Preservation Fees

ClarkeS1, by "preservation fees", do you mean a fee charged to new owners that, per the covenants, goes directly into the HOA/COA's reserve account?

What's your question about these?

Please also indicate whether your current covenants require new owners to pay this fee, or whether perhaps the owners are considering an amendment requiring such a contribution by new owners.

Good questions.

Thank you for elaborating and doing so with clear writing.

-- Most of the time my goal in posting here is to help people prepare for a meeting with an attorney. I am not an attorney. I have read a lot of case law, including summaries of the HOA/COA case law nationwide that have developed into "rules" that the courts often reference to decide a case.

-- Nationwide the rule the courts have established for amendments to bylaws and covenants is that the amendment must not represent a "tyranny of the majority," whereby a supermajority of owners changes the covenants or bylaws in a way that obviously oppresses, in an unfair way, a specific, definable sub-group of owners. In other words, the amendment has to be "reasonable." Your local court gets to decide what "reasonable" is. Example: Currently, and pursuant to the governing documents, a HOA assesses each lot the exact same amount. Subsequently the HOA has a vote and obtains a super majority to amend the governing documents to requires all owners having homes with more than three bedrooms to pay a larger assessment. Is this amendment lawful? I say no.

-- Would an amendment imposing on new owners (a.k.a. "buyers") a capital contribution charge (preservation fee) represent an unfair targeting of a sub-group of owners? I think not. Going forward, all owners wishing to sell would have this provision attached to the purchase agreement (one way or the other). The new provision would not discriminate. It is not a "tyranny of the majority." Or so I opine.

-- I have not seen any case law on the subject of amending to impose a reserve contribution requirement on new owners. I have seen case law where a HOA pulls the "tyranny of the majority" nonsense and gets kicked in the arse by a court.

Were doing our homework so we can cut down on a large attorney fee. This way we get thing pretty well spelled out so the fee is reasonable and we actually know much more about what were asking for in advance.

We're not forcing new owners to do anything. Current owners have been paying into this fund all along and the new owners are just helping to add to the fund when projects come up and to do the items in the preservation budget that support everybody in the community.

It probably depends on what your CC&Rs (Declaration, covenants) say the board may do. But such a charge to new owners would not be something you'd add to your bylaws. If your CC&Rs permit your Board to institute such a fee, it'll probably go in your Rules & Regulations, I think. You, as Shelia recommends, too, need to consult with your HOA attorney.

?

Covenants imposing a capital reserve contribution fee on new owners are common, particularly for condominiums.

Bylaws in Michigan specify fee amounts? Interesting!

what Clarke, is a "Preservation Budget?" Is it possibly the same as a reserve account?

Transfer fees are quite common in SC. I have seen 1/2% of sale price. Also seen 6 months of dues

Capital contribution fees are very common in my area. In my community, buyers pay two months' worth of assessments at closing which go into the reserves.

The issue I see with creating a new fee like this is that it's discriminatory. It will create two classes of owners since those who bought before the fee was added did not have to pay it.

Another issue would be approval. Assuming this sort of amendment is even legal, it may be one that requires unanimous approval from the membership. If current owners have to pony up in order to level the playing field to make the new fee legal, you can assume that you won't have the necessary votes.

If ALL new buyers are paying the same fee there is nothing discriminatory about it. If we use this same logic then anything that changes when CCR's are updated could be considered discriminatory.

I too agree. It's like saying that:

-- those owners who are grandfathered due to a CC&R change

and

-- those owners who are not grandfathered (due to purchasing after the amendment)

denote two classes, and so because of the two classes, something unlawful is occurring.

I think some people read "two classes of membership" and are triggered into thinking, "Oh, two classes means, yikes, discrimination. Discrimination is ba-aaaad and wrong." If so, then they are not thinking of the buzillion instances in the business world where distinguishing between different groups of people is entirely lawful. These many instances have nothing to do with bona fide unlawful discrimination on the basis of membership in a protected class (race, sex, religion et cetera per the various civil rights statutes).

Furthermore, given disclosure requirements, buyers are free to negotiate their offer price down to reflect the covenant-required capital reserve contribution fee. Meaning current owners see their sale prices; home appraisals for re-financing; and so on; decline a bit. Meaning all owners are affected.

In the HOA/COA world, I think suggesting that "two classes of membership" must automatically translate to something unlawful is highly misleading and sometimes, flat out erroneous. It appears to me that an amendment that allegedly yields "two classes of membership" is only unlawful to the extent that it represents a tyranny of the majority over a minority.

Related aside: Current covenants that are the original, un-amended covenants, and that establish two classes of membership without violating any federal or state law; are allowed. Why? Because all purchasers knew in advance what the covenants said. Hence the ruling in the Blue Lagoon case cited above. It's easy to say there are "two classes of owners" at Blue Lagoon (seaside owners and non-seaside owners). The original (and still current) covenants established these two classes. But any of the 83 non-seaside owners complaining that the 36 units that are seaside are not paying their fair share for the seawall is out of line. These 83 non-seaside owners bought their homes knowing full-well what the dues are for each unit and what the percentage voting power each unit has. Don't like it? Don't buy there.

I disagree that these are the same thing.

Owners who are grandfathered are still subject to the revised CC&Rs. Many such agreements amount to "the board won't make you change this now, but in the future if you make changes affecting the element that is now a violation, you must come into compliance at that point." Someone who is grandfathered will stop being so at some point. Grandfathering is simply a tool that allows a board to make reasonable enforcement decisions - it's also not required, boards can lawfully be butts if they want to and are prepared for an expensive fight that they may lose.

