Real Estate & Property Law

At What Point Does the HOA Board Start Assessing Members for Foreclosure Losses?

Professionals in this industry are bouncing around ideas as to how to deal with the issues related to foreclosures. This is just one of those issues. When a percentage of members of any HOA, whether 1% or 10%, lose their homes to foreclosure or "walk away, it leaves the rest of the homeowners "holding the bag". In other words, there is a budget for the year based on a certain anticipated income which consists of assessments collected from owners. When the Board estimates the income, it is based on the premise that all homeowners will be paying their assessments. Of course, when there is a foreclosure, or multiple foreclosures by the banks or lenders, most if not all of the assessments that fell due during the foreclosure process remain unpaid. Hence, a shortfall in the budget arises. There are various schools of thought about how to best deal with this. Here are some possibilities:

1. Plan ahead - and over or conservatively estimate costs so as to have extra cushion in the budget for possible losses;
2. Include an account for estimated "bad debt" losses;
3. Impose a special assessment or increase in the regular assessment mid-year to make up the extra income that is needed.

This last option may be authorized in your governing documents. The documents may be silent on the possibility. In California - Civil Code Section 1366 sets limits. The Board may not raise the regular assessments more than 20% in any fiscal year without approval of the members (requiring a majority of a 51% quorum). It may not impose a special assessment that exceeds 5% of the budgetted gross operating expenses without approval (same percentage requirement).

These figures are "aggregate" figures meaning if there is more than one increase or special assessment, they cannot add up to more than the limits. Many people assume that Boards can impose an assessment increase only once in a year, or only at budget time, and that is it. Not me. I believe Boards may, if and as needed, if shortfalls are discovered for whatever reason mid year, have more than one increase or more than one special assessment (within the limits prescribed).

However, I have to add a cavaet. The governing documents matter. They should be checked. If there is a provision that says regular assessments are determined only at budget time, it is possible that some would interpret that to mean just what it says, and that the Board either has to propose a document amendment to the owners for approval changing that, or get approval of the members for any subsequent assessment.

There are practitioners that believe documents should be amended to mandate that Boards impose mid year assessments to make up shortfalls due to foreclosure, or impose an assessment to cover the loss at each foreclosure, or that state clearly that when there is a foreclosure, all owners including the foreclosing lender must pay a fair share for the loss (to assure that lenders understand their participation in this contribution).

While this would memorialize the right to do it, I am not one of those that feel that a specific mandate in the documents would be particularly helpful or is necessary. What Boards need to do is pay attention, know what is happening, and understand how foreclosure works, what losses might ensue in any particular situation, stay on top of collections to try and minimize the losses when/if their is a foreclosure, and .... revisit the budget to determine the best way to deal with the losses.

Full post as published by California Condo & HOA Law on August 08, 2008 (boomark / email).