Developer funding obligations: Preventing issues before they arise at turnover
ECLUB NEWS |
At most developer controlled clubs, the membership documents are written to require the developer to fund deficits until some point in the future (usually until the developer turns control over to the members). Whether a club will have a contentious issue related to this depends on how well the membership documents define what deficits are or how well the club addresses items not properly defined.
All too often, terms are poorly defined and the calculation of proper funding is vague and subject to interpretation. This can easily lead to substantial problems at turnover if these items are not resolved.
Many terms can and should be clearly defined in a well written definition of developer funding responsibility for deficits.
Several common issues relate to:
- Whether the document requires the calculation to be in accordance with generally accepted accounting principles (GAAP).
- The definition excluding depreciation from the calculation but not addressing how gains or losses from sales or disposals of property and equipment should be handled.
- How to handle initial working capital contributions if the club is included in a homeowner's association.
- Whether the developer is allowed to offset prior funding with the surplus when the club generates positive cash flows prior to turnover and does not have a deficit in a particular year.
- The club's capitalization policy with respect to the purchase of small capital items – a very low policy (e.g., $100) could mean the developer is underfunding deficits, while an excessively low policy (e.g., $5,000) could indicate the developer is over-funding, and no policy at all offers any number of challenges.
- How equipment leases should be handled.
- The potential for large capital projects prior to turnover to lead to issues if certain expenses (e.g., golf course maintenance or capitalized payroll costs) which were normally expensed are capitalized into the project.
- How to account for membership transfer fees and non equity
Many more issues and considerations can arise at the time of turnover. To minimize the potential for unnecessary complications, clubs are advised to make the best effort possible to define the calculation of deficits precisely and to be consistent in its application prior to the turnover occurring.