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Subject: Reserves Contribution - Condo Sale
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Author Messages
MaryP1
(Washington)

Posts:3


07/28/2006 7:55 PM  
We are an older community that has been experiencing many sales the past couple of years as original owners are transitioning to retirement communties and care. The buyer inspections are typically finding minor issues requiring HOA repair. We would like to stipulate a standard reserves contribution when a unit is sold, to offset these expenses. Perhaps one months dues or a lump sum. This is not the same as requesting prepayment of 2 months dues during the sale and closing process. Is anyone doing this? I would love some insight to this approach.
HaroldS
(Arizona)

Posts:906


07/28/2006 9:35 PM  
MaryP - why haven't you been collecting reserve funds all along to cover these repairs? Why weren't these repairs made when they occured instead of waiting for a sale inspection? Why should a specific owner pay for repairs that are the responsibility of the association? Harold
GeraldT1


Posts:0


07/29/2006 5:57 AM  
MaryP1,

What's encouraging and a breath of fresh air is that your thoughts are on the right track!!

However, reserve funds are not for "minor issues" as you've stated you've found. Reserves are funds to be set aside to cover the complete replacement of elements that are considered common to the condo (roofs, siding, walkways, retaining walls, etc.)

What I recommend is 1) Create a reserve account that is funded by a portion of the monthly maintenance dues. The necessary amount is determined by a professional engineering report that analizes the element's condition and industry standar life-span. 2) Create a working capital account that is funded by the entirety of the pre-determined amount when each unit is sold. The working capital will be used for the repairs (however minor).

Best of success!!
GeraldT1
NNJ
MaryP1
(Washington)

Posts:3


07/29/2006 7:27 AM  
Great idea and thank you. We do have a reserve fund but you are correct we are holding it for major projects including those anticipated by our reserves analysis. I may not have been asking the question correctly but you picked up the point. The challenge is a limited maintenance budget and yes - perhaps not the best proactive maintenace program the past couple of years. It is always a balance act isn't it?
BradP
(Kansas)

Posts:2640


07/29/2006 11:01 AM  
Mary:

I don't know if you do this or not, but we have a $100 tranfer fee anytime a home is sold in our neighborhood. That is in addition to prepaying dues. To give you an idea of the ratio our dues are currently $10 a month. I am estimating that we will have 6-10 homes turn over every year. Obviously you are dealing with Condos but the same principals could be applied.
JosephW
(Michigan)

Posts:882


07/29/2006 8:40 PM  
You'll probably have some problem with this. The intitial capitalization fee you paid when the moving into a new condo was to get the association its initial funding. Now you're attempting to make up a shortfall by assessing new owners an extra amount. Your bylaws probably say that all assessments must be paid according to the percentage of value or the method used to determine the eindividual unit assessment. There is probably no language that would allow you to assess a new owner a different amount, especially when they had no part in creating the shortfall. I think an new owner could probably successfully challenge it.

I know that some associations are trying to do this in New Jersey, and I'll try and find out the how they're structuring it. I also say at least one case recently where the association lost when they attempted to do this.

At a minimum I would think it would take changing the bylaws to allow for uneven assessments and a logical reason for doing it, (I don't think "we screwed up so we're going to penalize the new guys" will fly). If I was a board member I wouldn't do this unless I had an opinion letter on file, from the association's attorney, stating it was entirely legal (and even then I have a problem with the ethics of letting the owners sho created the shortfall leave, while new owners who had nothing to do with it get the bill.

Your documents should give the board the power to adopt an additional assessment (levied on everyone as the documents call for) for the purposes of maintaining the common areas, without an owner vote. Most documents only require owner votes for capital improvements, not maintenance.

Joe

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GeraldT1


Posts:0


07/30/2006 6:11 AM  
JosephW,

The substance of this is more argument than fact.

I wouldn't characterize the scenario as "screwing up", or penalization from an unfair assessment. If everyone else paid the initial assessment upon purchase, why shouldn't the new purchasers?

Instead I'd characterize it as ensuring that all owners contribute equally to the replacement of the association's elements. It is entirely reasonable that a not for profit corporation request buy in for the benefit of the association. The fee only helps the purcahser's investments.

If anything it's the new purchasers that are benefitting from the more long term initial capitalization fee of the old purchasers. It could be argued by the older purchasers that there is discrimination when viewed this way.

You raise a valid point regarding uneven assessments and I would recommend the fee, if determined legal by the coa attorney, should be the same as it was initially assessesd.

