How to prevent “The Special Assessment Blues” in your Condo or HOA
When your board of directors sends out a letter advising members that they have made a special assessment, it hurts. You were not expecting it, and in many cases, you probably think that it’s not needed. The fact is that most likely it is needed and if your board passed it, you have no choice but to pay it. What really hurts is that this unexpected expense could have been avoided.
Boards pass special assessments because for one reason or another they did not prepare proper budgets or did not anticipate capital expenditures that caught them off guard. Often times, boards like to keep maintenance fees artificially low for the sole purpose of not having to increase them. The fact is the cost of running a community association increases annually (buildings don’t get younger) and it’s perfectly normal for fees to increase a small amount year after year. If the budget is not realistic, there is no doubt you will have a special assessment in your future. Pay a little now or a large chunk latter.
Another reason a special assessment is levied on unit owners is because the board did not act quick enough to address delinquencies and they have taken a bite out of the association’s income, and naturally somebody must pay for that shortfall. When a unit goes delinquent a board of directors should have a prepared plan of action (often called a uniform collection policy) and put it into action right away. Collections delayed are collections denied, and it’s the good paying owners who always wind up paying for the slow paying or non-paying owners.
Special assessments can be avoided and there are a few things board members and owners who get involved in the process can do about it:
Get Real with The Budget.
Sure, everybody will love the board of directors if no increases appear at the beginning of the year, but that is not how a budget is made. You must take all last year’s expenses, anticipate the coming years expenses, add some cushion (one to three percent) and that will be your budget. Don’t fit round pegs into square holes…If your water expenses were $100,000.00 last year do not expect this expense to go down unless you instituted a water conservation project that is guaranteed to save you money. It is what it was and it’s not going to change. The same is true for all your expenses and you can be sure that unless you have taken positive steps to lower costs, they will not reduce on their own.
Be real and honest about how much your community association will need to pay for its bills and fund the reserves properly.
Don’t fail to have a reserve study made and fund the reserves.
A reserve study is the only way you will know what the property will need in the years to come. Your budget is not a complete if you only consider the single year ahead. Properties get older, structures weaken, asphalt breaks apart, and you don’t want to pay for all of that at one time. People who are living in the property need to pay their share of the wear and tear and aging. “Kicking the can down the road” is not good business and can negatively affect the property values. Get a reserve study and fund it when it comes to budget season.
Don’t let delinquencies fester.
If you are on the board of a community association you want to be considered kindly by the membership. There will be times where some people will be having difficulties, but your responsibility is to the community association and not to individual members. Yes, you want to help your neighbors, but you must focus on your condo or HOA. Your fiduciary duty is to the community and when a unit goes delinquent its critical for both the association and the delinquent owner that you act quickly.
If you let a delinquency linger it will do nothing but grow which will put the delinquent owner deeper and deeper into a hole which they may never be able to climb out of. If you are not acting quickly, you will be doing this member a disservice. By engaging a collection agency, you are in fact waking them up and doing them a favor. Not acting on these issues is not helpful to all stakeholders involved. The association needs that money each month and the owner should not be allowed to fall into a deep dark abyss of debt. Stay alert and get that delinquency file over to your collection agency as soon as your uniform collection policy defines it as delinquent (we suggest two months is the level of tolerance for delinquencies to be allowed to be open).
Nobody likes to sing those Special Assessment Blues and a responsible board with an active manager can avoid it by preparing a correct and proper budget, funding reserves, and addressing delinquency issues.