In an ideal world, an HOA or condo association would issue a special assessment only in the most drastic of situations. It would be the result of something completely unavoidable and unpredictable. Unfortunately, most special assessments occur because the board of directors prepared an inadequate budget for one reason or another.
Sometimes, it’s because they had a target assessment amount and did not want to raise assessments out of fear of losing their spot on the board. I have even seen election flyers for board elections that will tout that “the current board of directors has not raised assessments in five years.”
That’s not the promise of greatness many believe it to be.
Other times, the board of directors did not have a reserve study, did not amend the reserve study (as they should be every two or three years), and of course, did not fund the reserves.
There are no magical condos or HOAs where things get younger and cheaper as time goes by–none of us live in a bubble. Even if your community’s buildings are well-maintained and kept up, inflation is on the rise, and the workforce is seeing massive shifts, creating income uncertainty for many. But HOA budgets are sometimes put together as if the community exists in a vacuum, which leads to a reliance on special assessments that have very far-reaching repercussions.
The Exception, Not the Rule
Special assessments should only happen because nobody knows what unexpected events may occur. Even the term “special assessment” indicates that this is not a normal way to fund the operational needs of your association, but rather they are for something “special.” In most states, special assessments must be used for a specific project.
For instance, if a component in a community breaks down and there is no money in the budget for a very expensive repair, the association has no other choice than to make a special assessment. If the association special assessed the membership for $100,000 for an unexpected repair, and at the end of the job it only costs $80,000, the association cannot use the surplus of $20,000 for any other reason. In some cases, CC&Rs or state statutes require that the money be returned to the membership on a pro-rata basis.
The reality is that the $80,000 needed should have been sitting in the association’s reserves. Had they performed a professional reserve study, kept it fresh by reviewing it every year or two, and funded the reserves, there would have been no need for a special assessment. This is a capital improvement project that should have been contemplated by the board after they had a professional reserve study.
The Unintended Consequences of Special Assessments
Aside from creating disgruntled homeowners, reliance on special assessments can have serious, unexpected consequences for a community. Here are a few every board should consider when building an annual budget:
- Lenders don’t just consider a potential buyer’s financial situation when assessing loan applications–they also look at the association’s assessment history and consider an abundance of special assessments as a sign that the association is being mismanaged. If they see that the association has had to special assess on a repeat basis, it is almost like an automobile insurance company seeing that you totaled a few cars. No lender wants to extend their capital to a buyer in a “special assessment happy” association, effectively reducing the value of the properties in the community.
- Special assessments will disrupt a family budget and cause delinquencies, which will put more pressure on the association’s budget. The more the board tries to keep the regular assessments down, the more they will experience cash flow problems and the more they will have to issue special assessments. It becomes a cycle of pain unless somebody brave and bold steps up and tells the board that they are not serving the community by keeping the assessments artificially low.
- Special assessments cause disharmony in the community. Every time there is a meeting to approve special assessments, the membership gets agitated, and the community devolves into a symphony of discontent. Special assessment meetings are often contentious events, and that is not good for community spirit. The more this happens, the less trust a community has in its board, and the more difficult community management becomes.
- We have seen boards being recalled because special assessments were made to pay for costs that should have been provided for in the budget, like Property and Casualty insurance. Once again, disharmony usually takes away any special flavor the community had and replaces it with castor oil.
Special Assessments Are Important When Done Right
Don’t get it twisted–a community will, at some point, need to rely on a special assessment. We are human, life is unpredictable, and there is a reason “special assessments” exist in the first palace. But if a board needs to make a special assessment for more than 10% of the annual budget, they have failed in some way–failed to budget correctly, failed to fund their assessments adequately, or failed to manage their components.
If a board member comes to a budget meeting with an agenda focused on keeping their own assessments low rather than supporting the realistic needs of the community, then the association has started on a journey to perdition. Axela Technologies helps boards budget better with comprehensive delinquency solutions. Click here to schedule your no-risk, no-cost consultation today.
