California Condo & HOA Law

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June 22, 2006

ASSESSMENT INCREASES - What are the Limits?

People write in all the time and ask what the limits are to assessment increases in HOAs in California. I think the best way to explain it is to include an excerpt from my book entitled: "The Davis Stirling Act in Plain English", in which I recite the law and then explain it. The statute is in regular text (paraphrased to some degree because hardly anyone can actually understand the statutory language), and the commentary is in italics:

1366. LEVY OF ASSESSMENTS; LIMITATIONS ON REGULAR ASSESSMENT INCREASES AND IMPOSITION OF SPECIAL ASSESSMENTS; DELINQUENT ASSESSMENTS; LATE FEES AND INTEREST.

(a) Except as to limits specified in (b), an association shall levy regular and special assessments sufficient to perform its obligations under the governing documents and the DS (Davis Stirling) Act. However, “annual increases in regular assessments for any fiscal year”, as authorized by (b), may not be imposed unless the board has sent out the information required by 1365(a) with for that fiscal year, or has obtained the approval of owners, constituting a quorum, casting a majority of the votes at a meeting or election of the association conducted in accordance with Corporations Code 7510 and 7613. For the purposes of this section, "quorum" means more than 50 percent of the owners of an association.

Comment: If the Board does not comply with 1365(a) in the time required (which requires sending out the budget and reserve information), the Board must seek approval of members for any increase in regular assessments for that year, and needs a majority of a quorum of the owners to approve. For this statutory requirement, that could conceivably be as few as 26% of all of the Owners since a "quorum" is more than 50 percent of the owners. Do not confuse the words “majority of a quorum” which is the approval requirement with “quorum” which is the number of votes that must be cast for the election for votes to be counted.

(b) Notwithstanding more restrictive limitations placed on the board by the governing documents, the board of directors may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association's preceding fiscal year or impose special assessments which in the aggregate exceed 5 percent of the budgeted gross expenses of the association for that fiscal year, without the approval of owners, constituting a quorum, casting a majority of the votes at a meeting or election (by written mail ballot). For the purposes of this section, quorum means more than 50 percent of the owners of an association. This section does not limit assessment increases necessary for emergency situations. For purposes of this section, an emergency situation is any one of the following:

(1) An extraordinary court-ordered expense;
(2) An extraordinary expense necessary to repair or maintain any part of the CID for which the association is responsible where a threat to personal safety is discovered;
(3) An extraordinary expense necessary to repair or maintain any part of the CID for which the association is responsible which could not have been foreseen by the board in preparing and distributing the pro forma budget under Section 1365 above. Prior to imposition of this emergency assessment, the board must pass a resolution reflecting written findings about the need for the assessment and why the expense could not reasonably be foreseen. The board must distribute the resolution to the owners with the notice of assessment.
(4) An extraordinary expense in making the first payment of the earthquake insurance surcharge pursuant to Section 5003 of the Insurance Code. [This is no longer applicable in practice because the insurance fund was repealed and the surcharge dropped.]

Comment: The intent of these sections of the assessment statutes is to assure that associations have adequate authority to impose assessments "sufficient to perform the obligations" imposed on the association. The rights and limitations to increases and imposition of assessments without a vote of the membership are the legislature's view of what's reasonable, no matter what appears in the governing documents. The statutory provisions control. As for understanding subsection (b), most HOA attorneys interpret this section (in its poorly worded condition) to mean that an association may increase regular assessments up to 20% of the regular assessment for the preceding year without a vote of the membership, even if the governing documents provide stricter limitations. Likewise, the association may impose a special assessment or special assessments that do not exceed 5% (in the aggregate) of the budgeted gross expenses for that fiscal year without a vote of the membership. If the association needs more money to pay expenses, approval of a majority of a quorum of the membership is required (a quorum being more than 50% of the owners) either at a meeting duly called, or a written ballot sent by mail that satisfies the written ballot requirements. “Emergency” needs are an exception, as described.

...
(d) The association shall provide notice by first-class mail to the owners of the separate interests of any increase in the regular or special assessments of the association, not less than 30 nor more than 60 days prior to the increased assessment becoming due.

Comment: Most associations send out notices of assessment increases and special assessments with the pro forma budgets, as the time frames coincide. However, there are times when the increases do not coincide with the fiscal year and the intent is to provide owners with sufficient notice to allow them to prepare for the new assessment amount.

...

1366.1. IMPOSITION OR COLLECTION OF ASSESSMENTS OR FEES; LIMIT ON AMOUNTS.

Associations may not impose or collect an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied.

Comment: This often overlooked but simply stated code section is important in consideration of assessments, fees for use of recreational facilities, document preparation and copying fees, transfer fees (although also covered under Section 1368 below). It furthers the persistent legislative intent to allow associations enough authority to collect monies necessary to adequately administer and manage the CID without providing unfettered authority to turn an association into a profitable venture or misuse an unanticipated overage or windfall. Right or wrong, this is commonly referred to as “zero-based” budgeting.

Posted by Beth Grimm at June 22, 2006 11:03 AM