MVF Capital Fee on Home Sales - Dead on Arrival

This is part of a series of postings over the next several weeks on the MVF Budget process.

A Montgomery Village Capital Contribution Fee on Residential Homes Sales – Dead on Arrival – Posting # 2

Background A Capital Contribution Fee (CCF) is a one-time non-refundable charge originally designed in connection with the sale by a developer of condominium communities. It was used to establish a beginning working capital and reserve fund for the association, usually equal to two to six times of the initial monthly Condominium Assessment. The use of a CCF for resale transactions and by Homeowners Associations has evolved over time. New Jersey amended its Homeowners Association Act in November of 2007 enabling Homeowner Associations the right to charge such a CCF if authorized by the association’s by-aws. In New Jersey, a CCF cannot exceed nine times the most recent common expense fee of each unit and must be proportionate to each unit owner’s obligation to pay other common expenses. 

Other states such as Maryland, Georgia and Florida have allowed Homeowners Associations to charge a CCF if authorized by its governing documents and if proportionate to each owner’s obligation to pay other common expenses.

CCF Court Ruling In the case of Micheve versus Wyndhan Place Freehold Condominium Association, the New Jersey Appellate Court declared a $750 Working Capital Contribution Fee payable to the association at settlement on the resale of a condominium unit invalid and discriminatory. The court ruled, since the disputed fee was intended to offset common expenses, the fee should have been determined identical to its commons expense assessment fee allocation.

Communities with Capital Contribution Fees In an August 17th memorandum, Dave Humpton and Greg Snellings provided to members of the MVF Board of Directors and representatives a list of 13 communities currently charging a property transfer fee. Nine HOAs in Montgomery County and Northern Virginia charge a property transfer fee. Three charge a flat rate per sale, Reston Association $250; the Villages of Urbana $100 on initial sale and $200 on a resale; and South Riding Proprietary in Loudoun County, $500. Seven HOAs charge a property transfer fee based on the annual assessment for common expenses including Kings Farm Citzens Assembly, three times the month assessment; Kentland Citizens Association, four times the monthly assessment; Leisure World of Maryland, initial sale only; and Quince Orchard Park HOA in Gaithersburg, three month of current assessments on the initial sale only. The memorandum identified three association which charge a property transfer fee based on a percentage of the selling price, Hilton Head Property Owner Association SC, one-quarter of one percent; Sienna Plantation Residential Association in Texas, one percent; and Rosemary Beach Property Owners in Florida, one-half of one percent. In each case the CCF was established and authorized in the Association’s initial Governing Documents and Public Offering Statement and the funds are designated as direct contribution to the Capital Reserve Fund of the Association and prohibited from being used for operating expenditures.

Is a MVF CCF on the sale of property based on the gross selling price legal?  Based on the Micheve versus Wyndhan Place ruling and wide-spread opinion within the legal community that courts wiould mostly likely rule any Foundation CCF based on gross selling price as unfair, discriminatory and is not proportionate to each MVF property owner’s obligation to pay common expenses. 

The only MVF common expense assessment fee paid by all 12,075 Village unit property owners for common expense is the Montgomery Village Foundation (MVF) Fund assessment. Consequently, a more appropriate CCF formula would be a multiple of the monthly or annual current MVF fund assessment. The 18 Poplar Springs property owners assessment only includes expenses for Poplar Springs’ property elements and not charged a MVF assessment and would exempt from any MVF CCF resale charges.

Do The Representatives to MVF from the Village’s residential communities have power, authority or standing to approve an amendment to the MVF By-Laws? Articles 3, 4, 5, 6 & 9 of the Montgomery Village Foundation By-Laws defines and outlines the powers, duties, rights and responsibilities of the MVF scared trinity. The:

1. Montgomery Village Foundation
2. Membership of Property Owners
3. Board of Directors

The purpose and powers allows the Foundation to acquire land, dispose and mortgage property, merge with similar non-profit organizations and call for a meeting of the membership.

MVF Property Owners are any person or entity that is a record Owner of any Private Dwelling Unit or Multifamily Rental Unit. Members shall be entitled to two (2) votes for each Private Dwelling Unit and One (1) vote for each Multifamily Rental Unit in any vote before the membership. The membership exercises its voting rights at a special meeting of the Membership called for by the Board of Director by a written notice outlining the purpose of the meeting mailed 30-days prior to the date of the meeting to all Owners of record. Membership rights and obligations are:

1. Payment of annual and special assessment or charges levied.
2. Use and enjoyment of MVF common property and facilities.
3. Comply with all duly authorized rules and regulations, architectural standards

The Board of Directors has the power to:

1. Call a special meeting of the Members.
2. Appoint and removal agents and employees prescribe their duties, responsibilities and compensation.
3. Establish, levy and assess assessments and charges.
4. Adopt and publish rules and regulations governing use of common property and facilities, conduct of their members and guests and establish penalties for their violation
5. Exercise for the Foundation all powers, duties and authority vested in or delegated to this Foundation, except those reserved to the Members.