GeraldT1
NNJ
WilliamT
(Arizona)

Posts:489


07/30/2006 6:39 AM  
I'm interested in learning more about a "buy in" or initiation fee, whichever it would be called.

Our MC charges new owners about $300 for the paper work of changing ownership. We're in Arizona. The Association does not get any of that money.

Now if we were to try and charge a buy-in fee on top of that, I'm thinking that may create some hard feelings with new owners.

I believe the fee would need to be built into our Bylaws, but I don't know.

A new owner may argue that the previous owner(s) of the home has contributed to the reserves up to this point, and all the new owner should be required to do is continue contributing through the monthly dues.

Viewed that way it would seem to be an unfair/unequal assessment on a new home owner.

Are there other ways the buy-in fee could be justified?

I think it is an excellent way to help increase reserves but have some reservations about the equality of the method.

Bill
GeraldT1


Posts:0


07/30/2006 7:25 AM  
WilliamT,

The fee does not have to, nor do I believe it should go to reserves. I recommended that it go instead to a working capital account for the general repair and maintenance of the common elements.

I do not subscribe to the argument that it is inequitable to charge new owners a fee, when the original purchasers were charged a fee.

GeraldT1
NNJ
Jonathan
(New Jersey)

Posts:14


07/30/2006 10:13 AM  
Gerald,
The Courts in NJ see it differently than you do, especially when the capital contribution is only authorized by Resolution, and is not in the Master Deed or By-Laws. See link below...

http://www.njlawblog.com/community-associations-court-invalidates-condos-nonrefundable-working-capital-contribution.html

There is some pending legislation in NJ to change this, but such a working capital fee would still be required to be set forth in your Master Deed or By-Laws.

Jon
NJ
GeraldT1


Posts:0


07/30/2006 1:46 PM  
Jonathan,

Thank you for the link. The link you provide mentioned a $750.00 fee. If this fee was more than the original owners had to pay, that would be innapropriate.

The substance of my comments, as stated, was argument not fact.

However, it is the obligation of the Board to fix common expense assessments in an amount at least sufficient to maintain and operate the common elements by the master deed.

If a covenant for assessments in the master deed provides the board the sole discretion to levy any and all installments, the argument can be made there is discretion written into the master deed, not something the board resolved.

Be that as it may, my master deed has these broad powers and that the working capital fee is payable upon title to a condo from the developer.

My community does not assess a one-time fee upon resale, however I would be in favor of it, and let the attorney do the written interpretation or analysis of board ability so as to comply with the law.

GeraldT1
NNJ
JosephW
(Michigan)

Posts:882


07/30/2006 2:33 PM  
Here's the NJ case:

NJ: Capital Contribution on unit sales violates NJ Condo Act
MICHEVE, L.L.C. v. WYNDHAM PLACE AT FREEHOLD CONDOMINIUM ASSOCIATION a1014-04

The question presented by this appeal is whether a condominium association may impose a non-refundable capital contribution fee whenever there is a transfer of title to a condominium unit. We conclude that such an imposition violates the provisions of the Condominium Act, N.J.S.A. 46:8B-1 to -38, which require the common expenses for maintenance of a condominium's common elements to be charged to all unit owners.

Defendant is a condominium association subject to the provisions of the Condominium Act. Those provisions include N.J.S.A. 46:8B-17, which requires a condominium association's "common expenses" to be "charged to unit owners according to the percentage of their respective undivided interests in the common elements."

In April 2002, defendant's Board of Directors adopted a resolution which provides that "pon acquisition of title to a unit, the unit owner shall pay to the Association a one time non-refundable working capital contribution of $750." The same resolution also requires payment of "a one time processing fee of $125.00" upon acquisition of title to any condominium unit.

In March 2003, plaintiff acquired title to one of the units within defendant's condominium complex by a sheriff's deed. In June 2003, plaintiff resold the unit to a third party. At closing, defendant required plaintiff to pay various charges, including both the $750 non-refundable working capital contribution and the $125 processing fee established by the April 2002 resolution.

Plaintiff subsequently brought this action seeking recovery of the $750 capital contribution. Plaintiff brought the case before the trial court by motion for summary judgment. The court concluded that the $750 capital contribution, assessed only on new purchasers of condominium units, violated the Condominium Act and defendant's master deed and by-laws. Accordingly, the court entered judgment requiring defendant to refund this assessment to plaintiff.

