Homeowner Association Special Assessment ProceduresSeptember 20, 2006Common Interest Development Committee Legislative CommitteeThe following is for study only and has NOT been approved by the Common Interest Development, Legislative or Executive Committees or the Board of Directors.Issue: Are special assessments causing operational or functional problems for unit owners and for homeowners associations (HOAs)?
Action: Action is required, if C.A.R. is to sponsor a bill next year.
Options: 1. Sponsor a bill that would require HOA’s to: 1) specify the use of special assessments; 2) limit the use of the money that is collected through the special assessment to be exclusively used for the purpose for which it is intended; 3) adopt a written finding explaining the reason for the special assessment; and 4) increase the minimum percentage to approve the special assessment if it is notdisclosed to the members in annual financial pro forma operating budget.
2. Collect data from REALTOR® members on this issue next year and then determine a course of action.
3. OtherStatus/Summary: Current law iswell laid out concerning the HOA budgeting process and the imposition of regular and emergency assessments. Periodically, the Legislature adds substantive and necessary change or simply tweaks the law on an as needed basis. One substantive change in law occurred this year. C.A.R. successfully sponsored AB 2100 (Laird). That measure will require all HOA’s to adopt an assessment schedule of the dates and assessment amounts that will be needed to fund HOA reserve accounts. Existing law concerningspecial assessments is not as well developed. The question before C.A.R. is to determine if special assessments are causing operational or functional problems for HOA’s. Are HOA members given sufficient time to become aware of a proposed special assessment? Do the members receive sufficient notice prior to the imposition of a special assessment? Are special assessments causing financial hardships for members forcing them to sell their units? If better financial planning was done, and the members had a longer notice period, would that help or harm HOA’s? Are reserve accounts significantly under funded? If that is so, are HOA’s “playing catch-up” by significantly increasing regular assessments or imposing large special assessments? Are real estate sales and listings being affected by proposed or actual large special assessments? Is additional statutory guidance really necessary? DiscussionOver twenty years ago California set the path for HOA’s to follow a financialplanning model. The enabling legislation was sponsored by C.A.R. Most every other year, C.A.R. has sponsored a bill in this area. An estimated 41,000 HOA’s in this state are affected by all of the financial planning laws.This year, for example, C.A.R. successfully sponsored a very significant bill, AB 2100 (Laird). It responded to bad financial planning by homeowner associations. One Union City association recently imposed an $18,494.27 assessment on homeowners and the Gables of Pleasanton levied a$12,900 special assessment last year. Unquestionably, financial hardship was an unfortunate result. Adequate reserves could have mitigated adverse consequences. AB 2100 requires HOA’s to adopt an assessment schedule of the dates and assessment amounts that will be needed to fund reserve account needs. Once this bill goes into effect, homeowners should be given a long term warning of changes in assessments. Arguably it will promote much earlier financial planning that exists today.While the law is replete in the process of how emergency and regular assessments are to be handled, it is somewhat scant concerning special assessments. Special assessments:1. Can be imposed without a majority vote of the HOA members as long as it does not, in the aggregate, exceed 5 percent of the budgeted gross expenses of the association for that fiscal year. NOTE: The five percent restriction can be helpful or harmful depending on the amount the association will spend in any fiscal year.
2. Must benoticed by first-class mail to the owners not less than 30 nor more than 60 day prior to the increased assessment becoming due. It there is a large assessment, homeowners may not be able to respond in a timely fashion and will be confronted with one or more difficult decisions.
3. Are delinquent 15 days after they become due unless the declaration provides a longer time period in which case the longer time period applies.
4. Must be disclosed if they are due and not paid inconnection with the transfer of title.
5. May be identified in the pro forma operating budget if the board determines or ANTICIPATES that the levy of one or more special assessment is required to repair, replace or restore any major component or provide adequate reserves therefore. NOTE: this contemplates that the board is to specify the purpose of the special assessment but the law does not require specification or findings by the board. Nor does state law specify when a special assessment is necessary vs. an increase in a regular assessment.
6. Are not subject to a high level of scrutiny or restrictions.
7. Can become the primary assessment method to collect adequate capital for an associations operatingor reserve account needs.
8. Permits HOA boards to defer increases in regular assessments in favor of special assessments.There are several questions that should be answered:1. Are special assessments affecting the operation and stability of HOA’s?
2. Are special assessments affecting listing and sales?
3. How frequent are the assessments being imposed?
4. Are the amounts being increased?
5. Are HOA boards inclinedto hold down increasing regular assessments and then when their back is to the wall, propose special assessments?
6. Is appearance and maintenance of HOA’s being affected by delayed improvements and renovations?
7. Should any change in state law be made at this time?
8. Are we micro-managing HOA’s? Is this a problem to be addressed at this time?In order to proceed on this issue, the CID Committee should consider the aforementioned questions. If it is determined that there is sufficient need, the next step will be to respond by either collecting additional data on special assessments or sponsoring or supporting a bill that will provide new parameters for HOA special assessments.