The community’s developer originally creates the HOA (Homeowners Association) and corporate By-Laws, before any sale of the units or homes takes place. The CC&R’s (Covenants, Conditions, & Restrictions) are recorded as the property is subdivided. The HOA has the authority to compel its members to pay their share of all common area expenses, either on a per-unit or square foot basis. Typically these expenses are known as HOA fees, but they can also be called dues or “regular assessments.”
The regular HOA fees accrue monthly but might be due and payable on a quarterly or annual basis, depending on the size of the contribution and the extent of a community’s improvements. These types of expenses can vary dramatically; an association can be like a mini-city – complete with guard gates, private streets, utilities, and community areas such as pools, gyms, tennis courts, or even schools. Other associations may merely have roofs, building exteriors and perhaps parking areas in common.
An association’s governing documents will describe the assessment process, as well as how often they may be adjusted; there is usually a cap on what percentage the fees can be raised within a given timeframe. Regular assessments are used to fund two types of accounts; the association’s operating expenses and the monies set aside in reserve:
The operating account covers the continuing costs required for maintenance and upkeep (like landscaping, utilities, pool upkeep and pest control) as well as administrative costs such as owner notices, security and professional property management. The kinds of expenses covered are generally dictated by the CC&R’s, but can also be added by the board of directors (though the board cannot subtract expenses or otherwise nullify the governing documents without an amendment passed by the majority of its members).
These funds are set aside to pay for less frequent and more expensive maintenance, repair and replacement of the common area’s assets (such as roofs, roads and parking lots). Proper funding of an HOA’s reserves is crucial to lessening the risk of special assessments being levied on the membership. An association’s Reserve Study will recommend the appropriate reserve contribution rate (part of the monthly dues) to protect the community’s assets and also minimize the chance of a special assessment. The intention is that there will be enough cash for large-item repairs when they are needed.
HOA boards have the authority to levy and collect these in addition to its regular or monthly fees. Typically, a special assessment is made for capital improvements, or to replace reserve funds used for maintenance that was not anticipated. A homeowner vote may be required, if prescribed in the By-Laws; this can also vary from state to state. For instance, in California a special assessment can only be imposed without a membership vote when the total is 5% or less of that association’s annual budget. However, if there are damages impacting public health or safety, a board might have the say over a special assessment amount.
Correct budgeting is half the battle in avoiding special assessments. Elect your board members carefully, attend meetings and read the fine print. Directors of a board have a fiduciary responsibility to inform and disclose all facts to the membership as early as possible, giving all homeowners the chance to participate in the decisions when time and governing laws allow.
Association management is far from an exact science, and there will be times that operating expenses exceed the community’s revenues. Of course, if fees are raised (and lowered) in tandem with budget vs. actual expenses – and reserves are properly funded in accordance with your Reserve Study – you will have hedged your bets in avoiding a special assessment.