To assess or not to assess, that is the question.
If you ever want to make your neighbors angry, consider implementing a special assessment. Just the thought of writing a big check in addition to normal association dues will make residents cringe and cry out in protest. Let’s discuss the need for special assessments, and some alternatives to seriously consider before heading down that path.
Community association and HOA boards will often consider special assessments as a way to generate the money required to cover operational shortfalls or pay for major projects not adequately funded in the budget or reserves. Many association covenants make it difficult to implement a special assessment, often requiring a higher percentage of votes than even a dues increase. That is another reason to look at alternatives before you upset your neighbors.
Alternatives to special assessments
As a board member, it’s your budget, and your fiduciary responsibility to look at all options. Before you decide on a special assessment, consider these alternatives:
- Put it in next year’s budget. Do you really need to tackle the project immediately? Especially with larger initiatives, it may take weeks or months of preparation before you can start work. Another alternative is to split the cost between two years.
- Cut elsewhere. Take a close look at your current budget and reserve account. Is there anything that can be trimmed, skipped or postponed in lieu of a special assessment? Maybe you can paint next year, or cut the social budget so you can prioritize more critical projects.
- Raise dues. As you review your budget and reserves, is this current expense truly an exception, or part of a trend of higher operating and maintenance costs?
The worst thing you can do is to implement a special assessment and then still have to raise dues in the next year or so. I also wouldn’t recommend borrowing from your reserve account, since that money is already allocated to other critical projects.
Sometimes special assessments are the only option
Unfortunately, major events occur that are unplanned and unbudgeted. I see this often with clients who have not adequately funded their reserve accounts, and then don’t have the money when it’s time for major repairs or replacement. Here are a few situations where a special assessment may make sense:
- Catastrophic event. If something major happens that is not sufficiently covered by your insurance policy, you may have no other choice. This may also include assessing residents for legal fees to sue whoever may be responsible for that event.
- One time event. Sometimes there are great economies of scale for making purchases on behalf of all residents. This could be something as simple as replacing mailboxes, or more expensive like upgrading balcony railings to meet new code requirements.
- Asset missing from the reserve account. Maybe your common area HVAC system fails, and you find that the replacement cost was not included in your reserve study. If you haven’t done a reserve study in the last few years, it’s time to commission one.
Bank loans vs. special assessments
The problem with borrowing money from banks is that you still have to pay the money back, and the interest payments give you less spending power in the future. Whether it’s through the existing budget, special assessments or dues increases, you can probably find the money from within the community.
Here is a rare example of where a bank loan may make sense. Let’s say your condo needs to build a parking deck for $3 million, so you need money immediately to pay for the construction. In this case, it may be cost prohibitive to divide up the $3 million as a one-time special assessment. A better alternative may be to secure a bank loan, then use a 3-5 year special assessment to pay off the loan in that same time frame.
Ask a professional for advice
If your community is facing the challenge associated with a major unplanned expenditure, seek the advice of a CPA with experience in community association and HOA matters.
Neal Bach, CPA