Assessments and Accounting Practices

Assumptions

- Community 'X' has two Common Areas

- Each Common Area is a single use recreational amenity

- Common Area 'A' is budgeted at $20,000 to maintain and operate

- Common Area 'B' is budgeted at $10,000 to maintain and operate

- HOA charges and collects fees totaling $10,000 for use of Common Area "B"

- Declaration of Covenants clearly identifies Common Areas "A" and "B" as Common Areas

- Declaration of Covenants contains a covenant for Maintenance of Assessments, which states:

- Each lot owner is responsible for paying annual assessments to HOA
- Assessments are to be used to maintain, improve , and operate Common Areas
- Annual assessments are to be fixed at a uniform rate for all lots

- Proposed budget for Community 'X' is total of Common Areas 'A' and 'B' or $30,000

Question

Would community 'X' be obligated to fix assessment rate based on $30,000, the cost to maintain Common Areas, or, could they back out anticipated $10,000 usage fees for Area 'B' and fix assessment rate at $20,000?

Roger, thank you for your response. I attempted to overly simplify the circumstances as this is somewhat of a convoluted situation (isn't it always). Anyway, here is what is happening:

- Current board and family members use Area 'A' extensively

- Same board and family members have no use for Area 'B'

- Board has deemed Common Area 'A' more valuable than Common Area 'B'

- Board is charging $1,800 annually per member for use of Common Area 'B', while use of Common Area 'A' is covered through standard annual assessment of $225.

- All expenses and maintenance for Common Area 'B' are passed on to seven community members

- Board believes they shouldn't have to pay for Common Area 'B' due to non-use

- Assessment rates have not been raised in six years

Declaration clearly mandates ALL Lot owners are obligated to pay for ALL Common Area maintenance and improvements through annual assessments, which are to be fixed at a uniform rate for all Lots. Declaration also states no Lot owner may be exempt for assessments to Common Areas for non-use.

The purpose of my original question was an attempt to validate my suspicion that the board is violating the Declaration by not collecting enough assessment fees for maintenance and operation for ALL Common Areas.

I believe the language of the Covenants mandates the board to collect the required assessments that are needed to properly maintain and operate ALL Common Areas FIRST, and then they can collect additional usage fees which could be used as reserves. Not offset the assessment fees with projected usage fees. If they were to fail in collecting enough usage fees for Common Area 'B', they would not have adequate funds to cover costs to maintain area.

The excessive fees for Common Area 'B' and lack of reserves are two additional legal concerns for another day.

Thanks again...

Dee, are you saying that if the HOA is subsidizing all costs associated with a Common Area, (operating - maintenance - repairs - capital improvements), in the form of a 'usage fee', they could be subject to income tax? Even as a non-profit?

Thanks...

Roger, yes I am referring to Common Areas. I apologize for being somewhat vague, but you never know how is monitoring these boards.

Anyway, both Areas 'A' and 'B' were deeded to the HOA as Common Areas and are clearly identified as Common Property on the original plat.

In addition to these two deeded Common Properties; surrounding the two Common Areas are lot owners who have granted the HOA partial use of their property though easement agreements, which amount to approx. six acres. The easements also state the HOA is responsible for all easement maintenance and upkeep.

The Declaration allows for 'reasonable fees' to be collected for any facility situated on a Common Area. Currently, the HOA is collecting $12,500 annually for use of Area 'B' and the easements, while the use of Area 'A' is covered under the standard annual assessment of $250.

The board has taken upon itself to 'break out' Common Area 'B' and treat it as a stand-alone amenity. Presently, ALL costs associated with operating and maintaining Area 'B' are being absorbed through fees collected for use of the facility. There are no assessments being used for Area 'B' upkeep.

Even more concerning is the total annual cost for maintaining Area 'B' is only $7,000. The HOA is placing the additional $5,500 into the HOA account and using it for items already paid for through the annual assessments.

What they are doing is subsidizing the annual assessments with the $12,500. This method of accounting has allowed the board to keep the assessments at the same rate for the last six years.

