Special Assessments Under an HOA (Homeowners’ Associations)
Special assessments are one of the tools available to the HOA Board of Directors to raise funds when needed. Most often, it is used for unexpected or unanticipated major repairs or capital improvements. Boards should be careful to limit the use of special assessments to capital items that are not included in the operating budget.
Larger HOAs may be able to absorb unexpected or unanticipated costs in a reserve fund created from their annual budget. Smaller associations are often unable to absorb a significant unanticipated or unexpected costs in their annual budget. These costs may include: a major landslide, a huge increase in water costs due to an extensive drought with water rationing, an extraordinary weather event such as a hurricane, hail storm, tornado or fire, or a massive lawsuit attacking common area rights of property owners.
If the HOA does not have funds reserved, either in their reserves fund or in their operating funds, corrective action must be taken to address the financial emergency. Special assessment is one of the methods that boards may use to raise the funds. A special assessment is a one time , additional fee levied by the Board of Directors on all owners in their community to meet an extraordinary and/or unforeseeable circumstance. Often, the cost is spread equally among all owners. For instance, the board might assess $500 per owner to support repairs for a broken water line. The board may also elect to divide the costs based on percentage of common area owned or other equitable basis.
Although boards have the authority to assess special assessments without the need to seek member approval of the amount. However, in order for the board to levy the special assessment, the amount of the special assessment must be ratified by the members. Note that the members who are voting as a class of the special assessment may be a minority of the owners of the association.
Even if the board has previously adopted a policy authorizing themselves to levy special assessments, the board must still comply with the 28 day notice as described above.
The Law of Special Assessments in California
The Davis-Stirling Common Interest Development Act ("Davis Stirling Act" or "Act"), which governs HOAs, is found in California Civil Code Sections 4000-6150. As discussed below, the Act is not the only law applicable to HOAs. By way of example, Sections 1510 through 1520 of the California Corporations Code provide additional requirements on member meetings and right to vote. The California Civil Code has 21 sections relating to HOA board meetings, elections and voting procedures, and there are numerous HOA-related sections found in the Government Code, Family Code, Probate Code and other areas of California statutory law.
Section 5600 of the Civil Code defines a "special assessment" as "any assessment other than a regular assessment, or any portion of an assessment which is in addition to either a regular assessment or other special assessments, that is levied against any parcel of common interest development." (emphasis added)
Section 5600 requires that the special assessment fulfill a "purpose." The term "purpose" is a legal term of art which can be described as synonymous with "reason," i.e. "[e]xtraordinary expense becoming necessary in carrying out the general purposes" of the association. (See Black’s Law Dictionary, 4th ed. 1968.) Section 5600 requires that this purpose be "necessary or desirable in the operation of the common interest development."
As with regular assessments, the special assessment provisions must be followed. The HOA’s governing documents may require the HOA to follow specific notice and quorum requirements, to obtain an election by secret ballot, and to provide a justification for the special assessment. Notably, however, the Davis-Stirling Act does not require special assessments to be approved by a supermajority of the HOA members – only regular assessments require a supermajority approval.
Procedure for Imposing Special Assessments
An HOA in California is ordered to follow statutory procedures when implementing a special assessment. No consideration is given to HOA rules and regulations. Here are the procedural steps required to implement special assessments:
1. Give notice of (a) the proposed special assessment, (b) the board’s intent to vote on it, (c) the time line for voting, (d) the amount of assessment, and (e) the date by which ballots must be received – Conservative HOA Boards will provide members as much time as they can under the law to vote so the HOA has ample protection against a challenge.
