MAY SPECIAL ASSESSMENTS BE IMPOSED TO FUND RESERVES?
This is a question I received recently via email from a manager: “We are having discussion among our managers regarding whether you can special assess within limits of civil code to fund reserves with no project on the table for an assessment. Just special assess to fund reserves because they are very low. … Yes – we know they [the HOAs] should have done the assessment when they did the budget but they didn’t. We are wondering if such a special assessment would violate Civil Code 1366.1 which says: An association shall not impose or collect an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied.
My response is below. I am sharing it because I am sure that other associations and managers have the same questions.
I do not see a legal issue to the Board imposing an assessing to pump up the reserves so long as the assessment is within the legal assessment increase limits in California for regular or special assessments which are 20% per year in the aggregate for regular assessments and/or 5% of the budgeted gross operating expenses for the fiscal year for special assessments– Civil Code Section 1366. Conversely assessing to fund reserves in my view would not qualify for an emergency assessment so a vote of members would be needed if the legal limits were to be exceeded.
There are some things that need to be verified though.
One needs to review the governing documents to check for provisions that may affect the decision. I am not saying the documents control over the assessment statutes because the opposite is generally true. However, there may be provisions that need to be considered or ruled out. So, before I would to provide definitive legal advice for any association on the question I would want to review the governing documents and the reserve study.
As to any question about whether CC 1366.1 prevents special assessments to fund reserves, I do not believe it does. Assessing to fund reserves that are not fully funded per the reserve study would be consistent with raising funds to necessary for the repair and replacement of the components that the association is obligated to repair and replace. The statute carries no time factor – and money collected to repair or replace roofs or other components should then be used for that purpose. One might want to specify what particular component the assessment is being imposed to fund – but avoiding specificity as to components is probably also okay. Naming the component for which the assessment was collected would definitly be consistent with 1366.1. But even being nonspecific about the component(s) would seem consistent if the assessment is imposed to fund the reserves that will be used for any of the components that are an assessment obligation. Reserves “defray” costs. (“Defray” means pay some or all of cost: to provide money to pay for part or all of the cost of something.)