And here's an article by Rich Thompson about it:

http://realtytimes.com/rtcpages/20040728_feefairness.htm

Joe

Joseph West
Official HOATalk.com Sponsor
Community Associations Network, LLC
www.CommunityAssociations.net

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GeraldT1


Posts:0


07/30/2006 5:50 PM  
JosephW,

Thank you for the articles, the references, etc. They are informative for purposes of case law and the court's interpretation. Was the plantiff delinquent in his/her assessments?

GeraldT1
NNJ
GeraldT1


Posts:0


07/30/2006 5:51 PM  
Correction - was the owner the plantiff purchased from delinquent in his/her assessment (dues).

GeraldT1
NNj
GeraldT1


Posts:0


07/30/2006 6:31 PM  
Joe,

I read the article by Rich Thompson, I am familiar with his spin. His article, while relating to the topic, is his opinion. He states, "Every time a condo sells, the new owner inherits obligations passed on by the former owner or required by the HOA.".

True.

However, every time a condo owner purchases, they also inherit the contributions by the former owners required by the HOA as well. I do not believe that poor budgeting should prevent new purchasers from contributing as others have, as I do not believe that poor budgeting should inspire the board to tax new owners unfairly.

GeraldT1
NNJ
JosephW
(Michigan)

Posts:882


07/30/2006 11:04 PM  
Gerald,

I don't know if the plaintiff was delinquent.

I'm not disagreeing with the concept, but I think there is a problem with the legality. Most condo and HOA documents, as well as many state laws, don't allow for additional assessments to be paid by just some of the owners, or one class of owners, in this case, new owners. The exception to that, is usually covered in the section dealing with the developer which specifically allows for a one-time working captial contribution to provide initial funding for the association. I know in Michigan, the only other exception is made for repairs to limited common areas (those areas controlled by and for the use of one owner) and then only if the documents expressly allow it. Most documents don't even mention the exception and so it can't be used without amending the docs.

I've also seen the new owner re-imbursing the seller for the seller's share of the reserve fund, on the grounds that the new owner will assume the responsiblity and obtain the benefits of the reserve fund. But this is usually handled directly between the buyer and seller, as the association doesn't want to have owners requesting their share of the unused reserve fund when they sell.

Basically, what they've decided around here is simply that:

Capital repair and replacement of common areas is forever. As soon as the new roof goes on, you start contributing for the next roof replacement.

Your annual contribution to the reserve fund covers the wear and tear for that year, just as the new owners will contribute for their wear and tear.

Problems arise when funds are not set aside properly and a new owner gets smacked with an additional assessment to make up ground. I personally believe that sooner or later, boards are going to be held liable for the failure to reserve properly, although a number of attorneys tell me that it will be a tough case to win (the boards having a certain amount of discretionary decision power).

In looking back at the original post, I guess I would raise the question: Why not assess the selling owner a couple of months worth of assessments? They contributed to the wear and tear and failed to contribute an adequate amount to the reserves. I'd rather assess them (since they're leaving anyway) rather than have a new owner get hit when they move in.

Joe

Joseph West
Official HOATalk.com Sponsor
Community Associations Network, LLC
www.CommunityAssociations.net

*See legal notice below (end of page) or go to www.hoatalk.com/legal
GeraldT1


Posts:0


07/31/2006 3:57 AM  
JosephW,

The original posts by MaryP explained they do have a reserve fund for long-term replacements.

My north new jersey hoa/coa has the exception for a one-time non-refundable fee written directly into the Master Deed. There is no target of one class of owners.

"Non-refundable" is erroneous because the money is re-invested into the replacement of common elements. There is a return on the investement.

In fiscally responsible hoa/coa's, the contributions for the next roof replacement should start well before the old roof goes, the target dollar amount for replacement cost should be reached before the necessary replacement.

Unfortunately, many boards will only respond to a group of owners that collectively challenge the reserve allocations as inadequate, i.e. rule by consensus, not by sound business management.

GeraldT1
NNJ


JosephW
(Michigan)

Posts:882


08/01/2006 12:35 PM  
I read an interesting blog from a NJ law firm about the case and new legislation to change it. It's a good summary:

http://www.njlawblog.com/community-associations-capital-contributions-and-condominium-associations-perfect-together.html

Joe

Joseph West
Official HOATalk.com Sponsor
Community Associations Network, LLC
www.CommunityAssociations.net

*See legal notice below (end of page) or go to www.hoatalk.com/legal
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