Special Assessments: When, Why And How

To function, Associations must have the ability to assess Owners for the operation of the community, as outlined in their Governing Documents. The general rule is for Associations to establish an annual budget that provides for the maintenance, repair and replacement of the common elements. Many states also have statutes dealing with these general assessments. But, what happens when the Annual Assessment does not meet the expenses of the Association? Why do these deficits occur?

Most Associations try to forecast the operating and capital needs of their community, but sometimes things happen that are beyond their control. Operating budgets are prepared annually to meet those routine maintenance and operating expenses. Reserves are collected to meet the repair and replacement costs for defined capital items. In order to protect the Owners, Boards must practice Risk Management and Best Practices to protect the assets of the community. Boards must rely on engineers to prepare Reserve Studies, they must insure against all possible losses to minimize exposure and they must use realistic figures when preparing the annual budget.

Still, things happen that cause Operating Budgets to fall short of the expenses of the community, natural disasters happen that leave the community in a deficit position, latent defects are found that require vast amounts of money to correct and the Board is faced with a decision of how to fund these deficits. The obvious answer is to Special Assess the Owners. Again, most governing documents and state statutes provide for this assessment.

When it is necessary to make a Special Assessment, Boards and Managers should check the Covenants to see how this should be handled. If fees are assessed on a percentage of ownership interest, then the Special Assessment is usually handled in the same manner. If all Units pay the same fee, then the Special Assessment may be divided and assessed equally to all Owners. If the assessment is large, you may want to make it payable over many months to make it easier for the Owners to pay this unexpected bill.

Another are of concern to take into consideration is who is assessed in the case of a resale. Again, refer to the documents and state statutes to see if there is any language guiding the assessment. General rule is that the Owner of the home, at the time the assessment is made, is responsible for the assessment. However, if the assessment is allocated to replace a deficit in a specific category, such as snow removal, allow for this in your resale disclosure. The person buying the home should not pay snow removal expenses incurred prior to that purchase. If you know there will be an assessment, put an estimate in the resale disclosure and ask the title company to escrow this money until the assessment is made.

Special Assessments should be made as soon as possible after it has been determined that the funds are needed. Putting off bad news does not make it easier to take, and may cause more problems when it comes after the fiscal year has ended.

Some Boards “rob Peter to pay Paul” and borrow from reserve funds to pay their bills.

Eventually this practice comes to light and the Association is faced with inadequate funds to properly repair and replace the common elements.

Too often, Boards try to hold fees down, even though expenses are rising. They feel that having a low fee is better than having a track record of unrealistic budgets that cause annual Special Assessments. They believe low fees make the homes more desirable. Boards must avoid the urge to be the hero, at the expense of the other owners.

Lenders are looking closely at the fees and also the number of Special Assessments needed to keep the community going. The ability of a buyer to repay their mortgage is based on current fees. Special Assessments could push them into a bracket where they are not able to meet the monthly obligations. Owners who are on fixed income are also vulnerable when it comes to Special Assessments.

How can your community avoid Special Assessments? It is not always possible to avoid Special Assessments; however, basing your annual budget on realistic figures will give you the best chance at keeping Special Assessments to a minimum. If fees are realistic, you will have years when you are under budget and years when you are over budget. These should net out so you have operating Owners Equity that can be used in years when there is an unexpected deficit. Boards must also minimize risk by insuring for all probable losses and utilizing experts for engineering studies, major replacements and legal issues to protect the assets of the Association. The more planning that takes place, the less likely an association is to face unexpected financial burdens along the way.