Earlier this year the HOA proposed adding a 0.50% Community Enhancement Fee (CEF), paid by the buyers of homes and lots at close of escrow, to supplement our Master Reserve Fund for community projects. Just more than 10% of property owners submitted written objections, which meant we would have to ask all property owners to participate in a community-wide vote to get the resolution passed.
Rather than taking the resolution to a vote, in April, we told you that we would evaluate our options, consider making changes to the original resolution based on the feedback we received, and get back to you. We listened, learned, and modified our approach.
The HOA is losing a significant source of funding from Architectural Review and Construction Access that have decreased from $1.172 million in 2021 to about $575,000 this year, nearly a $600,000 reduction in these fees that need to be replaced. We expect to see these fees continue to decline as our community gets built out, and we also expect our expenses will increase as our beautiful community is now 37 years old, and it costs more to maintain. In addition, with inflation, materials, and labor costs rising, it has become considerably more expensive to pay for capital improvements and expenses, and repairs and maintenance of the existing property. Quite simply, we need to replace the revenue we are losing from Architectural Review and Construction Access fees, and we need additional income to keep up with inflation so we can continue to pay our bills.
We have two options: The first is to begin charging a fee to new property owners. The second is to increase the Master Assessment or charge special assessments to all property owners. As our expenses increase, the assessments would also have to increase. The recommendation from the real estate agents we met with was to charge the fee to new property owners because it’s what neighboring communities are doing. Continuing increases in assessments and/or special assessments (indicating an underfunded reserve) could create uncertainty for potential buyers —potentially lowering demand for Desert Mountain properties. Additionally, real estate legal professionals told us that approximately 90% of the new community developments and a high percentage of existing HOA communities currently have or are initiating a similar CEF program.
From a Master Reserve perspective, when inflation began to rise, the HOA immediately engaged Facilities Advisors to re-evaluate our future costs to understand the funding gap that was being created. The consultant recommended that the HOA increase contributions to the Master Reserve by 20% beginning in 2024 for each of the next seven years. If we do that, we will fund an additional $6,469,000 to reserves; however, the HOA Master Reserve will still be approximately $2.2 million short of the recommended funding by 2030. If we don’t implement the Fee, these additional Reserve contributions will be financed through increased property owner assessments.
These increases will be in addition to any Village increases. There may also be additional assessments to fund one-time expenses like installing cell towers, adding a third lane at the construction entrance, and improving the gate houses that are over 30 years old. Our annual assessments are already higher than the average of Mirabel, DC Ranch, Estancia and Silverleaf, all of which have already begun charging a similar fee (which is likely lowering their HOA assessment fees as compared to our HOA assessment fees).
Other actions taken by the HOA to address the above shortfall include:
- Hiring of a Civil Engineer to evaluate the road repair, maintenance, and replacement costs;
- Changing our investment policy and deploying operation and reserve funds to successfully achieve greater returns while maintaining and protecting principal; and
- Implementing policies to reduce costs (i.e., bidding contracts, bulk purchases, and deferring maintenance where practical).
However, with the above actions, we are still short of funding. In addition, the Board has taken into consideration the feedback we received and revised the initial resolution as described below:
HOA Capital Reserve Fund Fee (Fee)
Effective March 1, 2024, the Desert Mountain HOA will rename the Community Enhancement Fee to the HOA Capital Reserve Fund Fee (Fee) because it describes how the money earned from this fee will be spent – limited to capital improvements and expenses, and repairs and maintenance of the existing property. The details are:
- 0.45% fee on the purchase price of a home or lot, paid by the buyer through escrow, based on Purchase Agreements signed on or after March 1, 2024; note that we understand that such a fee ultimately will be negotiable between a buyer and seller.
- The fee will not be charged when title is transferred for estate planning; transferred to a business or LLC controlled by the owner; or when the title passes to immediate family.
- All fees will be collected by the escrow company, remitted to the HOA Capital Reserve Fund, and will be used only to fund capital improvements and expenses, and repairs and maintenance of the existing property.
The HOA Board believes we need to do more. The responsibility of the HOA Board is to keep our community safe, secure, and beautiful, while maintaining our property values. We want every potential buyer to be as awe-struck as we were when we first drove through our gates. Creating that first impression and maintaining a community of our size and prestige costs money. We know that no one likes to pay fees, but after considering other options, we believe the HOA Capital Reserve Fund Fee is our best option.
Because the Board has revised the original resolution, we will be sending an official notice to all property owners within the next few days. This email is not the official notice. Once again, if more than 10% of homeowners submit a written objection, the resolution will go to a vote of the entire community, and two-thirds of the voting members would be required for approval.
Below is a list of some of the questions we received, with our responses. If you have additional questions or comments, please send them to firstname.lastname@example.org, and we will do our best to answer them.
President, HOA Board of Directors
Questions and Answers About the HOA Capital Reserve Fund Fee
Q1: Why did you change the name from Community Enhancement Fee to HOA Capital Reserve Fund Fee?
