Can the HOA board take profits from HOA dues? Many residents wonder about this. They want to know how the association manages funds and whether some of the extra income benefits the community instead of the board.
What are HOA Dues?
When you’re part of a community with a homeowners association, you must usually pay HOA dues. This is stipulated in your HOA’s governing documents, including how much the fees will cost you. HOA dues fund the community’s maintenance and daily operations. Some of the things they typically cover include:
- Maintenance: This includes maintaining the landscaping for common-use areas, pools, clubhouses, and other shared facilities.
- Utilities: This includes payments for communal water, electricity, and waste disposal bills.
- Administrative Costs: These are payments for insurance premiums, legal fees, and other operational expenses.
- Reserve Fund: These are funds used for long-term projects or emergency repairs. A healthy reserve fund is necessary for HOAs to avoid sudden special assessments.
- Capital Improvements: These include projects that improve the community, such as adding new amenities or upgrading existing systems.
Additional Revenue Sources for HOAs: Where Can They Make Surplus Income?
While associations can already make profits from HOA dues as their primary source of income, it is not their only source of funds. Other than dues, the HOA may generate extra revenue from the following:
Special Assessments
If you’ve been a part of an HOA for a long time, you may have already heard about it and paid for special assessments. Simply put, these are collections levied for large projects or unexpected expenses outside the scope of regular maintenance.
Facility Rentals
The community has common amenities that the HOA can rent out for a fee. Letting homeowners lease out common areas like pools, clubhouses, and function halls for events is a common practice, and this can generate consistent additional income for your association.
Violation Penalties
When a homeowner breaks the rules and regulations stipulated by the association’s governing documents, they face punishment. After several warnings, the HOA usually imposes monetary penalties on homeowners breaching community rules. These fines both help deter residents from breaking community guidelines and contribute to the HOA’s revenue.
Community Collaborations
Many HOAs can form partnerships and collaborations with local businesses. This is a way of helping these small businesses while also generating income for the community. These collaborations usually involve sponsorships for newsletter spots or community events.
While these sources help boost the HOA’s funds, many homeowners will wonder how the surplus income is utilized and whether it aligns with the HOA’s fiduciary obligation to the community and the association’s non-profit status.
Can HOAs Make a Profit?
First, it is important to distinguish between HOA revenue and profit before determining whether the association makes profits from HOA dues.
Revenue is the total income a HOA earns from all of its income-generating sources, such as HOA dues, fines, rentals, and collaborations. On the other hand, profits are the surplus funds after all operating expenses have been covered.
Yes, generating revenue is key to an HOA’s operations, but board members can’t pocket any resulting profits. Instead, profits must align with the community’s best interests, ensuring transparency and accountability.
HOAs are commonly established as non-profit organizations. This means that they are designed not to make a profit. However, this doesn’t mean homeowners associations can’t create surplus income. Instead, the status may provide regulations on how these surplus funds or earnings from HOA dues are used.
HOAs are governed by several limitations and requirements.
Legal Restrictions
Under its legal obligations, homeowners associations must reinvest their profits into the community.
There are several ways to do this. For example, the surplus income may be put into reserve funds for future repairs. Another way is to use the surplus funds for improvement projects. You may also roll the surplus income into next year’s budget to fund unexpected repairs or help lighten homeowners’ financial burden by lowering fees.
However, you must check state laws before your HOA allocates surplus funds. Some states let the HOA decide how to reinvest the money in the community. Others, such as Colorado and North Carolina, require HOAs to refund members unless stated otherwise in the association’s governing documents.
Tax Regulations
All HOAs need to comply with tax regulations in the U.S., including the Internal Revenue Code Section 528. The said section outlines specific benefits that HOAs can enjoy. However, it also mentioned that income generated outside of HOA dues, such as fines and facility rentals, might be subject to taxes if the association doesn’t use it for community-related expenses.
Governing Documents
The HOA’s bylaws and CC&Rs usually outline specific rules about allocating funds, including surplus funds. Some of the standard surplus-income-related stipulations in the governing documents include the restriction or ban on refunding members and instead allocating funds for the benefit of the community.
How to Know HOA Fund Allocations
As a homeowner, you may wonder, “Where does HOA money go?” If you’re curious, the HOA keeps documentation you may have access to to determine whether the money you pay in dues is being appropriately used.
These documents should include detailed financial reports that the board must share at annual meetings. Periodic newsletters may also detail upcoming projects or repairs for which funds are allocated. The HOA may provide a detailed breakdown of the association’s income and expenses if you request it.
Can HOA Boards Mismanage Funds?
Even with stringent regulations, the mismanagement of funds in HOAs can still happen.
These commonly result from a lack of transparency, unjustified fee increases, and expenditures that are not approved or included in the HOA annual budget.
To hold the HOA accountable, residents are encouraged to attend and participate in meetings and request regular updates about the association’s financial health.
Best Practices for Managing HOA Finances
If you are part of the HOA board of directors, you are also responsible for ensuring that HOA finances are appropriately managed. While this can be intimidating, there are some tips that you can follow.
Be Transparent
As the HOA representative to your peers, you must ensure transparency, especially regarding the profit HOAs make and the budget. You should ensure that homeowners have access to financial reports, budgets, and meeting minutes. It is also important to ensure that any information is up to date.
Have Proper Budgeting
When creating your HOA budget, be sure to have one that is realistic and aligned with the community’s priorities and goals.
Perform Regular Audits
One of the best practices an HOA can do, especially on the financial side, is to conduct annual audits. These audits help verify if the financial reports and other pieces of information are accurate and up to date. Not only does this maintain your association’s integrity, but it also helps identify and reduce your HOA’s risk of fraud.
Financial Management is Key
Profits from HOA dues and other revenue sources are technically not inherently bad. As long as they are reinvested and used properly for the community, profits or surplus income can be seen as a benefit. HOA board members need to remember they have a fiduciary duty to the community, and part of that is managing funds properly, ethically, and transparently.
Personalized Property Management offers HOA management services, including assistance with board meetings around Southern California. Call us at 760-325-9500 or email us at info@ppminternet.com for more information!