2. Mail, hand deliver or deliver by any method whereby the ballot is received within the 30-day deadline a ballot with:
(a) A statement indicating the ballot is for a special assessment approved by the Board, the amount of the special assessment, and the date by which ballots must be received. The statement must be substantially as follows:
"Ballot for approving a special assessment of $XXXXX. DEDUCT IT FROM YOUR DUES"
(b) A description of the due dates for the special assessment and the method and time of payment from the date of approval by the Board. (HOA has to put together a time line)
(c) Instructions for returning ballots. (Including a return address)
(d) For assessments requiring approval by the members, an explanation that any ballot that is not returned shall be counted as a NO vote. (This is generally done when a dispute over votes arises in an attempt to meet the required thresholds in order to pass the special assessment without additional votes)
(e) A space for a member’s signature. (We give members a sticker henceforth known as "stealer sticker" to put on the ballot and prevent voting more than once)
(f) If the vote is being conducted by certified mail, the ballot shall indicate that is a secret ballot and shall be torn off and mailed back in a manner that does not allow any person to ascertain how each member voted (PO-TOO, a member votes for special assessments YES or NO but only the secret ballot envelope will have the stealer sticker)
HOA Owner Rights and Protections
Despite the association’s authority under the CC&Rs to levy special assessments, many times homeowners disagree with the need for a special assessment, or feel that the amount is too high. The Davis-Stirling Common Interest Development Act (Civ. Code §§ 4000-6150) offers homeowners protections in this regard. First, all owners of separate interests in a common interest development must be provided with a summary of the "association’s right to foreclose on a separate interest." Civ. Code § 5675(b)(1). This summary must be "in at least 12-point type. . ." Id. The summary must include a statement of the following: Next, prior to the initial board meeting following the owner of a separate interest receiving a notice of assessment, the board must provide the owner with written "an explanation of the procedures used by the association to calculate the amount of the regular and special assessments." Civ. Code § 5600(a). If a board member or members of the association’s governing documents exercises the right of lien foreclosure (even if the amount owed is less than $1,800), the owner "may request an explanation from the board of the decisions made by the board which led the board officer or officers to execute the notice of lien." Civ. Code § 5655(a). The board must respond to the owner’s request "not less than 15 calendar days nor more than 30 calendar days" after receiving the request. Civ. Code § 5655(b). The recording of the lien must be suspended during this 15-30 period. Id. Coming rules relating to the enforcement of liens for delinquent assessment payments must be "applied evenhandedly." Civ. Code § 5725. If an association files a lawsuit against a homeowner, "[t]he association shall have, at the time of filing of the complaint, in addition to any other bonds required by law, an undertaking in an amount equal to the greater of one thousand dollars ($1,000) or 5 percent of the amount of the claim, up to a maximum of two hundred fifty thousand dollars ($250,000)." Civ. Code § 5930(a). If the assessment resulting from the lawsuit is $10,000, the board will need a bond valued at $500. The bond is also used to cover damages or injuries a homeowner may incur while the lien is in place.
Commonly Disputed Issues
HOAs have financial obligations that require the imposition of special assessments from time to time. Special assessments may be a particular burden for some homeowners, which can lead to difficulties for the HOA. The following list provides common issues for HOAs and homeowners when tackling special assessments: Some HOAs fail to provide adequate information to homeowners regarding the purpose, need, and amount of the special assessment. Some HOAs fail to follow proper procedure to approve and collect special assessments. Some HOAs may not be familiar with the latest court decisions or legislative developments in California relating to special assessments. Some special assessments are later disputed by homeowners who believe that the association has failed to comply with California’s Davis-Stirling Common Interest Development Act . Some homeowners fail to make timely payment of special assessments leading to the HOA bringing legal action to collect the amounts due. Some homeowners may fail to pay assessments for the wrong reason. For example, a homeowner may fail to pay assessments due on other lots where the homeowner believes the lots owe no assessments. Some homeowners may not be able to pay special assessments leading to complaints that the assessments are unfair, and thus legal action may be brought against the HOA.
The above issues may be avoided by ensuring that board members (and managers) are thoroughly familiar with California’s Davis-Stirling Common Interest Development Act, Davis-Stirling’s latest court decisions, and tight association policies and procedures.
Effect on Property Value from Special Assessments
While the immediate goal of a special assessment is to address specific maintenance or repair issues, it can have an impact on property values as well. Short-term effects are often tied to a perception of financial instability within the HOA. Homeowners may be concerned about the assessed entity’s ability to manage its financials and day-to-day operations which could result in unexpected costs for homeowners. This concern can be compounded if the HOA has already had a string of special assessments over the previous years, which also may be perceived as indicative of ongoing mismanagement. As a result, some purchasers may decide to hold off on making an offer until the special assessment is eliminated. Subjectively, this can lead to decreased property valuations until the assessment is paid.
In addition to the subjective viewpoint, certain objective criteria may also have a role in property valuations in relation to special assessments. Due to lender policies, perhaps the biggest concern when it comes to property value impacts is the length of the term for repayment of the special assessment. If a special assessment will last more than twelve months, lenders will likely require an additional reserve for the assessment beyond the monthly dues. Oftentimes, this amount can be busily as part of the regular monthly dues, resulting in those dues not being collectable for more than twelve months. This means that a portion of the HOA dues cannot be used for regular HOA expenses. Essentially, in order to collect the monthly dues as requested by the HOA going forward, there will be a temporary increase in the monthly dues because of the special assessment.
Finally, special assessments have an even longer-term impact on property values. Once a special assessment is initiated and an HOA has collected funds, the assessment can be amended as necessary, and even grow infinitely with interest. Since the uncollected portion will remain on the books of the principal until it is paid, the viability of the association is directly impacted. For instance, if an assessment is not paid, the association may be forced into a sale of the property in order to recover the amount necessary to pay off the special assessment. If this is not done, an association may never be able to collect the assessment, regardless of its size. Once the special assessment is instituted and money is collected, there is no normal process for the elimination of the amount. Instead, there will always be a lingering unpaid balance. For this reason, homeowners may perceive that these amounts will always be a factor in the management of the HOA.
