Free Money for Associations – The Significant Benefit of Capital Contribution Provisions

By Neal McCulloh, Senior Partner

In today’s world, associations struggle to meet their financial obligations.  Additionally, Associations are loathe to increase their assessments, as this puts ever-increasing financial burden(s) on their owners.  Consequently, associations need, to the degree possible, to develop ways to increase their sources of funding without harming their existing owners.  As a result of this fact, associations should consider immediately amending their documents to provide for capital contributions, if such rights do not already exist.  In fact, even if such rights exist, associations may want to consider amending their capital contribution provisions to increase the amount of future funding they can obtain from individuals and/or entities which are not current owners.

For those of you who are not familiar with capital contribution provisions, please understand that such provisions can require future purchasers of lots or units within a subdivision, condominium or cooperative to pay a fee to the association as a condition and/or a requirement of the sale.  As such, provided such a provision exists, each time a property within the subdivision, condominium or cooperative sells, the association should get significant extra funds.  In fact, the amount of such capital contribution generally should be included within the association’s estoppel letter to the closing agents so that such funds can be collected at the closing of each sale and paid directly to the association.

Unfortunately, many capital contribution provisions only require a contribution (i.e., a payment to the Association) on the initial sale of the unit or lot from the developer to the first time buyer (e.g., not each and every subsequent sale).  As such, if your association’s capital contribution provision suffers from this deficiency, you may wish to amend it.

Of course, an association may encounter someone alleging that enacting and/or updating a capital contribution provision will have a chilling effect on the sales and make it more difficult for existing owners to sell their properties.  In our experience, nothing could be farther from the truth.  While requiring purchasers of a lot or unit to pay a capital contribution will increase the amount purchasers ultimately pay at closing, the extra amount is relatively small, especially in proportion to the purchase price of the property (e.g., $500, $1,000, etc.).  Therefore, such relatively small amount(s) really should not obstruct the sale.  Additionally, an association should keep in mind that when individuals purchase property, they generally sign a contract, which contract not only specifies the purchase price, but also that the purchaser will be responsible for other costs and expenses associated with the sale.  Moreover, purchasers (before entering into sales contracts) almost never seem to obtain, read and digest the Associations’ governing documents, and most importantly, whether they contain a capital contribution provision.  Additionally, when someone signs a sales contract, even if the sales price is $100,000.00, the actual cost to the purchaser will almost always exceed the $100,000.00 purchase price because there are numerous other expenses which may be and generally are associated with the sale such as title expenses, closing costs, recording fees, doc stamps on note and mortgage, etc.  Moreover, when individuals close on the sale (e.g., at closing), they generally do not fully understand or appreciate all the fees and expenses they are being charged (despite them being itemized).  In fact, generally, purchasers simply accept that the fees and expenses are proper and appropriate.  Stated differently, the purchasers generally see the fees as a requirement of purchasing the property.  Therefore, in our experience it is rare that any of the fees or expenses are even raised, much less challenged, by purchases.  Moreover, even if a capital contribution is initially questioned, provided it is specified in and required by the Association’s governing documents, ostensibly there would be little basis to challenge the expense.  Please understand that the capital contribution is essentially an assessment that is required to be paid by the purchaser at, or as a result of, closing.  As such, the additional fee(s) required of the purchaser at closing to satisfy the capital contribution generally seem to never even be noticed and even if they are, they get paid as a matter of course.

Given the above, not only are the sellers of the property not harmed by the capital contribution, but the remaining owners within the subdivision, condominium or cooperative substantially benefit.  Please understand that capital contributions can significantly decrease the amount of assessments that the existing owners have to pay.  Therefore, to the extent that the individuals wanting to sell their property are not harmed by such a provision and the existing owners benefit, it would appear requiring capital contributions make great sense.  In fact, the benefits derived from capital contributions can be so substantial that even once a capital contribution requirement exists within an Association’s documents, periodically Associations want to amend those provisions to increase the amount of capital contributions they can collect.  Again, capital contributions appear to have no chilling effect on sales and therefore, can be of tremendous value to the existing owners. 

Given the above, consider amending your documents if:

  1. your Association does not already have a capital contribution provision;
  2. your Association’s capital contribution provision and requirements only apply to the initial sale; or
  3. the amounts being charged are insufficient. 

Of course, Clayton & McCulloh can assist the Association with the drafting and implementing such documents.