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Subject: Capital Improvement Transfer Fee used to pay debt
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JudyM9
(Arizona)

Posts:10


09/01/2017 8:53 PM  
Our community is doing a multi-million dollar clubhouse remodel by borrowing money on a 20-year loan. It will all be paid back by Capital Improvement Transfer Fees imposed on buyers. This is sold to the homeowners as "free" since future homeowners will pay the loan back.

How is a buyer supposed to know when a Capital Improvement Transfer Fee in one community is being used for planned improvements and in another community a fee with the same title is being used to pay off a long term debt? Note that for 20 years there will be no other capital improvements as there will be no money and no borrowing power. What obligation does the seller have to explain it?
JohnC46
(South Carolina)

Posts:6802


09/02/2017 7:04 AM  
Judy

In your eyes, do all developments have to operate the same way? The buyer has to deal with your association, not one down the road.

In most cases when an association borrows money (debt), they pledge/secure the debt somehow, regardless of how they intend to pay it back. How that debt gets reflected/shown to a buyer can vary from state to state. In some states it would go against the title which I believe is shown as an encumbrance. In other states an Estoppel from the association would reveal it.

As your association is saying it will be paid back with a Capital Improvement fee paid by new owners, I am not sure it gets referenced back to the clubhouse project. It is simply a new buyer Capital Improvement fee which are quite common often in the form of a % (1 to 1.5% common) of the sales price. This makes it negotiable as to who pays it. The seller or the buyer.
JudyM9
(Arizona)

Posts:10


09/02/2017 7:44 AM  
The clubhouse property was pledged in a Deed of Trust.

A buyer in the process of choosing a house in competing communities cannot readily determine which community's Improvement Fee is for debt.
MelissaP1
(Alabama)

Posts:6650


09/02/2017 8:29 AM  
This is a bad idea. Think about it. How many new owners do you get a year? Your HOA would have to have a pretty high turn around on homes or selling new homes at a pretty good clip would they not? The people who would best benefit could up and sale could they not? Then what? Leave the burden of this clubhouse bill on those new owners who had no voting rights to agree/disagree.

Taking out a loan for a HOA is very risky business. Your basically having every member taking out that loan. This should call more for a special assessment to put into the reserves fund to pay for this. What is the immediate need?

Former HOA President
JudyM9
(Arizona)

Posts:10


09/02/2017 8:59 AM  
Actually, no members here had a vote. There was a multi-million dollar loan and construction commitment made with no community vote or even a survey. It went from a President's letter in December 2016 stating that a loan was a "mailbox rumor" to an emergency meeting signing the loan and deeding over our property 4 months later. In the interim were a couple of meetings showing all of the beautiful architect renderings and a single page showing the financial arrangements. That page was not made available to the homeowners.

The "need" was a list of 18 items, not one of which had anything to do with fiscal responsibility. It was things like being able to simultaneously host a wedding, a golf party and casual diners. We were also told we needed a much bigger bar. We are a private community with an average age over 70, so not a lot of weddings and casual diners have many nearby restaurants to go to on those rare days the dining room is closed for special events. The remodel is supposedly going to attract 55 year olds to buy our homes in order to belong to the country club.

Speaking in general. I cannot fathom how an association which has a pattern of not communicating with members and ignoring their input has any appeal for a 55 year old no matter how big and sparkly the bar is. Debt is the icing on the cake.
TimB4
(Virginia)

Posts:14509


09/02/2017 9:03 AM  
Personally, I wouldn't purchase in a development that had such a fee.

I interpret such a fee as potential financial issues for the Association or that the Association is trying to expand beyond the scope of the governing docs. A financial stable
Association wouldn't need such a fee (in my opinion)

JudyM9
(Arizona)

Posts:10


09/02/2017 9:06 AM  
Unfortunately, we are finding the Arizona laws to be pretty weak in terms of how this type of debt is disclosed to new buyers.
JanetB2
(Colorado)

Posts:3355


09/03/2017 5:12 PM  
Posted By TimB4 on 09/02/2017 9:03 AM
Personally, I wouldn't purchase in a development that had such a fee.

