55+ communities and developer (or successor-to-developer) fees (long-term, friendly, states, relative)

[City__Datarer]

In looking into possible retirement communities, I've come across some where the developer (or successor corporations) owns a permanent interest in a development (instead of having an involvement in the property/COA/HOA only while the development's being built and eventually turning all the property and/or amenities over to the residents).

If I'm understanding correctly, these situations can vary from where, at one extreme, when you purchase, the developer doesn't give you a fee simple deed to your own home but is rather giving you a long-term leasehold, to situations where you do get a fee simple deed but they retain ownership of specific components of the development (such as a golf course and/or a clubhouse and/or other amenities) and have a right to charge a fee (one that in some developments you don't have the right to opt out of).

It's difficult to get exact/detailed info because often it's something even otherwise well-informed residents don't know. Also in some places it appears the status has changed over time due to settlements that have resulted in modification of whatever the initial agreements were.

Basically, I think a lot of people don't look into this when they buy; they just want to know what their monthly fee will be (similar to its being common that when the community owns everything itself, many buyers ask about only the monthly dues, not budget/reserves/possible future special assessments). But it's important for me to look into this before buying because, while I'll of course expect costs to eventually go up over time, I won't have much of a cushion for sudden large escalations in homeowning costs. And once a development is complete (no more profit from new home sales) and a developer's only revenue stream is the components of the property they've retained an interest in, my concern (in the absence of any hard info, which again, can be hard to come by) would be they would be likely to raise the monthly fee as high as they can within guidelines (if any) that control the amount.

The understanding I have so far is that in at least some cases the fee increase is tied to a cost-of-living/inflation increase (have not been able to get details on what index is used to measure this).

This makes me wonder if fees that I'm seeing that seem acceptable now are partly that way only because we've had relatively low cost-of-living increases in recent times. (Yes, I agree with anyone who's thinking about how much prices have shot up at the grocery store in the last few years , but the official stats seem to differ from my subjective grocery shopping experience!)

So I'm curious to hear from both homeowners who may live in or have considered such communities and also the people here who know more than me (which is almost everyone!) about financial planning and the economy.

If you live in such a community, do you know what governs possible future increases? Does the developer always raise the fee the most they can, or are amenities they've retained profitable enough for them (in terms of use fees they collect that are on top of the monthly fees) that they still have an interest in trying to keep residents happy (keep their goodwill in setting involuntary fees so they'll continue spending voluntary money playing golf, dining, signing up for events, classes, trips, etc.)? If part of your monthly fee is residents paying for common expenses (for property owned in common by the residents) and part is to the developer (or its successors), is the developer portion a high percentage of your total fee?

Even a community where the residents control everything may have to raise fees in the case of inflation, but they at least have the opportunity to try to mitigate that through the choices they make, including not only their spending, but also whether encouraging volunteerism for what had been paid positions is a good idea for their particular community (something that I would expect to vary depending on the affluence or lack thereof of the particular community). So my question is for people dealing specifically with this situation of non-resident-owned amenities, etc., with mandatory fees.

For people who understand finance, is this an ok time or a really bad time to buy a home in a community where increases are tied to the cost of living? Or maybe an ok time to buy a home in a place with a small fee of this kind, but not a large one? (I've seen fees ranging from around $100/month to several hundred.) What do you see, not next year or next couple of years, but over the next few decades, as far as inflation/cost-of-living risk? Do you see sudden sharp increases? (I'm thinking with slow and gradual increases you could sell a property if it was becoming unaffordable to you personally, but sudden sharp increases for a few years in a row could raise the fees to a place where homes subject to such increases might fall to firesale prices.)

(This overlaps several possible forums but I've posted here because in my own personal experience it's something I've come across in some 55+ communities, and also those retirees who are on a fixed income may be less able to roll with such increases compared to individuals whose salaries would--hopefully!--increase if we ever have runaway--or very long-term--inflation.)

[City__Datarer]

The situation I described is in some ways comparable to getting an adjustable-rate mortgage, in terms of the uncertainty/risk you're taking on. (But not in all ways comparable--one big difference is that with the mortgage you can at least eventually get rid of the payment altogether by paying off the mortgage.)

I personally have low tolerance for risk with respect to unknown future costs. So I've always preferred to pay the higher fixed-rate mortgage payments than take chances with an adjustable-rate mortgage that, while cheaper initially, could result in big increases in payments at some point.

But say, hypothetically, that that adjustable-rate mortgage (or, in the case I raised above, developer monthly fee tied to cost-of-living increases) is unavoidable. If you want to live in that particular community, you're stuck with this higher level of uncertainty/risk concerning future increases--it's part of the package.

On the other hand, the community is really nice for your price range, sometimes residents wave to you when you're there to look at it and even give you friendly and helpful inside information, it is very safe compared to comparably priced homes elsewhere, it even has ______ that will draw people with similar interests to yours to the community (fill in your activity of choice here; for me it would be that it not only has a bookclub but one that is reading books I'd enjoy reading/discussing). It just has lots of other positive checkmarks on your list and no real downside apart from the possible cost spiralling (that may or may not ever happen, depending on the future economy).

