In recent years, the amount of new community associations has experienced a remarkable surge in numbers. However, community associations have not been immune to the far-reaching effects of the pandemic, like surging sale prices and inflation. Both developers and homeowners have encountered their fair share of challenges. In today’s landscape, everything comes at a higher cost, and HOA budgets need to reflect these price increases accurately.
Recently, the Department of Real Estate (DRE) has implemented a change in policy concerning HOA assessment fees through their Operating Cost Manual addendum. What follows is vital information about the required fee increases, how this will impact projects, and the essential steps to navigate this new terrain effectively.
The Basis for this Increase:
The California DRE has implemented changes to its policies regarding Homeowners Association (HOA) budgets, specifically to address rising costs due to inflation. The DRE has mandated that all reviewed budgets must account for the increase in costs from 2016 to the present day, which amounts to 25%. This adjustment is intended to address the increase in costs associated with maintaining common amenities and services within Common Interest developments.
DRE Policy Change:
Effective immediately, all budgets must utilize the updated costs reflected in the DRE’s Operating Cost Manual addendum (OCM) to incorporate a flat 25% inflation adjustment for operating and reserve costs. Utilities must also be adjusted to account for anticipated future increases. It is possible to include lower costs than required in the OCM, but the DRE requires two written quotes or signed contracts for services to substantiate these figures. The DRE also requires that you provide historical operating costs for aged and existing projects.
How this Impacts You:
All new budgets going in for initial approval must meet the new standard. If you have previously approved budgets, you must review and update them to meet the new policy. This includes: If 24 months have passed since your approval, if there are any expected delays in the completion of common areas, if there are changes or revisions to the project setup, and if you’re making any modifications to subsidy or maintenance agreements.
The Budget Went Up- What Happens Next?
Your Public Report quotes the approved budget from the DRE. You can adjust the traditional/phased budget up to 19% without invalidating the Public Report. However, a 20% increase from the approved amount will automatically invalidate the Public Report, requiring an amendment. This applies to any issued Public Reports. It’s also worth noting that the DRE will not issue new Public Reports while a budget review is in process.
To resubmit, you will need to provide several key documents, including the current budget, the proposed revised budget, financial statements, bank statements, reserve study reports, HOA minutes, a delinquency report, and new bids for future phases. The DRE has a process that allows for sales to continue while the budget is being reviewed, but closings will be on hold until an amended Final Public Report is issued.
What You Can Do:
- Stay on the Board: As the builder or developer, it is essential to maintain control of the board. Non-builder board members can make decisions for the HOA that may cause problems with your approvals. Effective management and budget control are paramount. Pay attention to small expenses like holiday decorations and other non-budgeted expenses.
- Conduct a Reserve Study: Engage a qualified Reserve Study analyst who is familiar with DRE requirements to conduct a comprehensive reserve study. This study will provide valuable insights into future unannexed common areas, reduce delinquency reports, and help you better understand the different phases (map phase, development phase, marketing phase) of your project. Hire one that will work with your budget preparer to keep dues down and offer cost-saving suggestions.
- Prepare in Advance: Given the changes in the budget, it is advisable to prepare at least six months ahead of your anticipated DRE Submittal or 12 to 18 months before your first closing in the project. Stay proactive and be ready to submit your revised budgets promptly when required.
While change is inevitable, it is important for you, as the developer, to stay vigilant and prepare to adapt. There are many changes at the state level, and what worked yesterday may not work tomorrow. At California Builder Services, we have worked on tens of thousands of projects throughout the state and can offer strategy and consulting services for your team.