I interpret such a fee as potential financial issues for the Association or that the Association is trying to expand beyond the scope of the governing docs. A financial stable
Association wouldn't need such a fee (in my opinion)


AMEN ... same here ... I would most likely not purchase in such an HOA. Are you sure they already took out a loan ... or is this feed to be collected until money is there to pay for future Capital Expenditure? Here is one site I found discussing these type fees: http://www.thekolbteam.com/what-is-the-capital-improvement-fee/

I hope $$$ is going to an account for "future" possible expenditure vs paying a current loan. Because some states no longer allow some fees of this nature to be charged when homes are purchased. So ... If the State Law in future no longer allows and if a loan was already taken out ... that could put all other owners in a nasty bind.
TimB4
(Virginia)

Posts:14509


09/03/2017 10:41 PM  
Posted By JanetB2 on 09/03/2017 5:12 PM

If the State Law in future no longer allows and if a loan was already taken out ... that could put all other owners in a nasty bind.




In my opinion, all owners are in a nasty bind now.

Money has already been borrowed.
If a the number of homes needed to pay the monthly note doesn't close in any specific month, the note still has to be paid. This means a special assessment, deferred maintenance or some other method of acquiring the funds to pay the note.
JanetB2
(Colorado)

Posts:3355


09/03/2017 10:55 PM  
Posted By TimB4 on 09/03/2017 10:41 PM
Posted By JanetB2 on 09/03/2017 5:12 PM

If the State Law in future no longer allows and if a loan was already taken out ... that could put all other owners in a nasty bind.




In my opinion, all owners are in a nasty bind now.

Money has already been borrowed.
If a the number of homes needed to pay the monthly note doesn't close in any specific month, the note still has to be paid. This means a special assessment, deferred maintenance or some other method of acquiring the funds to pay the note.


I AGREE!!! ... I am hoping the OP misunderstood and that it is being set aside for future potential expenditure. The article I noted while does not state as fact seems to HINT that such fees are for future estimated capital expenditures ... not a current loan. OP should maybe get a quick attorney consultation on this issue.
JudyM9
(Arizona)

Posts:10


09/03/2017 11:02 PM  
People will continue to buy homes here because they will not know the Improvement Fee will go to pay off this multi-million dollar debt for two decades to come.

The deed to our clubhouse properties was transferred to the bank months ago, something our Board denied for 6 weeks after the fact until we got a copy from the Recorder.
JanetB2
(Colorado)

Posts:3355


09/03/2017 11:33 PM  
Judy ... Do you fall under the Condo Statutes or the Single Family Home Statutes???

If you are condo your state law says:

33-1252. Conveyance or encumbrance of common elements

A. Portions of the common elements may be conveyed or subjected to a mortgage, deed of trust or security interest by the association if persons entitled to cast at least eighty per cent of the votes in the association, or any larger percentage the declaration specifies, agree to that action in the manner prescribed in subsection B, except that all the owners of units to which any limited common element is allocated must agree in order to convey that limited common element or subject it to a mortgage, deed of trust or security interest. The declaration may specify a smaller percentage only if all of the units in the condominium are restricted exclusively to nonresidential uses. Proceeds of the sale or encumbrance of the common elements are an asset of the association.

B. An agreement to convey common elements or subject them to a mortgage, deed of trust or security interest shall be evidenced by the execution of an agreement, or ratifications of the agreement, in the same manner as a deed, by the requisite number of unit owners. The agreement shall specify a date after which the agreement will be void unless previously recorded. The agreement and all ratifications of the agreement shall be recorded in each county in which a portion of the condominium is situated and are effective only on recordation.

C. The association, on behalf of the unit owners, may contract to convey common elements or subject them to a mortgage, deed of trust or security interest, but the contract is not enforceable against the association until approved pursuant to subsections A and B. Thereafter, the association has all powers necessary and appropriate to effect the conveyance or encumbrance, including the power to execute deeds or other instruments.

D. Except as permitted in this chapter, any purported conveyance, encumbrance, judicial sale or other voluntary transfer of common elements is void.

E. A conveyance or encumbrance of common elements pursuant to this section does not deprive any unit of its rights of access and support.

