HOA Dues Versus Assessments
“Dues” is such a common term in the industry that it has been accepted as meaning regular monthly assessments, while “assessments” are generally understood to mean “special” assessments. Even so, there are industry professionals who do not like the term.
"Assessment" Argument. Those who dislike the term argue that it is inappropriate to use "dues" when referring to regular monthly (or quarterly) assessments levied at the beginning of an association's fiscal year because dues are voluntary, such as membership dues to a health club, while an association's assessments are mandatory. Therefore, regularly assessed payments pursuant to an annual budget should be called "assessments" not dues.
"Dues" Argument. Those who defend the term "dues" point to the Oxford English Dictionary definition of the word. The dictionary defines dues as a general term covering any type of money due, including assessments. Therefore, all assessments are dues by definition. The word “dues” is better understood by homeowners. Members often refer to "monthly dues" since they are fixed and regular. They are “due” every month, like rent or a mortgage payment. Whereas “assessment” for something extraordinary is being levied, such as a special or emergency assessment.
There is no right or wrong answer. Using "dues" versus "assessments" is a matter of preference.
HOA Assessment Formulas
The association's governing documents define a member's share of regular and special assessments. The allocation is set by the Declarant when the association is created. Assessments are generally allocated in one of the following ways:
- Uniform Rate. Members pay the same amount regardless of the size of their units/lots.
- Variable Rate. Assessments are levied on a percentage basis for each unit or lot. The percentage is often based on the square footage of a unit or lot. Even though payment of assessments is disproportionate, the courts have ruled that such payment schedules are reasonable and do not violate public policy. (Cebular v. Cooper Arms.)
- Blended Rate. Assessments are calculated using a uniform rate for some budget items and a percentage or variable rate for other expenses according to the benefit each unit/lot receives from the association. The two amounts are blended into an assessment levied against units/lots. Unfortunately, blended rates often result in short-term and long-term errors.
Equally & Uniformly. Sometimes, CC&Rs use "equally and uniformly" when referring to assessments. The phrase's meaning will depend on how it is used in the sentence. If it modifies the word "rate" or "amount," it means everyone pays the same amount. If the sentence states that assessments shall be applied equally and uniformly, it means assessments must be levied in a non-discriminatory manner. Usually, a mechanism (variable, blended, or uniform) will be described in an exhibit attached to the CC&Rs. Following are two examples where the phrase "equally and uniformly" is used in the application of the law and the levy of taxes:
The rule of equality, in respect to the subject, only requires the same means and methods to be applied impartially to all the constituents of each class, so that the law shall operate equally and uniformly upon all persons in similar circumstances. (Clay Tower Apartments v. Kemp (9th Cir. 1992) 978 F.2d 478, 481.)
[Taxes are] left to the discretion of the legislative power, and there is nothing to forbid the classification of property for purposes of taxation and the valuation of different classes by different methods. The rule of equality, in respect to the subject, only requires the same means and methods to be applied impartially to all the constituents of each class, so that the law shall operate equally and uniformly upon all persons in similar circumstances. (Kentucky Railroad Tax Cases (1885) 115 U. S. 321, 337.)
Pro Rata Allocation. Some CC&Rs use the term "pro rata" allocation of assessments. It is sometimes hyphenated as "pro-rata" and is Latin for "in proportion." It can be confusing because the term can refer to any of the three assessment rates described above. If the assessment rate is uniform, the member's proportional share is the same as everyone else's, i.e., their assessments are equal. If the assessment rate is variable, each member's pro rata share is the percentage assigned to their unit or lot. Following are examples taken from different sets of CC&Rs:
- [Uniform Rate] As part of the regular annual assessments for maintenance authorized above, the Board shall annually fix the amount to be contributed pro rata by each member... Regular and special assessments shall be charged and divided among the owners equally.
- [Uniform Rate] Annual assessments shall be charged to and divided among the Lot Owners equally (pro rata according to the total number of Lots in the Project)...