An additional assessment is a binary thing - you either paid it, or you didn't; you either have to pay, or you don't. It can't be addressed in the future except by assessing those who weren't assessed previously or refunding the assessment to those who'd paid it.

I also think it's misleading to refer to this proposed change as a "fee", as if it's similar to what an owner is charged for use of the amenities and which non-users aren't charged. This proposed change is an assessment, and buyers would have no choice about paying it. Fees may be waived; assessments may not.

Another hint that these are different: Violations of CC&Rs often involve deed restrictions. These restrictions generally limit behaviors or choices homeowners make and can be amended by a majority vote of the membership. Assessments do not involve choice, are not negotiable, and amendments pertaining to assessments and how they're determined often require unanimous approval from the membership. The law itself has decided that there is a higher bar to clear when assessments are involved.

In other words, restrictions involve what a person does. An assessment involves what a person is (an owner).

Regardless, from a pragmatic standpoint, there will be two classes of owner on paper. An HOA should still keep track of who paid this new assessment and who didn't. There's always a chance that someone may object and lawyer up, and a judge may decide that the objector is correct - at which point the HOA would have to disgorge this extra money.

ClarkeS1,

Michigan statutes do address "transfer fees." By my reading of Michigan statutes, a properly completed amendment to the covenants, imposing on buyers a one-time preservation fee (a.k.a. reserve contribution), is lawful. Elaboration:

Michigan Compiled Laws (MCL) 565.892 prohibits "transfer fees." However, MCL 565.891 states that "transfer fees" do not include:

"Any fee, charge, assessment, fine, or other amount payable to a homeowners', condominium, cooperative, mobile home, or property owners' association pursuant to a declaration or covenant or law applicable to such association, including, but not limited to, fees or charges payable for estoppel letters or certificates issued by the association or its authorized agent.

As interested, see http://www.legislature.mi.gov/(S(ycb0i0e5tq24zm2kaj5nueic))/documents/mcl/pdf/mcl-Act-35-of-2011.pdf

It appears to me that state legislatures nationwide address this issue more and more. In New York and New Jersey, imposing on co-op unit buyers a capital contribution fee is known as a "flip tax." Legislators in the latter two states have addressed this and come down on the side of decreeing flip taxes to be lawful when authorized by the covenants. Connecticut statutes on the other hand do not speak to flip taxes. For the interested reader, see https://www.cga.ct.gov/2008/rpt/2008-R-0107.htm

Florida has some interesting verbiage in its condo and co-op statutes that seem to prohibit imposing a capital contribution requirement on buyers. But not so for Florida HOAs.

The article below is from 2019, so a bit old, but according to it, imposing a new assessment/fee of this sort is legally murky and - surprise! - different states have different ideas about whether it's OK or not.

It's Time to Begin Charging Condo/HOA a Capital Contribution or New-Owner Fee (or Not)

Any community that wants to try it if their original declaration doesn't mention this separate assessment better get the association attorney's blessing in writing first.

Just chatting here, adding facts and viewpoints (palaver or not) for the archives.

I know people have a right to their opinion. I know CathyA3 attempts to work with the facts and logic, as best as she, I or anyone else can render these.-- The article above was dissected at least once here already at https://www.hoatalk.com/Search/ForumSearch/tabid/87/forumid/1/postid/285448/view/topic/Default.aspx
Even you noted the difference between capital contribution fees and "transfer fees."

-- By my reading of the above linked article, as long as state statutes do not prohibit requiring buyers to make a capital contribution, and the Declaration authorizes such a fee, it's not legally murky.

-- You seem to make an interpretation of the following (from the linked article):

In Ohio, this is something Bob Kmiecik, a partner at Kaman & Cusimano LLC, which represents associations throughout Ohio, has seen only when the governing documents permit it. "In my experience, I've seen it, but only where this fee is specifically authorized in governing documents," he says. "I don't think you could pass a rule that says that every time a unit transfers, the new buyer has to provide the association a fee of, say, $500.

The governing documents includes all amendments to same. I would presume he really means the Declaration (and not merely board-created rules). You seem to assume that when attorney Kmiecik speaks of 'passing a rule,' he is referring to an amendment to the Declaration. I doubt this.

-- I believe the article fails to consider that in California, "transfer fees" refer to the administrative costs of disclosure and responding to lenders. See https://www.davis-stirling.com/HOME/T/Transfer-Fee. Note that all the case law linked from the latter site refer to the aforementioned administrative costs.

-- For the 2019 article to call a "capital contribution fee" "new" surprises. I think capital contribution fees have been around for at least 15+ years.

-- So far I am not turning up any case law speaking to a Declaration amendment that imposes a capital contribution fee. The only articles I have seen on Declaration amendments imposing a capital contribution on buyers/new owners refer to state statutes and not case law. Florida seems to be the only state that prohibits capital contribution fees, and only for Florida condominiums. But I also see reports that many Florida condos do have such capital contribution fees, pursuant to their declarations. E.g. https://archive.naplesnews.com/business/real-estate/goede-can-a-condo-board-charge-owners-a-resale-capital-contribution-for-resales-ep-1323742381-337609311.html/

-- Whichever way opinion in this thread goes, with the other veterans here I agree only an attorney should be writing up a proposed amendment to the Declaration. Said attorney would check statutes and case law.