Capital contributions

VC (Florida(FS 720))
Posts: 118

Posted:

Hi,

We have a mixed community of single family homes and town homes. We have two reserve funds: one for town homes, one for the common area and none for single family homes.

I wonder, if you collect capital contributions upon a property purchase, how you distribute the proceeds between those two reserve funds ? Or everything just goes to the Common Reserve Fund ?

Thanks

ElleN (Idaho)
Posts: 4,420

Posted:

If the governing docs are truly silent on this point, then I would divide up the capital contribution pursuant to how townhomes and SFHs are each assessed. Try answering these four questions:

How much of each townhome owner's assessment goes to the common area reserve fund? How much goes to the townhome reserve fund?

How much of each SFH owner's assessment goes to the common area reserve fund? How much (if any) goes to the townhome reserve fund?

VC (Florida(FS 720))
Posts: 118

Posted:

We have 45%-55% ownership breakdown (sfh vs. th)

The common fund is funded in the same proportion, say, out of 100K, 45K come from SFH and 55K come from TH. The TH fund is funded solely by the TH owners.

So, if we just fund only the common fund, we'll get a fair distribution, I think, because both communities benefit from it.

Does that make sense ?

The bylaws are silent on that.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By VC on 05/09/2024 12:03 PM
We have 45%-55% ownership breakdown (sfh vs. th)

The common fund is funded in the same proportion, say, out of 100K, 45K come from SFH and 55K come from TH. The TH fund is funded solely by the TH owners.

So, if we just fund only the common fund, we'll get a fair distribution, I think, because both communities benefit from it.

No, I do not think this is fair.

For example, if this is a townhome buyer, then to be fair, I think some part of the buyer's Cap Contribution should go to the TH fund. What this dollar figure should be requires more information. See the four questions I asked above.

If this is an SFH buyer, then so far I think all of the capital contribution should go to the common area fund.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

VC

If the townhomes get services like roofing, siding, etc. then the breakdown is unfair. The SFH's would be supporting the townhomes.

VC (Florida(FS 720))
Posts: 118

Posted:

John,

Townhomes have their own reserve fund.

Ellen,

If a townhome is sold, then, ok, the contribution goes to the townhome reserve.

If a single family home is sold, then the contribution cannot go to the common fund, because the single family home sale will be subsidizing the townhome 55% part. It cannot go to the single family fund either because there is no single family reserve fund.

That's the quandary.

Does it make capital contributions impossible in this scenario since fairness cannot be achieved ?

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By VC on 05/09/2024 1:38 PM
If a townhome is sold, then, ok, the contribution goes to the townhome reserve.

This is not what I said.

Quote:

Posted By VC on 05/09/2024 1:38 PM
If a single family home is sold, then the contribution cannot go to the common fund, because the single family home sale will be subsidizing the townhome 55% part.

But consider: If enough townhomes are sold, then the townhomes could be subsidizing the SFH part.

Perfect fairness is not possible for a few reasons. One reason is because of the variability of how many of each of the two types of homes are sold each year. Another reason perfect fairness is not possible is because in any given year, the fraction of each owner's assessment dollars going to each fund might change.

One has to accept that fuzziness is inevitable here. To minimize the fuzziness, the Board should try to have at least some rational basis for divying up the capital contributions. This 'rational basis' will not be perfect, but it is better than nothing. Afer all, your board does need to decide where each sale's cap contribution goes. The latter is a fact. In this vein, consider the following approach:

The HOA has a yearly budget. It shows the planned capital contributions to each of the two reserve funds. One can compute this year's contribution to the townhome reserve fund that each townhome makes; call this X. One can also compute this year's contribution to the common reserve fund that each townhome makes; call this Y.

Let X + Y = T = total $ any given townhome contributes

Upon the sale of a townhome, I propose:

X / T * capital c amount that goes to the townhome reserve fund.

Y / T * capital c amount that goes to the common area reserve fund.

Upon the sale of an SFH, I propose all goes to the common area fund. Why? Because it is not generally appropriate for the SFHs to pay for townhome infrastructure. There may be exceptions to this, related to maintaining property values of the whole HOA, say, because maybe previous boards made mistakes and did not properly fund the townhome reserve fund. What to do? The board special assesses the townhome owners only to shore up the townhome reserve fund.

Likewise, suppose the common area reserve fund goes to zero due to some catastrophe. The board special assesses both SFH and townhome owners.

