Using Initiation Fees as a New Source of Income for your Community

How many Associations are looking for a way to raise revenue without increasing the annual assessment? Without having to organize a bake sale, there is one method Associations can borrow from real estate developers who have devised and incorporated into the Declarations for their projects the means to fund capital reserve funds or to increase the general operating expenses at the front end of a development. Initiation fees. Initiation fees are a sum of money paid to the Association at the transfer of ownership of property. Generally these developer generated provisions obligate payment of initiation fees when the property is conveyed (only) to the first owner of the property for residential purposes. Developers do this for three reasons: 1) they do not want to increase the cost of the lots to builders; 2) because it is the first residents who will use and benefit from the community’s amenities; and 3) the developer is not generally concerned with the Association’s long term budget issues. An initiation fee provision can be drafted, however, so that an initiation fee is paid to the Association not only upon transfer to the first residential owner but on every successive transfer of the property as well.

The obligation to pay initiation fees has to be set forth specifically in the Declaration. If your Association’s Declaration does not provide for initiation fees, your Declaration can be amended to add such a provision. However, there are several issues for the Board to consider before suggesting that your Declaration be amended to add an initiation fees provision to the membership at large. First: What should the initiation fee be used for? You may look upon the collection of initiation fees as a windfall, and as such want to earmark their use to a capital reserve fund. Alternatively, the Board may not want to restrict the use of the funds and retain the flexibility to apply these extra monies either to the reserve account or for use in the general funds on an as needed basis. Second: How much should the initiation fee be? The Board will have to balance how much the Association needs with how much buyers in your community’s price range will be able to pay. This leads directly to the third issue: The Board must give some thought to whether the potential downsides to such an Amendment would outweigh the benefits. If the Board is considering a substantial initiation fee (probably anything in excess of $1,000) would this have a chilling effect on prospective purchasers considering homes in your community? Finally, the Board needs to assess whether there would be sufficient support for such an Amendment to pass. Before incurring the expense of having an Amendment drafted by the Association’s attorney, the Board should review past attempts to pass Amendments in the community.

Once the Board has hammered out all of the issues above there are a few general considerations to be given to the amendment itself. The initiation fee provision should specifically state that the initiation fee constitutes a specific assessment against the lot and that the fee shall be in addition to, not in lieu of, the annual general assessment and shall not be considered an advance payment of any assessment. This ensures that owners can not argue that they withheld payments of general and/or other assessments because they thought the initiation fee constituted an advance payment of such assessments. Your Association’s management company, or treasurer, if self-managed should be instructed to call attention to the initiation fee amendment in all pay-off letters given to closing attorneys.

If, after considering the issues above the Board determines that amending the Declaration to include initiation fees is desirable, there may still be some issues regarding passage. In addition to following the amendment provisions of your community’s Declaration, be aware of O.C.G.A. Section 44-5-60(c)(4) which provides that “no change in the covenants which imposes a greater restriction on the use or development of the land will be enforced unless agreed to in writing by the owner of the affected property at the time such change is made.” Although no Georgia court has considered the issue, it may be that an amendment to a Declaration imposing an initiation fee would constitute an imposition of a greater restriction on the use of the land which would require every owners consent. Of course, the Association’s argument is that an initiation fee is not a restriction on the use or development or the land and does not affect title in a material way. If the Association is a mandatory homeowners’ association and is subject to the Property Owners’ Association Act (O.C.G.A. Section 44-3-220, et seq.), the amendment would have to be passed in accordance with the Act’s amendment provision, which requires a two-thirds affirmative vote or such higher percentage as is specified in your Association’s Declaration.

In many communities, initiation fees can be an effective tool for raising revenue for your Association. Amending your Declaration to provide for the imposition of these fees is a relatively inexpensive way to provide a new source of income. So Board Members, how about initiating something positive for your community?!?