On a daily basis, the clubhouses at age-restricted communities are buzzing with many activities, including monthly Board meetings and groups gathering to exercise, play cards, and socialize. This “resort-like” atmosphere is one of the features that attracts so many people to live in these active adult associations.
Many of these Associations have private clubs which differ from the committees that assist the Board in running the organization or the Association’s activities team. These clubs may have social, philanthropic, or recreational value and are organizations that collect fees, organize events, and are committed to improving the quality of life for their members. Most of these clubs are independently run without the Board’s oversight. In doing so, these clubs present a number of challenges for the Board.
There are, among community association professionals, two schools of thought:
1. Boards should steer clear of attempting to regulate the private clubs and their resident members, and should not interfere in the affairs of resident gatherings. Some believe the perceived risks flowing from an aberrant club are overstated. It should never be assumed that the Association, as mere facilitator of maintaining the common property, should also become gatekeeper and guardian to the community’s clubs. In addition, too much oversight may result in the assumption that the Board has that responsibility.
2. The other school of thought is held by professionals who are risk-averse, fearful of the significant liability the Association may face from club activities. These may include negligently managed funds of other residents, gatherings at the community clubhouse for a reckless purpose, or regular failure to abide by federal, state and local tax, or liquor laws. They believe the Association will ultimately be responsible for these costs, or will pay dearly trying to prove that it is not at fault. In addition, the Association’s insurance coverage does not extend to clubs and their numerous unregulated activities. Further, unsuspecting volunteer “officers” of an unincorporated club may be completely unaware that, in the event of a lawsuit, they may be personally liable.
In attempts to find a practical balance, we frequently advise our clients to be aware of the following best practices, as well as some possible unintended situations to be aware of.
Distinguishing between Board-sanctioned and independent clubs
The Board should have knowledge of all of the clubs existing on the property. Some Associations prefer to separate clubs into two categories: clubs existing under the activities department within the Association and other clubs existing wholly independently of the Association. For those clubs that do not desire to incorporate, establish bylaws, or file their own taxes, the first category may be a preferable option. This allows the Association to manage the parameters of the club’s activities and ensures that they conform to Association standards, while not discouraging the club from pursuing an independent purpose. For those clubs that prefer to exist as completely independent entities, the Association should maintain a “club file” for its records.
Creating the “club file”
When it comes to independent clubs, the Association should annually request the following documentation:
• Copies of documentation with club’s legal name, current bylaws,and current membership list
• A certificate of insurance evidencing general liability and naming the Association as an additional insured
• Copies of any necessary licenses or permits (e.g. alcoholic beverage, bingo)
• An annual list of proposed activities requiring reservation of Association property
• Annual certification by the club acknowledging compliance with all legal and tax requirements
Recognizing the scope of the Association’s insurance coverage with respect to all clubs
Liability insurance policies cover only entities and activities owned, controlled, and managed by the named insured. Even though a list of clubs may be provided to the Association’s insurer, coverage would only extend to those club that are “acting on behalf of and at the direction of the named insured.” Additionally, insurance companies require knowledge of the insured’s activities and also include exclusions, limitations and conditions. Under most policies, if clubs exist independently of the Association, neither the club nor the Association would be protected for the club’s activities by that insurance. The Association’s concern is that, if there is a lawsuit, the Association as owner and facilitator of the property may be named in the suit.
Certain clubs frequently schedule trips or host outings oﬀ-site, and most Associations’ insurance coverage does not extend to activities held oﬀ premises. Similarly, activities may include hiring performers or workers who may not be covered under the Association’s worker’s compensation policy.
We advise clients to inform residents that certain club activities, and most particularly those events held oﬀ-premise, are likely not covered under the Association’s policy. As always, clients are advised to speak directly with their insurance professionals for guidance.
Protecting the Association when any club serves alcohol
The Division of Alcoholic Beverage Control (“ABC”) in New Jersey establishes and enforces compliance with alcoholic beverage control laws and regulations.
Clubs serving alcoholic beverages must elect one of the following: (a) pay for the alcohol from its own budget; (b) have club members supply their own beer and wine; (c) hire a caterer with a liquor license that may be utilized at the Association premises; or (d) obtain a special events or club license. The Association should advise any clubs that if these steps are not followed, alcohol may not be served on the premises under any circumstances. Always confer with an attorney or with the ABC directly prior to hosting an event involving liquor.
Factors to consider when implementing financial reporting and controls
Some Boards mandate that the activities of all clubs be conducted under the Board’s direction and fiscal control, which includes integrating the financial and tax reporting with all other activities of the Association. Others turn a blind eye toward the groups that run enterprises outside of the Board’s financial control, preferring not to know of any kind of financial and tax implications belonging with these clubs. However, most Board/club relationships fall somewhere in between.
Some factors to consider when deciding how to implement financial reporting and controls include:
• Independent clubs using the Association’s name may be perceived to be managed by the Association;
• Club funds may be misplaced, misappropriated or not accounted for;
• Funds are used for political contributions;
• Club financials are not published – either by the club or the Association where it operates;
• Sales tax is not collected or submitted where appropriate or paid on purchases;
• Taxable income is earned but not reported;
• 1099 Forms are not issued where required;
• Funds are used for unauthorized or illegal purposes;
• Funds are spent for purposes unrelated to the club’s activities;
• Club leaders or certain members may receive undisclosed privileges such as free trips or commissions;
• No documentation is maintained supporting the financial activity.
These problems may become the responsibility of the Association and may result in a cost or loss to the Association. Frequently, Boards are not even aware of these potential issues because club finances are not provided.
Reporting financial activities or income tax liabilities
Unless the club is operating under a national organization (such as a local chapter of a national charity) or has a separate tax identification number (“EIN”), their activities must be included in the Association’s audited financial statements.
Clubs and organizations may be subject to tax on certain income. If the club has its own EIN it may apply for a tax exemption from the Internal Revenue Service (“IRS”) if it meets certain requirements to qualify as a “social club.”Without this approval, the club or organization is at risk that certain income may be subject to income tax. Once approved, tax- exempt organizations are required to file annual forms with the IRS and may also be required to file in the resident state.
Clubs operating under the Association’s EIN must provide the Board with reports of all of their financial activity to ensure that any income or sales tax implications are handled by the Association. Clubs operating under a national organization or that have their own EIN are independent of the Association and are not required to report to the Board.
Reporting sales tax liabilities
Clubs are subject to sales tax on their purchases like any other business organization. If sales tax is not charged, the club may be required to pay use tax with respect to their purchases, and therefore will have to file the necessary sales tax forms. It is important for the clubs to be aware of, and comply with, applicable regulations. The sales tax implications are dependent on the state where the club operates, but may apply to both independent clubs and those using the Association’s EIN.
In addition, income collected for certain activities may be subject to sales tax that should be collected and remitted to the state. The list of these activities is immense, so speak with your advisor when participating in activities where income in collected.
Today’s adult associations promote a certain lifestyle for their residents. These Associations are vested in the quality of life of its residents in numerous ways. By virtue of shared property and facilities, and to the extent that the Board is sometimes involved with community clubs on the property, the Association and clubs share an interdependent relationship. If associations take the necessary steps to help structure clubs appropriately while still allowing them to function freely and for their intended purpose, they will enhance the quality of life for their members.