The only reference to a “Representative” in the MVF By Laws a Property Owner’s Representative duly authorized to cast the Owner’s ballot at a special or annual meeting of the Foundation. 

The only function previously preformed by a Representative or Alternate from the 11 Homes Corporations, 10 Condominiums, five rental apartment complexes has been to vote for or against a proposed raise in per unit annual ceiling increase for the Montgomery Village Foundation Fund in conjunction with the preparation and approval of the Annual MVF Operating and Reserve Budget.

A MVF Capital Contribution Fee based on gross selling price will have a further detrimental effect on the Village crippled Real Estate market and declining home values.  This sentiment was expressed in recent Letters to the Editor of the MV News from Kimberly Nugent, Poplar Spring, Chris Raley, Whetstone, and Jacob A. Donkersloot, Northgate.

As it now stands, sellers already pay seven hundred dollars to MVF and the Homes Corporation for transfer fees and a Resale Disclosure Certification documents charged at the highest legally allowed amount. This places Village homeowners at a distinct disadvantage when potential buyers compare not only MV closing cost, but also delivery of municipal services, access to Park and Recreation facilities and public safety with a home they are also considering buying in nearby Gaithersburg, Rockville or Germantown or another Planned Unit Development like Montgomery Village such as Kings Farm Citzens Assembly, Kentland Citizens Association or Quince Orchard Park HOA, all located in Gaithersburg.

As reported in Realty Track, Montgomery Village currently has 102 foreclosed properties on the market. The Montgomery Village edition of American Towns reports that the average price per square foot for Montgomery Village was $123, a decrease of 20.6% compared to the same period last year. The median sales price for homes in Montgomery Village for April to June 2011 was $155,000 based on 17 home sales. Compared to the same period one year ago, the median home sales price decreased 32.6%, or $75,000, and the number of home sales decreased 76.1%. There are 141 resale and new homes for sale in Montgomery Village, including 22 homes in the pre-foreclosure, auction or bank-owned stages of the foreclosure process. The average listing price for homes for sale in Montgomery Village was $278,660 for the week ending Aug. 3, which represents an increase of 1.5%, or $4,185, compared to the prior week.

The proposed CCF is especially egregious and unfair to the Ownership of the five-Multifamily Rental Apartment properties in the Village. The sale and transfer of ownership Residential Rental and Commercial Real Estate occur frequently over the course of time. Using the most recent quarterly median selling price in the Village of $155,000 per unit MVF’s the CCF proposed charge upon sale would be;

1. Cider Mill 864 units $134,000
2. Walker House 212 units $33,000
3. Avalon Rothbury Apartments 204 units $33,600
4. Breckenridge at Montgomery Village 298 units $46,200
5. Sunrise at Montgomery Village 141 units $22,500

Capital Reserve Funding is the mandated and most effective mechanism for setting aside and accounting for funds for future major repairs, and replacement of property and site elements and improvements. Properly used, managed and maintained capital reserve funding is designed to insure that now and in the future there will be adequate funding available to cost effectively maintain and enhance each and every common property building and site element, component and system at the appropriate time. Unfortunately, since 1992 the Foundation has substantiality under budgeted, underfunded and has diverted reserve funds to cover the continuing Maintenance Activity Fund (MAF) loses.

Let’s Take a Moment to Reconsider

Consideration of a CCF and approval and implementation of the Five-year Capital Improvement plan should be postponed until 2012. Regardless of the outcome the 2012 MVF, Designated Users and Reserve Contribution Fund Assessments will not change.  An approval of a CCF and/or the five-year plan plus the near term implementation of landscaping outsourcing will significantly affect the Village’s the future. These are not routine matters normally incorporated into the annual budget approval process and are best dealt with independently. In doing so it would be wise for the Foundation to obtain an opinion on the advisability of attempting to pass a CCF based on a percentage of selling price and whether the MVF Representative can approve an Amendment to the MVF By-Laws by a firm other than the Foundation’s legal counsel and each of the Homes Corporations, Condominiums and Rental Apartment communities should consult their lawyers also.