Matthew Winton's Condo & HOA Blog

Developer transition article

For those interested or approaching the issue of transition time in a real estate development/homeowners association/condominium association, this 51 page article provides a wealth of information and examples.

Matthew L. Winton, Oklahoma homeowner association lawyer

FHA and Reasonable Modifications

To assist board members and owners with navigating the sometimes confusing web of the Fair Housing Act, the Department of Justice has issued the technical bulletin you can download here: Download reasonable_modifications_mar08.pdf

The bulletin is helpful in outlining community association/owner responsibilities in reasonable modification scenarios.

Matthew L. Winton, Oklahoma condominium and homeowner association attorney.

CAIRF Best Practices - Reserve Studies

At this evening's community association seminar, we discussed reserve studies and reserve funding. I mentioned Community Association Institute Research Foundation and their Best Practices Reports. Their website is found here, which includes among other great reports, Best Practices Reports on reserve funding and financial operations.

Matthew L. Winton, Oklahoma community association lawyer.

The profile of an effective board member

While this article from the Ford Foundation's CEO doesn't specifically deal with the community association setting, I thought her points would translate very well for the homeowner or condominium association board. See what you think.

Have a happy holiday.

Matthew L. Winton, Oklahoma community association lawyer.

Collection of condominium and homeowner association assessments

For both community association boards and the association members, it is important to know and understand the process for proper collection of association assessments. Because Oklahoma law for both condo and homeowner associations simply refers the researcher back to the governing documents, the first place to look for guidance on assessment issues is the declaration of covenants (however it is titled).

The governing document should outline a clear and fair procedure for:

1. Association budgeting;
2. Invoicing of assessments;
3. Notification of member's delinquency
4. Filing of liens to secure repayment
5. Recovery of association costs in the collection process

Some might say that an association that "collects" assessments from unwilling members isn't being very neighborly. However, when a person purchases property within a community association, they agree to join their neighbors in the mutual funding of the common expenses of the association. When one neighbor unilaterally opts out by refusing to join their neighbors in funding the association, their neighbors get to carry the financial burden for the unwilling owner. Some might say that isn't very neighborly.

So that the association can operate optimally, without having to specially assess owners for shortfalls, a fair and clear collections practice should be instituted by the association. Before the board contacts an attorney for collection of delinquent assessments, the board should make an attempt to contact the delinquent owner, apart from the routine invoicing of assessments. The board may want to determine if the owner is undergoing a medical emergency, has been called up to active military duty, or has some other circumstance that may warrant the board offering a payment plan.

In an instance of no contingency, and if provided by the governing documents, the board should secure repayment by the filing of a lien against the lot for which the assessment is owed. While some may have the impression that association liens cannot be foreclosed in Oklahoma, such impression is false. In Oklahoma, association assessment liens may be foreclosed, even to the point of the sheriff selling the subject lot. Because of this, it makes sense for association members to meet their assessment obligation realistically, without polemic or philosophic defenses. By meeting their assessment obligations reasonably, an owner will help make their neighborhood a community. In the same vein, a reasonable board will seek community through the association's collection practices.

By: Matthew Winton, an Oklahoma community association attorney.

Taxation of the Community Association

Taxation of the Community Association: A Short Overview.

A common misconception is that community associations (condominiums, homeowner and neighborhood associations) are exempt from taxes. This myth may derive from the fact that many associations are nonprofit entities. However, simply because an association is a nonprofit corporation does not mean the entity is tax exempt. In fact, most community associations are subject to federal, state, and local taxes. The purpose of this article is to provide a general introduction to the various tax regimes to which a community association may be subject.[1]

Each association should apply for an Employer Identification Number by filing a Form SS-4 with the Internal Revenue Service. This number will identify the association on each of its corporate returns.

Local Taxation of the Association

Local tax takes the form of sales taxes and property taxes, also called ad valorem taxes. Property taxes are paid to the county on an annual basis for real estate owned by the association. If the association chooses not to pay these taxes, the county or an investor may ultimately own the real estate owned by the association, a troubling result for the association and its members.

Federal Taxation of the Association

Depending on whether the association employs various persons, the association may be required to remit income withholding taxes on behalf of its employees, as well as Federal Unemployment Tax Assessment, or FUTA. It is crucial for the association to understand its withholding requirements or employ an accountant to manage the taxation aspects of the association.

In 1976, Congress adopted section 528 to the Internal Revenue Code.[2] This section is an association-specific tax provision. Essentially, the section allows the association to calculate its income taxes either under the standard corporate taxation scheme (as reported on Form 1120) or determine the income tax liability under the section 528 provisions (as reported on Form 1120H). Further explanation of Section 528 may be found in the 1120H instructions found at www.irs.gov and in the interpretive regulations to Section 528 in the Code of Federal Regulations, Section 1.528-1 through 1.528-10.

