SHOW ME THE MONEY – How to Pay for Common Area Maintenance and Repairs
Submitted by: Laurie F. Masotto, Esq.
Community Legal Advisors, Inc.
Representing residential and commercial associations in the counties of Orange, San Diego and Riverside
Has your community experienced roof leaks which have caused damage to the buildings or interior of homes? Or, maybe it is past time to paint wood and stucco, or repave private streets. Is it time to cut water expenses by installing drought-tolerant landscaping? Unless your association’s reserve funds are adequate to cover these expenses, how will these items be paid for? A number of funding options should be considered:
The Power to Levy Assessments. Civil Code Section 5600 (in the Davis Stirling Act) provides that a Board “shall” levy regular and special assessments sufficient to perform its obligations under the governing documents and the law. However, this authority is limited as follows:
Raising Regular Assessments. Civil Code Section 5605 allows associations to increase regular assessments up to 20% each year without approval of the members. While this can provide additional income in small increments over time, a monthly assessment increase will generally not provide funds fast enough or in a sufficient amount to get large necessary repair projects (roofs, painting, roads, etc.) done in a prompt manner.
Special Assessments. If the cost of the repair/replacement exceeds 5% of your budget, as is the case with most large projects (painting, roofs), a special assessment may be imposed upon obtaining the approval of a majority of a quorum of members. “Quorum” is specifically defined under this law (regardless of what your Bylaws say) as more than 50% of the members. See Civil Code Section 5605c. Owners may be more likely to approve a special assessment for a specific repair for which they will see the physical results (i.e. new roof, new paint). Explain that repairs and/or replacement now will help to avoid future damage and deterioration, preserve and possibly increase property value, and enhance curb appeal without indebting the Association. These factors will assist members who wish to sell or refinance.
Notice to Members. Once any increase in regular dues or special assessment is approved, the Association is required to give at least 30 days’ notice of the due date. See Civil Code Section 5615.
Possible Loan. Check with lenders who are experienced in lending to homeowners associations as to whether a loan can be obtained. Collateral for such these type of loans is typically the right to incoming assessment payments. No lien against the Common Area is necessary. Repayment may be able to be funded by both an increase in regular dues and a special assessment over a period of time, which could be more palatable and affordable to owners. Many governing documents contain restrictions requiring membership approval for loans, so consult legal counsel first.
Is It an Emergency? If a repair arises of which the Board was unaware during budget planning, where a threat to personal safety on the property is discovered (i.e. a dangerous condition), or the Association is ordered by a court to make a repair, the Board may levy an assessment on “emergency” basis without membership approval, regardless of the amount. See Civil Code Section 5610. An emergency does not include a repair which has been known for a while and the Board now wishes to get it done ASAP (i.e. deferred maintenance). A Board resolution must be provided to the membership stating the reasons why such expense was not foreseen.
Government Subsidies/Programs. Often, there are grants or subsidies (energy or water related) available to help fund a repair project. For instance, the Moulton Niguel Water District has rebate programs offering up to $4 per square foot of turf removal, and has rebates for drip systems and weather-based irrigation controllers.
Can’t Get the Members to Consent? There is a last resort option if you have necessary maintenance or repairs but are unable to get the required consent of the members: court action. Corporations Code §7515(a) allows a corporation to file a petition (legal action) in superior court to attempt to obtain approval.
Funding Future Reserves. After a large repair/replacement is achieved, it is not too early to engage in financial planning and start building reserves and bolster your association’s financial condition to be prepared for the next project. Obtain input from professionals (reserve study analyst, accountant, investment consultant).
Further Steps. First consult your association’s attorney to discuss and evaluate all of your options or combination of options, and any restrictions in your governing documents. Educate and inform the owners at a town hall meeting so that members know what to expect. You will be on your way to achieving the work.
This article was submitted by Laurie F. Masotto, Esq. with Community Legal Advisors, Inc.; all rights reserved.