictions the Developer has placed on the development. They form a HOA/POA under their name to execute those restrictions onto the members. The members then pay the Developer dues to cover it's expenses. Which later when Developer leaves that money will then go to Members/owners owned HOA/POA.

WELL ... depends on your State Statutes ... In my state any of the property which the developer has reserved the right to utilize while building ... guess what developer pays to maintain.

Even though the developer is receiving money from the members, that money is going to fund the HOA running expenses. However, the Developer is also in the business of selling those parcels of land so they can leave. What makes those parcels attractive? Offering amenities. People want a pool, a clubhouse, tennis court etc... They also like the idea they can have restrictions to keep the neighborhood looking attractive to potential buyers. A HOA/POA is basically a sales tool for a Developer by combining both these desires.

Now the Developer is to provide the amenities for the HOA/POA. Just like they purchased the parcels of land, they need to put on that land those amenities. Which will be paid for out of the developer's pocket to provide. It's not the HOA/POA's budget directly. It may be in the ledger. However, most likely any expenses the developer incurs will also be there. They still do own the HOA/POA.

Would potentially disagree here ... You see the HOA in many states is required to be implemented BEFORE the developer sells any lots to other owners. Potentially the HOA items need to be separate from the Developer items.

Basically your not going to be able to stop this loan. Your not likely to inherit either. All going to inherit is the responsibility to maintain these amenities in the future.

Not sure here if your are understanding OP’s question ... No they cannot stop a loan which has already been distributed. The question is whether the HOA or Developer is responsible for the loan based on what the loan was for ... Yes if was for HOA amenities potentially the HOA could be the liable party ... unless was items Developer was previously responsible for per what had already been promised and per the purchase contracts.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Joe

At best the only answer you will receive here is one you want to hear. If so concerned, then lawyer up and be prepared.

JoeB18 (Georgia)
Posts: 31

Posted:

Thank you everyone for your comments. I am consulting an attorney as this is a messy situation.

JanetB2 (Colorado)
Posts: 4,219

Posted:

Quote:

Posted By JoeB18 on 12/05/2017 7:01 PM
Thank you everyone for your comments. I am consulting an attorney as this is a messy situation.

YEP ... When you have had at least three of us suggest you need to consult an attorney that is pretty good odds to follow. I would recommend consulting with at least 2-3 attorneys. Many will offer a free or low cost short consultation ... just be sure to go in with your documents in hand backing up your list of questions. The more you are prepared the less the cost if superceede initial consultation time allowed.

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