10 Aug 2022

Does your association’s Governing Documents (e.g., its Declaration) require future purchasers of Lots and/or Units within your community, upon closing, to pay the association a capital contribution? If not, you’re losing out on free money. Even if your Governing Documents require such capital contributions from future purchasers, is the amount too low? Please appreciate that a capital contribution requirement in the association’s Governing Documents (e.g., its Declaration) would generally require each future purchaser (and/or transferee) to make a one-time contribution (i.e., a payment) to the association at the time of purchase in the designated in the Declaration.[1] By way of example, a capital contribution provision in the Declaration may require purchasers to pay an additional one-time assessment to the Association in the amount of one-thousand dollars ($1,000.00). 

Ultimately, Clayton & McCulloh believes that associations and their current owners greatly benefit from capital contribution requirements in their Governing Documents. In many ways, we see capital contribution requirements, as alluded to above, as providing the association with free and easy money. While we appreciate that someone may, at least initially, be concerned that requiring a capital contribution may have a chilling effect on sales or potentially even preclude sales, I have never experienced this. To the contrary, I have never had anyone object, challenge or even question them. In fact, I am unaware of an association that has ever been challenged or questioned with respect to them. As such, it is my overwhelming experience that they are automatically paid at closing without objection.

There are various reasons why capital contributions go unquestioned. However, the primary reason may be that purchasers are probably not even aware that they are paying them. Please appreciate that at closing, there are all sorts of fees above and beyond the purchase price of which purchasers generally have little or no understanding. By way of example, if you are buying a piece of property for one-hundred thousand dollars ($100,000.00), at closing the amount that you may be required to pay might be one-hundred and seven thousand dollars ($107,000.00) due to the other expenses and charges associated with the purchase (e.g., title insurance, closing cost, document stamps, taxes, recording fees, proration of assessments, etc.). Ask yourselves, what percentage of purchasers really understand these charges, their propriety and whether they have been accurately and properly calculated? In my experience, most people just rely on the closing company’s calculation. Moreover, the closing company generally requests and gets an estoppel letter from the association delineating assessments and other charges due to the association at closing. As such, this is just another assessment/charge.

In addition to the above, please appreciate that usually when people are purchasing property, they sign the contract without ever reviewing the association’s Governing Documents and the requirements therein. Therefore, the purchaser(s) usually are bound by the contract and its terms despite never having reviewed the Governing Documents. Even if a purchaser obtains the Governing Documents prior to executing the contract, what percentage of purchasers ever read them, much less, read them prior to closing? Even those who endeavor to read the Governing Documents, at best, normally only scan them or review them for other purposes. As such, what is the probability that a purchaser is going to understand that by purchasing, he or she is going to be making a one-time contribution? Even if he or she understands the requirement of a one-time contribution, what is the probability that he or she is going to object or even try to kill the purchase predicated on such a relatively minor amount compared to the purchase price? In any event, remember that the sales contract has already been signed and the requirements in the Governing Documents must be met.

In addition to the above, please consider that it is in each of the current owners’ best interest to have and/or implement a capital contribution requirement as it will defray association expenses and should reduce the amount of future assessments he or she will have to pay. Therefore, each and every one of the current owners should be in favor of capital contributions.

For your convenience, we have listed, in outline form below, some of the potential benefits of associations’ Declarations requiring capital contributions:

  1. Free money;
  2. Reduces assessments;
  3. Provides capital to defray expenses, especially for potentially unpopular and/or controversial expenses;
  4. Generally, collected as part of the closing process by the title company;
  5. Current owners pay nothing extra;
  6. Purchasers are generally unaware of the requirement for payment;
  7. Purchasers generally are unaware that they are making (i.e., paying) a capital contribution to the association;
  8. Generally, purchasers sign their purchase contract and are bound by its terms prior to obtaining the association’s Governing Documents, much less reading them, much less appreciating their requirements (including payment of a capital contribution);
  9. Even if a purchaser learns of the capital contribution, is he or she really going to object and try to forgo the purchase due to the extra charge?
  10. The purchaser being obligated to pay the capital contribution pursuant to the Governing Documents (e.g., the Declaration) and, if he or she fails to pay it, then, provided the association’s Governing Documents are properly worded, it should be able to be collected as a type of assessment for which the association can lien and foreclose;
  11. All current owners, ostensibly, benefit from a capital contribution, and
  12. The lack of chilling effect on sales.

Given the above, associations should seriously consider amending their Governing Documents to provide for capital contributions, if they do not already require them. Moreover, even if your Governing Documents provide for a capital contribution, consider whether your association may want to amend the Governing Documents to increase it.

[1] If the association is going to amend its Governing Documents (e.g., its Declaration) to provide for a capital contribution or increase the amount of its already existing capital contribution, it may want to consider a capital contribution of one-thousand dollars ($1,000.00) or one years’ worth of assessments. However, we have seen capital contributions which are less, as well as substantially more.