The Association has a fiscal responsibility to maintain, repair and protect the infrastructure and amenities of our community. To fund operations, the HOA collects assessments (sometimes called dues) from homeowners. Many residents wonder how the assessments are determined. In this article, we’ll explore the key factors that influence the HOA assessments.
Budgeting Process
The basis of HOA assessments lies in the budgeting process. Each fall, the Association creates a budget that outlines expected expenses and revenue for the upcoming year. This budget includes categories like utilities, landscaping, insurance, administrative costs, and reserve funds for future repairs and replacements. By estimating these expenses, the HOA determines the total amount needed from assessments to cover these costs.
While there have been years that the HOA was able to lower or keep the assessment unchanged, more often than not, rising costs mean having to raise the assessment to protect the Associations ability to pay the bills, both now and in the future. HOAs in California have the legal right to increase assessments up to 20% per year, but we make every effort to increase at a lower rate: enough to keep up with higher costs, but low enough to avoid placing a financial burden on our members with a large increase in a single year.
Next we look at the two types of expenses that go into the budget: Operating Expenses and Reserve Funds.
Operating Expenses
The largest portion of HOA assessments goes towards covering the day-to-day operating expenses of the community. This includes expenses such as maintenance of common areas, the pool, landscaping, security, garbage collection, and administrative costs such as: building, liability, earthquake and other insurance policies; management fees; and accounting services. The HOA considers historical data and cost projections when estimating these expenses.
Reserve Funds
Reserve funds are critical for the long-term maintenance of the community. These funds are set aside to cover significant repairs and replacements to components, such as roofing, repaving, or replacing common area components such as lights, pool equipment, railings, and even the water-proof coating on balconies. The amount of money that needs to be set aside is based on a legally required reserve study.
California Civil Code requires HOAs review the health of their reserve funds every year (reserve study), and to conduct a physical analysis assessing the condition of all the components at least every three years (called an onsite reserve study, or a reserve study with site-visit.)
Casa De Oaks hires a professional firm to do our reserve studies. The report they prepare details all the components the Association is responsible for, determines their remaining useful life, and estimates their replacement cost. The report provides a dollar figure called the “fully funded amount” representing the reserves necessary to cover all present and future replacement needs. It then gives a percent funded figure, based on how much is currently set aside. An ideal range is between 70% and 130% funded.
Owners receive a summary of the reserve study along with the annual budget mailing. A complete report is available upon request, on the homeowner portal, and on the Association website.
Ultimately the board reviews the reserve study during the budgeting process and determines how much money should be allocated to the reserve fund annually, which contributes to the assessment calculation.
Allocation Methods
HOA assessments are sometimes allocated based on the size, type, or other characteristics of each unit. At Casa De Oaks, each owner pays an equal amount regardless of the size, type, or placement of their unit.
Special Assessments
In addition to regular assessments (discussed above), HOAs in California may impose special assessments to cover unexpected expenses or major repairs that exceed the reserves. These assessments are usually divided among homeowners and are necessary to prevent financial strain on the association. The membership must vote on any special assessment that exceeds 5% of the regular annual expenses. In general, the higher the reserve funding, the lower the risk is of a special assessment.
Conclusion
Understanding how HOA assessments are determined is essential for homeowners looking to make informed decisions. By knowing the factors that influence assessments, you can engage more meaningfully with the association, and contribute to the betterment of our community.