GLA Board loves debtors; could forgive almost $200,000.00
Jun 2, 2016 10:04:41 GMT -7
chris and dorothykeeler like this
Post by Admin on Jun 2, 2016 10:04:41 GMT -7
GLA Board Proposal could reduce debtor's past due amounts by 69%
Landowners could lose almost $200,000.00 of the $288,000.00 past due.
Landowners could lose almost $200,000.00 of the $288,000.00 past due.
The GLA Board has recently proposed a covenant change that could give almost $200,000.00 back to landowners who owe past due assessments. The GLA Board has decided via a rule change to adopt an interim 12% simple interest rate that is retroactive for 20 years or more.
The Covenants specify that 18% interest, compounded monthly be applied to all past due balances along with a 5% penalty. The courts have generally ruled that a 5% penalty is illegal. They have also ruled that 18% is currently unacceptable but 15% is fine.
Almost 30% of all landowners have stopped paying assessments. Some have not paid a penny in almost 20 years.
We assembled a table below to show you the amounts, principal and interest, owed at various interest rates for a typical landowner who has not paid any assessments since 1997.
We left out the 5% penalty since that is illegal. For simplicity we only compounded interest once a year rather than the once a month that the Covenants call for.
The table contains much information so you may follow our calculations. The most important part are the totals, which we will explain below.
Note: How to understand the table below.
When a landowner does not pay their assessments they are essentially borrowing money from the landowners who do pay their assessments. It is a loan and there are costs associated with it. Costs include the time value of money, the power of inflation to reduce the value of money and the opportunity cost of money. Thus interest must be charged.
Interest can be of two types; simple or compounded. Whatever type is chosen it must be sufficient to cover the costs involved and be high enough so it encourages people to pay their assessments on time.
Simple interest is interest that is only charged on the principle which is the yearly assessment. Eg; 12% simple interest on an assessment of $240.00 is $28.80 as shown in the 8th column from the left, 3 rows down, in the below table.
Compound interest is interest on the principal and any interest that accumulates. Eg;12% compounded interest on a $240.00 past due assessment is $28.80 as shown in the 5th column from the left, 3 rows down.
Both interest amounts are the same for the first year. The second year is where you start to see the difference between simple and compound interest. 12% simple interest is just $57.60 for the second year because it is only on the accumulated principle of two years unpaid assessment bills of $480.00. The landowner actually owes $480.00 plus the first years interest of $57.60. However simple interest does not get charged on past due interest. See column 7 and 8 in row 4.
Compound interest is interest charged on the past due principal, $480.00 plus the unpaid interest of $57.60. See column 5, row 4. The compounded interest is higher, $61.06 vs. the simple interest of $57.60. The difference is not large for year two but it grows exponentially. The longer the landowner disregards their assessments the larger the difference between simple interest and compound interest.
Interest may be compounded daily, monthly or yearly. It is my understanding the QuickBooks software easily accommodates any time period you wish.
The Covenants specify that 18% interest, compounded monthly be applied to all past due balances along with a 5% penalty. The courts have generally ruled that a 5% penalty is illegal. They have also ruled that 18% is currently unacceptable but 15% is fine.
Almost 30% of all landowners have stopped paying assessments. Some have not paid a penny in almost 20 years.
We assembled a table below to show you the amounts, principal and interest, owed at various interest rates for a typical landowner who has not paid any assessments since 1997.
We left out the 5% penalty since that is illegal. For simplicity we only compounded interest once a year rather than the once a month that the Covenants call for.
The table contains much information so you may follow our calculations. The most important part are the totals, which we will explain below.
Note: How to understand the table below.
When a landowner does not pay their assessments they are essentially borrowing money from the landowners who do pay their assessments. It is a loan and there are costs associated with it. Costs include the time value of money, the power of inflation to reduce the value of money and the opportunity cost of money. Thus interest must be charged.
