THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Saturday, December 3, 1994 TAG: 9412010321
SECTION: REAL ESTATE WEEKLY PAGE: 02 EDITION: FINAL
COLUMN: COMMON GROUND
SOURCE: G. ROBERT KIRKLAND and MICHAEL INMAN
LENGTH: Medium: 88 lines
Q. I live in a homeowners association, which manages the development. The association owns a large recreational facility worth more than $1 million that includes tennis court and a pool called The Club.
The association has an agreement with an outside group to manage The Club, which has its own board and operates independently of the association.
The Club does not pay any rent to the association or provide any other form of income. It does have annual audits and pays for the operation of The Club.
I am told this type of arrangement is illegal under English Common Law. Am I correct that a property owners association cannot assign revenue of that property to another organization?
A. English Common Law is not directly applicable to this type of arrangement. The proper place to look is state law and association legal documents.
We are assuming that this is part of an arrangement established by the developer. The agreement should be spelled out in the promotional and legal materials available from the sales agents or the association.
There are a number of reasons why this arrangement may be in the best interest of the association. The cost of operating a completed facility when all the homes have not been built could be prohibitive.
By allowing an outside entity to assume that liability and the responsibility for maintenance could provide definite advantages to the association.
The use of a professional management group to run the facility can provide a level of service that the association could not afford. The developer is probably subsidizing the operation until such time as the development is complete. There may be major financial advantages to the association.
In many states it is permissible for the developer to create recreational facilities that are not owned by the association and are operated by the developer or related entity.
Since The Club is association property, members must have a right to membership in the recreational facility. It is permissible for the use of the club to require the payment of additional user fees.
However, it is important that the association through its board of directors have a role in the oversight of this facility if it is owned by the association. Anytime an asset of the association is involved, it is incumbent on the board to ensure that its value is protected.
At a minimum, the board should require regular reports from The Club's managers. These reports should include financial, physical inspections and narrative reports. The board should also be involved in the review of the management agreement.
While it is not necessary that profit from The Club be transferred to the association, be aware that those profits may be subject to income taxes and may even jeopardize the association's tax standing as a not-for-profit corporation.
We would suggest that the way to resolve these issues takes two steps: Gather the necessary legal documents and request a meeting with either the association's manager or the board of directors.
Each of the following issues should be addressed:
Who owns The Club?
What are the terms of the management agreement?
What are the provisions for turning over control to the association?
Are there any profits from The Club?
To what use are they being put?
Are there any other factors of which you are not aware?
Are there any state or document restrictions?
If the meeting provides you with the information you need, we suggest that the association prepare a flier to explain this to all owners, current and futures.
The developer also needs to review the promotional and disclosure material to ensure that all prospective buyers are properly informed. It is our experience that few developers or associations intentionally violate the law. Most of these problems result from a lack of information or poor communications.
We believe that it is imperative for an association to make sure that significant issues are reviewed and that appropriate disclosure be prepared. MEMO: G. Robert Kirkland, president of a Virginia Beach property management
consulting firm, and attorney Michael A. Inman specialize in Virginia
community association issues and are affiliated with the Southeastern
Virginia chapter of the Community Associations Institute. Send comments
and questions to them at Real Estate Weekly, 150 W. Brambleton Ave.,
Norfolk, Va. 23510. To submit questions by phone, call 446-2033; fax:
446-2531.
by CNB