Case Examples and Real Life Cases
Case Study 1: Oceanview Heights – The $10,000 Assessment
At Oceanview Heights, located on the Pacific coast in San Luis Obispo County, a major mudslide in 2022 required extensive remediation work and corrective action. The Board of Directors sought bids from several engineering firms and ultimately chose Santa Barbara Engineers for the job. This company was highly recommended for its integrity and quality of work, but the Board didn’t receive a quote for the restoration work until the budget had already been approved for 2023. As a result, the association was now faced with a challenge: how to fund the needed repairs with minimal disruption to the membership.
The President and Vice President crafted an assessment notification letter that included all of the pertinent requirements of Civil Code §5600, including the notice of a 30-day review period, as well as the rationale for imposing the assessment, how the amount of the assessment was determined, and a proposed repayment plan. In the notice, they drafted an explanation as to why the assessment bill would need to be paid in two installments, because the mudslide work is being funded with a loan for $50,000 from a bank at 6 percent interest, due in two installments, the first of which is due March 15, 2023. They decided to impose the special assessment due on April 15, 2023, and November 15, 2023.
The Board also provided a copy of the signed contract, outlined the engineering plans, and explained that the loan includes a contingency for unexpected work. A copy of any written contract with the contractor, if they enter into a contract for repairs, will be disclosed to members within 60 days after it is signed. They also provided an itemized list of the types of work that will be performed and the estimated costs associated with each. Because of the magnitude of the repairs, the directors explained that the association has no choice but to assess the owners in order to pay for them and that the assessment will need to be imposed for two (2) years.
They carefully explained the legal limitations on the amount of the special assessment and how it only applies to the unpaid dues at the time of the assessment (Civil Code §§ 5665 and 5705). The assessment may not exceed five percent (5%) of the amount of the regular monthly assessment to which each member is subject as of the date of the assessment. If an emergency assessment is necessary to cover an estimated deficit in the regular budget that exceeds twenty-five percent (25%) of the regular budget, the Board’s decision may be overturned by a majority of the entire membership. And in all cases, the Board must show that they acted reasonably in collecting the full amount of the assessment.
The Board’s letter concluded by encouraging members to review the special assessment notice right away with their legal counsel and ask the Board questions about the repair process.
The correspondence was well received and the lawyers sent their instructions and opinion letters without anyone suing the Board.
The moral of the story is that when you have a huge crisis, the Board should get opinions from experts and follow the procedural requirements.
Special Assessment Frequently Asked Questions
Following are some FAQs that I hope will provide you with a clearer understanding of special assessments:
When does the board decide to impose a special assessment? The board must in good faith make that decision based upon its reasonable judgment regarding the common area needs at the time. If there is sufficient difference of opinion on the board, the board may seek the advice of management, legal counsel, their insurance carriers, CDIPIC, reserve study experts or anyone else who might be of help.
Can the board be required to go to the members for approval of the special assessment? Yes, if the bylaws or articles require member approval.
If a special assessment is decided by the board and no member approves of it, can it be challenged in court? Yes, a suit can be filed to challenge a special assessment that is determined in bad faith or has little reasonableness applied to it.
While waiting to go to court, what happens to the special assessment payment? Even if the payment is in dispute, it must still be made. A failure to pay the special assessment (or any regular assessment) justifies the filing of a lien, and every owner, even an owner who wants the improvement, must pay his fair share.
What is the statute of limitations for bringing a suit to challenge a special assessment? Four years, which is the same period of time for all causes of action based on contract .
Must the money collected for the special assessment only be spent on the improvement for which the assessment was levied? Generally, yes. If members are told that the special assessment is to be used to replace the club house roof, and instead the money is used to build a new sauna, it could be considered to be a diversion of funds, even if the new sauna is arguably as nice as the new roof.
I was told by the board that we only need to pay the regular monthly assessment until we know more about how much money is needed for the special assessment. Is that true? No. Even if the board knows that the total special assessment is going to be $100,000 and that amount is going to be charged over 10 months, each owner must pay the monthly regular amount PLUS one-tenth of the special assessment each month until the assessment is done.
Will the special assessment be spread out over the period which the improvements are needed? Probably, yes. If a special assessment for roof replacement is collected over a 10 year period, it can save the community from paying a larger assessment later. However, if the reserve account has significant amounts of assessments collected, and there is no additional delinquent receivables, a shorter time frame might be okay.