Interest can be of two types; simple or compounded. Whatever type is chosen it must be sufficient to cover the costs involved and be high enough so it encourages people to pay their assessments on time.
Simple interest is interest that is only charged on the principle which is the yearly assessment. Eg; 12% simple interest on an assessment of $240.00 is $28.80 as shown in the 8th column from the left, 3 rows down, in the below table.
Compound interest is interest on the principal and any interest that accumulates. Eg;12% compounded interest on a $240.00 past due assessment is $28.80 as shown in the 5th column from the left, 3 rows down.
Both interest amounts are the same for the first year. The second year is where you start to see the difference between simple and compound interest. 12% simple interest is just $57.60 for the second year because it is only on the accumulated principle of two years unpaid assessment bills of $480.00. The landowner actually owes $480.00 plus the first years interest of $57.60. However simple interest does not get charged on past due interest. See column 7 and 8 in row 4.
Compound interest is interest charged on the past due principal, $480.00 plus the unpaid interest of $57.60. See column 5, row 4. The compounded interest is higher, $61.06 vs. the simple interest of $57.60. The difference is not large for year two but it grows exponentially. The longer the landowner disregards their assessments the larger the difference between simple interest and compound interest.
Interest may be compounded daily, monthly or yearly. It is my understanding the QuickBooks software easily accommodates any time period you wish.
| Assessment | Year End | Year End | |||||||
| Landowner "A" Year End-Dec. 31 | 1 Land and 1 Dwelling | 18% Compounded Interest Yearly | 18% Balance | 12% Compounded Interest Yearly | 12% Cpnd Balance | Past Due Principal | 12% Simple Interest Yearly | 15% Compounded Interest Yearly | 15% Balance |
| 1997 | $240.00 | $43.20 | $283.20 | $28.80 | $268.80 | $240.00 | $28.80 | $36.00 | $276.00 |
| 1998 | 240.00 | 94.18 | 617.38 | 61.06 | 569.86 | 480.00 | 57.60 | 77.40 | 593.40 |
| 1999 | 240.00 | 154.33 | 1,011.70 | 97.18 | 907.04 | 720.00 | 86.40 | 125.01 | 958.41 |
| 2000 | 240.00 | 225.31 | 1,477.01 | 137.64 | 1,284.68 | 960.00 | 115.20 | 179.76 | 1,378.17 |
| 2001 | 240.00 | 309.06 | 2,026.07 | 182.96 | 1,707.65 | 1,200.00 | 144.00 | 242.73 | 1860.90 |
| 2002 | 240.00 | 407.89 | 2,673.97 | 233.72 | 2,181.36 | 1,440.00 | 172.80 | 315.13 | 2,416.03 |
| 2003 | 240.00 | 524.51 | 3,438.48 | 290.56 | 2,711.93 | 1,680.00 | 201.60 | 398.40 | 3,054.44 |
| 2004 | 240.00 | 662.13 | 4,340.61 | 354.23 | 3,306.16 | 1,920.00 | 230.40 | 494.17 | 3,788.60 |
| 2005 | 264.00 | 828.83 | 5,433.43 | 428.42 | 3,998.58 | 2,184.00 | 262.08 | 607.89 | 4,660.49 |
| 2006 | 264.00 | 1,025.54 | 6,722.97 | 511.51 | 4,774.09 | 2,448.00 | 293.76 | 738.67 | 5,663.17 |
| 2007 | 290.00 | 1,262.33 | 8,275.31 | 607.69 | 5,671.78 | 2,738.00 | 328.56 | 892.97 | 6,846.14 |
| 2008 | 318.00 | 1,546.80 | 10,140.10 | 718.77 | 6,708.55 | 3,056.00 | 366.72 | 1,074.62 | 8,238.76 |
| 2009 | 348.00 | 1,887.86 | 12,375.96 | 846.79 | 7,903.33 | 3,404.00 | 408.48 | 1,288.01 | 9,874.78 |
| 2010 | 382.00 | 2,296.43 | 15,054.39 | 994.24 | 9,279.58 | 3,786.00 | 454.32 | 1,538.52 | 11,795.29 |
| 2011 | 382.00 | 2,778.55 | 18,214.94 | 1,159.39 | 10,820.96 | 4,168.00 | 500.16 | 1,826.59 | 14,003.89 |
| 2012 | 382.00 | 3,347.45 | 21,944.39 | 1,344.36 | 12,547.32 | 4,550.00 | 546.00 | 2,157.88 | 16,543.77 |