If the HOA is purposely not collecting assessments for the operation and maintenance for Area 'B', and are passing those costs along to a small group in the form of 'usage fees', you believe they should be obligated to pay tax on the collected fees?

I'm not sure IRS Section 528(d)(3) is in agreement.

(3) Exempt function income
For purposes of this subsection, the term ''exempt function
income'' means any amount received as membership dues, fees, or
assessments from -

Susan is right on the money! And, unless the gov. doc. specifically say that the lot owners bordering on the one common area are solely resp. for maintinence, then ALL the members (including those board members who don't like this common area!) should be assessed accordingly. Incidentally, you assessments are used (or should be) to cover ALL the expenses associated with operating the HOA, not just maint. of the common areas.

Glen, I didn't like your answer because you failed to understand the question, as is still the case.

I was attempting to find it if a Board has the right to 'opt-out' of paying for the maintenance and operations for an entire Common Area simply because they deem the area of no value to them.

The current board is funneling more then 60% of the assessments into the Common Area their children use and have decided to pass the entire cost for maintaining, operating, and improving the other Common Area onto 7 homeowners.

My issue has NOTHING to do with paying an additional fee, so the amenity in question is irrelevant.

The Covenants state the following:

No Owner may waive or otherwise escape liability for the assessments provided for herein by non-use of the Common Area or abandonment of his Lot.

I have not been able to find any precedence of a board having the right to pick and choose what Common Areas to collect assessments for and maintain.

That's what I am here attempting to find out. Not whether or not the board has a right to charge a additional fee. The current board's idea of a 'reasonable fee' is $12,000. Do you get my point now?

Mary, thank for your response.

The Covenants are very clear.

"Common Properties" shall mean and refer to those areas of land with any improvements thereof, as well as any agricultural or recreational easements conveyed to the Association as "Common Property", or which are deeded to the Association and designated in said deed as "Common Properties". The term "Common Properties" shall also include any personal property acquired by the Association if said property is designated as "Common Property".

Purpose of Assessments:
The assessments levied by the Association shall be used exclusively to promote the recreation, health, safety and welfare of the residents of the Properties, to maintain, improve and operate the Common Area, to maintain and improve the Lots (including Garage Lots) and improvements thereon as herein provided, and to administer the Association's affairs, such uses to include (but not be limited to) the cost of repairs, replacements and additions to the Common Area, Lots and improvements situated thereon, the cost of labor, equipment and materials related to operation of the Common Area, the cost of management and supervision of the Association's affairs, the payment of taxes assessed against the Common Area.

No Owner may waive or otherwise escape liability for the assessments provided for herein by non-use of the Common Area or abandonment of his Lot.

That's it. If there is anything in the above language that authorizes the Board to deem one Common Property of more value than the other, and relinquish its maintenance responsibility, I don't see it.

"However, they may not pass on the cost of maintaining, operating, and improving any common area to individual homeowners."

That is exactly what I needed to know. Thank you for answering my question.

As for my lack of clarity; I am attempting to be selective in how much information I divulge as this is this matter is likely heading to court. I was hoping that would be obvious.

I have an email from HOA Treasurer stating EXACTLY that. I will have to thank her for that some day. What would have cost me thousands to get through a deposition, she provided for free.

Yes sir, they area.

I shouldn't type and eat at the same time.

I meant to say, yes they are. Both are open to all residents.

Hi Clayton,

Any idea how or when this "dual" assessment situation came into being? It looks like you have seven owners paying $ 1,800 each per year to maintain an easement plus the $ 225 per year that everyone pays to maintain the other area. That's a big bill to drop on seven owners.

Have these seven owners been paying this for years? How was it determined that just those seven owners should pay that cost? What if one of them sells and the new owner doesn't want to pay it? What if all seven said they weren't going to pay for it? Is there something recorded with their deeds saying they have to pay this extra cost?

It's hard to figure out from your cryptic description how these costs ever came into being, what they are for and most importantly, why only seven members are required to pay them.