Initiation Fees

Annette, what state? Can you be more specific on exactly what you call an initiation fee? Where the money goes depends on whether it a charge by the Developer for the Developer or for the Association.

AnnetteN,

In my HOA/COA each owner paid a one-time fee at close. This fee was put into a Working Capital Account, not reserves. The amount contributed to reserves was taken from a portion of the monthly maintenance dues.

Your gov. docs. may outline the one-time fee. Look there first.

GeraldT1
NNJ

Our HOA is in Georgia and the builder charged a one-time $100 initiation fee to the very first homeonwer(per our covenants). This was used to offset expenses until the HOA was turned over to the homeowners from the developer. The developer reduced his out of pocket expense by charging this fee.

We just passed an amendment to our covenants allowing for an initiation fee everytime a home is sold in our neighborhood. Through research and talking with contacts and management companies, we found that most neighborhoods have an iniation fee when there is a transfer of property. Our first attempt was a fee of $150 but when we started the process over this year, we changed it to 'the same as the current years dues'. It took me 6 months to collect the 2/3 majority vote but we are now collecting the much needed money. Our plan is to put the money into reserves which will help keep the annual assessment from going up so much each year.

Brad,

If a new home owner asks why the initiation fee is being charged to new homeowners when everyone is supposed to be assessed equally, how do you justify the charge?

Is the initiation fee written into your CC&R's?

I'm interested in asking our board to consider having an initiation fee for new owners in order to help bring our reserve funds up, because they are currently very low, and I need to have answers so I can sell the program to the other board members.

So far I can't see how we can justify the fee.

WilliamT

William,

We had a number of points to sell this idea on everyone:

1. Why is it that only the very first homeowner had to pay the fee and no one else? Shouldn't everyone have to pay it?

2. Most associations have this fee as it is considered an initiation fee into a swim/tennis community.

3. The money will help offset the increases each year of the annual assessment. Everyone is in an uproar when they receive the annual assessment invoice because it goes up, primarily to build the reserve we didn't have. We sold approximately 30 homes last year...had we collected the $450 we are collecting now, that would have paid for the new pool furniture we purchased at $12,000....which really cost each homeowner about $100.

4. Some people thought that an initiation fee will affect the sale of their home. In my opinion, would a homeonwer rather pay an up-front fee rolled into closing costs or have higher annual assessments each year, that will only continue to grow? If we have a $450 assessment, assuming the dues stay the same, I would rather pay that $450 initiation fee once and continue with $450 dues instead of paying $700 or $1,000 every year.

When you are looking for a home in a subdivision with covenants, you look at the common areas, pool and tennis courts. If they are not in good condition, you probably will not look at the homes. Maintenance and repairs takes money, a lot of it, if you want to maintain the property values in the neighborhood. This is the curb appeal so to speak. In the future, if I am looking for a home, I will probably not move into a smaller neighborhood because I know the dues will be higher (fewer homes means a higher share of the cost). I will also look at the amount of the HOA dues...can I afford $2,000 every year or can I afford $500? Would I rather pay a $500 initiation fee knowing the annual HOA dues will be lower, you bet. I think it is a smart way to run the business of the HOA.

Charles:

To answer your question yes that is how it is or at least where we are. The initiation fee is seperate, but when our homeowners close they pay pro-rated dues in their closing through the end of the current calendar year.

Charles,

We have the $450 initiation fee for this year for all new homeowners. Our HOA assessment is due 4/1. Typically, the seller will receive a refund (pro-rated) and the new homeowner pays a pro-rated amount for the balance of that year. If a home is sold July 1, the old homeowner would get a refund of $225...the new homeowner pays $225 plus the $450 initiation fee.

William,

Like anything, we had a hard time getting people to respond to the mailings and consent forms to get the amendment approved. We re-keyed the pool gate this year and decided to have people pick up their new key and have them sign a consent form in order to get the amendment passed (needing 2/3 majority vote).

Thinking about doing that again next year if we decide to change from an HOA to a POA. For some reason, the same people who didn't want the initiation fee think it is awful to foreclose on someone who hasn't paid dues. Where's the logic?

