Reinvestment Fees Offset HOA Turnover Costs, Contribute to Reserves

October 5, 2018 | By: Scott Welker

Many Utah families have utilized their increased equity from the strong buyer’s market and healthy economy to upscale or downscale their housing situation. All of this movement in the housing industry is expensive for nonprofit homeowners’ associations and requires adequate budgeting and preparation for current and future market fluctuations.

According to the U.S. Census Bureau, more than 14 percent of the population moves each year for various reasons, so an HOA comprised of 150 units can generally expect an annual turnover of 21 units. However, HOAs should plan for additional movement in coming years, as many local economists are concerned that Utah is experiencing a housing bubble. However, you can help to stabilize your member retention by making only a few changes.

Reinvestment fees taken at closings can help with HOA member retention, and I’ll explain why. New homeowners have made a large investment in their new home, the largest they may ever make in their lives. Their budgets will be tight for the first few years until they can refinance their home loan. They have budgeted for your monthly or quarterly HOA fee, but they likely do not have room for any fee increases.

Regular HOA fees are the lifeblood of an association, so when overhead costs increase or there are expenses not budgeted for, an HOA can utilize its savings in the short term. Reinvestment fees, however, can replenish your savings for a longer period and thus delay your need to increase your member’s HOA fees. Keeping your community affordable to its members is critical to its success.

The Utah Code permits the use of reinvestment fees for administrative costs associated with turnovers, as well as regular expenses for maintenance of the legal common areas within your HOA, including infrastructure, parks, or open space. Be aware that proceeds from reinvestment fees must benefit the association and not the developer or another third party. The law was changed in 2010 in this regard, and what used to be referred to as “transfer fees” are now called reinvestment fees.

A reinvestment fee provision, including the amount to be charged and the appropriation of those fees, must be approved by HOA board members and included in the organizational documents. It must also be filed on county records as a “Notice of Reinvestment Fee Covenant.” In Utah, HOAs are permitted to charge no more than 0.5% of the purchase price of the individual unit sold, but those proceeds can add up quickly.

HOAs should consider the fee amount wisely, as the charge often cuts into a buyer’s purchasing power. Many buyers will embed the reinvestment fee into the principal of their home loan to make it more affordable. Another option buyers may consider is paying for the fees with a separate signature loan. Utah Code permits this as long as any collateral used for the loan is released when the loan has been repaid.

An HOA should inform a buyer or their realtor of the reinvestment fee, as well as regular monthly or quarterly assessments, when a bid is accepted and a unit goes under contract. That way a buyer can evaluate their budget prior to closing and determine if the fees, in addition to their mortgage and other household expenses, will still be affordable.

Reinvestment fees are an additional tool that HOAs can use to pay for community expenses that are often affordable and not too cumbersome for its members. They can work as a buffer when HOA costs increase over time and help to delay the need for increasing regular monthly or quarterly assessments. It is never ideal when members of your community get behind in paying their assessments, and the addition of reinvestment fees in your HOA’s organizational documents is in everyone’s best interest. Vial Fotheringham, LLC, provides collections and other legal services for homeowners’ associations. Contact me today for legal advice or HOA collections services.