Assessing HOA Clubhouse/ Common Areas

[SD Capital Investment]

Good Afternoon,

I have been contacted by the president of an HOA and have a meeting coming up to discuss the assessment of the homes inside the HOA and the Clubhouse. Currently all properties, but one, are duplexes. Each property is coveted which encompasses the articles of incorporation and bylaws, giving each property rights of use to the common property, not a percentage of ownership. The common property is a 5,000 sqft clubhouse with an indoor pool, outdoor pool, and parking lot.

Since the start of the development in 2004, the common property has been assessed its own value, and is legally described as an individual lot. The deed has been transferred from the developer to the HOA for $0. The twinhomes in the HOA have been reappraised and given market adjustments to follow the appreciation in value through sales over the past few years.

The HOA president has stated at his home in Arizona the common property is not assessed, as its value is recaptured through each sale of the lots inside the coveted HOA. I have been able to view case law for Florida relating to this issue, but cannot find anything helpful for South Dakota. My fellow SD assessors seem to agree the value is captured in this manner and they are being double assessed for the value of the clubhouse.

Does anyone have any experience making adjustments for this situation and do you have any laws in your state that help guide you in doing so fairly?

Thanks,
Ethan

 

[Russ Kitzberger]

My fellow SD assessors seem to agree the value is captured in this manner and they are being double assessed for the value of the clubhouse.

I think you have an indication of your answer there.

It is a legal question. Perhaps you can attend the meeting as an introductory meeting to gather information and wait for the owner to describe their legal position.

 

[Mark K]

FWIW, HOA property in this state is assessed at $0 via a change in the law back a few years ago. I think it took some case law to get it changed.

It previously was assessed at what the Assessor called market value, however their version of MV was nothing more than a depreciated cost approach.

Indiana Code 6-1.1-10-37.5
Common areas in a residential development; land; improvements; exemption procedures; review
by the county board
Sec. 37.5. (a) As used in this section, “common area” means a parcel of land, including improvements, in
a residential development that:
(1) is legally reserved for the exclusive use and enjoyment of all lot owners, occupants, and their
guests, regardless of whether a lot owner makes actual use of the land;
(2) is owned by:
(A) the developer, or the developer's assignee, provided such ownership is in a fiduciary
capacity for the exclusive benefit of all lot owners in the residential development, and the
developer has relinquished all rights to transfer the property other than to a person or
entity that will hold title to the property in a fiduciary capacity for the exclusive benefit of
all lot owners;
(B) each lot owner within the residential development, equally or pro rata; or
(C) a person, trust, or entity that holds title to the land for the benefit of all lot owners
within the residential development; [such as a homeowners association]
(3) cannot be transferred for value to another party without the affirmative approval of:
(A) all lot owners within the residential development; or
(B) not less than a majority of all lot owners within the residential development, if
majority approval is permitted under the bylaws or other governing documents of a
homeowners association, or similar entity;
(4) does not include a Class 2 structure (as defined in IC 22-12-1-5) [a Class 2 structure is a
home]; and
(5) is not designed or approved for the construction of a Class 2 structure.
The term includes, but is not limited to, a lake, pond, street, sidewalk, park, green area, trail, wetlands,
signage, swimming pool, clubhouse, or other features or amenities that benefit all lot owners within the
residential development.
(b) As used in this section, “lot owner” means an individual or entity that is the owner of record of a lot,
parcel, tract, unit, or interest within a residential development, upon which a Class 2 structure (as defined
in IC 22-12-1-5) is or will be constructed.
(c) As used in this section, “residential development” means a parcel of land that is subdivided into lots,
parcels, tracts, units, or interests:
(1) all of which, except for a common area, include an existing Class 2 structure (as defined in IC
22-12-1-5) [i.e., a home], or are designated for the construction of a Class 2 structure; and
(2) each of which is encumbered by substantively identical restrictive covenants concerning one
(1) or more servient estates located within the boundaries of the original undivided parcel, or
other governing document of record.
(d) Notwithstanding any other provision of this article, a common area is exempt from property taxation,
provided that the common area easements and covenants restricting the use and conveyance of common
areas to lot owners are recorded, and notice is provided, to the appropriate county or township assessor.

 

[SD Capital Investment]

I think you have an indication of your answer there.

It is a legal question. Perhaps you can attend the meeting as an introductory meeting to gather information and wait for the owner to describe their legal position.

I agree and that's my plan currently. I'm just trying to build up a well grounded understanding beforehand. Neither of us are attorney's and likely there will be no legal representation present at the initial meeting, so the more I can cover beforehand the better.

FWIW, HOA property in this state is assessed at $0 via a change in the law back a few years ago. I think it took some case law to get it changed.

It previously was assessed at what the Assessor called market value, however their version of MV was nothing more than a depreciated cost approach.

