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Title: - Fraud Can Happen at Any Time

The Story:

There are a number of community associations that have been built on land that are not common elements of the association. The land is held by a separate owner with standard fee interest. The owner is most often the original owner of the property. The property is leased to the association or in some cases with leases directly to the unit owners. This is not an unusual circumstance nationally. At some point, it becomes in the best interests of the association to purchase the lease rights and land from the existing owner. Subsequent to the purchase, the association often amends the declaration documents. The land becomes a common element and the lease is dissolved. It is not a troublesome transaction from accredit standpoint. Typically, the lease payment and the proposed loan payment are near equal so the net effect to the unit owners very little net increase in how big a check they must cut each period to live in the property (association dues and lease payment versus one largely association dues payment). The transactions on a legal basis tend to be very complicated and engaging counsel with real estate knowledge as well as community association knowledge is prudent.

A large self managed association in California approached us to help finance the purchase of a land lease; 350 units. There were certain parts of the transaction that were more complicated than others lease buy outs. The president of the association was an attorney and the Board had been working at this transaction for 5 years. To save legal expenses, the president had been handling most of the complex negotiations with all the associated parties. A conflict of interest in my mind but nothing that had to do with the loan application or credit underwriting. In my view, the association’s attorney would become involved should the loan be approved and move towards closing. Board members would be signing detailed bank provided resolutions and certifications. The loan did become approved. The financial aspects of the association were all sound, evidence of votes for the purchase were strong and the net cash flow impact to the property owners was going to be negligible.

 

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