Is it worth considering (for the average homeowner, not someone looking for a high-risk investment)? Or is it just a bad idea, in terms of what anyone can guess about future inflation?

I know no one has a crystal ball, but I'm especially uninformed on the economy, maybe someone can make a more educated guess than I can?

I just know inflationary considerations have been negligible for my adult life but can remember as a teenager in the 1970s hearing about how the runaway "double-digit" inflation was hitting seniors on a fixed income particularly hard.

[lvoc]

There is always some clever fellow who comes up with a new way to make money.

I am familiar with a number of such developments in the Las Vegas area and have seen no such procedures.

The only new money gouging in recent years has been charging a fee to new residents to join the Association. It is either a fixed fee or a percentage of the sales price.

There has also been an attempt that did not get to far to enable original developers to collect a fee on subsequent sales. That however was not restricted to 55+

Ownership of golf courses has always used a number of different models. Private, Municipal or owned by the Association. Note that golf courses are often not profitable so owning one may be bad for the Association.

I have not seen a 55+ where the Associatlion was not owned by the owners. Then again the original one of the older active community was Leisure World in CA which had ownership that was virtually impossible to penetrate.

[rational1]

> the developer doesn't give you a fee simple deed to your own home but is rather giving you a long-term leasehold,

This would certainly trouble me. But on the other hand, I have never HEARD of such a thing. Can you provide examples?

A general thought. You cannot prevent future increases in the cost of housing. This is true not only in a HOA community but also in a single-family fee-simple house.

Personally I would be very reluctant to buy into an association with a golf course (doesn't matter whether it is builder-owned or community-owned). It seems that there are too many golf courses right now.

[City__Datarer]

Thank you both for the helpful replies.

Yes, I agree if we ever have double-digit inflation, this will be bad for everyone's housing costs across the board. But it just may possibly be even worse for those where this kind of developer fee tied to increases in the cost of living is in play.

I did the math, and (if my rusty math skills are right) 7 or 8 years of 10% increases will approximately double your fees. (Caveat: my math "skills" should definitely not be relied on by anyone else. )

My guess is that in some of the more affordable communities where the residents own everything themselves, fees would still go up some, but residents (especially in 55+ communities where many are on a fixed income) might choose to cut back/use volunteers more rather than allow fees to actually double within that short of a time span. Of course, in high-end communities where people have more discretionary income, my guess is residents, although less than thrilled, might not be panicked by the prospect of sizable increases (and so in some of these communities, at least, the increases could be similar to what might turn out to be the case in the developer-owned situation).

Re the request for examples: I've come across the lease situation with respect to the home itself in several 55+ communities I've looked into, ranging from apartment-style condos to villa-type homes in a golf-course community that also includes single-family homes. I don't want to name them because I'm fuzzy on the details and don't want to inadvertently give wrong info about anyone's specific community. For instance, in one community I know of I have the impression the leasehold situation may apply to some of the homes and not others, and I could find no info on what determines amount of fee increases (that is, in that particular community I don't know if it's tied to cost of living or not). I did go to the website of that community just now but could find no info on this.

But my impression is that what I've read elsewhere (about certain communities' having a long-term lease) is likely correct, because when I see a listing of a home that interests me in one of these communities and bring up an image of the deed used for the last transfer in the county public records, instead of being titled just "Warranty Deed," it says "Warranty Leasehold Estate Deed" or "Leasehold Estate Warranty Deed." And where on a non-leasehold propery I would typically read something like "To have and to hold in fee simple forever," I instead see "To have and to hold . . . for the remainder of the term of the Leasehold Estate."

I remember there was an episode of House Hunters (or one of the other HGTV shows) where the buyer was in Hawaii and one of the factors she was weighing was that one of her choices involved a leasehold situation. What I'm coming across in a few different communities seems similar.

That is a situation of a leasehold with respect to your own home; I've also come across ones where (if I understand correctly) it is only certain amenities/property that the developer (or its successors) retain an interest in and have the right to charge a mandatory fee for. (And again, specifics can be hard to come by, and I've read about modifications over time, sometimes in response to litigation by residents, so don't want to post names of specific communities and possibly be wrong about the details/current status of things.)

Yes, that's good advice to be cautious about golf courses (especially if you're not a golfer) and see if they're in your best long-term interest. I've heard about cases where the golf courses stop operating and cases where residents were unhappy with plans to build additional homes on what had been their golf course view. I've also seen upscale condos selling for much less than comparable ones in non-golf-course communities due to there being a large mandatory equity buy-in and ongoing high membership fees.

By the way, for anyone who is interested in golf, there are actually some 55+ communities that are very affordable and yet do have golf courses (can do so because of the large number of residents--so that the costs are spread out over many households). In some cases, the homes were built over time and some are very basic while others are more upscale, so the communities have a wide range of home prices. (Just thought I'd mention that for anyone assuming such communities are only possible at a high price point.)

[lvoc]

A quick check reveals few of these and the ones that I could find appear to be manufactured home...rv places. So they are pretty uncommon.