VC (Florida(FS 720))
Posts: 118

Posted:

Quote:

Posted By ElleN on 05/09/2024 2:16 PM

Posted By VC on 05/09/2024 1:38 PM
If a townhome is sold, then, ok, the contribution goes to the townhome reserve.

This is not what I said.

Quote:

Posted By VC on 05/09/2024 1:38 PM
If a single family home is sold, then the contribution cannot go to the common fund, because the single family home sale will be subsidizing the townhome 55% part.

But consider: If enough townhomes are sold, then the townhomes could be subsidizing the SFH part.

Perfect fairness is not possible for a few reasons. One reason is because of the variability of how many of each of the two types of homes are sold each year. Another reason perfect fairness is not possible is because in any given year, the fraction of each owner's assessment dollars going to each fund might change.

One has to accept that fuzziness is inevitable here. To minimize the fuzziness, the Board should try to have at least some rational basis for divying up the capital contributions. This 'rational basis' will not be perfect, but it is better than nothing. Afer all, your board does need to decide where each sale's cap contribution goes. The latter is a fact. In this vein, consider the following approach:

The HOA has a yearly budget. It shows the planned capital contributions to each of the two reserve funds. One can compute this year's contribution to the townhome reserve fund that each townhome makes; call this X. One can also compute this year's contribution to the common reserve fund that each townhome makes; call this Y.

Let X + Y = T = total $ any given townhome contributes

Upon the sale of a townhome, I propose:

X / T * capital c amount that goes to the townhome reserve fund.

Y / T * capital c amount that goes to the common area reserve fund.

Upon the sale of an SFH, I propose all goes to the common area fund. Why? Because it is not generally appropriate for the SFHs to pay for townhome infrastructure. There may be exceptions to this, related to maintaining property values of the whole HOA, say, because maybe previous boards made mistakes and did not properly fund the townhome reserve fund. What to do? The board special assesses the townhome owners only to shore up the townhome reserve fund.

Likewise, suppose the common area reserve fund goes to zero due to some catastrophe. The board special assesses both SFH and townhome owners.

That's a possibility. The problem may be as follows:

Let's say both S and T collected $10K in capital contributions in a given year. Townhomes will transfer to the common fund $2K(Y) and $8K(X) to its own reserve fund. In this case, single family homes will be subsidizing THs because instead of the usual 45/55% distribution of contributions, you'll obtain 83/17%, heavily skewed in favor of THs.

ElleN (Idaho)
Posts: 4,420

Posted:

VC, if the board cannot admit that the various uncertainties here translate to there being no perfectly (or even reasonably) fair approach, then the board will never come up with a practical solution to this problem.

If I knew more of the numbers, then I might have a lot more to say. E.g. suppose the common area reserve components add up to 1/10th the value of the townhome reserve components. This might change my thinking about this a lot.

Also: Capital contributions should perhaps be viewed as gravy. At least, I hope the bulk of what is transferred to the reserve funds comes from the regular assessments.

Of course, the HOA could keep a running total of amounts contributed each year to each of the two funds. The HOA would then make an adjustment every year, with the goal that the running total of THs capital contributions amount to as close as possible to 55%. To use this approach and keep things clean: You all could have one "cap contributions account" for the THs and another for the SFHs. Each year, transfer from both to the two reserve funds with the 55/45 overall goal (over the many years of the HOA's existence) in mind.

Is the 55/45 breakdown in either the CC&Rs or bylaws?

VC (Florida(FS 720))
Posts: 118

Posted:

55/45 is the TH/SFH owners ratio. Say, you budget 50K for the next for the common fund. The amount is just divided by the total number of property owners regardless of the type. It has been this way since the HOA establishment.

One possibility is as follows:

As you said, SFH just pay "their" capital contributions to the common fund but also reduce their next year part of the budgeted assessment used to fund the common reserve by the collected amount. It does not matter what reserve fund the TH owners pay, their next year part of the assessment used to fund either reserve will be reduced by their capital contribution amount in the previous year. For simplicity, they can just pay into the same common reserve.

Problems arise when the capital contributions exceed budgeted assessment contributions to the reserves -- an unlikely scenario.

ElleN (Idaho)
Posts: 4,420

Posted:

The best laid plans of mice and men often go awry.

-- A proverbial expression used to signify the futility of making detailed plans when the ability to fully or even partially execute them is uncertain.