Builder Subsidy

Started by RaghuramA • 6 replies • 1618 views

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RaghuramA (Texas)
Posts: 26

Posted:

HI experts

We have a question regarding builder subsidy. We just took over the board from builder
Upon reviewing the financials for last 4 years, we found that few years there is an excess spent over the income

The budget for each year shows the budgeted income and expected expenses, which is off course, more than the income.
The loss, that is, the excess expenses over income was shown as "budgeted Builder subsidy". when the year is completed, there is an actual loss or excess spent, but builder has not paid a single penny out of the budgeted builder subsidy. One year he actually paid some amount towards that account, but it is being shown in our current books as "Loan from builder to HOA" and legally we are supposed to pay back.

Questions in this regard to the experts are:

1. During the years in which the HOA is completely managed by the builder, if the expenses are more than the income, is the builder not legally bound to bear the shortfall ?

2. Our understanding is that they have kept some bills unpaid at the end of the year and cleared them thru the HOA dues received next year. If this is correct is not illegal ?

3. The management company engaged by the builder all these years are saying that if we take the overall picture for 5 years including 2017, there is a net gain, so builder is not liable to pay anything. Is this correct ?

Please advise

Thanks
Raghu

LetA (Nevada)
Posts: 2,679

Posted:

Quote:

Posted By RaghuramA on 04/28/2018 5:18 PM
HI experts

We have a question regarding builder subsidy. We just took over the board from builder
Upon reviewing the financials for last 4 years, we found that few years there is an excess spent over the income

The budget for each year shows the budgeted income and expected expenses, which is off course, more than the income.
The loss, that is, the excess expenses over income was shown as "budgeted Builder subsidy". when the year is completed, there is an actual loss or excess spent, but builder has not paid a single penny out of the budgeted builder subsidy. One year he actually paid some amount towards that account, but it is being shown in our current books as "Loan from builder to HOA" and legally we are supposed to pay back.

Questions in this regard to the experts are:

1. During the years in which the HOA is completely managed by the builder, if the expenses are more than the income, is the builder not legally bound to bear the shortfall ?

2. Our understanding is that they have kept some bills unpaid at the end of the year and cleared them thru the HOA dues received next year. If this is correct is not illegal ?

3. The management company engaged by the builder all these years are saying that if we take the overall picture for 5 years including 2017, there is a net gain, so builder is not liable to pay anything. Is this correct ?

Please advise

Thanks
Raghu

1.) Not illegal if these are legitimate losses. You'll never see their books because you're not entitled to see them.

2.) Not illegal or unethical if that is the payment arrangements if the builder set up with the debtor. \

3.) That one, I don't know. Did your builder turn over all funds to the HOA and did they properly fund your reserves? that;s if Texas law requires it.

RaghuramA (Texas)
Posts: 26

Posted:

Thanks for your reply "LetA"

Let me rephrase my question ...

In the year 2014.. the Income from HOA Dues from residents occupied by that year is $60k.
Expenses were $70k .

Who will pay for this difference of $10k.

There was a budgeted line item of Builder subsidy of $30k for that year, but he didnt pay it.
It seems the bills were deferred to 2015 and were paid from the HOA Dues received for 2015.

Same is the case with next three years.
Can we ask builder to pay for these short falls ?

Thanks
Raghu

MelissaP1 (Alabama)
Posts: 13,836

Posted:

You can ask sure. Will they pay? Most likely not. The HOA is owned by the owners now right? So it is probably a little too late to be negotiating with the former owner if turnover has occurred.

This isn't too unusual though. When the builder/developer own the property they are most likely using their own funds to finance the operation. The dues collected from the owners/members offset some of those expenses. Guess you would say the owners/member are paying for their share of the maintenance with their dues while the developer is still involved.

It's a bit complicated. Just not sure what shortfall is not covering? Did someone not get paid because of this shortfall or is it just an accounting thing? Like we collected this much but spent x amount. The difference is X amount. Don't think the developer to kick in for this shortage if it's not something that involves actual debt owed.

Former HOA President

JohnC46 (South Carolina)
Posts: 14,265

Posted:

If turnover has occurred then how the builder did it is none of your business. Unless he comes after you for money, forget it and move on.

LouisS1 (Florida)
Posts: 1

Posted:

Hi...

I have a follow-up question. I know this thread is old. But I just recently joined the group and we have a similar issue.

Regarding the Second item:

"2. Our understanding is that they have kept some bills unpaid at the end of the year and cleared them thru the HOA dues received next year. If this is correct is not illegal ?"

In my community, the builder still has the HOA. However, there are many costs that the builder has purposely Not Paid yet.

Over the next year or so, the builder will be transitioning HOA control to the community residents. However, we found many items that are unpaid. The builder has stated that prior to the transition, the bills will be paid from the funds in the HOA. Most of these bills are directly related to Building fees owed to the City. I understand that once such bill is HOA feels that the builder must pay to the City once the Lots are released for sale. The builder hasn't paid one dime yet.

Is there any way that we can proactively defend against the builder dipping into the residential HOA funds to pay fees owed to the City or other entities for similar costs, or are the community residents stuck with these excessive debts?

Thanks,

CathyA3 (Ohio)
Posts: 6,299

Posted:

You should probably start a new thread if you want to get into this further.

However, how the builder handles his accounts is between him, his accountants/auditors, and the IRS. Homeowners are not entitled to see this info unless there is a lawsuit and the records are disclosed as a result.

Your best protection is the builder's track record. If this builder has developed many communities over the years and hasn't been involved in any legal action, chances are that he does things by the book and will continue to do so. On the other hand, if this is an inexperienced builder or there are hints that he may be in financial trouble, there may be reasons to take a closer look. (The time for a closer look, unfortunately, is before you buy the house.)

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