October 3rd, 2016
One of the common complaints at annual meetings of homeowners associations is that assessments are being increased the following year.
How much can the association directors increase future assessments without the owners’ approval?
Inquiring homeowners should first direct their attention to the Declaration of Covenants, Conditions and Restrictions that governs their community. Most of the time, the Declaration contains a provision that limits the amount that the directors alone can add onto prior assessments without membership approval. Five percent is typically a permissible increase. Some documents tie the permissible increase to the increase in the annual consumer price index (CPI), which is logical. The consumer price index is a measure of price changes in consumer goods and services over time. The boards can increase assessments to adjust for inflation during a certain year. Monthly CPI data is released by the U.S. Bureau of Labor Statistics and published on its website at http://www.bls.gov/cpi/.
Occasionally, governing documents are silent as to what, if any, increases in assessments the boards alone can approve. The documents usually only state that the boards set the annual assessment, and the first annual assessment is not to exceed a certain amount. Some states have statutes that fill in missing answers by setting a maximum annual increase without the membership vote. North Carolina does not.
When determining what, if any, increase in assessments are warranted the next year, boards should start with the budget, not with some arbitrary increase they may have in mind. Take the old budget, go over each item, and determine whether each expense is still necessary the next year. Find out what expenses may have gone or will go up: quotes from contractors, anticipated legal disputes, any other circumstances. The assessment for the next year will be determined by the expected expenses. Boards should be prepared to explain each expense and establish that the increase in assessments is reasonable. Unreasonable increases will most likely be challenged by the owners. In that case, a membership vote may be the best route to enforce the assessment increases.