F. A conveyance or encumbrance of common elements pursuant to this section does not affect the priority or validity of preexisting encumbrances.

If as you stated there was NO vote of owners ... then owners could potentially stop the process. Potentially without owner approval the Board action could possibly be illegal. This is Condo Statute and not sure what the other statutes would state. But this is why I suggested you should consult with an attorney. Some attorneys will offer a "free" or low cost consultation. It would be worth checking out ... same as Tim I would not purchase a home under such circumstances myself. If you in future wanted to resell your home ... you could be facing a huge issue.
JanetB2
(Colorado)

Posts:3355


09/03/2017 11:39 PM  
If you are a Condo Association you could take the above State Statute to the Mortgage Lender and point out Section (c). That could get one heck of a response.
JudyM9
(Arizona)

Posts:10


09/03/2017 11:50 PM  
This is a "mandatory Social Club", something developers and their attorneys have made very common here in the Western US. It allows them to bypass HOA statutes. We have less protection than one would by belonging to fraternal club like an Elks Lodge, because at least there you could drop your membership.

Meeting with an HOA attorney this week. Our recourse at this point looks like a Recall of Officers followed by a complete review of the project.
JanetB2
(Colorado)

Posts:3355


09/04/2017 1:07 AM  
Posted By JudyM9 on 09/03/2017 11:50 PM
This is a "mandatory Social Club", something developers and their attorneys have made very common here in the Western US. It allows them to bypass HOA statutes. We have less protection than one would by belonging to fraternal club like an Elks Lodge, because at least there you could drop your membership.

Meeting with an HOA attorney this week. Our recourse at this point looks like a Recall of Officers followed by a complete review of the project.


I would like to know how the hell they are getting away with that??? When you say common in Western U.S. ... Sorry not in Colorado or New Mexico with regards to housing developments. Even the homes located on the Golf Courses are not Mandated to join the Golf Course. Many do because that is one reason they chose to live on the course and many of those courses will offer a discount to owners in the association. However, they are homeowner associations and not mandatory social clubs.



JudyM9
(Arizona)

Posts:10


09/04/2017 9:13 AM  
The original Sun City in Arizona is a good example. They have no incorporated "city" and all of the amenities are in a mandatory Social Club. Multiple golf courses, pools, and recreation centers are all paid for through dues and transfer fees. 23,000 homes. Homeowners there have no protection from HOA laws.

Why is all of this important? Because as interest in golf declines and interest in country clubs declines, more communities will be facing these outrageous long term loan schemes. New buyers will have no idea that big transfer fee is being used for debt. This is what the club is betting on, that new buyers don't read the details which they don't receive until closing.
JanetB2
(Colorado)

Posts:3355


09/04/2017 1:06 PM  
Well you will have to let us know what your attorney says .... for this very unique situation.
JudyM9
(Arizona)

Posts:10


09/04/2017 1:07 PM  
I plan to post what we learn from attorney.
TimB4
(Virginia)

Posts:14509


09/04/2017 1:34 PM  
Janet,

Sun City AZ was the original DelWebb 55+ communities. It first opened in 1960 (well before any planned community statutes). I suspect that most DelWebb communities are still based on this model of a mandatory social club.

JohnC46
(South Carolina)

Posts:6802


09/05/2017 4:33 AM  
To me a 1% Capital Improvement fee would not deter me from buying a home I liked. If I can afford say $300K, I can afford $303K.
JudyM9
(Arizona)

Posts:10


09/05/2017 9:22 AM  
The size of the fee is not what is contentious. That fact that the loan is secured by the unlimited ability by this Board to raise our dues or assess for the next 20 years to cover any shortfall caused by not selling enough homes every year is a big problem. Think 2008.

The fact that the Capital Improvement Transfer fee is not identified as Debt payment is a problem. If it was $1m over 5 years you might be okay with it. If it was $20m over 20 years, you might not. Buyers should be able to assess their own risk comfort level. They need information to do that.

Would you buy into a community which has no buying or borrowing power for 20 years? No ability to remodel that again clubhouse in 12-15 years?
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