It is reasonably common in Hawaii to run into leaseholds but virtually unheard of in the rest of the US. It is common in Europe. A good part of London is all leaseholds. It is also possible now in time shares. They originally provided fee simple ownership but nowadays much more complicated mechanisms. Condo-hotels are fee simple but have a fully flexible fee to the hotel that basically puts the owner at the mecry ofthe hotel. You may make a little money but if it actually gets profitable the hotel will change its fee structure and grab more.

I am skeptical of the ability to finance such ownership. Certainly not with comventional mortgage paper. So it would have to be caah or a private funded arrangement. That says resale will be very difficult.

Off hand I would not get near one.

Golf courses are tricky. Often depends on the exact language. Do owners buying golf frontage have a contracted right to it? That varies all over the place. We have had a couple of reversion of golf courses to homes in Las Vegas. One pretty contentious. One Sun City carries three courses at a yearly loss of a couple of million dollars. They have carefully examined the situation and believe the cheapest outcome is to maintain the three courses. Like many courses these are set up for flood control as well as golf so you do not just convert to something else.

[Robyn55]

Originally Posted by lvoc

There is always some clever fellow who comes up with a new way to make money.

I am familiar with a number of such developments in the Las Vegas area and have seen no such procedures.

The only new money gouging in recent years has been charging a fee to new residents to join the Association. It is either a fixed fee or a percentage of the sales price.

There has also been an attempt that did not get to far to enable original developers to collect a fee on subsequent sales. That however was not restricted to 55+

Ownership of golf courses has always used a number of different models. Private, Municipal or owned by the Association. Note that golf courses are often not profitable so owning one may be bad for the Association.

I have not seen a 55+ where the Associatlion was not owned by the owners. Then again the original one of the older active community was Leisure World in CA which had ownership that was virtually impossible to penetrate.

There are honestly so many permutations and regional and state variations that it's impossible to generalize. One model in a lot of higher end communities in Florida today is recreational facilities (often including a golf course) where the developer say right up front that he owns the facilities but plans to sell to the highest bidder when he's finished with the community. The highest bidder might be the homeowners - or might be someone else. FWIW - there are statutes/cases in Florida concerning what an association must do to acquire something like recreational facilities (and there are differences between condo and homeowners' associations). Note that my HOA has a golf course within its gates - but it has nothing to do with the HOA. This is not unusual where I live.

As far as collecting a fee on sales - our HOA is controlled by homeowners. And there was a proposal a while back that the HOA collect fees on subsequent sales (some of our residents had seen things like this in some places to the north - for some reason - Hilton Head comes to mind). As a "buy-in" to our (fairly substantial) reserves. The proposal didn't go anywhere (people thought it would reduce property values). On my part - as a homeowner - I've lived here for almost 20 years - long enough that a lot of the money I've paid into reserves has been spent on various capital improvements - many major. So if I were to leave tomorrow - I don't think I'd be leaving a ridiculous amount of money in reserve funds. And any fee like this wouldn't go into my pocket - it would go to the HOA. So I was not in favor of the proposal.

BTW - the biggest shock for most homeowners when it comes to fees probably won't be annual increases. It's special assessments after major catastrophe property losses. We had about a $10k assessment after Hurricane Andrew. This is not the kind of thing associations keep reserves for. And - at least in Florida - insurance deductibles can be very high (and some things - like landscaping - are often not covered by insurance at all). Loss assessment coverage (generally an optional coverage) in a homeowners' policy may cover part of these assessments - but usually not all. Robyn

[johngolf]

Interesting subject matter and while I think Datarer might be overly concerned, Robyn makes a good point that there are many permutations especially in larger retiree areas like FL and AZ or any place where there are rent/lease the land developments.

I have lived in 6 or so HOA's in several states and I have never once saw lease the land and/or developers still having a piece of the action after all homes were sold. I know such exist, but they are the exception rather then the norm other then primarily mobile home developments.

[johngolf]

A development with an attached golf course(s) can be very tricky. The ownership of the golf course has to be paid close attention to. Many times the course is owned by a different corporation then the developer of the housing is. In some cases it can be the same "person" but under different corporations. The golf course might not always be there or the ownership could change thus changing any prior arrangements like dues, playing times, etc. What one thought was going to be private for member/owners gets thrown open to the public. Worst case it goes broke and ends up being sold for another use like housing, stores, etc.

I bought a townhome on a golf course with the promise that the club would remain private as it was. After all the units were sold, the club went public. I learned that lesson fast.

There are many situations concerning the golf course ranging from being sold out from under for development to the HOA owning the course but going broke because of it.

I do not have an answer as there are many variations. All I can say is be very careful when a golf course is involved even if you do not play golf. For those basing their decision on wanting a golf course, then be twice as careful.

[Longford]

Speaking of condominium associations, I've lived under such governance and I've seen the Declarations of many other associations ... and each has clearly outlined how the relationships work legally. A problem is I think relatively few prospective buyers take the time to read the organizational documents, review the financial statements, understand the rules and regulations ... before buying.