Indiana Code 6-1.1-10-37.5
Common areas in a residential development; land; improvements; exemption procedures; review
by the county board
Sec. 37.5. (a) As used in this section, “common area” means a parcel of land, including improvements, in
a residential development that:
(1) is legally reserved for the exclusive use and enjoyment of all lot owners, occupants, and their
guests, regardless of whether a lot owner makes actual use of the land;
(2) is owned by:
(A) the developer, or the developer's assignee, provided such ownership is in a fiduciary
capacity for the exclusive benefit of all lot owners in the residential development, and the
developer has relinquished all rights to transfer the property other than to a person or
entity that will hold title to the property in a fiduciary capacity for the exclusive benefit of
all lot owners;
(B) each lot owner within the residential development, equally or pro rata; or
(C) a person, trust, or entity that holds title to the land for the benefit of all lot owners
within the residential development; [such as a homeowners association]
(3) cannot be transferred for value to another party without the affirmative approval of:
(A) all lot owners within the residential development; or
(B) not less than a majority of all lot owners within the residential development, if
majority approval is permitted under the bylaws or other governing documents of a
homeowners association, or similar entity;
(4) does not include a Class 2 structure (as defined in IC 22-12-1-5) [a Class 2 structure is a
home]; and
(5) is not designed or approved for the construction of a Class 2 structure.
The term includes, but is not limited to, a lake, pond, street, sidewalk, park, green area, trail, wetlands,
signage, swimming pool, clubhouse, or other features or amenities that benefit all lot owners within the
residential development.
(b) As used in this section, “lot owner” means an individual or entity that is the owner of record of a lot,
parcel, tract, unit, or interest within a residential development, upon which a Class 2 structure (as defined
in IC 22-12-1-5) is or will be constructed.
(c) As used in this section, “residential development” means a parcel of land that is subdivided into lots,
parcels, tracts, units, or interests:
(1) all of which, except for a common area, include an existing Class 2 structure (as defined in IC
22-12-1-5) [i.e., a home], or are designated for the construction of a Class 2 structure; and
(2) each of which is encumbered by substantively identical restrictive covenants concerning one
(1) or more servient estates located within the boundaries of the original undivided parcel, or
other governing document of record.
(d) Notwithstanding any other provision of this article, a common area is exempt from property taxation,
provided that the common area easements and covenants restricting the use and conveyance of common
areas to lot owners are recorded, and notice is provided, to the appropriate county or township assessor.

This is very informative thank you. I wish I did not have to be the one to move this through case law for the state, but it seems like someone has to do it, or bend the rules.

"assessed at what the Assessor called market value, however their version of MV was nothing more than a depreciated cost approach" that is our current situation.

 

[Elliott]

When I was in assessment field, years ago, if there were 20 units and they sold for $200,000 each, then the MV of the total was about $4,000,000. The pool, tennis court, and common areas were not separately valued or assessed. It was assumed 1/20th of the common elements were included in the purchase price.

 

[SD Capital Investment]

When I was in assessment field, years ago, if there were 20 units and they sold for $200,000 each, then the MV of the total was about $4,000,000. The pool, tennis court, and common areas were not separately valued or assessed. It was assumed 1/20th of the common elements were included in the purchase price.

That is the route I intend to go if I am able.

Elliot, did you ever look back at assessing after you left or is the grass greener on your side? I've been dragging my feet to complete my log, write one more narrative example, and take the test. I feel that if stable, the financial reward would be worth while. Honestly I have become a bit complacent and have no guidance to the private sector.

 

[Russ Kitzberger]

I agree and that's my plan currently. I'm just trying to build up a well grounded understanding beforehand. Neither of us are attorney's and likely there will be no legal representation present at the initial meeting, so the more I can cover beforehand the better.

A large part of the reason I suggested the listening approach was that you are unsupported without legal advice and you had stated previously you didn't have access to legal counsel. I assumed your situation isn't codified (written in a law that you know of), because in your position that would be something you would have access to. Since you don't have legal counsel or the ability to use lexus nexus or legal research to prepare: You start from a position of immunity, which is not the case for private parties. Waiting for opposing party to state their case might give you everything you need to make your decision.

That is the difference in your job vs private parties, you would be expected to know the case for the legal determination before making determination (date of the assessment (market value)) as a private party. Continuing to go through the motion that others have prescribed for you until the motions are challenged might be covered under immunity as a government employee.

When I was in assessment field, years ago, if there were 20 units and they sold for $200,000 each, then the MV of the total was about $4,000,000. The pool, tennis court, and common areas were not separately valued or assessed. It was assumed 1/20th of the common elements were included in the purchase price.

That is the route I intend to go if I am able.

Elliot, did you ever look back at assessing after you left or is the grass greener on your side? I've been dragging my feet to complete my log, write one more narrative example, and take the test. I feel that if stable, the financial reward would be worth while. Honestly I have become a bit complacent and have no guidance the the private sector.

 

[Terrel L. Shields]

their version of MV was nothing more than a depreciated cost approach.

That's pretty much the only method I see used in the states I've worked (3) and while they derive the depreciation via sales to some extent, it is a cost approach.

 

[SD Capital Investment]

That's pretty much the only method I see used in the states I've worked (3) and while they derive the depreciation via sales to some extent, it is a cost approach.

Yeah it's a depreciated cost approach with adjustments derived from annual assessments/sales statistics. Sales comparison is used during all appeals, the income approach is used when necessary and applicable.

 

[SD Capital Investment]

A large part of the reason I suggested the listening approach was that you are unsupported without legal advice and you had stated previously you didn't have access to legal counsel. I assumed your situation isn't codified (written in a law that you know of), because in your position that would be something you would have access to. Since you don't have legal counsel or the ability to use lexus nexus or legal research to prepare: You start from a position of immunity, which is not the case for private parties. Waiting for opposing party to state their case might give you everything you need to make your decision.

That is the difference in your job vs private parties, you would be expected to know the case for the legal determination before making determination (date of the assessment (market value)) as a private party. Continuing to go through the motion that others have prescribed for you until the motions are challenged might be covered under immunity as a government employee.

I will be listening to them no matter what, as a public servant I don't have a choice. I do basically start from a position of immunity. I also do my due diligence reviewing South Dakota property tax law related to the subject, I do have access to that at least. I'm always willing to listen and consider any parties case, some can be very intriguing others are comical.

According to Mark K's information, in Indiana as of 2016 there is a law allowing the exempt status of common HOA property. I will likely use this information as reference and pass it along. There is definitely no exemption for that in SD, maybe they'll get Governor Noem on board with it.