A1: We changed the name to better describe how the money will be used. There was some confusion about the word “enhancement,” and there were some property owners who thought the money would be used for Club projects, so we also added “HOA” to the description to let you know that the monies will be used entirely for capital improvements and expenses, and repairs and maintenance of the existing property, and none of this revenue will go to the Club.
Q2: Why did you change the fee from 0.5% to 0.45%?
A2: In our original proposal, we allowed for the deduction of real estate fees up to 6% from the sales price to which the fee is applied. To simplify the calculation, we determined that if we reduce the fee from 0.5% to 0.45%, the net fee would be just a little bit less than it would have been if we subtracted a 6% real estate fee.
Q3: Why don’t you just increase our annual assessments?
A3: The Board considered increasing assessments more than would normally be expected but decided against it for a couple of reasons. We believe, based on input from local realtors and real estate attorneys, that a history of annual dues increases at these levels, or periodic one-time assessments, may not be appealing to new buyers.
We also looked at the method used by the Club: new Members pay an initiation fee that is used for capital improvements and expenses, and repairs and maintenance because those new Members will benefit most from those improvements.
Q4: Why not charge a flat-fee on all homes?
A4: We looked at several ways to assess this fee, and like many things in life, there is no perfect answer. If we charge a fee based on the average sales price of about $3 million, buyers of lower-valued homes would pay a disproportionate percentage, while higher-valued homes would pay less relative to sales price. From January 1 through June 30 of this year (excluding Seven), 51 homes were sold for $3 million or less and 35 homes were sold for more than $3 million. We want the fee to be fair to all homeowners. Home value is used for other fees, like taxes, real estate commissions, insurance rates, etc.
Another reason we chose not to go with a flat fee is that the value of that fee would diminish in value over time due to inflation, and we didn’t want to come back in a few years with an increased fee. A percentage will always reflect current market conditions, whether they increase or decrease.
Q5: Why didn’t you put on cap on the fee for higher-valued homes?
A5: Arizona law says that HOAs must assess uniform fees to all lots, regardless of the value of the property. We also considered charging a flat fee solely for sales of undeveloped lots but doing so would have also violated state law.
Q6: How much money do you expect to collect from this fee each year?
A6: From January 1st through June 30th of this year 17 lots and 86 homes were sold, for $270,825,000 (excluding Seven). If we had charged the proposed 0.45% fee starting January 1st, the HOA Capital Reserve Fund would have received about $1.2 million. Our best guess for full-year revenue would be about $2 million, taking into consideration a slowdown near year-end.
Q7: How much will the buyer have to pay for this new fee if I sell my house after March 1, 2024?
A7: According to Sotheby’s Semi-Annual Sales Report 2023, the average sales price of homes sold for the first half of the year was $2,375,000. In this example, the fee would have been $10,688.
The HOA Capital Reserve Fund Fee increases $4,500 per million dollars of sales price:
- $2,000,000 X 0.45% = $9,000
- $3,000,000 X 0.45% = $13,500
- $4,000,000 X 0.45% = $18,000
- $5,000,000 X 0.45% = $22,500
Q8: Can the seller pay the HOA Capital Reserve Fund Fee or split it with the buyer?
A8: Like most real estate fees, the fees that the buyer and seller pay are negotiable, but ultimately the buyer is responsible for paying the fee at the close of escrow.
Q9: What happens if real estate sales decline, and we don’t collect enough revenue from this fee?
A9: We are fortunate to live in a community that is in high demand due to our natural beauty, our unique private trail system, and the Club ranked in the top 10 of the Platinum Clubs of America. We understand that sales in our community are strong. However, if there is a significant downturn in the market, we would need to consider alternatives, such as postponing capital improvement projects, if possible, raising our annual assessments or charging a special assessment.
Q10: If 10% or more of property owners object to the revised resolution, will the resolution be voted on?
A10: Yes. If more than 10% of property owners submit a written objection by the deadline, we will take this revised resolution to an immediate vote of all homeowners. That information will be included in the official notice that the HOA will send within the next few days.
Q11: We have a lot of non-resident Members coming through our gates to visit the Club. Why don’t we charge them higher fees for their eGo tags to earn extra revenue?
A11: As of July 1st, the Club had 438 Members who live off-property. The Club has an access agreement with the HOA that allows non-resident Members the same access to our community as anyone else with an eGo tag.
Even if this wasn’t the case, because the number is so low, they would each have to pay $1,000-$2,000 a year for the right to use our roadways to generate meaningful revenue. The HOA Board agrees with the Club that such a fee would be unreasonable.
Q12: Does this fee apply to homes sold at Seven?
A12: No, Seven is not operated under our HOA, thus this fee does not apply to homes sold in that community.
Q13: How much money does the Master Reserve Require?
A13: Please see the table below for estimated Master Reserve expenses through 2030.
Reserve Study - Master Association Expenditures by Year until 2030