FOCUS TODAY - July 2005

The Community Membership Solution

Mandatory Club Membership

in the Residential Community

--Robert Patasnick, CPA

Goals and Objectives of Community Membership.

• Keep the community economically viable and preserve and enhance property values in doing so.
• Create a stable and secure membership base whereby ultimately all property owner support the maintenance of the common areas and club-related recreational amenities, which indirectly supports real estate values.  (A healthy club is a healthy community.)
• Establish the long-term financial fate and destiny of the community while minimizing the extent of future dues rate and fee increases, thus keeping club membership attractive and affordable (assuring a high-quality club and amenities).
• This is not an instant fix but rather a long-term solution to correct a flaw in your community design.  The community will not be immediately overburdened.  Often there is initially excess capacity.

What is the Community Membership Solution?

The conversion plan strategy involves two fundamental themes:

• How to minimize the population of prospective plaintiffs (those opposed to mandatory membership who take legal action).  While there have been lawsuits, all have been settled so far, usually with the “generation-skipping” approach (see “Grandfathering in Perpetuity” below).  We are not aware of any reported appellant legal decisions in Florida that have specifically ruled upon the enforceability of an amendment to a homeowners association declaration of restrictive covenants requiring membership in a private country club as a mandatory condition precedent to property ownership where such a requirement was not in the original community documents.
• What financial incentives may be necessary to get resident nonmembers to vote for community membership (and nonresident club members to vote for it as well).

Grandfathering existing resident nonmembers from club membership.

• The next legitimate homebuyer must take some level of membership.  (Bona fide family estate planning vehicles and transfers to immediate family members exempt.)
• Grandfathering in perpetuity—

(a)    Future buyers don’t have to become members (believed to be least litigious option, but doesn’t have as rapid a beneficial financial impact).  Usually the second of third subsequent owner of the property must join the club (called “generation skipping”).

(b)   (b) If existing resident of a future buyer of the home joins the club, he does so with irreversible consequences.  All successive owners of the home must join the club.

• Membership required upon passage of the mandatory-membership initiative, or after a grace period. Significantly the most aggressive option.

Dues continuation.

• Existing and future members cannot resign from the club and must maintain a minimum level of membership.  It is good to conduct a vote of the club members first—showing their commitment to mandatory membership—followed by a vote of members of the homeowners association, which includes both club members and other residents.

Minimum category of membership required for all residents.

• Usually only “social only” membership is required.
• A new entry-level category of membership can be created.  You might not want to introduce this category unless you feel it is absolutely required.  Typically it is a non-voting membership category.

The desire is ultimately to get a dues-paying member (an annuity) for each residence.

• The strategy is either to get an existing resident to join the club (waive/reduce joining fees or entry-level dues rates), or,
• Accelerate the departure of resident nonmembers to bring in new members.  One method of hastening the departure is to share some of the new member’s joining fee with the outgoing nonmember.

How Is Community Membership Accomplished?

Due diligence is performed by leadership of the club and the property owners association (POA).  An ad hoc committee may be formed.

• Consensus building among and between the club and property owners association boards of directors is critical.
• Select consultants, advisers and special counsel.
• Meet with and study other club communities.
• Hold focus-group meetings among club and POA leaders.

POA issues and documents (declaration of restrictive covenants changes).

• Expert analysis of real estate factors.  It all comes down to driving the real-estate impact to gain support.
• Intense analysis of legal documents that dictate voting structure (master association and potentially sub-associations as well).
• Decision of who pays for the community membership initiative.
• Club indemnification of the POA.

Club issues and documents (bylaw changes).

• Resignation issues (a window created?).
• Step-downs in membership addressed (limitations created?.
• Potential new entry-level membership category created.
• Member discipline issues—suspension, expulsion.
• Hardship provisions (how flexible, voter impact).  A theme worth conveying:  “The healthier the club, the more varieties of potentially qualifying hardships.”

Community involvement and education.

• Town hall informational meetings with PowerPoint presentations.

Understanding the views of your constituencies.

• Smaller focus groups ranging from influential groups to isolated groups may be advisable.
• The club voter—resident and nonresident members; golf and non-golfing members.
• The POA voter—club members and nonmembers.

Distribution of various collateral and marketing materials.

Letters from the club and POA boards, frequently asked questions, newsletter and/or Web-site coverage, media coverage, testimonials, interaction of respected real estate representatives, etc.

Won’t This Make It More Difficult for Me To Sell My Home?

• Studies and experience thus far have shown this ultimately to be a fear and not a reality.
• The base of buyers obviously shifts to qualified buyers with similar desires versus “shoppers.”
• While it is indeed natural to think it will be more difficult, the actual experiences of other communities has proven to be counter-intuitive.  Future prospective buyers seem to gain more comfort and confidence in their buying decisions by knowing other new buyers and community residents all share in the commitment to financially support all of the community’s amenities.