In short, Section 528 takes the gross income of the association, reduces the gross income by the “exempt function income,” deducts certain allowable expenses, applies a straight $100.00 deduction, and taxes the remainder by a flat thirty (30%) percent.

The form must be filed by March 15 and must be signed by an officer of the association, and any paid preparer.

State Taxation of the Association

As with federal taxation of income, the association could incur state income taxation. This would be income tax owed on the unrelated business income of the association, such as interest or membership fees. In Oklahoma, the reporting form is 512E. If the association operates as a non-profit corporation, then franchise taxes will not be owed.[3] Finally, if the association operates as a limited liability company, then an annual certificate fee will be owed to the state.

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[1] The author is an attorney not an accountant or tax advisor. This article represents neither tax or legal advice nor an offer to provide either. The author highly recommends that each community association find a competent tax advisor.

[2] 26 USCA §528

[3] 68 O.S. §1206 exempts non-profit corporations from the payment of franchise taxes.

Fundamental rights and Associations

A while back (Nov. 29, 2005), I discussed on this blog the Panther Valley case and the potential constitutional limitations on an associations' ability to limit certain behaviors and activities within a community. If you recall, Panther Valley is a New Jersey case. Interestingly, New Jersey has produced another blockbuster of a decision in the community association area.

The Twin Rivers case was decided by a New Jersey appellate court (not the court of last resort in New Jersey) on February 7, 2006. You can read the decision here. In essence, the dispute arose over whether the HOA could limit the placement of political signs within the neighborhood. The appellate court finds that the New Jersey constitution, under the facts of the case, balances a person's fundamental right to political speech over private property rights (i.e. the association's governing documents allowing the association to administer the common areas).

The Twin Rivers case is sure to continue up the appeals process (Panther Valley was denied a hearing by the U.S. Supreme Court). We'll see where it goes.

Oklahoma Assessment Liens & Foreclosure

Often, community association governing documents will provide that the periodic assessments payable to the association are lienable claims. This means that if an owner fails to pay the assessment, an automatic lien (due to language in the covenants) or the right to file a lien will ensue.

Once a lien is created or filed, the lien secures the claim against the property. Theoretically, the property cannot be sold without the claim being discharged or passed to the successor in title.

Under Oklahoma law, the lien may be foreclosed. 60 O.S. 852. Whether the association should foreclose on their lien depends on the facts and circumstances of each case. The association may also seek to collect the assessment in court other than by a foreclosure action. In fact, the Oklahoma Court of Civil Appeals has said that the Real Estate Development Act does not limit collections to foreclosure only. Falconhead v. Frederickson.

Satellite Dishes and FCC - OTARD

Today on the radio program, "Who do you trust," a caller inquired about the FCC regulations that could render your association's rules on restricting satellite dishes unenforceable. Below are some links to additional information about this subject.

The FCC regulates over the air reception devices (OTARD), by virtue of Section 207 of the Telecommunications Act of 1996.  While the rule has been in place for several years, many questions on how the rule affects community associations linger. To assist in understanding the regulation, the FCC puts out a Fact Sheet that explains the rule and its mechanics.

A number of interpretive rulings may be found here.

One law firm has written a plain language summary of the regulation, which may be found here.

Matthew L. Winton, Esq.

Covenants, Articles, and Bylaws

Here is a short primer on the three most common governing documents, Covenants, Articles, and Bylaws: what they are and what they do.

1. Covenants. Covenants are real property covenants, also called servitudes, and sometimes may take the form of an easement, either negative or positive. In general terms, a real property covenant prevents (negative) someone from doing something with their property, or requires (positive) someone to do something with their property. Covenants come in two forms: use and structural. A use restriction limits or requires a certain uses of property. A structural restriction limits or requires certain improvements to a property.

2. Articles. Articles of Incorporation are the founding document for the corporate entity of a community association. The Articles would be filed with the Oklahoma Secretary of State, usually outline the basics or fundamentals of the corporate existence. You can read the law on Oklahoma corporations here.

3. Bylaws. Bylaws are the rules and regulations by which a corporation operates. In analogy, the Articles are like a constitution, whereas the Bylaws are like laws. The Bylaws will determine voting rights, meeting times, and other procedural matters relative to the business of the corporation. The law on bylaws may be read here.

Each of these three documents are amended in different ways. Advice from someone trained in governing document amendments should be consulted prior to undertaking an amendment process.

Matthew L. Winton, Esq.