CHAPEL HILL — A Wake County judge has ordered the developer of a local retirement community to stop collecting certain membership and monthly overhead fees in a multimillion-dollar lawsuit alleging the fees violate state law.
Raleigh attorney Benjamin Kuhn said the lawsuit isn’t targeting The Cedars but the “substantial developer fees” residents pay to live there and when their condo is sold. Condo owners don’t receive any benefit from the fees, which are “unenforceable, illegal, unconscionable, violate public policy and are unconstitutional,” he said.
Under the state’s Condominium Act, residents also share ownership of common properties, including a clubhouse and health center. The Cedars is located in Chapel Hill’s Meadowmont community.
Since 2004, records show residents have paid millions in developer fees, including a 10 percent fee every time a condo is sold. The developers’ role in property ownership never ends and limits the homes’ marketability, Kuhn said. Plus, the fees violate state public policy laws prohibiting certain land transfer fees and “unreasonable restraints” on the home’s marketability, he said.
Special Superior Court Judge William Pittman agreed in a Jan. 7 summary judgment and told The Cedars to stop collecting the fees from residents.
Kuhn said they could seek as much as $30 million the company and its affiliates collected from former and current owners. Hearings might not begin before summer, he said.
Bob Woodruff, founding partner, president and chief executive officer, said The Cedars’ fees are legal. The N.C. Department of Insurance, which is responsible for protecting consumers, approved their financial structure, he said.
The Cedars is seeking to delay the injunction and will appeal to the N.C. Court of Appeals,Woodruff said.
The lawsuit was filed in June 2011 on behalf of two families. In May 2012, Orange County Superior Court Judge Carl Fox approved a class-action lawsuit. Kuhn said it’s grown to nearly 500 people.
The defendants are The Cedars of Chapel Hill LLC and its affiliates, The Cedars of Chapel Hill Club, The Cedars of Chapel Hill Development Co., The Cedars of Chapel Hill Investor Group, The Cedars of Chapel Hill Realty Co. and Meadowmont Retirement Community.
The lead plaintiffs in the case are former ArtsCenter executive director Jonathan Wilner and Diane Wilner, and Chapel Hill commercial real estate broker Edwin B. Hoel, Per Ole Hoel and Linda Leekley.
The N.C. Department of Insurance regulates continuing care retirement communities, and they are licensed by the N.C. Department of Health and Human Services. The state has nearly 60 CCRCs, but only two – The Cypress of Charlotte and The Cypress of Raleigh – operate like The Cedars.
CCRCs offer levels of care, from independent living to skilled nursing. Residents own their homes but share common areas, such as clubhouses.
State officials say a large, upfront payment of a few thousand to several hundred thousand dollars is typical. CCRCs also offer a menu of services paid via a monthly fee of several hundred dollars to more than $5,000, officials said.
A 2013 report filed with the Department of Insurance shows The Cedars opened in 2004 and has more than 400 residents, most in single-family condos. The DuBose Health Center provides 48 assisted-living and nursing beds.
Buyers pay The Cedars a one-time membership fee equal to 10 percent of the sale price. Kuhn said the problem is the new owner’s fee is deducted from the money they pay to the seller. That reduces the owner’s return on the investment, he said.
Residents also pay a service fee based on the type of home, usually around $2,400 to $5,300 a month, a Department of Insurance report stated.
The Cedars reported $8.6 million in service fee revenue in 2012 – the latest year available – and $1.6 million in overhead fees, documents show. The Cedars also reported $934,900 in membership fees.
The overhead fee goes to six founding partners: Woodruff, retired surgeon McNeely DuBose, and development executives David Anna, Roger Perry, John R. McAdams and Peter Y. Gevalt. The money is a return on their investment of more than $125 million in building, licensing and marketing The Cedars, Woodruff said.
Some claims in the initial lawsuit were not submitted, including fraud, negligent misrepresentation, civil conspiracy and unfair and deceptive trade practices in how the membership fee is collected.
Woodruff said residents get annual financial statements and know what they are getting into when they sign the contract.
The staff verifies potential residents can afford to live there, but if someone did run into trouble, Woodruff said The Cedars could credit the home’s value and collect from the estate. “We would never foreclose on their home,” he said.