| 2013 | 382.00 | 4,018.75 | 26,345.15 | 1,551.52 | 14,480.84 | 4,932.00 | 591.84 | 2,538.87 | 19,464.64 |
| 2014 | 382.00 | 4,810.89 | 31,538.03 | 1,783.54 | 16,646.38 | 5,314.00 | 637.68 | 2,977.00 | 22,823.63 |
| 2015 | 420.00 | 5,752.45 | $37,710.48 | 2,047.97 | $19,114.34 | 5,734.00 | 688.08 | 3,486.54 | 26,730.18 |
| Total Interest | $31,976.48 | $13,380.34 | $6,114.48 | $20,996.18 | |||||
| Total Principal and Interest | $37,710.48 | $19,114.34 | $11,848.48 | $26,730.18 |
- The total principal owed for landowner A is $5,734.00 for one land and one dwelling. This is the total of just the assessments not paid from 1997 to 2015.
- At 18% interest, compounded yearly, the total owed in interest to landowners is: $31,976.48. Principal and interest total $37,710.48
- At 12% interest, compounded yearly, the total owed in interest to landowners is: $13,380.34. Principal and interest total $19,114.34
- At 12% simple interest the total owed in interest to landowners is just: $6,114.48. Principal and interest total only $11,848.48
As you can see, reducing the interest rate from 18% to 12% compounded yearly, allows our debtor to wiggle out of $18,596.14. That is a nice gift for not paying your assessments for 18 years. Wait, it gets better!
The GLA Board wants to abolish the Covenant requirement of compounding interest and replace it with simple interest. A few changed words would allow our debtor to reduce his past due assessments from $37,710.48 to a mere $11,848.48. The GLA Board wants to reward him with a savings of $25,862.00! His debt will be reduced by a breath taking 69%. Wait, it gets even better!
At the June 1st Finance Committee meeting a draft Collections Policy was discussed. One aspect was to allow debtors to make a proposal to the GLA Board if they could not "afford" to pay the bill in full. The proposal only needed a Board vote to be accepted. So if a 69% reduction in your past due amount seems too little...then you could propose a 90 or 95% reduction. You literally have nothing to lose and a great deal to gain by presenting a heart rendering story that will sway the majority of Board members. The Forum has personally witnessed, a tearful and compassionate GLA Board give away tens of thousands of dollars in past due assessments, to long term friends and fellow church people.
Landowners who have diligently followed payment plans will not be treated so kindly. Treasurer Rudy Parker has stated no refunds will be given for the 18% interest they paid.
Compound interest is widely used for consumer loans and mortgages because it allows the lender to cover their actual costs fairly. Simple interest is most often used for personal loans between family and close friends.
Montana State law clearly allows compounded interest rates up to 15%. The right most column of the above table shows what that rate would yield in terms of principal and interest.
We suggest that the GLA Board amend their covenant change to include the language from 18% to "the highest rate allowed by law" while retaining the compound interest requirement.
Dan Kehoe has designed a spreadsheet that supposedly calculates the above for many past due landowners. His calculations have not been made public and thus have not been scrutinized or verified. If he wishes to email the Forum a copy we will be happy to publish it and comment on it so landowners may gain a greater understanding of just how much money they stand to lose via the 12% simple interest rate.
What do you think?