- [Variable Rate] Assessments levied against an Owner shall be the pro rata interest or obligations of a Condominium based on the pro rata share of ownership of each Owner in the Common Area...
- [Variable Rate] All assessments shall be assessed on a pro-rata basis based on the size of each Condominium...
- [Blended Rate] "Regular Assessment" shall mean and refer to the annual charge against each Owner and his respective Condominium representing a portion of the Common Expenses of the Association; (1) The "Base Assessment Component" (defined below) shall be allocated equally among Owners... and (2) the "Variable Assessment Component" shall be allocated on a pro-rata basis according to a Condominium's square footage...
Blended Rate Formula. Variable assessments refer to "blended rates," which are assigned using a uniform rate for some budget items and a percentage rate for other budget items. These assessment formulas make it impossible to simply increase everyone's assessment by a fixed percentage since each unit must be individually calculated. Because of the formula, a 20% increase in the budget could result in some owners receiving a 15% to 20% increase in their dues while others receive a 25% to 30% increase as provided for in Civil Code § 5605(b): ". . . the board may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association's preceding fiscal year. There are two ways to interpret the statute. The statute says the "regular assessment for the association's preceding fiscal year," which indicates a 20% increase in the association as a whole, i.e., its budget, not on individual owners' assessments. Using this interpretation, it would be allowable for some owners to receive a greater than 20% increase as long as the overall increase did not exceed 20%. The second interpretation looks at the impact on individual assessments. Using this approach, the budget increase is limited by the owner with the highest variable assessment.
Recommendation: To avoid a potential legal challenge, boards should calculate budget increases so that no owner receives a greater than 20% increase. In addition, boards should amend their documents to eliminate variable assessment rates and implement a fixed or pro-rata assessment schedule.
Changing Assessment Formulas
Associations are allowed to change their assessment formula by amending their CC&Rs. Members "may by requisite vote choose any legal and equitable method they prefer for assessing their homeowner fees." (Battram v. Emerald Bay Community Assn. (1984) 157 Cal.App.3d 1184, FN. 6.)
Erroneous Assessment Allocations
Sometimes, an association discovers that the assessment allocation schedule used does not match the one described in the governing documents. Moreover, the assessments have been levied erroneously for years, with some owners paying too much and others paying too little. Can the error be corrected, and how?
Correct Current Assessments. Associations have two choices: (i) immediately amend the governing documents to conform to the existing erroneous assessment schedule or (ii) adjust everyone's assessments to conform to the schedule found in the governing documents. Most choose the latter.
Correct Past Errors? Owners who overpaid often want a refund. Are associations legally obligated to pay such refunds? Whenever this issue has been litigated, the courts have ruled against refunding the overpayments. In Seabrook Island POA v. Pelzer, the court ruled that associations are not required to refund erroneous assessments collected before the point where a unit owner objected to the assessment or where the association learned of the improper assessment, provided:
- Assessments were levied in good faith, and
- No one objected when they were levied.
The court reasoned that unit owners have constructive knowledge of how assessments should be levied via recorded documents. If they do not object to the improper method of allocating assessments, unit owners will be estopped from claiming a refund for those assessments. (Also see: Queen's Grant II Horizontal Property Regime v. Greenwood Development Corp., 628 S.E.2d 902, 911, 368 S.C. 342, 358 (S.C. App. 2006); Kelso Woods Ass'n, Inc. v. Swanson, 753 A.2d 894, 900 (Pa.Cmwlth. 2000); Pew v. One Buckhead Loop Condominium Ass'n, Inc., 700 S.E.2d 831, (Ga.App. 2010); Wellington Condominium Trust v. Pino, 686 F.Supp.2d 117, 121 (D.Mass. 2010); Blood v. Edgar's, Inc., 632 N.E.2d 418 (Mass.App.Ct. 1994)).
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