How to Handle Unanticipated Expenses in Your HOA
Homeownership entails dealing with occasional unanticipated expenses. While board members don't plan on a main water line breaking recently, it can happen. Resolution can come days later, with a lot of money spent. HOA board members can't tell the water company or its neighbors, "I'm sorry, I can't stop this flooding right now; I can't afford it." No HOA wants the expense, but it happened.
HOAs are a collection of interconnected homeowners, and major everyday area repair expenses affect them all. One of the many benefits of HOA living is that homeowners share the costs of keeping up the HOA community, with economies of scale usually reducing the individual price. The association's duties are nothing more than the individual homeowner has–they're just shared.
Residents and community members may claim that the HOA needs replacement or repair of building components, but the HOA "can't afford it this year." However, nothing in the Davis-Stirling Act references financial hardship as an excuse from any of its requirements. Here is a quick review of some significant requirements required by the HOA:
Maintenance
Civil Code Section 4775 requires HOAs to maintain and repair common areas. Nothing in that statute says "if the finances are in order" or "if the money is in the budget." Leaky roofs or pipes or unsafe balconies need repairing. It has to be done just like the individual owner who has to dig up their water supply line. Delay almost always makes things worse.
Termite Treatment and Repair
Civil Code 4780 states that condominiums, stock cooperatives, and community apartments must deal with termite prevention and damage repair. The statute does not have an exemption for times in which the HOA funds are low.
Balcony Inspection
HOAs must complete the "elevated vertical elements" assessment no later than January 1, 2025, and repair anything found that could be a safety threat. The statute, Civil Code Section 5551, does not mention the ability of the HOA to pay for the inspection or repairs.
Assessments
Civil Code 5600(a) – "the association shall levy regular and special assessments sufficient to perform its obligations," which means that HOAs are required to budget for its reasonably anticipated costs of operation – not its hope-for costs but its anticipated costs. Target-based budgeting, in which the board dictates to its manager what assessment increase to the budget for, has the process backward and violates this legal requirement.
Reserves
Associations should set aside money to offset the ongoing deterioration of common area components which the HOA replaces or repairs. Some HOAs need to improve on those savings contributions to reduce pressure on assessments, which means the HOA is quietly slipping into debt. The reserve fund can also be a precious emergency fund from which the HOA can borrow for up to one year. During this time, the HOA can rearrange its finances (like any homeowner experiencing major unexpected expenses).
Emergency Assessments
The law allows HOAs to deal with significant surprises. Civil Code Section 5610 will enable boards to pass emergency assessments to deal with substantial expenses unanticipated during the preparation of the last budget. That must be accompanied by a written board resolution explaining why the emergency assessment became necessary to the membership.
Homeownership, including shared ownership, involves occasionally unavoidable expenses. Those expenses are best-addressed head-on since they don't go away or diminish with time.
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