It seems as if you're dealing with 3 separate issues. Let me see if I can put some explanations to them so the discussion can center on the individual pieces.

In a brand new development, thee is usually a one-time fee charged to new owners. It may be called an initiation fee, but is also often called a "working capital deposit". This is designed to provide some initial funding for the association. Because some association costs are paid in advance, insurance premiums being the prime example, the fee is needed, because normal assessments will not accrue fast enough to cover these costs in a brand new association. Annette, this is the one I think you are referring to. The monies should be deposited to, and accounted for, in the association funds, not the developer's pockets. The audit at transition will show this.

The second type can be called a "transfer fee". It may have many other names, but essentially it is a payment when a re-sale occurs. This fee may actually have two parts, one to the association and one to either a management firm, or third party vendor, similar to CondoCerts. Part (or all) of this fee is designed to cover the costs of providing the paperwork and/or documents necessary for a buyer to close on their purchase. In some states, like VA, this fee is capped ($100), but in most states it isn't. This is basically an administrative charge, and the association may or may not actually see any monies resulting from it. There may be other fees of this type, sometimes charged to the new owner, such as for gate and pool keys, but here the new owner is covering an actual cost.

The third type, and the one I think this thread started with is relatively new. It appears that some associations are trying to resurrect the "working capital deposit" format (although under different names( and applying it to re-sales. The main purpose is usually the shortage of funds, either in operating or reserve accounts, and the use of this mechanism to provide additional funds without having to raise assessments. There are a number of problems with this. First, many documents prohibit assessing owners for anything, other than direct costs (see second type), that isn't assessed among all of the owners. If all you're doing is raising funds, then it's an assessment and the documents spell out how that is to be applied.

Another rationalization is that the new owner hasn't contributed to the reserves, and this is a form of "catching up". This fall flat on its face as the new owner also didn't contribute to the wear and tear on the common areas so how you can you assess him for something he didn't cause. Saying that the new owner will benefit from the reserve repairs and replacements runs into the same argument - the new owner wouldn't need the repair or replacement if the prior owner hadn't contributed to the wear and tear.

Next, why would you want to penalize a brand-new neighbor. Its certainly not going to help their opinion of the association. If anything, I would think you would want to stick it to the outgoing owner, who was a part of the problem in the funds shortage and won't be around to complain anymore.

Basically, if what you're trying to do falls under the third type, then I would:
a) Make sure your documents allow it
b) Make sure your state allows it (or is silent on the subject)
c) Have an opionon letter from your attorney on file stating that you have the authority and that it is legal.

Without these items, you could find yourself having to return all of the money if someone challenges it.

Joe

Charles, you will want to look in your documents to see what percentage is required for amending the covenants. Ours is 2/3 majority vote of the eligible association, some are higher.

Joe, our covenants state that a $100 initiation fee will be paid by the first time homeowner. Our attorney wrote the amendment and didn't note any problems with an initiation fee for whatever reason. In the Atlanta area, most subdivisions have an 'initiation fee'. When I researched the idea, our management company, as well as others I deal with through my job, stated that the majority of their HOA's have this fee and you are not very smart if you do not have it.

All the money we collect on this will go directly into our reserve fund which will offset future assessment increases. I only wish we had it for everyone from the beginning. I also wish we had a reserve study and reserve fund for the first 5 years of our HOA.

The covenants stated for the first time home buyer only from the developer but we just amended it for re-sales.

Joe:

Ours is and has been written into our docs as a transfer fee ($100) since the inception of the HOA on all sales including re-sales. The docs were drawn up by an attorney and signed off on.

Thanks for all of the replies. Yes, I am a volunteer at this point, but a very experienced one (lots of Boards and was my line of business before I was ever on a Board)

We fear that our developer spent all of the initiation fees without putting them into a reserve. They are talking special assessment now and supposedly, there is only 200.00 in bank IN AUGUST! You know there won't be anymore coming in.

I will be reviewing the financials tomorrow - hopefully. The Board was just recently appointed. The developer has been running things for almost three years. I need to look into a lot of things - but wanted to know if there was anything he HAD to do with the fees.

The docs only state that each buyer had to pay them. The docs do not spell out how the fees were to be treated - AT ALL. Wish us luck.