Dissolving our HOA

We are considering dissolving our HOA. We have a simiple HOA and own only vacant lots, nothing else.

From what I've read from google searches and this forum, there are two main approaches. Formal dissolution involving an attorney to help eliminate the HOA legal entity, or merely selling off owned vacant lots and setting the annual assessments to zero. The latter is obviously much less expensive and has the advantage of being able to be restarted by having owners start paying assessments again, and would therefore also save on expensive fees to create a new HOA entity.

If we sold the lots we would distribute the proceeds to the owners. The wrinkle here is that about a 1/3 of the homeowners have some unpaid annual assessments.

So here's the question:

Would there be a legal issue if we distributed the proceeds proportional to the paid assessments? For example, if a homeowner has only paid 75% of the assessments owed to the HOA, could we give that homeowner only 3/4 of the amount that would otherwise be given to a homeowner with a zero balance?

We have both kinds. Four vacant residential lots and one large vacant "park". There are no signs or anything like that.

Regarding the actual dissolution, we are pursuing that latter option: no formal dissolution. Our governing docs allow the sale of the vacant lots with 2/3 majority vote. So the plan is to sell the lots (or simply deed to the city the large vacant lot if not sellable) and then set the annual assessments to zero. Therefore no formal dissolution would be necessary.

That is something you'd have to ask a lawyer. Personally, I would think no. Their delinquency status doesn't affect their status as members of the Association (at least not in Texas). The solution would be to deduct whatever balance they owed to the Association from their portion of the proceeds.

I don't see why anyone would purchase land they can't occupy or generate income, so I think you chances of selling the park area are slim. I've also never known a city to agree to take ownership of HOA property. Good luck to you!

Have you read your CCR’s to see if this is possible? In my local city all CCR’s when submitted to the local government for approval are required to have a section where the local city government approval is required in order to disolve the HOA. Do your CCR’s have something similar?

If you want to do this you need to hire a good real estate attorney. Each property would need to have their property title changed to remove the HOA from their title and you want to make sure done right to avoid any “clouding” of anyone’s property titles.

Because we are choosing option B.

Option A: Hire a lawyer and formally dissolve the HOA entity
Option B: Sell the vacant lots and set the annual assessments to zero.

The latter option sas the same practical effect, but avoids an attorney. And, if we decided to restart the HOA all we would need to do is start collecting annual assessments and thereby save again on not having to hire a lawyer to form a new HOA entity.

Something seems off on this. Are these vacant lots not also be considered HOA membership if someone was to own them? It seems these vacant lots are part of the HOA or under the CC&R's are they not? It's a little fuzzy on the details here.

I just don't think it's as easy as your describing the situation. Selling off the lots don't get your HOA off the hook. It just means you have additional owners/members joining the HOA. Does this not or am I missing something?

Tax liability. Hadn't even thought of that. Thanks.

Keep in mind that the PLAT and agreement the developer may have had with the city/county may require that a park exists and that the Association maintains it. This could require legal paperwork and agreements with the local government to eliminate that parcel.

If you can't eliminate and the City/County agrees to take it on, you could end up with a special tax district to maintain the park - which would then be public open to all.

Does the Association provide any services (trash/recycling, etc.)?
If yes, you need to amend the covenants to remove that requirement.

Does the Association pay any utility bills (electric for street lights/entrance lights)?
If yes, you need to figure out how that will change.

Is the Association responsible for any storm water management devices (ponds, swales, etc.)?
If yes (and the answer is typically yes), you need to check with the County about that as well.

I agree with both Barbara and Ben. It's doubtful that the city would accept the deeded park. Personally, I would want to see Articles of Dissolution filed with the state in order to "wind up" the corporation's affairs. I think it's pretty standard to spell out a plan that details how delinquent members will have their payouts reduced in accordance with their unpaid obligations.

Make sure there's nothing in your documents and deed restricions that can't be safely done away with. There may be obligations to government agencies, such as drainage districts, that you can't just walk away from. Legal advice from a licensed attorney is strongly suggested.

Most Assocaitions file form 1120-H.
1120-H allows all income from assessments to be tax free income for the Association.
However, any other income (interest on bank accounts, proceeds from the sale of land, etc.)is taxed at 30% (less the $100 exclusion).

Depending on the amount of refund, the Association may have to file 1099-misc for every member that receives a portion of the proceeds (as this would not be a refund of assessments, but a distribution of proceeds).

For more info see:

Taxes - Association Rules for Capital Gains and Losses 2014 article HOA Pulse

Selling HOA Common Elements and Giving Proceeds to Owners; Discussion Forum Follow-Up 2010 article in HOA Leader

IRS Letter Number: 200439017

You also have not answered my prior questions. In my state the Colorado State Law notes:

(1.5) No planned community that is required to exist pursuant to a development or site plan shall be terminated by agreement of unit owners, unless a copy of the termination agreement is sent by certified mail or hand delivered to the governing body of every municipality in which a portion of the planned community is situated or, if the planned community is situated in an unincorporated area, to the board of county commissioners for every county in which a portion of the planned community is situated.

Then our CCR’s noted the HOA “MUST” obtain the local government approval.

So the issue was covered via BOTH State Law and CCR’s. Both state similar info; however, CCR did give higher authority of approval to the local government in our situation. I would bet a lot of your local or state laws will have something similar. You might check with your local government Planning Department to see if whether what you are proposing would be legal and what steps are needed to complete. That department would know the laws and is supposed to be impartial when they give their answers. However, potentially government agencies are in some instances being proven not following laws ... so if in doubt read for yourself.